UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 1, 2006
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. [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 30, 2005, the last day of
business of our most recently completed second fiscal quarter, was approximately
$24,185,850 based on the closing price for the registrant's common stock as
traded on the NASDAQ Global Market (formerly the NASDAQ National Market) of The
NASDAQ Stock Market LLC on such date of $1.19 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, 2006, there were 28,680,842 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for its Annual Meeting
of Shareholders are incorporated by reference into Part III of this Annual
Report on Form 10-K.
ii
TABLE OF CONTENTS
Item Page
---- ----
PART I
1. Business ......................................................... 1
1A. Risk Factors ..................................................... 8
1B. Unresolved Staff Comments ........................................ 18
2. Properties ....................................................... 18
3. Legal Proceedings ................................................ 18
4. Submission of Matters to a Vote of Security Holders .............. 21
PART II
5. Market for Registrant's Common Equity, Related Shareholder
Matters
and Issuer Purchases of Equity Securities......................... 22
6. Selected Financial Data .......................................... 23
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................ 24
7A. Quantitative and Qualitative Disclosures About Market Risk ....... 40
8. Financial Statements and Supplementary Data ...................... 41
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ........................... 82
9A. Controls and Procedures .......................................... 84
9B. Other Information ................................................ 86
PART III
10. Directors and Executive Officers of the Registrant ............... 87
11. Executive Compensation ........................................... 87
12. Security Ownership of Certain Beneficial Owners and Management
and Related Shareholder Matters .................................. 87
13. Certain Relationships and Related Transactions ................... 87
14. Principal Accountant Fees and Services ........................... 87
PART IV
15. Exhibits and Financial Statement Schedules ....................... 88
Signatures ....................................................... 89
i
PART I
Unless the context indicates otherwise, when used in this report, "we," "us,"
"our," "Concord" and the "Company" refer to Concord Camera Corp. and its
subsidiaries. Our fiscal year ends on the Saturday closest to June 30. Fiscal
2007 refers to the fiscal year ending 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; and fiscal 2002 refers to
the fiscal year ended June 29, 2002.
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 restructuring initiatives, cost-reduction initiatives, and new business
initiatives, anticipated financial benefits of de-emphasizing the sale of
digital cameras and eliminating our reliance on internally designed and
manufactured digital cameras and increasing the design, co-development and
purchase of digital cameras from outsourced manufacturers, the viability of
marketing and selling digital cameras and competing in the digital camera
market, the cost structure requirements needed to maintain a presence in the
digital camera market and to market and sell digital 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 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 the market for our products, by our
inability to develop and maintain relationships with contract manufacturers or
by our inability to negotiate favorable terms with our licensors or with the
People's Republic of China in connection with the processing agreement that
expires in October 2006. Obtaining the results expected from the introduction of
any new products or product lines may require timely completion of development,
successful ramp-up of full-scale production on a timely basis and customer and
consumer acceptance of those products. In addition, future relationships or
agreements may require an ability to meet high quality and performance
standards, to successfully implement production at greatly increased volumes and
to sustain production at greatly increased volumes, as to all of which there can
be no assurance. There also can be no assurance that products 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.
ITEM 1. BUSINESS.
We incorporated in New Jersey in 1982. We design, develop, manufacture,
outsource and sell popularly priced, easy-to-use image capture products
worldwide. Our products include single-use, digital and
1
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 digital cameras and certain of our single-use and 35mm
traditional film cameras for sale to retail sales and distribution ("RSD")
customers. In fiscal 2005 and fiscal 2006, we de-emphasized the sale of digital
cameras and we do not expect digital camera sales to be material in fiscal 2007.
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
under its two DMS contracts with us. Although we continued to seek and evaluate
DMS business opportunities, there were no DMS sales in fiscal 2006.
In fiscal 2004, we initiated a strategic review process to determine how we may
increase sales of our popular single-use cameras and reduce our costs of doing
business. The strategic review, which continued in fiscal 2005 and fiscal 2006,
led to our initiating a restructuring plan and cost-reduction initiatives. The
review also resulted in our decision to de-emphasize the sale of digital
cameras. You can find more information on our restructuring plan and
cost-reduction initiatives and our fiscal 2006 results of operations in Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
In fiscal 2005, we initiated a project to identify, assess and, as appropriate,
commercialize new business opportunities and products. For additional
information see, "New Business Initiatives" below.
The mailing address of our headquarters is 4000 Hollywood Boulevard, 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 IMAGE CAPTURE MARKET
There are three main types of cameras within the amateur image capture market:
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.
o DIGITAL CAMERAS - Digital cameras use an electronic sensor and other
components to capture and process an image electronically (versus
silver halide film), that is then stored within memory. Most digital
cameras possess an image review capability that enables instantaneous
viewing and/or deletion. In addition, images can be downloaded to a
computer for viewing, manipulation, storage, transmission (via the
Internet) or printing.
o 35MM TRADITIONAL FILM CAMERAS - This category includes all other
(non-single-use) cameras that use silver halide film.
2
IMAGE CAPTURE MARKET TRENDS
Market trends within the image capture industry 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 2005 and are projected to
decline to 374 million units in calendar 2006. We believe, however,
that single-use cameras remain a large and viable category. We believe
we are currently the third largest producer of single-use cameras in
the world. (Market Research Source-PMA 2006)
DIGITAL CAMERAS - Digital imaging is fast becoming a mature growth
industry, and several key markets have already peaked. According to
available third-party market research data, Japan's digital market
peaked in calendar 2004, North America's is projected to peak during
calendar 2006 and Europe's will peak in calendar 2007. (Market
Research Source-InfoTrends 2006)
The maturation of the Japanese, North American and Western European
digital camera markets will likely set off a chain reaction of other
trends, such as an increased number of repeat buyers, the practice of
designing and marketing digital cameras for late adopters and an
industry vendor shakeout. A few major manufacturers such as Konica
Minolta, Contax and Kyocera have already exited the market. (Market
Research Source-InfoTrends 2006)
According to InfoTrends 2006, calendar 2006 worldwide digital camera
sales are expected to reach nearly 89 million units, representing a
15% increase over calendar 2005 and unit sales are expected to grow
until calendar 2010, although most of the growth will come from the
Asia-Pacific, Eastern Europe and Latin America regions. The
Asia-Pacific region is expected to become the leading region for sales
of digital cameras by calendar 2010.
In the U.S. market, digital camera sales reached 20.5 million units in
calendar 2005, up 13% from the previous year. Digital cameras sales in
calendar 2006 are expected to be only modestly higher than in calendar
2005 before declining for the first time in calendar 2007 as
penetration of digital cameras reaches half of U.S. households and
replacement cycles of higher resolution cameras by consumers continue
to lengthen.
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 the past two years. The
calendar 2005 film camera sales in the United States were reported at
4.3 million units, a 36% decrease from the previous year. The decline
is expected to continue in calendar 2006, with sales projected at 3
million units, which represents about a 30% decrease in sales. The
contribution of film cameras to the total sales mix of image capture
products in the U.S. was just 17.5% in calendar 2005 and is expected
to be about 10% by calendar 2007. Two significant market participants
previously announced their withdrawal from the film camera market:
Nikon (with the exception of two SLR models) and Konica Minolta. In
response to the declining market for 35mm traditional film cameras, in
fiscal 2006, we reduced our standard product range and focused our
sales effort on three key models: motorized, auto focus and zoom
cameras. These three models provide the features that suit different
consumers' needs at affordable retail prices below $30.
Based on the image capture market trends discussed above, we believe that the
market for single-use cameras is the most viable for our company. As a result,
we are focusing on increasing our sales of single-use cameras through various
sales and marketing initiatives and the development of new single-use
3
camera designs and products with lower costs, improved performance, enhanced
quality, greater consumer appeal and new features.
IMAGE CAPTURE PRODUCTS
Our products include single-use, digital 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 certain of our 35mm traditional film cameras
and outsource the manufacture of our digital cameras and certain of our
single-use and 35mm traditional film cameras.
We offer a complete line of single-use cameras, including outdoor, flash,
auto-wind and underwater models. We believe that we are uniquely structured to
provide encasements, finishes and packaging to accommodate different user and
customer preferences.
Our digital cameras include resolutions ranging from video graphics array
(VGA) up to and including 8 megapixels. We have de-emphasized, and are
continuing to significantly de-emphasize, the sale of digital cameras.
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 design and development decreased to $3.8 million in
fiscal 2006 from $8.4 million in fiscal 2005. We expect design and product
development expense to continue to decrease as a result of our de-emphasis of
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.
SALES AND MARKETING OF IMAGE CAPTURE PRODUCTS
We sell to retailers on a worldwide basis through offices and/or representatives
in the Americas, United Kingdom, Germany and France ("Europe"), and Hong Kong,
China and Japan ("Asia"). We currently market our products to retailers on a
private label basis and/or under the following brand names:
o Concord
o EasyShot
o Fun Shooter
o Jenoptik
o Keystone
o Le Clic
o Polaroid
We have established our presence with our retail customers by offering
attractive, easy-to-use and popularly priced single-use, digital and 35mm
traditional film cameras. We market many different styles of cameras that are
sold through thousands of retail outlets.
We have in-house sales and marketing personnel who make the majority of our
direct sales to our 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.
4
COMPETITION IN THE IMAGE CAPTURE MARKET
The image capture industry is highly competitive with many companies marketing
products to the retail market. As a producer and/or marketer of popularly priced
image capture 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 from outsourced manufacturers high quality products 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 July 1, 2006 was approximately $13.0 million. We
experience fluctuations in our backlog at various times during our fiscal year.
We expect that approximately $12.8 million of the unfulfilled orders at July 1,
2006 will be shipped during the first quarter of fiscal 2007. 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 2006, we had two retail customers, each of whose purchases represented
in excess of 10% of our total net sales: Wal-Mart Stores, Inc. ("Wal-Mart")
represented 33.8% of total net sales; and (ii) Walgreen Co. ("Walgreens")
represented 15.2% of total net sales. During fiscal 2006, there were no sales to
Kodak, which was a significant customer of ours during the first two quarters of
fiscal 2005. Kodak stopped purchasing single-use cameras under its two DMS
contracts with us in December 2004, which had a material adverse effect on
results of operations. See Note 21, Geographic Area and Significant Customer
Information, in the Notes to Consolidated Financial Statements.
SEASONALITY
Sales of our products are linked to the timing of vacations, holidays and other
leisure activities. Sales are normally strongest in the first and second
quarters (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
5
depends on the continuation of our right to use the Fuji patents. As a result,
the loss of the Fuji license prior to the expiration of the patents could have a
material adverse effect on our financial position and results of operation.
We have the worldwide, exclusive right to use the Polaroid Corporation
("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 but excluding instant and digital
cameras, except for products released by 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. The traditional film camera license agreement expires on January 31,
2009 and provides for a minimum royalty payment of $50,000 to Polaroid on or
before October 31, 2006, which will be fully credited against percentage
royalties during the first year of the term. 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 35mm traditional film percentage
royalties exceeded the minimum royalty amount. We believe that the loss of the
Polaroid license would 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 does not contain any minimum guaranteed royalty
payments. See Note 16, Commitments and Contingencies, in the Notes to
Consolidated Financial Statements.
For further discussion of our license and royalty agreements, see Note 16,
Commitments and Contingencies, "License and Royalty Agreements," in the Notes to
Consolidated Financial Statements.
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 connection with our restructuring plan and
cost-reduction initiatives, in fiscal 2006 our manufacturing facilities focused
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.
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. In fiscal 2006, we did not purchase components relating to
the manufacture of digital and 35mm traditional film cameras as a result of our
decision to outsource the manufacture of these products.
6
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, expires in October
2006. We have entered into a new processing agreement that will allow us to
continue to operate in the PRC until October 2016. The new processing agreement
is pending approval by the applicable PRC governmental entities. See Item 2,
Properties, for information on the leases and land use agreements related to our
manufacturing facilities in the PRC. We expect to continue manufacturing in the
PRC after October 2006 either under the recently executed processing agreement
that is pending PRC governmental approval or pursuant to some other form of
legal authorization.
In 2002, we established, registered and commenced operations of a wholly foreign
owned enterprise, Concord Camera (Shenzhen) Company Limited ("Concord
Shenzhen"), pursuant to the laws of the PRC relating to enterprises with a sole
foreign investor. The business license of Concord Shenzhen, which is a
wholly-owned subsidiary of Concord Camera HK Limited ("CCHK"), permits it to
design, develop, manufacture and sell single-use, 35mm traditional film and
digital cameras and camera components in the PRC and worldwide on both a retail
and wholesale basis.
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 35mm 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. 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 business areas capable of helping our company regain momentum and
build a profitable business on a sustainable basis. We evaluated, and continue
to evaluate, opportunities 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 product concepts and tested purchase
intent, channel preference and price sensitivity. We have also conducted limited
market testing to evaluate certain product concepts. The product concepts
include both photographic and non-photographic products.
7
EMPLOYEE RELATIONS
As of August 21, 2006, we had 131 employees, of whom 57, or 43.5% were located
in Hong Kong, 21, or 16.0%, were located in Europe and 53, or 40.5%, were
located in the Americas. We currently have one collective bargaining agreement
covering six employees in France that has no stated expiration date. During
fiscal 2006, pursuant to our agreements with PRC governmental entities, and
based upon production demand, approximately 2,200 to 4,400 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 21, 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.
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.
As of July 2, 2005, we identified ten material weaknesses in our internal
control over financial reporting. 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.
Although we believe that at least seven of the previously identified material
weaknesses were remediated as of July 1, 2006, we are still experiencing
material weaknesses in internal controls over financial reporting in connection
with our enterprise resource planning ("ERP") system, our information technology
and our sales, accounts receivable and revenue recognition processes. We
anticipate that these remaining three material weaknesses will be remediated
during fiscal 2007. We cannot assure you, however, that our remediation efforts
will be successful within this time frame or at all. We may also 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.
THE IMPLEMENTATION OF OUR NEW ERP SYSTEM IN EARLY FISCAL 2005 CONTINUES TO
REPRESENT A MATERIAL WEAKNESS IN OUR INTERNAL CONTROL OVER FINANCIAL REPORTING.
During August 2004, we converted from our existing legacy systems to a new ERP
system. This design and implementation project began in July 2003 and includes
our accounting, financial and operating functions and systems, including sales,
supply chain and manufacturing systems. Implementing the ERP system involved
significant costs, in terms of both the financial and human resources incurred
and expended. As disclosed in this report and in earlier reports filed with the
SEC, the ineffective planning and implementation of the ERP system constitutes a
material weakness in our internal control over financial reporting that we have
not yet successfully remediated. See Item 9A, Controls and Procedures, below.
The remediation effort associated with this material weakness continues to
involve significant costs, in terms of both the financial and human resources
incurred and expended. Although we believe the material weakness with respect to
the ERP system will be remediated during fiscal 2007, if we are unsuccessful in
remediating this material weakness, our reliance on the ERP system could
interfere
8
with our ability to file our periodic reports with the SEC on a timely basis and
could continue to have a material adverse effect on our results of operations
and our ability to manage our business.
WE MAY NOT CONTINUE TO MEET NASDAQ LISTING STANDARDS.
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.
As disclosed in the Current Report on Form 8-K that we filed with the SEC on
June 30, 2006, on June 26, 2006, we received a deficiency letter from the NASDAQ
staff indicating that for 30 consecutive days, the per-share price of our common
stock closed below the minimum $1.00 per-share requirement. NASDAQ has provided
us a period of 180 calendar days to regain compliance with the minimum per-share
price requirement. The compliance period will expire on December 26, 2006. If
our common stock does not achieve compliance with the minimum per-share price
requirement within this period, NASDAQ will provide written notification to us
that our common stock will be de-listed. 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 regain and 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.
9
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 litigations have been instituted against us 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 17, Litigation and Settlements, in the Notes to Consolidated Financial
Statements.
THE EXPIRATION 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
2006. We have entered into a new processing agreement which will allow us to
continue to operate in the PRC until October 2016. The new processing agreement
is pending approval by the applicable PRC governmental entities. If the new
processing agreement is not approved or we cannot enter into an alternative
arrangement that will permit us to continue to operate in the PRC under similar
terms and conditions, our results of operations and our ability to carry on our
business would be materially adversely affected.
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 $8.3
million and we were required to provide cash deposits pledged as security in the
amount of approximately $8.3 million against the facility. See Part II, Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, "Hong Kong Financing Facilities," for additional information on the
HSBC 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 results of operations.
OUR BUSINESS STRATEGIES MAY NOT SUCCEED.
During the normal course of our business, we evaluate, develop and implement
various short-term and long-term business strategies such as our restructuring
initiatives and cost-reduction 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.
10
WE MAY NOT BE SUCCESSFUL IN IMPLEMENTING OUR RESTRUCTURING INITIATIVES AND
COST-REDUCTION INITIATIVES.
In December 2004, we implemented restructuring initiatives that, among other
things, were designed to eliminate our reliance on internally designed and
manufactured digital cameras and increase the design, co-development and
purchase of digital cameras from outsourced manufacturers. In fiscal 2005 and
fiscal 2006, we incurred significant restructuring charges and expenses as a
result of the restructuring initiatives and may incur additional charges. In
addition, 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 consolidating certain of our operations in Europe. 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 results of operations and our ability to compete could be
adversely affected. See Note 19, Restructuring and Other Charges, 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 FACE SIGNIFICANT RISKS RELATED TO THE SINGLE-USE, DIGITAL AND 35MM
TRADITIONAL FILM CAMERA MARKETS.
Based upon available third-party market research data, the digital camera market
peaked in Japan in calendar 2004 and is projected to peak in North America
during calendar 2006 and will peak in Europe in calendar 2007; the 35mm
traditional film camera market has been in significant decline and is expected
to continue to decline; and the single-use camera market is in decline. See
Item1, Business, "Image Capture Market Trends," above. As discussed in this
report, we have de-emphasized sales of our digital camera products and 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, they will be profitable or that we will be able to
maintain our market share in the single-use and 35mm traditional film camera
markets.
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.
11
THE CAMERA AND PHOTOGRAPHIC PRODUCTS INDUSTRY IS HIGHLY COMPETITIVE.
As a manufacturer, marketer and distributor of low cost, popularly priced image
capture products, we encounter intense competition from a number of companies,
including without limitation, Canon, Fuji, Hewlett-Packard, Kodak, Olympus,
Nikon, Sony, Pentax, Panasonic, Samsung and Vivitar, 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 products 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.
DIGITAL CAMERA PRODUCTS ARE SUBJECT TO RAPID TECHNOLOGICAL CHANGES, PRICE
EROSION, OBSOLESCENCE AND HIGHER RATES OF RETURNS AND ALLOWANCES.
Digital camera products are subject to rapid technological changes, price
erosion, rapid obsolescence and rates of returns and allowances to a greater
extent than 35mm traditional film and single-use camera products. When our
average selling prices decline, our revenues decline unless we sell more units,
and our gross profits and margins decline unless we are able to reduce our
product costs by commensurate amounts and percentages or find new customers. To
be successful in the market, we have to respond quickly to technological
advances and market conditions and manage our inventory effectively to
accommodate price declines and erosion resulting from such factors as
competition and the short life span of such products. Due to price competition,
allowances for digital cameras are considerably higher than those provided to
customers for traditional and single-use cameras. These uncertainties,
individually or in the aggregate, have had and could continue to have a material
adverse effect on our gross profits and profit margins and, as a result, as
discussed in this report, we have de-emphasized sales of our digital camera
products.
WE DEPEND ON THIRD-PARTY SUPPLIERS, AND OUR REVENUE, GROSS PROFITS AND MARGINS
COULD SUFFER IF WE FAIL TO MANAGE SUPPLIER ISSUES PROPERLY.
We currently purchase all of our digital and certain of our single-use and 35mm
traditional film camera products from outsourced manufacturers for sale to our
RSD customers worldwide. 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.
12
Given the variety of products that we offer, the large number of our suppliers
and outsourced manufacturers that are dispersed across the globe and the long
lead times that are required to manufacture, assemble and deliver certain
components and products, adverse circumstances, issues and problems could arise
in planning production, procurement and managing inventory levels that could
negatively impact our business and increase our financial exposure and risk.
Other supplier problems that we could face include component and product
shortages, excess supply and risks related to fixed-price contracts that would
require us to pay more than the open market price, as more fully described
below.
o Supply shortages. We may experience a short supply of, or a delay in
receiving, certain components and products as a result of strong
demand, capacity constraints or other problems experienced by
suppliers. If shortages or delays persist, the price of these
components and products may increase, we may be exposed to quality
issues or the components and products may not be available at all. We
may not be able to secure enough components and/or products at
reasonable prices or of acceptable quality to build, sell and
distribute new products in a timely manner in the quantities or
configurations needed. Accordingly, our revenue, gross profits and
margins could suffer as we could lose time-sensitive sales, incur
additional freight costs or be unable to pass on price increases to
our customers. If we cannot adequately address supply issues, we may
have to re-engineer and/or source some components and products,
resulting in further costs and delays.
o Oversupply. In order to secure products or components for the
production of products, at times we may make advance payments to
suppliers, 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 for prices in excess
of the current market price, we may be at a disadvantage to
competitors who have access to components and/or products at lower
prices. This excess over current market 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 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 ceased manufacturing digital cameras at the end of fiscal 2005. We began
purchasing digital camera products exclusively from outsourced manufacturers in
the first quarter of fiscal 2006. The risks identified above will continue to be
significant as a result of our purchases of products from these manufacturers.
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 a single distribution facility operated by
a third-party service provider in San Pedro, California; and (ii) European
operations are handled from a single distribution facility operated by a
third-party service provider in Moerdijk, The Netherlands. 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
13
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.
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 facilities in
the PRC. During fiscal 2006, based upon production demand, we had approximately
2,200 to 4,400 workers at our manufacturing facilities 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 revenues 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, allowances and returns, as necessary. In the past, we have
had customers file for protection from their creditors under Chapter 11 of the
U.S. Bankruptcy Code. As a result, we have recognized provisions related to
accounts receivable and inventory. See Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations, below. If we are
unable to collect or timely collect outstanding receivables from our customers
or our customers seek protection from their creditors under the Bankruptcy Code
or applicable foreign bankruptcy regulations, our business and results of
operations may be materially adversely affected.
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.
14
From time to time, we receive patent infringement claims which we analyze and,
if appropriate, take action to avoid infringement, settle the claim or negotiate
a license. Those claims for which legal proceedings have been initiated against
us are discussed in Item 3, Legal Proceedings, and in Note 17, 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 are 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 July 1, 2006 to be between
$0 and approximately $6.6 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
July 1, 2006.
OUR ABILITY TO MANUFACTURE AND SELL SINGLE-USE CAMERAS DEPENDS 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 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.
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. Accordingly, our business is subject to the political, economic and other
risks that are inherent in operating in foreign countries. These risks include,
but are not limited to:
o the difficulty of enforcing agreements, collecting receivables and
protecting assets through foreign legal systems;
o trade protection measures and import or export licensing requirements;
o the imposition of tariffs, exchange controls or other restrictions;
o difficulty in staffing and managing widespread operations and the
application of foreign labor regulations;
o required compliance with a variety of foreign laws and regulations;
o changes in the general political and economic conditions in the
countries where we operate, particularly in emerging markets; and
o increased costs and risks of doing business in a number of foreign
jurisdictions.
Our business 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.
15
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 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 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. This change
effected a de facto revaluation of the yuan to the U.S. Dollar from 8.28 yuan to
8.11 yuan per U.S. Dollar. 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. We expect that the revaluation may initially
have an immaterial negative effect on our manufacturing operations in the PRC by
immaterially increasing our cost of doing business in the PRC.
The interest rate related to our Hong Kong financing facilities provided by HSBC
is based on a spread over the Hong Kong Interbank Offered Rate on import loans
denominated in Hong Kong Dollars and over 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 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
16
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.
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 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 outbreak has an adverse impact on the businesses of our
customers, it could reduce the size and/or frequency of our customers'
purchases, which could adversely impact our results of operations.
OUR FUTURE INCOME TAX RATES COULD INCREASE.
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 2006.
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 results
of operations.
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. The cost of
acquisitions within the industry has generally increased over time.
Additionally, we compete for acquisitions with certain other industry
competitors, some of which have greater financial and other resources than 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.
17
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 and lease approximately 13,200 square feet of office space comprised
of two floors under a lease expiring in October 2006. We are currently
negotiating an extension of the lease for our Hong Kong office space. The land
on which the building is situated is subject to a governmental ground lease that
will expire in 2047.
We also lease warehouse and/or office space in the United Kingdom, France,
Germany and Japan in connection with the activities of our subsidiaries in these
jurisdictions. The lease on the office space in Germany expires on December 15,
2006, and the lease on the office space in Japan expires on September 29, 2006.
We have timely notified the respective landlords that we intend to terminate
each lease when it expires.
In the PRC, we own manufacturing facilities in the Longgang District of Shenzhen
and we lease several employee dormitories, a cafeteria 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 2038. At the end of
the term, a PRC governmental entity will own the facilities and we will have the
right to lease the land and improvements at then prevailing lease terms.
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 2007 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 us and certain of our
officers in the United States District Court for the Southern District of
Florida by individuals purporting to be our shareholders. On August 20, 2002, we
filed a motion to dismiss the complaint and in December 2002, our motion was
granted by the court and the complaint was dismissed. In January 2003, an
amended class action complaint (the "Amended Complaint") was filed adding
certain of our current and former directors as defendants. The lead plaintiffs
in the Amended Complaint sought to act as representatives of a class consisting
of all persons who purchased our Common Stock (i) issued pursuant to our
September 26, 2000 secondary offering (the "Secondary Offering") or (ii) during
the period from September 26, 2000 through June 22, 2001, inclusive. On April
18, 2003, we filed a motion to dismiss the Amended Complaint and on August 27,
2004, the court (i) dismissed all claims against the defendants related to the
Secondary Offering and (ii) ruled that the allegations occurring before January
2001 or after April 2001 were not actionable. 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 are centered around
claims that we failed to disclose in periodic reports filed with the SEC and in
press releases made to the public during the Class Period regarding our
operations and financial results, that a large portion of our accounts
receivable was represented by a delinquent and uncollectible balance
18
due from then customer KB Gear Interactive, Inc. ("KB Gear"), and that a
material portion of our inventory consisted of customized components for KB Gear
products that have no alternative usage. The Amended Complaint claims that such
failures artificially inflated the price of the Common Stock. The Amended
Complaint seeks unspecified damages, interest, attorneys' fees, costs of suit
and unspecified other and further relief from the court. Pursuant to a
scheduling order of the court, trial in this matter is scheduled to commence on
November 13, 2006. We have 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. We have sought coverage from our insurance
carrier for this lawsuit under our 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.
See Note 23, Subsequent Events, in the Notes to Consolidated Financial
Statements, for more information regarding the pending settlement. Although we
believe the settlement will be consummated and approved by the court, we cannot
guarantee this result and if the lawsuit continues and is adversely determined,
our ultimate liability, which could be material, cannot be ascertained. On
September 17, 2002, we were advised by the staff of the SEC that it is
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 our funds by a former employee, uncovered in April
2002. We provided the requested information to the SEC and NASDAQ and have not
received any further communication from the SEC with respect to the informal
inquiry or from NASDAQ with respect to its request since we last responded in
February 2003.
In September 2004, a class action complaint was filed against us and certain of
our officers in the United States District Court for the Southern District of
Florida by individuals purporting to be our shareholders. In August 2005, an
amended consolidated complaint (the "Amended Complaint") was filed adding one of
our former officers as a defendant. The lead plaintiff in the Amended Complaint
seeks to act as a representative of a class consisting of all persons who
purchased our Common Stock during the period from August 14, 2003 through August
31, 2004, inclusive (the "Class Period"), and who were allegedly damaged
thereby. The allegations in the Amended Complaint are centered around claims
that we failed to disclose, in periodic reports filed with the SEC and in press
releases made to the public during the Class Period regarding our operations and
financial results, (i) the full extent of our excess, obsolete and otherwise
impaired inventory; (ii) the departure of the newly added former officer
defendant until several months after his departure; and (iii) that Kodak would
cancel its DMS contracts with us due to our alleged infringement of Kodak's
patents. The Amended Complaint also alleges that we improperly recognized
revenue contrary to GAAP due to an alleged inability to reasonably estimate
digital camera returns. The Amended Complaint claims that such failures
artificially inflated the price of our Common Stock. The Amended Complaint seeks
unspecified damages, interest, attorneys' fees, costs of suit and unspecified
other and further relief from the court. We intend to vigorously defend the
lawsuit. Although we believe the lawsuit is without merit, the outcome cannot be
predicted, and if adversely determined, our ultimate liability, which could be
material, cannot be ascertained. In a letter dated November 19, 2004, the SEC
staff advised us that it is conducting an investigation related to the matters
described above. We have provided the requested information to the SEC and have
not received any further communication from the SEC with respect to its request
since we last responded in May 2005.
On November 16, 2004, a shareholder derivative suit was initiated against
certain of our 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 our shareholder. The complaint alleges
that the individual defendants breached their duties of loyalty and good faith
by causing us to misrepresent our financial results and prospects, resulting in
the class action complaint described in the immediately preceding paragraph. The
complaint seeks 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 us and the
19
individual defendants 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 we believe this
lawsuit is without merit, its outcome cannot be predicted, and if adversely
determined, the ultimate effect on us, which could be material, cannot be
ascertained. We have sought coverage from our insurance carrier for this lawsuit
and the related class action suit under our directors and officers liability
insurance policy, and the insurance carrier is defending the actions under a
reservation of rights.
Pursuant to our Certificate of Incorporation, as amended, the personal liability
of our directors is limited to the fullest extent permitted under the New Jersey
Business Corporation Act ("NJBCA"), and we are required to indemnify our
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 us written
undertakings to repay us all amounts so advanced if it shall ultimately be
determined that the individual defendants are not entitled to be indemnified by
us under the NJBCA.
In April 2004, a patent infringement complaint was filed by Compression Labs,
Inc. against 28 defendants, including our Company, in the United States District
Court for the Eastern District of Texas. The complaint asserts that the
defendants have conducted activities which infringe U.S. Patent No. 4,698,672
(the "'672 Patent") entitled, "Coding System for Reducing Redundancy." The
complaint seeks unspecified damages, interest, attorneys' fees, costs of suit
and unspecified other and further relief from the court. In February 2005,
pursuant to an order of the Judicial Panel on Multi-District Litigation, this
action was transferred to the United States District Court for the Northern
District of California. The defendants in this action have reached an agreement
in principle with the plaintiffs on a group settlement of this lawsuit. The
settlement is subject to the defendant's agreement as to the allocation of the
settlement amount among the defendants, the execution of a mutually agreeable
settlement agreement and approval by the court. Based on the current proposed
allocation, the settlement amount allocated to us is not material and will not
have a material adverse effect on our financial position or results of
operations. We accrued the settlement amount as of July 1, 2006. Although we
believe the settlement will be consummated and approved by the court, we cannot
guarantee this result and if the lawsuit continues and is adversely determined,
our ultimate liability, which could be material, cannot be ascertained. We have
notified several third parties of our intent to seek indemnity from such parties
for any costs or damages that we incur as a result of this action.
On October 6, 2004, a patent infringement complaint was filed by Honeywell
International, Inc. and Honeywell Intellectual Properties, Inc., against 27
defendants, including our company, in the United States District Court for the
District of Delaware. The complaint asserts 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 seeks unspecified damages,
interest, attorneys' fees, costs of suit and unspecified other and further
relief from the court. The proceedings in this action against us and other
similarly situated defendants have been 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. We have notified several
third parties of our intent to seek indemnity from such parties for any costs or
damages incurred by us as a result of this action.
In November 2005, Flashpoint Technology, Inc. filed a patent infringement
complaint against our company in the United States District Court for the
District of Delaware. The complaint asserted that we conducted activities which
infringed U.S. Patent Nos. 6,177,956, 6,249,316, 6,847,388, 6,278,447 and
6,233,190. The complaint sought injunctive relief, unspecified damages,
interest, attorneys' fees, costs of
20
suit and unspecified other and further relief from the court. We have reached a
settlement with the plaintiffs and the suit has been dismissed with prejudice.
The amount of the settlement is not material and does not have a material
adverse effect on our financial position or results of operations. We accrued
the settlement amount as of July 1, 2006.
In June 2006, St. Clare Intellectual Properties Consultants, Inc. filed a patent
infringement complaint against 22 companies, including our company, in the
United States District Court for the District of Delaware. We have not yet been
served with the complaint. The complaint asserts that the defendants have
conducted activities which infringe U.S. Patent Nos. 5,138,459, 6,094,219,
6,233,010 and 6,323,899. The complaint seeks injunctive relief, unspecified
damages, interest, attorneys' fees, costs of suit and unspecified other and
further relief from 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, we have not accrued any amounts relating to this action. We are
assessing potential claims of indemnification against certain of our suppliers
with respect to this action.
We are involved from time to time in routine legal matters incidental to our
business. Based upon available information, we believe that the resolution of
such matters will not have a material adverse effect on our financial position
or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
21
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 2006 and fiscal 2005, the high and low sales prices per share of our
common stock as reported by the NASDAQ Global Market.
Quarter Ended High Low
------------- ---- ---
July 1, 2006 $1.19 $0.61
April 1, 2006 $1.32 $1.02
December 31, 2005 $1.42 $1.00
October 1, 2005 $1.60 $1.16
July 2, 2005 $1.65 $1.12
April 2, 2005 $2.30 $1.55
January 1, 2005 $2.76 $1.47
October 2, 2004 $3.36 $1.62
On September 1, 2006, the last reported sale of our common stock as reported on
the NASDAQ Global Market was $0.49 per share. According to the records of our
transfer agent, there were 965 shareholders of record of Concord's common stock
at September 1, 2006. 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.
We did not repurchase any of our shares during fiscal 2006.
22
ITEM 6. SELECTED FINANCIAL DATA.
(Dollars in thousands, except per share data)
As of and for the
Fiscal Years Ended
--------------------------------------------------------
STATEMENT OF July 1, July 2, July 3, June 28, June 29,
OPERATIONS DATA: 2006 2005 2004 2003 2002
-------- -------- -------- -------- --------
Net sales $137,529 $174,348 $203,132 $189,783 $129,317
Cost of products sold 122,928 180,130 188,954 153,532 110,345
-------- -------- -------- -------- --------
Gross profit (deficit) 14,601 (5,782) 14,178 36,251 18,972
Operating expenses 34,873 39,794 43,426(c) 30,421(b) 26,161
------ ------ ------ ------ ------
Operating (loss) income (20,272) (45,576) (29,248) 5,830 (7,189)
Interest expense 374 931 715 1,230 2,522
Other income, net (1,142) (1,770) (500) (2,372) (3,060)
------ ------ ------- ----- -----
(Loss) income before income taxes
and extraordinary item (19,504) (44,737) (29,463) 6,972 (6,651)
Provision (benefit) for income taxes 107 186 7,537 569 (1,403)
------- ------- ------- ----- ------
(Loss) income before extraordinary item (19,611) (44,923) (37,000) 6,403 (5,248)
Extraordinary gain -- -- 5,778(d) -- --
------- -------- -------- -------- --------
Net (loss) income $(19,611) $(44,923) $(31,222) $ 6,403 $ (5,248)
======== ======== ======== ======== ========
Net (loss) income per common share:
Basic and diluted:
(Loss) income before extraordinary item $ (0.67) $ (1.54) $ (1.29) $ 0.23 $ (0.19)
Extraordinary gain -- -- 0.20 -- --
-------- -------- -------- -------- --------
(Loss) income per common share $ (0.67) $ (1.54) $ (1.09) $ 0.23 $ (0.19)
======== ======== ======== ======== ========
As of and for the
Fiscal Years Ended
----------------------------------------------------
July 1, July 2, July 3, June 28, June 29,
BALANCE SHEET DATA: 2006 2005 2004 2003 2002
-------- -------- -------- -------- --------
Working capital $ 46,843 $ 61,761 $100,603 $121,077 $128,382
======== ======== ======== ======== ========
Total assets $104,742 $146,756 $189,517 $205,814 $198,076
======== ======== ======== ======== ========
Total debt $ -- $ 2,936 $ 9,170 $ -- $ 14,934(a)
======== ======== ======== ======== ========
Total stockholders' equity $ 62,967 $ 82,303 $127,125 $156,828 $149,156
======== ======== ======== ======== ========
23
(a) This debt was retired in August 2002.
(b) Includes $0.9 million of variable stock-based compensation expense. For
further discussion, see Note 1 and Note 13, Description of Business and
Summary of Significant Accounting Policies and Stock Option Plans,
respectively, in the Notes to Consolidated Financial Statements.
(c) Includes $0.7 million of variable stock-based compensation income. For
further discussion, see Note 1 and Note 13, Description of Business and
Summary of Significant Accounting Policies and Stock Option Plans,
respectively, in the Notes to Consolidated Financial Statements.
(d) Represents the excess of estimated fair value of net assets acquired over
cost (negative goodwill) for the Jenimage acquisition. For further
discussion, see Note 2, Acquisition, in the Notes to Consolidated Financial
Statements.
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 our consolidated financial
statements and the related notes included elsewhere in this annual report on
Form 10-K. 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.
OVERVIEW
We market and sell popularly priced, easy-to-use image capture products
including single-use, digital 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 PRC and
outsource the manufacture of digital cameras and certain of our single-use and
35mm traditional film cameras. In fiscal 2005 and fiscal 2006, we de-emphasized
the sale of digital cameras and we do not expect digital camera sales to be
material in fiscal 2007. We sell our private label and brand-name products to
our RSD customers worldwide (either directly or through third-party
distributors). During fiscal 2005, our DMS sales of single-use cameras declined
primarily as a result of the decision of Kodak to cease purchases under its two
DMS contracts with us. Although we continue to seek and evaluate DMS business
opportunities, there were no DMS sales during fiscal 2006.
EXECUTIVE SUMMARY
YEAR-OVER-YEAR RESULTS OF OPERATIONS
Our operating loss in fiscal 2006 was $(19.6) million as compared to an
operating loss of $(44.9) million for fiscal 2005.
Significant factors contributing to the year-over-year reduction of our
operating loss were:
1. Lower product design and manufacturing labor and overhead costs;
2. Lower digital camera and component inventory charges;
3. Lower selling, general and administrative expenses; and
4. Lower restructuring and other charges.
Lower Product Design and Manufacturing Labor and Overhead Costs
24
As a result of the restructuring initiatives implemented in fiscal 2005 designed
to eliminate our reliance on internally designed and manufactured digital
cameras and to increase reliance on the outsourced manufacture of digital
cameras, we significantly reduced our product design costs and manufacturing
labor and overhead costs. As compared to fiscal 2005, these
manufacturing-related cost reductions, together with increased efficiencies and
production volumes related to the manufacture of single-use cameras, resulted in
a decrease in product design costs and reduced under-absorption of manufacturing
labor and overhead in fiscal 2006 in the amounts of $4.6 million and $6.6
million, respectively. These reductions in product design costs and
under-absorption of manufacturing labor and overhead costs resulted in a total
reduction of $11.2 million in our year-over-year operating loss.
Lower Digital Camera and Component Inventory Charges
We continued to experience significant competition and price declines in the
digital camera market in fiscal 2006. The inventory charges recorded for fiscal
2006 were $1.6 million as compared to $8.7 million recorded in fiscal 2005. In
fiscal 2006, this reduction in inventory charges was primarily due to a
significant reduction in our digital raw materials, components, work-in-process
and finished goods inventory levels resulting from our increased reliance on the
outsourced manufacture of digital cameras, de-emphasis of the sale of digital
cameras and improved inventory management processes. This fiscal 2006 reduction
in inventory charges contributed $7.1 million to the reduction of our
year-over-year operating loss.
Lower Selling and General and Administrative Expenses
As a result of our restructuring initiatives and cost-reduction initiatives
discussed below and in Note 19, Restructuring and Other Charges, in the Notes to
Consolidated Financial Statements, we realized the benefits of lower selling,
general and administrative expenses of $4.9 million in fiscal 2006 as compared
to fiscal 2005. The decrease is primarily due to a reduction in professional
fees, marketing activities, personnel and freight related costs.
Lower Net Restructuring and Other Charges
The restructuring initiatives implemented in fiscal 2005 resulted in significant
costs for restructuring and other charges. During fiscal 2005, we incurred
restructuring charges of $1.2 million related to employee severance and $4.3
million related to inventory impairment. We also recorded an additional $1.4
million in depreciation expense related to the reduction in the useful lives of
the molds and tooling formerly used in the manufacture of digital cameras. In
addition to the restructuring charges, during fiscal 2005, we incurred other
charges of $0.6 million related to employee severance as part of the
consolidation of operations in Europe. During fiscal 2006, we incurred other
charges of $1.8 million related to employee severance and retention resulting
from our de-emphasizing digital cameras sales in Europe and further
consolidation of our European operations. In addition, we recorded impairment
charges in fiscal 2006 totaling $1.8 million related to the impairment of
certain long-lived assets. As compared to fiscal 2005, restructuring costs
decreased by $6.9 million in fiscal 2006, whereas other charges increased by
$3.0 million, which in total contributed to a net reduction of $3.9 million to
the year-over-year operating loss.
FISCAL 2006 RESULTS OF OPERATIONS
Although we significantly reduced our operating loss by $25.3 million, or 56%,
in fiscal 2006 as compared to fiscal 2005, we still recorded an operating loss
of $(19.6) million during fiscal 2006.
25
Factors contributing to the fiscal 2006 operating loss were:
1. Negative gross profit margins on sales of digital cameras;
2. Operating expenses related to the sale of digital cameras; and
3. Other charges
4. Professional fees related to internal control compliance
Negative Gross Profit Margins on Sales of Digital Cameras
Although we outsourced the manufacture of digital cameras during fiscal 2006, we
continue to experience significant competitive pricing pressures that resulted
in negative gross profit margins on sales of digital cameras. In addition, we
did not realize a gross profit on the sales of digital cameras whose carrying
values were lowered in prior periods. Since we lowered the carrying value of
certain digital camera inventory, sales of such digital camera inventory in
future periods will result, on average, in a nominal gross profit margin.
Operating Expenses Related to Sales of Digital Cameras
During fiscal 2006, we incurred significant operating expenses, mainly in
Europe, related to sales of digital cameras. As we implement our operating
strategy that includes a realignment of our operations in Europe 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, we anticipate our
future operating expenses in Europe to be significantly lower.
Other Charges
During fiscal 2006, we recorded other charges totaling $3.6 million related to
long-lived asset impairment ($1.8 million) and severance and retention costs
($1.8 million). See "Restructuring and Other Charges," below for further
information regarding the nature of the charges.
Professional Fees Related to Internal Control Compliance
We incurred professional fees of $1.9 million primarily related to compliance
measures under Section 404.
Although we have significantly increased our gross profit margin and lowered our
costs, as a result of our increased emphasis on the sale of single-use and, to a
lesser extent, 35mm traditional film cameras, our fiscal 2006 sales and gross
profit margins were not sufficient to cover our gross deficit on the sale of
digital cameras and related operating expenses. Due to the pricing pressures in
the digital camera market and the previous write-downs of our digital camera
inventory, we have, however, not been able to achieve positive gross profit
margins on our sale of digital cameras. In light of these trends, 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)
continued de-emphasis of digital camera sales and reduction of related operating
expenses; (iii) implementation of additional cost reductions; and (iv) potential
new business initiatives. 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
26
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 ("SFAS No. 48"). If actual future returns are higher than
estimated, then net sales could be adversely affected. Management has assessed
the appropriateness of the timing of revenue recognition in accordance with SFAS
No. 48. After considering the requirements of SFAS No. 48, we concluded we would
defer recognition of revenue from certain customers until such customers'
transactions meet all of the requirements of SFAS No. 48.
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 base the provision for doubtful accounts on our assessment of the
collectibility of specific customer accounts and the aging of accounts
receivable. If there is a deterioration of a major customer's credit worthiness
or actual defaults are higher than our historical experience, our estimates of
the recoverability of amounts owed to us could be adversely affected.
INVENTORIES
Inventory purchases and commitments are based upon estimates of future demand
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. The obsolescence risk related to digital cameras is more significant
than 35mm traditional film and single-use cameras due to, among other factors,
the shorter life cycles of digital products. See Item 1A, Risk Factors, above.
27
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 July 1, 2006 and July 2, 2005. 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 2005
and fiscal 2006, a potential impairment indicator, we performed an impairment
test of our long-lived and other assets as of July 1, 2006 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 6, Property, Plant and Equipment, Net and Note 19, Restructuring and
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.
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.
28
At July 1, 2006, we had $8.3 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 $7.8 million import facility from The Hongkong and Shanghai
Banking Corporation Limited. 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 at July 1, 2006. 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 under the
caption "Liquidity and Capital Resources."
CONTRACTUAL OBLIGATIONS AS OF JULY 1, 2006
(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 $15.0 $15.9 $1.8 $ -- $ --
Operating Leases 3.3 0.7 0.9 0.8 0.9
Patent, Trademark, Licensing and
Royalty Obligations 2.8 0.5 0.8 0.6 0.9
----- ----- ---- ---- ----
Total $21.1 $16.2 $1.7 $1.4 $1.8
===== ===== ==== ==== ====
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.
RESULTS OF OPERATIONS
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
29
increased single-use camera sales to Walgreens and Wal-Mart. See Note 21,
Geographic Area and Significant Customers, in the Notes to Consolidated
Financial Statements.
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.
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 21,
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.
30
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. 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. 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 15, "Description of Business and
Summary of Significant Accounting Policies" and "Income Taxes," in the Notes to
Consolidated Financial Statements.
31
Net Loss
We incurred a net loss of $(19.6) million, or $(0.67) per common share, for
fiscal 2006 as compared to a net loss of $(44.9) million, or $(1.54) per common
share, for fiscal 2005.
RESTRUCTURING AND OTHER CHARGES
During fiscal 2005, we announced restructuring initiatives designed to eliminate
our reliance on internally designed and manufactured digital cameras and to
increase the design, co-development and purchase of digital cameras from
outsourced manufacturers to provide competitive products to the retail market
(the "Restructuring Initiatives"). The Restructuring Initiatives were a result
of our previously announced strategic review process to determine how we might
better compete in the digital camera market. Our reliance on internally designed
and manufactured digital cameras ended at the end of fiscal 2005.
Table I - Restructuring Liability reconciles the beginning and ending balances
of the restructuring liability.
(in thousands)
Restructuring Liability
Severance
---------
Balance as of July 3, 2004 $ --
Charges 1,217
Payments (1,107)
-------
Balance as of July 2, 2005 $ 110
Charges --
Payments (110)
-------
Balance as of July 1, 2006 $ --
=======
Table II -- Restructuring Charges presents the related expenses and their
classification in the consolidated statements of operations.
(in thousands)
Restructuring Charges
Inventory
Fiscal 2005 Severance Impairment Total
---------------------------------- --------- ---------- ------
Cost of products sold $1,176 $4,272 $5,448
Selling Expense 4 -- 4
General and administrative expense 37 -- 37
------- ------ ------
Total Fiscal 2005 $1,217 $4,272 $5,489
======= ====== ======
During fiscal 2005, we recorded an additional $1.4 million in depreciation
expense, which is included in cost of products sold in the consolidated
statements of operations, related to the reduction in the remaining useful lives
of the molds and tooling formerly used in the manufacturing of digital cameras.
In connection with the Restructuring Initiatives, we also incurred other charges
related to retention costs of employees who were not terminated in fiscal 2005.
The services of these employees benefited parts of the business other than the
manufacture of digital cameras. Accordingly, these retention costs are
classified as "Other Charges" in Table IV below. During fiscal 2006, we incurred
approximately $0.2 million in expenses related to employee retention costs
associated with the Restructuring Initiatives implemented in fiscal 2005.
32
COST-REDUCTION INITIATIVES
We continue to evaluate our cost structure and implement cost-reduction
initiatives as appropriate. During fiscal 2006, cost-reduction initiatives
included, among other things, the separation of three executives and the
elimination of certain employee positions. As a result, during fiscal 2006, we
recorded total charges of $1.2 million related to severance costs for the
separation of the three executives and elimination of certain other employee
positions. See Note 16, Commitments and Contingencies, "Executive Separation
Agreements," for more information regarding the severance costs related to the
separation of the three executives.
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 are realigning our operations in Europe
including relocating certain operations from our Jena, Germany office to our
United Kingdom office. As a result of the German office relocation in fiscal
2007, we recorded charges of approximately $0.4 million for severance costs. In
addition, as a result of our de-emphasizing 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 which included a
reduction in the carrying value of a license used primarily in the branding of
digital cameras and in certain machinery held for sale in the amounts of $1.0
million and $0.8 million, respectively.
During fiscal 2005, cost-reduction initiatives included, among other things, the
elimination of certain employee positions and consolidation of certain
operations in the United Kingdom, France, and Germany into our operations in
Jena, Germany. As part of the consolidation of our European operations in Jena,
Germany during 2005, we entered into severance and retention agreements with
certain employees affected by our decision to consolidate these European
operations.
Table III -- Other Charges Liability reconciles the beginning and ending
balances of the other charges liability.
(in thousands)
Other Charges Liability
Severance Retention Total
--------- --------- ------
Balance as of July 3, 2004 $ -- $ -- $ --
Charges 377 336 713
Reversals (117) -- (117)
Payments (70) (207) (277)
------ ----- ------
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
====== ===== ======
33
Table IV -- Other Charges presents the related expenses and their classification
in the consolidated statements of operations.
(in thousands)
Impairment
Long-Lived
Other Charges Severance Retention Asset Total
------------- --------- --------- ---------- ------
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, we
expect to make cash payments totaling $1.2 million related to severance and
retention.
FISCAL 2005 COMPARED TO FISCAL 2004
Net Sales
Net sales for fiscal 2005 were $174.3 million, a decrease of $28.8 million, or
14.2%, as compared to net sales for fiscal 2004. The decrease in net sales was
primarily due to a reduction in the sales volume of single-use cameras sold to
significant RSD and DMS customers and lower average selling prices for digital
cameras resulting from significant pricing competition and lower than
anticipated sales by certain of our RSD customers. This reduction in net sales
was partially offset by the inclusion of a complete fiscal year of net sales
related to our acquisition of Jenimage in May 2004. See Note 2, Acquisition, in
the Notes to Consolidated Financial Statements for more information regarding
the Jenimage acquisition.
RSD net sales were $160.7 million for fiscal 2005, an increase of $4.7 million,
or 3.0%, as compared to fiscal 2004, and accounted for 92.2% of total net sales.
RSD net sales from our operations in the Americas for fiscal 2005 were $87.2
million, a decrease of $18.8 million, or 17.7%, as compared to fiscal 2004. The
decrease in RSD net sales was due primarily to reduced sales of single-use and
digital cameras to two significant customers. This decrease in sales had a
material adverse effect on fiscal 2005 results of operations. The reduction in
sales to one significant RSD customer was due to the customer's overstocked
inventory levels of single-use cameras during the first and second quarters of
fiscal 2005. During the third and fourth quarters of fiscal 2005, sales of
single-use cameras to this customer increased over the levels of the second
quarter of fiscal 2005, and we expect sales of single-use cameras to this
customer will continue to increase as its inventory levels decrease. The
reduction in sales to the other significant RSD customer was
34
attributable to a reduction in sales of digital cameras, partially offset by an
increase in sales of single-use cameras to such customer.
RSD net sales from our operations in Europe for fiscal 2005 were $68.2 million,
an increase of $20.8 million, or 44.1%, as compared to fiscal 2004. This
increase was principally attributable to our acquisition of Jenimage.
DMS net sales were $13.6 million for fiscal 2005, a decrease of $33.7 million,
or 71.2%, as compared to fiscal 2004, and accounted for 7.8% of total net sales.
The decrease in DMS net sales was primarily attributable to lower sales to
Kodak, for whom we manufactured products under two DMS agreements. Sales to
Kodak in fiscal 2005 accounted for 7.3% of total net sales, while in fiscal
2004, sales to Kodak accounted for 19.6% of total net sales. As previously
reported, Kodak advised us that it would cease purchases under the two DMS
contracts during the second quarter of fiscal 2005. The winding down of sales to
Kodak had a material adverse effect on our results of operations for fiscal
2005.
Net sales from our operations in Asia for fiscal 2005 were $18.9 million, a
decrease of $30.8 million, or 62.0%, as compared to fiscal 2004. Net sales from
our operations in Asia for fiscal 2005 included RSD sales of $5.3 million and
all of our DMS sales. The decrease was attributable primarily to a reduction in
sales to Kodak, partially offset by sales from our subsidiary in Japan.
Gross (Deficit) Profit
Gross (deficit) for fiscal 2005 was $(5.8) million, or (3.3) % of net sales,
versus gross profit of $14.2 million, or 7.0% of net sales, in fiscal 2004.
During fiscal 2005, gross (deficit), in dollars and as a percentage of net
sales, was negatively affected by the following factors: (i) reduced sales
volume of single-use cameras and lower average selling prices for digital
cameras; (ii) a $8.7 million charge to reduce the carrying value of certain
finished goods, components, work-in-process, raw material and return camera
inventory below its cost basis to its estimated market value resulting from
price declines; (iii) restructuring and other charges of $5.6 million consisting
of a reduction in the carrying value of certain finished goods, components,
work-in-process, raw material and return camera inventory below our cost basis
to its estimated market value and employee severance costs attributable to our
restructuring initiatives and cost-reduction initiatives; (iv) lower production
volumes in our manufacturing facilities that created under-absorption of
manufacturing labor and overhead and other costs of $5.5 million; and (v)
additional depreciation expense of $1.4 million related to the reduction in the
remaining useful lives of certain molds and tooling used in the production of
certain digital cameras.
Product engineering, design and development costs for fiscal 2005 and fiscal
2004, in dollars and as a percentage of net sales, were $8.4 million (4.8%) and
$10.5 million (5.2%), respectively. For further discussion, see "Inventories"
under the caption, Critical Accounting Policies above, and Note 19,
Restructuring and Other Charges, in the Notes to Consolidated Financial
Statements.
Operating Expenses
Selling expenses for fiscal 2005 were $16.8 million, or 9.6% of net sales,
compared to $13.5 million, or 6.6% of net sales, for fiscal 2004. The increase
was primarily due to the cost of additional sales and marketing personnel and
increases in freight-related shipping costs. Selling expenses in fiscal 2005
also included costs incurred by Jenimage.
General and administrative ("G&A") expenses, excluding variable stock-based
compensation or income, for fiscal 2005 were $22.9 million, or 13.1% of net
sales, compared to $26.8 million, or 13.2% of net sales, for fiscal 2004. The
decrease in G&A expenses was primarily due to decreases in personnel costs and
decreases in professional fees associated with designing and installing our ERP
system, partially offset by increased costs and the recording of expenses
related to previously capitalized costs incurred in
35
connection with potential acquisitions. G&A expenses in fiscal 2005 also
included costs incurred by Jenimage. We did not recognize any variable
stock-based compensation expense for fiscal 2005 because the price of our common
stock was lower than the exercise price of $5.97 of our repriced options at the
beginning and end of the fiscal year. Variable stock-based compensation income
for fiscal 2004 was $0.7 million because the price of our common stock on July
3, 2004 was lower than the price of our common stock used to compute variable
stock-based compensation expense in previous quarters. We consider all of our
variable stock-based compensation or income as a component of G&A expenses. See
Note 1, Description of Business and Summary of Significant Accounting Policies,
"Stock-Based Compensation," in the Notes to Consolidated Financial Statements.
Interest Expense
Interest expense was $0.9 million and $0.7 million for fiscal 2005 and fiscal
2004, respectively. The increase was primarily due to an increase in average
outstanding indebtedness under the financing facilities provided by HSBC during
fiscal 2005 as compared to fiscal 2004.
Other Income, Net
Other income, net was $1.8 million and $0.5 million for fiscal 2005 and fiscal
2004, respectively. The increase is primarily attributable to the gain on the
sale of an available-for-sale investment and the gain on the sale of a building
in the United Kingdom. See Note 1, Description of Business and Summary of
Significant Accounting Policies, "Investments," and Note 6, Property, Plant and
Equipment, Net, in the Notes to Consolidated Financial Statements.
Income Taxes
As a result of fiscal 2005 losses realized by our foreign subsidiaries, the
foreign subsidiaries had an accumulated earnings deficit of approximately $19.6
million as of July 2, 2005. Consequently, there was no basis to provide for U.S.
federal and state income taxes for the results of the foreign operations. As of
July 2, 2005, we had net operating loss carryforwards for U.S. tax purposes of
approximately $12.6 million. The net operating loss carryforwards were scheduled
to expire between 2006 and 2025. Additionally, we had approximately $39.5
million of net operating loss carryforwards related to our foreign operations,
of which $37.9 million related to Hong Kong. A significant portion of these net
operating loss carryforwards had no expiration dates.
During fiscal 2005, 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 our 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. During fiscal 2005, based
on all the available evidence, management determined that it is not more likely
than not that its deferred income tax assets will be fully realized.
Accordingly, a full valuation allowance was recorded against all of our deferred
income tax assets in fiscal 2005. For fiscal 2005 and fiscal 2004, our effective
tax rates were 0.4% and 25.6%, respectively.
Net Loss
As a result of the matters described above, we incurred a net loss of $(44.9)
million, or $(1.54) per basic and diluted common share, for fiscal 2005 as
compared to a net loss of $(31.2) million, or $(1.09) per basic and diluted
common share, for fiscal 2004.
36
LIQUIDITY AND CAPITAL RESOURCES
We are not engaged in hedging activities and had no forward exchange contracts
outstanding at July 1, 2006. 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 $1.2 million
from $8.0 million at July 2, 2005 to $6.8 million at July 1, 2006. The decrease
was primarily the result of cash used for restricted cash of approximately $8.3
million, net payments of $2.9 million related to short-term borrowings under
credit facilities and capital expenditures of $1.6 million, partially offset by
$11.6 million of net proceeds provided by the sale of short-term and
available-for-sale investments.
Short-Term Investments - Short-term investments, including available-for-sale
investments, decreased by $11.6 million from $35.2 million at July 2, 2005 to
$23.6 million at July 1, 2006, primarily as a result of the sale of investments
to provide cash flow for operations and debt repayment.
Cash Used in Operating Activities - Cash used in operations in fiscal 2006 was
$27,000, which compared favorably to cash used in operating activities of $7.8
million for fiscal 2005 and cash used in operating activities of $24.6 million
for fiscal 2004. The changes in cash used in operating activities for the
respective fiscal years were primarily attributable to changes in accounts
receivable, inventories and accounts payable.
Cash Provided by Investing Activities - For fiscal 2006, the increase in cash
from investing was primarily due to proceeds from the sale of short-term
investments, partially offset by capital expenditures and an 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 2006, fiscal 2005 and
fiscal 2004 were $1.6 million, $2.8 million and $6.8 million, respectively, and
related primarily to expenditures on plant and equipment for our manufacturing
facilities in the PRC. The decrease in fiscal 2005 was primarily the result of
significantly reduced expenditures related to the ERP system purchased in fiscal
2004 and a reduction in expenditures primarily related to digital camera
production tooling and other plant and equipment at our manufacturing facilities
in the PRC. In fiscal 2005, we received 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. For fiscal 2004, the
increase in cash from investing activities related to proceeds received from the
sale of short-term and available-for-sale investments, offset by cash used in
the Jenimage acquisition, net of cash received.
Cash (Used in) Provided by Financing Activities - 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.
Cash provided from financing activities in the amount of $10.7 million during
fiscal 2004 resulted from proceeds of $9.2 million received from borrowings
under our short-term financing facilities and proceeds of $1.5 million received
from the issuance of common stock from stock option exercises.
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
37
terms of annual costs or in total future minimum payments. See Note 16,
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.
Related Party Transactions - We engaged in related party transactions as
discussed in Note 18, Related Party Transactions, in the Notes to Consolidated
Financial Statements. These transactions did not materially affect our results
of operations, cash flows or financial condition.
Other Contractual Obligations - We do not have any material financial guarantees
or other contractual commitments that are reasonably likely to adversely affect
liquidity. See Hong Kong Financing Facilities below for information about our
financial guarantees.
Hong Kong Financing Facilities - As we previously disclosed in reports filed
with the SEC, in October 2005, Concord Camera HK Limited ("CCHK"), our Hong Kong
subsidiary, accepted a proposal from HSBC dated September 20, 2005 (the
"September 2005 Agreement") that reduced CCHK's borrowing capacity from an
aggregate of approximately $15.9 million under the previous agreement effective
February 2005 to an aggregate of approximately $9.6 million. Under the September
2005 Agreement, the financing facilities consisted of an import facility of
approximately $7.8 million and a $1.9 million foreign exchange facility, and
CCHK agreed to provide HSBC with security over cash deposits in the amount of
$2.0 million.
In January 2006, CCHK accepted a revised proposal from HSBC (the "January 2006
Agreement"). Under the January 2006 Agreement, the $1.9 million foreign exchange
facility was eliminated and CCHK agreed to provide HSBC with additional security
over cash deposits in the amount of $6.2 million. In addition to the import
facility of approximately $7.8 million, the security also covered a guarantee
facility of 380,000 Euros (equal to approximately $500,000), resulting in the
required aggregate security over cash deposits of approximately $8.3 million.
Upon receipt of CCHK's acceptance of the proposal and CCHK's providing the
additional security of $6.2 million, HSBC agreed to cancel: (i) our corporate
guarantees up to the aggregate amount of $13.7 million and 380,000 Euros; (ii)
certain liens securing substantially all of CCHK's assets; (iii) the Letters of
Undertaking from CCHK to HSBC, pursuant to which, among other things, CCHK was
subject to certain covenants; and (iv) any and all of our and CCHK's obligations
under two subordination agreements between CCHK and us, each dated March 31,
2005, pursuant to which we and HSBC agreed to subordinate approximately $20
million in inter-company payables from CCHK to us to any amounts that CCHK owed
to HSBC.
On August 1, 2006, CCHK accepted HSBC's proposal to renew the demand financing
facilities under the same terms and conditions as contained in the January 2006
Agreement. The renewed financing facilities are subject to review by HSBC at any
time, and, in any event, by June 15, 2007. See Note 9, Short-Term Borrowings and
Financing Facilities, in the Notes to Consolidated Financial Statements for more
information regarding the Hong Kong financing facilities.
At July 1, 2006 and July 2, 2005, we had zero and $2.9 million, respectively, in
short-term borrowings outstanding under the import facility described above. The
weighted average borrowing rates on the short-term borrowings as of July 1, 2006
and July 2, 2005, were 6.79% and 4.15%, respectively.
At July 1, 2006 and July 2, 2005, we had $8.3 million and $8.4 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 are issued under our HSBC financing facilities.
38
Exchange Offer - On August 28, 2001, we launched an offer to exchange
outstanding stock options that had an exercise price of more than $7.00 per
share for new options to purchase 75% of the shares subject to the outstanding
options at an exercise price of $5.97 per share representing the closing price
of the common stock reported on the NASDAQ National Market on the date the Board
of Directors approved the exchange offer. The exchange offer expired on October
16, 2001. We accepted for exchange and cancelled options to purchase a total of
1,375,876 shares of common stock and issued new options to purchase a total of
1,031,908 shares of common stock in exchange for the cancelled options. As a
result of the exchange offer, we were previously required to apply variable
accounting to these new stock options until the options are exercised, cancelled
or expired unless the price of our common stock at fiscal year end is less than
the exercise price of the repriced stock options. For fiscal 2005, we did not
record any variable stock-based compensation expense in our consolidated
statement of operations because the stock price of our common stock on July 2,
2005 was below the exercise price of $5.97. For fiscal 2004, variable
stock-based compensation income was $0.7 million because our stock price on July
3, 2004 was lower than the price of our common stock used to compute variable
stock-based compensation expense in previous quarters. Because the determination
of variable accounting expense associated with the repriced stock options is
dependent, in part, on our closing stock price at the end of each prospective
reporting period, it is not possible to determine its future impact, either
favorable or unfavorable, on our results of operations. On July 3, 2005 we
adopted SFAS No. 123R. We are no longer required to apply SFAS No. 148 and
variable accounting to our outstanding repriced stock options. See Note 1,
Description of Business and Summary of Significant Accounting Policies and Note
13, Stock Options, in the Notes to Consolidated Financial Statements.
License Agreements - See Note 16, Commitments and Contingencies, in the Notes to
Consolidated Financial Statements for a discussion of our licensing activities.
Intellectual Property Claims - See Note 16, Commitments and Contingencies and
Note 17, Litigation and Settlements, in the Notes to Consolidated Financial
Statements regarding intellectual property claims and litigations.
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.
ACCELERATED FILER STATUS
On December 21, 2005, the SEC published final rules that, among other things,
revised the definition of "accelerated filer" to make it simpler for accelerated
filers whose public float falls below the $50 million threshold to exit
accelerated filer status. Under the new rules, an accelerated filer that has
voting and non-voting equity held by non-affiliates of less then $50 million is
permitted to exit accelerated filer status at the end of the fiscal year in
which its equity falls below $50 million. This measurement is taken at the end
of the company's second fiscal quarter. If it is determined that the company is
no longer an accelerated filer, it will be permitted to file its annual report
for that year and subsequent periodic reports on a non-accelerated basis.
Accelerated filer status affects an issuer's deadlines for filing its periodic
reports with the SEC. Additionally, a non-accelerated filer is not required to
comply with the requirements of Section 404 with respect to an assessment of its
internal control over financial reporting until its first fiscal year ending on
or after December 15, 2007.
39
Since our closing common stock price on December 30, 2005 was $1.19 per share
and, of the approximately 28.7 million shares outstanding, at least 29% were
held by our affiliates, our public float approximated $24.2 million as of such
date. As a result, we exited accelerated filer status at the end of fiscal 2006
and we are now treated as a non-accelerated filer with respect to the filing
deadline for this 2006 Annual Report on Form 10-K ("Form 10-K") and for the
three quarterly reports that we will file with the SEC during fiscal 2007.
As a non-accelerated filer, we are required to file our Form 10-K within 90 days
(increased from 75 days for accelerated filers) after the fiscal year end and
our quarterly reports within 45 days (increased from 40 days for accelerated
filers) after the fiscal quarter end. We are also not required to comply with
the requirements of Section 404 until our 2008 fiscal year, which will provide
us with temporary relief from compliance costs, including, without limitation,
the costs incurred in connection with an annual audit related to the
effectiveness of our internal control over financial reporting by our
independent registered public accounting firm. During the period that we are
treated as a non-accelerated filer, we will, however, continue to incur costs
for remediating the material weaknesses that we believe have not yet been
remediated and for maintaining effective internal control over our financial
reporting.
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 and 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 July 1, 2006, our exposure to changes in interest rates was limited, since we
had no outstanding debt. Since we have no outstanding debt, we do not deem
interest rate risk to be significant or material to our financial condition or
results of operations. We do not presently use derivative instruments to adjust
our interest rate risk profile. We do not utilize financial instruments for
trading or speculative purposes, nor do we utilize leveraged financial
instruments.
Each of our foreign subsidiaries purchases their inventories in U.S. Dollars and
certain of their sales are in foreign currency, thereby creating an exposure to
fluctuations in foreign currency exchange rates. We have purchased and continue
to purchase in foreign currencies certain components, products, raw materials
and services needed to manufacture and sell our products. The impact of foreign
exchange transactions is reflected in our statements of operations. Although we
have previously analyzed the benefits and costs associated with hedging against
foreign currency fluctuations, as of July 1, 2006, we were not engaged in any
hedging activities, and we had no forward exchange contracts outstanding.
40
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm 42
Report of Independent Registered Public Accounting Firm 43
Consolidated Balance Sheets at July 1, 2006 and July 2, 2005 44
Consolidated Statements of Operations for the years ended July 1, 2006,
July 2, 2005 and July 3, 2004 45
Consolidated Statements of Stockholders' Equity for the years ended July 1,
2006, July 2, 2005 and July 3, 2004 46
Consolidated Statements of Cash Flows for the years ended July 1, 2006,
July 2, 2005 and July 3, 2004 47
Notes to Consolidated Financial Statements 48
41
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Concord Camera Corp.
We have audited the accompanying consolidated balance sheets of Concord Camera
Corp. and subsidiaries as of July 1, 2006 and July 2, 2005 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years then ended. We have also audited the schedule for the years
ended July 1, 2006 and July 2, 2005 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. 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 subsidiaries at July 1, 2006 and July 2, 2005, and the results
of its operations and its cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States of America.
Also, in our opinion, the 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 8, 2006
42
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Concord Camera Corp.
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of Concord Camera Corp. and subsidiaries
for the year ended July 3, 2004. Our audit also included the financial statement
schedule listed in the Index at Item 15(a). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audit.
We conducted our audit in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the Company's internal control over financial reporting. Our
audit 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of Concord Camera Corp. and subsidiaries for the year ended July 3,
2004, in conformity with U.S. generally accepted accounting principles. Also in
our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
As discussed in Note 5 to the consolidated financial statements, in the year
ended July 3, 2004, the Company changed its method of accounting with respect to
the allocation of manufacturing labor and overhead costs to inventories.
/s/ Ernst & Young LLP
----------------------------------------
Certified Public Accountants
Fort Lauderdale, Florida
September 28, 2004
43
CONCORD CAMERA CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
JULY 1, JULY 2,
2006 2005
-------- --------
ASSETS
Current Assets:
Cash and cash equivalents $ 6,795 $ 8,016
Restricted cash 8,264 --
Short-term investments 23,550 35,200
Accounts receivable, net 16,648 31,860
Inventories 28,260 36,382
Deferred compensation assets 372 8,711
Prepaid expenses and other current assets 2,905 2,708
-------- --------
Total current assets 86,794 122,877
Property, plant and equipment, net 13,778 16,672
Other assets 4,170 7,207
-------- --------
Total assets $104,742 $146,756
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings under financing facilities $ -- $ 2,936
Accounts payable 23,366 32,257
Accrued expenses 14,711 14,108
Deferred compensation liabilities 315 8,688
Other current liabilities 1,559 3,127
-------- --------
Total current liabilities 39,951 61,116
Other long-term liabilities 1,824 3,337
-------- --------
Total liabilities 41,775 64,453
Commitments and contingencies
Stockholders' Equity:
Blank check preferred stock, no par value,
1,000 shares authorized, none issued -- --
Common stock, no par value, 100,000 shares
authorized; 30,925 shares issued
as of July 1, 2006 and July 2, 2005 143,518 143,518
Additional paid-in capital 5,128 4,853
Deferred share arrangement 624 624
Accumulated deficit (80,686) (61,075)
-------- --------
68,584 87,920
Less: treasury stock, at cost, 1,735 shares as
of July 1, 2006 and July 2, 2005 (4,993) (4,993)
Less: common stock held in trust, 509 shares as
of July 1, 2006 and July 2, 2005 (624) (624)
-------- --------
Total stockholders' equity 62,967 82,303
-------- --------
Total liabilities and stockholders' equity $104,742 $146,756
======== ========
See accompanying notes to consolidated financial statements.
44
CONCORD CAMERA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Fiscal Year Ended
------------------------------
July 1, July 2, July 3,
2006 2005 2004
-------- -------- --------
Net sales $137,529 $174,348 $203,132
Cost of products sold 122,928 180,130 188,954
-------- -------- --------
Gross profit (deficit) 14,601 (5,782) 14,178
Selling expenses 13,895 16,846 13,522
General and administrative expenses 20,978 22,948 26,842
Goodwill impairment -- -- 3,721
Variable stock-based compensation (income) -- -- (659)
-------- -------- --------
Operating loss (20,272) (45,576) (29,248)
Interest expense 374 931 715
Other income, net (1,142) (1,770) (500)
-------- -------- --------
Loss before income taxes (19,504) (44,737) (29,463)
Provision for income taxes 107 186 7,537
-------- -------- --------
Loss before extraordinary item (19,611) (44,923) (37,000)
Extraordinary gain - acquired net assets in
excess of cost -- -- 5,778
-------- -------- --------
Net loss $(19,611) $(44,923) $(31,222)
======== ======== ========
Net loss per common share:
Basic and diluted
Loss before extraordinary item $ (0.67) $ (1.54) $ (1.29)
Extraordinary gain -- -- 0.20
-------- -------- --------
Loss income per common share $ (0.67) $ (1.54) $ (1.09)
======== ======== ========
Weighted average common shares outstanding --
basic and diluted 29,190 29,157 28,716
======== ======== ========
See accompanying notes to consolidated financial statements.
45
CONCORD CAMERA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Common Stock (Accumulated
---------------- Additional Deferred Deferred Deficit) Treasury Stock
Issued Stated Paid-in Stock-Based Share Retained ---------------
Shares Value Capital Compensation Arrangement Earnings Shares Cost
------ -------- ---------- ------------ ----------- ------------ ------ -------
Balance as of June 28, 2003 29,464 $141,109 $5,407 $(190) $ -- $ 15,070 1,543 $(4,137)
Exercise of stock options
and warrants 1,108 1,964 -- -- -- -- -- --
Deferred stock-based
compensation -- -- -- 161 -- -- -- --
Purchase of treasury stock -- -- -- -- -- -- 56 (483)
Common stock held in Trust -- -- -- -- -- -- -- --
Deferred share arrangement -- -- -- -- 413 -- -- --
Stock-based compensation -- -- (554) -- -- -- -- --
Net loss -- -- -- -- -- (31,222) -- --
Realized loss on securities -- -- -- -- -- -- -- --
Comprehensive loss -- -- -- -- -- -- -- --
-----------------------------------------------------------------------------------------------------------------------
Balance as of July 3, 2004 30,572 $143,073 $4,853 $ (29) $413 $(16,152) 1,599 $(4,620)
Exercise of stock options
and warrants 353 445 -- -- -- -- -- --
Deferred stock-based
compensation -- -- -- 29 -- -- -- --
Purchase of treasury stock -- -- -- -- -- -- 136 (373)
Common stock held in Trust -- -- -- -- -- -- -- --
Deferred share arrangement -- -- -- -- 211 -- -- --
Net loss -- -- -- -- -- (44,923) -- --
-----------------------------------------------------------------------------------------------------------------------
Balance as of July 2, 2005 30,925 $143,518 $4,853 $ -- $624 $(61,075) 1,735 $(4,993)
Stock-based compensation
expense -- -- 275 -- -- -- -- --
Net loss -- -- -- -- -- (19,611) -- --
-----------------------------------------------------------------------------------------------------------------------
Balance as of July 1, 2006 30,925 $143,518 $5,128 $ -- $624 $(80,686) 1,735 $(4,993)
=======================================================================================================================
Common Stock Accumulated
Held in Trust Other
------------- Comprehensive
Shares Cost Loss Total
------ ----- ------------- --------
Balance as of June 28, 2003 -- -- $(431) $156,828
Exercise of stock options
and warrants -- -- -- 1,964
Deferred stock-based
compensation -- -- -- 161
Purchase of treasury stock -- -- -- (483)
Common stock held in Trust 331 (413) -- (413)
Deferred share arrangement -- -- -- 413
Stock-based compensation -- -- -- (554)
Net loss -- -- -- (31,222)
Realized loss on securities -- -- 431 431
--------
Comprehensive loss -- 0 -- (30,791)
---------------------------------------------------------------------
Balance as of July 3, 2004 331 $(413) $ -- $127,125
Exercise of stock options
and warrants -- -- -- 445
Deferred stock-based
compensation -- -- -- 29
Purchase of treasury stock -- -- -- (373)
Common stock held in Trust 178 (211) -- (211)
Deferred share arrangement -- -- -- 211
Net loss -- -- -- (44,923)
---------------------------------------------------------------------
Balance as of July 2, 2005 509 $(624) $ -- $ 82,303
Stock-based compensation
expense -- -- -- 275
Net loss -- -- -- (19,611)
---------------------------------------------------------------------
Balance as of July 1, 2006 509 $(624) $ -- $ 62,967
=====================================================================
See accompanying notes to consolidated financial statements.
46
CONCORD CAMERA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Fiscal Year Ended
----------------------------
July 1, July 2, July 3,
2006 2005 2004
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(19,611) $(44,923) $(31,222)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for inventory charges 1,586 12,954 11,100
Depreciation and amortization 5,164 8,823 7,872
(Gain) loss on sale of short-term investments -- (1,124) 916
Gain on sale of building -- (450) --
Deferred income taxes -- -- 7,204
Extraordinary gain -- -- (5,778)
Goodwill impairment -- -- 3,721
Impairment of long-lived assets 1,828 -- --
Stock-based compensation 275 -- --
Variable stock-based compensation income -- -- (659)
Changes in operating assets and liabilities:
Accounts receivable, net 15,212 (2,493) 11,643
Inventories 6,536 3,081 (23,021)
Deferred compensation assets 8,339 (34) (2,206)
Prepaid expenses and other current
assets (197) 3,806 (6,310)
Other assets 583 1,159 2,976
Accounts payable (8,891) 13,474 (3,694)
Accrued expenses 713 (2,289) 1,159
Restructuring reserve, net of payments (110) -- --
Deferred compensation liabilities (8,373) 773 957
Other current liabilities (1,568) (75) 1,893
Other long-term liabilities (1,513) (473) (1,146)
-------- -------- --------
Net cash used in operating activities (27) (7,791) (24,595)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds (purchases) from sale of short-term
investments, net -- (1,846) 40,254
Proceeds from sales of available-for-sale
investments 52,650 13,401 --
Purchase of available-for-sale investments (41,000) (6,031) (6,155)
Restricted Cash (8,264) -- --
Purchases of property, plant and equipment (1,644) (2,819) (6,806)
Proceeds from sale of property, plant and
equipment -- 941 --
Acquisition, net of cash received -- -- (9,097)
-------- -------- --------
Net cash provided by investing activities 1,742 3,646 18,196
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments) borrowings under financing
facilities, net (2,936) (6,234) 9,170
Net proceeds from issuance of common stock -- 72 1,481
-------- -------- --------
Net cash (used in) provided by financing
activities (2,936) (6,162) 10,651
-------- -------- --------
Net (decrease) increase in cash and cash (1,221) (10,307) 4,252
equivalents
Cash and cash equivalents at beginning of the
year 8,016 18,323 14,071
-------- -------- --------
Cash and cash equivalents at end of the year $ 6,795 $ 8,016 $ 18,323
======== ======== ========
47
See Note 3, Supplemental Cash Flow Information, and accompanying notes to
consolidated financial statements.
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 popularly priced, easy-to-use image
capture products worldwide. The Company's products include single-use, digital
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 facilities in the Peoples Republic of China ("PRC") and outsources
the manufacture of digital cameras and certain of its single-use and 35mm
traditional film cameras for sale to retail sales and distribution ("RSD")
customers. In fiscal 2005 and fiscal 2006, the Company de-emphasized the sale of
digital cameras and the Company does not anticipate digital camera sales will be
material in fiscal 2007. The Company sells its private label and brand-name
products to its RSD 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 2006 and Fiscal 2004 were comprised of 53 weeks;
whereas, Fiscal 2005 was comprised of 52 weeks.
For reference purposes, the Company's Fiscal 2006 quarters are defined as the
quarter ended: October 1, 2005 ("First Quarter Fiscal 2006"), December 31, 2005
("Second Quarter Fiscal 2006"), April 1, 2006 ("Third Quarter Fiscal 2006"), and
July 1, 2006 ("Fourth Quarter Fiscal 2006"). Also for reference purposes, the
Company's fiscal year ending on June 30, 2007 is designated as "Fiscal 2007."
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the United States
and include the accounts of the Company. All significant intercompany balances
and transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The more significant of the
Company's estimates includes sales returns and allowances, provision for bad
debts, inventory valuation charges, realizability of intangibles including
goodwill, realizability of deferred tax assets, and accounting for litigation
and settlements, among others.
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
48
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 2006, Fiscal 2005 and Fiscal
2004 included in "Other income, net" in the accompanying consolidated statements
of operations are approximately $0.3 million, $0.4 million, and ($0.7) million,
respectively, of net foreign currency losses (gains).
HEDGING ACTIVITIES
During Fiscal 2006, Fiscal 2005 and Fiscal 2004, 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 2006, there were two such
customers. See Note 21, 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. Deferred compensation related assets and liabilities are valued at fair
market value based upon the fair market value of their underlying investments.
Because judgment is required in interpreting market data to develop estimates of
fair value, the estimates are not necessarily indicative of the amounts that
could be realized or would be paid in a current market exchange. The effect of
using different market assumptions or estimation methodologies may be material
to the estimated fair value amounts.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities of
three months or less when purchased to be cash equivalents.
RESTRICTED CASH
The Company's financing facilities require a minimum cash deposit as security in
the amount of $8.3 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
July 1, 2006 and July 2, 2005 was $8.3 million and zero, respectively on the
consolidated balance sheets.
49
INVESTMENTS
At July 1, 2006 and July 2, 2005, 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 2006, 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. During Fiscal
2004, the Company recorded a $0.9 million loss as a result of its sale of
short-term investments. The (gain) loss on the sale of short-term investments is
included in "Other income, net" in the accompanying consolidated statement of
operations. Investment income of $1.5 million, $1.0 million and $1.3 million
related to the short-term investments is included in "Other income, net" for
Fiscal 2006, Fiscal 2005 and Fiscal 2004, 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 5,
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 2006,
Fiscal 2005 and Fiscal 2004 was approximately $5.6 million, $8.2 million and
$7.5 million, respectively. Depreciation expense for Fiscal 2005 and Fiscal 2004
includes $1.4 million and $1.8 million, respectively, related to a reduction in
the remaining useful lives of certain molds and tooling. See Note 6, Property,
Plant and Equipment, Net and Note 19, Restructuring and Other Charges for
further discussion.
Useful Lives
Asset Class (in years)
------------------------------ ------------
Buildings 30-50
Equipment, including tooling 1-10
Office furniture and equipment 3-7
Transportation equipment 5-7
Leasehold improvements 3-11
GOODWILL, NET
Goodwill represents the excess of purchase price over the fair value of net
assets acquired. The Company applies the provisions of Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets, ("SFAS No.
142"). In accordance with SFAS No. 142, goodwill is not amortized, but is
required to be assessed for impairment at least annually. The Company performs
its goodwill
50
impairment tests on or about June 30 of each year. The Company did not recognize
any goodwill charges for Fiscal 2006 and Fiscal 2005 but determined its
remaining goodwill of $3.7 million at July 3, 2004 was impaired and,
accordingly, this goodwill was written-off during Fiscal 2004. Identifiable
intangible assets that have finite useful lives will continue to be amortized
over their useful lives. The Company's amortizable intangible assets include
patents, trademarks and licenses and their respective costs are amortized on a
straight-line basis over their estimated useful lives. See Note 7, Goodwill, Net
and Note 8, Other Assets.
IMPAIRMENT OF LONG-LIVED 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 2006, Fiscal 2005 and Fiscal 2004, a potential impairment indicator, it
performed an impairment test of its long-lived assets as of July 1, 2006, July
2, 2005 and July 3, 2004. 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 6, Property, Plant and Equipment, Net and Note 19,
Restructuring and Other Charges.
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.
Management has assessed the appropriateness of the timing of revenue recognition
in accordance with SFAS No. 48. After considering the requirements of SFAS No.
48, the Company concluded it would defer recognition of revenue from certain
customers until such customers' transactions meet all of the requirements of
SFAS No. 48.
SHIPPING, HANDLING AND RELATED COSTS
The Company incurred shipping, handling and related costs of approximately $3.1
million, $3.6 million and $2.4 million during Fiscal 2006, Fiscal 2005 and
Fiscal 2004, 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 facilities and warehouses) are included in the
accompanying consolidated statements of operations under the caption "Cost of
products sold."
51
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 $3.8 million, $8.4 million and $10.5 million during Fiscal
2006, Fiscal 2005 and Fiscal 2004, 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.
STOCK-BASED COMPENSATION
The Company has four stock-based employee compensation plans, which are
described more fully in Note 13. Prior to July 1, 2005, the Company accounted
for those 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 stock-based compensation was recognized in the consolidated
statements of operations for Fiscal 2005 or Fiscal 2004, 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. Effective July 3, 2005, the
Company adopted the fair value recognition provisions of SFAS No. 123R, using
the modified-prospective-transition method. Under that transition method,
compensation cost recognized in Fiscal 2006 includes: (a) compensation cost for
all share-based payments granted prior to, but not yet vested as of, July 3,
2005, based on the grant-date fair value estimated in accordance with the
original provisions of SFAS No. 123 and (b) compensation cost for all
share-based payments granted subsequent to July 3, 2005, based on the grant-date
fair value estimated in accordance with the provisions of SFAS No. 123R. Results
for prior periods have not been restated. As a result of adopting SFAS 123R on
July 3, 2005, the Company's loss before income taxes for the year ended July 1,
2006 includes approximately $275,000 of stock based compensation expense.
52
The total income tax benefit recognized in the consolidated statement of
operations for the stock-based compensation arrangements was $0 for Fiscal 2006.
The Company considers all of its stock-based compensation expense as a component
of general and administrative expenses. In addition, no amount of stock-based
compensation was capitalized as part of capital expenditures or inventory for
Fiscal 2006.
In Fiscal 2002, the Company consummated an exchange offer for certain
outstanding stock options and, as a result, was required to apply variable
stock-based compensation accounting for the new options issued in the exchange
until they were exercised, cancelled or expired. For the repriced options, the
Company was only subject to variable stock-based compensation expense when the
Company's stock price was greater than $5.97. In Fiscal 2005 the Company
recorded $0 variable stock-based compensation expense in the consolidated
statement of operations because its Common Stock price on July 2, 2005 was below
the new repriced stock options exercise price of $5.97 at the beginning and end
of the fiscal year. For Fiscal 2004, the Company recorded $0.7 million in
variable stock-based compensation income in the consolidated statement of
operations because its Common Stock price on July 3, 2004 was lower than the
Common Stock price used to compute variable stock-based compensation expense
earlier in the previous quarters. The Company adopted SFAS No 123R on July 3,
2005, and no longer applies the variable method of accounting for stock options.
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 two years ended July 2, 2005:
Fiscal Year
---------------------
2005 2004
--------- ---------
Risk-Free Interest Rates 3.8% 2.8%
Expected Option Lives 3-5 years 3-5 years
Expected Volatilities 75.1 75.6
Expected Dividend Yields 0% 0%
Weighted Average Fair Value
of Options Granted $1.16 $5.82
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):
53
Fiscal Year
-------------------
2005 2004
-------- --------
Net loss, as reported $(44,923) $(31,222)
Deduct/Add: variable stock-based compensation (income)
expense, net of related tax effects, included in the
determination of net loss as reported -- (659)
Deduct: total stock-based compensation
expense determined under fair value based
method for all awards, (858) (1,319)
-------- --------
Pro forma net loss $(45,781) $(33,200)
======== ========
Loss per share:
Basic -- as reported $ (1.54) $ (1.09)
======== ========
Basic -- pro forma $ (1.57) $ (1.16)
======== ========
Diluted -- as reported $ (1.54) $ (1.09)
======== ========
Diluted -- pro forma $ (1.57) $ (1.16)
======== ========
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 15, Income Taxes.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income in accordance with SFAS No. 130, Reporting Comprehensive
Income, ("SFAS No. 130") includes net (loss) income adjusted for certain
revenues, expenses, gains and losses that are excluded from net (loss) income
under accounting principles generally accepted in the U.S. Unrealized gains
related to the Company's available-for-sale investments are excluded from net
(loss) income. During Fiscal 2006, Fiscal 2005 and Fiscal 2004, the Company's
comprehensive (loss) was ($19.6) million, ($44.9) million and ($30.8) million.
During Fiscal 2006 and Fiscal 2005, the Company did not have any items of other
comprehensive income or (loss). During Fiscal 2004, the Company had other
comprehensive income of $0.4 million related to a realized loss on
available-for-sale securities. See "Investments" above for a further discussion
of available-for-sale securities.
(LOSS) INCOME PER SHARE
Basic and diluted (loss) income per share are calculated in accordance with SFAS
No. 128, Earnings per Share ("SFAS No. 128"). All applicable (loss) income per
share amounts have been presented in conformity with SFAS No. 128 requirements.
During the past three fiscal years, the Company has issued shares of Common
Stock upon the exercise of stock options as follows: Fiscal 2006 (0 shares),
Fiscal 2005 (353,478 shares) and Fiscal 2004 (1,107,679 shares). In Fiscal 2006,
Fiscal 2005 and Fiscal 2004, potentially dilutive securities comprised of
options to purchase 337,354 shares, 2,265,889 shares and 3,325,944 shares of
Common Stock, respectively, were not included in the calculation of diluted loss
per share because their impact was antidilutive.
For Fiscal 2006 and Fiscal 2005, the weighted average effect of the 509,054
shares for which delivery was deferred under the Company's Deferred Delivery
Plan, was included in the denominator of both
54
basic and diluted loss per share calculations. For Fiscal 2004, the weighted
average effect of 331,011 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 12, Deferred Share
Arrangement.
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 whether the adoption of FIN 48 will have a
material effect on its consolidated financial position, results of operations or
cash flows.
NOTE 2 - ACQUISITION
(tables in thousands)
On May 10, 2004, the Company completed the acquisition of Jenimage Europe GmbH
("Jenimage"), a German corporation. Jenimage, based in Jena, Germany, was merged
with and into the Company's subsidiary, Concord Camera GmbH, and during Fiscal
2006, the combined entity marketed and sold JENOPTIK branded photographic and
imaging products, including digital cameras and 35mm traditional film cameras,
binoculars and accessories. The acquisition expanded the Company's retail sales
and distribution business in Germany and other parts of Europe and resulted in
the consolidation of certain European operations and departments at our office
in Jena, Germany in Fiscal 2005. The acquisition, recorded under the purchase
method of accounting, included the purchase of 100% of the outstanding stock of
Jenimage plus acquisition costs together totaling approximately $14.5 million in
an all cash transaction. The assets acquired and liabilities assumed were
recorded at estimated fair market value at the date of acquisition which
resulted in an excess of estimated fair value of net assets acquired over cost,
or negative goodwill, of $5.8 million, which was recorded as an extraordinary
gain. As the negative goodwill is a permanent income tax difference, no income
taxes have been provided relating to the extraordinary gain.
The operating results of Jenimage have been included in the accompanying
consolidated statements of operations beginning on its date of acquisition.
The components of the purchase price and its allocation are as follows:
Consideration and Acquisition Costs:
Cash paid for Jenimage common stock $ 13,382
Acquisition costs 1,162
--------
$ 14,544
========
55
Allocation of purchase price:
Current assets, including cash of $4,285 $ 25,499
Liabilities assumed (5,177)
Excess of estimated fair value of net assets acquired
over cost (5,778)
--------
$ 14,544
========
Pro forma amounts as if the acquisition had occurred at the beginning of the
earliest period presented are not required as the acquisition was not
significant.
NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION:
(in thousands)
Fiscal Year
------------------
2006 2005 2004
---- ---- ----
Cash paid for interest $184 $442 $ 6
==== ==== ====
Cash paid for income taxes $134 $ -- $353
==== ==== ====
Non-cash Investing Activities:
Deferred Share Arrangement 2005 2004
----- -----
Common stock issued to participant and trust $ 373 $ 483
Treasury stock received by Company (373) (483)
Deferred share arrangement obligation to participant 211 413
Common stock received and held in trust (211) (413)
----- -----
$ -- $ --
===== =====
See Note 12, Deferred Share Arrangement for a description of the deferred share
arrangement transactions in Fiscal 2005 and Fiscal 2004. See also Note 23,
Subsequent Events, regarding the expiration of one of the deferral periods and
the release of the deferred shares to the beneficiary of the trust in which the
shares were held.
NOTE 4 - ACCOUNTS RECEIVABLE, NET:
(in thousands)
Accounts receivable, net consists of the following:
July 1, July 2,
2006 2005
------- -------
Trade accounts receivable $20,475 $39,971
Less: allowances for sales returns and allowances,
discounts, and doubtful accounts (3,827) (8,111)
------- -------
Total accounts receivable, net $16,648 $31,860
======= =======
56
NOTE 5 - INVENTORIES:
(table in thousands)
Inventories consist of the following:
July 1, July 2,
2006 2005
------- -------
Raw material, components and work-in-process $ 9,589 $ 6,507
Finished goods 18,671 29,875
------- -------
Total inventories $28,260 $36,382
======= =======
During Fiscal 2006 and Fiscal 2005, the Company recorded inventory related
pre-tax charges of approximately $1.6 million and $13.0 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 of finished goods, components, work-in-process and
raw material. The Company reduced the carrying value of inventories below their
cost basis to their estimated net realizable value at July 2, 2005 and at July
1, 2006. 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 19, Restructuring and Other Charges.
During the First Quarter Fiscal 2004, the Company changed its method of applying
manufacturing labor and overhead costs to inventories. Previously, the Company
used the ratio of labor and overhead costs compared to material costs incurred
during a twelve-month period to estimate labor and overhead costs to be applied
to material costs in inventories at the end of the period. Under this method,
manufacturing labor and overhead costs are applied to inventories using a
standard cost approach to estimate the costs incurred during the procurement and
production processes.
The standard cost approach was made possible by the Company's efforts to update
its information systems and capture additional information related to its
standard costs of manufacturing. Management believes that applying manufacturing
labor and overhead costs to inventories improves the matching of costs incurred
to manufacture the product with their flow through the production process. Under
APB Opinion No. 20, Accounting Changes, this accounting change was considered to
be a change in accounting estimate inseparable from a change in accounting
method. The effect of changing its method of applying manufacturing labor and
overhead costs to inventories during Fiscal 2004, resulted in an increase in
each of cost of products sold and net loss in Fiscal 2004 of approximately $1.7
million ($0.06 per diluted common share) compared to the prior method.
57
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT, NET:
(in thousands)
Property, plant and equipment, net consist of the following:
July 1, July 2,
2006 2005
-------- --------
Buildings $ 6,804 $ 6,804
Equipment, including tooling 36,238 35,686
Office furniture and equipment 15,412 15,440
Transportation equipment 509 567
Leasehold improvements 5,593 5,571
-------- --------
64,556 64,068
Less: accumulated depreciation and amortization (50,778) (47,396)
-------- --------
Total property, plant and equipment, net $ 13,778 $ 16,672
======== ========
During Fiscal 2006, the Company recorded an impairment charge of $0.8 million to
lower the carrying value of certain machinery held for sale. The Company plans
to sell the machinery during Fiscal 2007 and has reclassified the $0.3 million
carrying value of certain machinery to current assets in the accompanying
consolidated balance sheets at July 1, 2006. During Fiscal 2005, the Company
reduced the carrying value and the remaining useful lives of certain molds and
tooling used in the production of certain digital cameras since the Company
believed that these products had a shortened product life due to market
conditions and that these specific molds and tooling did not have alternative
production uses. In Fiscal 2005, the reduction of the remaining useful lives of
the molds and tooling had the effect of decreasing property, plant and
equipment, net by $1.4 million ($.05 per diluted common share), and increasing
depreciation expense by $1.4 million, which amounts were included in the cost of
products sold. See Note 19, Restructuring and Other Charges.
In Fiscal 2005, the Company sold an 11,000 square foot building on a one-half
acre parcel in Coalville, England that was used in connection with its
operations in the United Kingdom. Under the terms of sale, the building was sold
for approximately $0.9 million with a carrying value of approximately $0.5
million. Accordingly, in Fiscal 2005, the Company recorded a gain on the sale of
the building in the accompanying consolidated statements of operations of
approximately $0.4 million.
NOTE 7 - GOODWILL, NET
The Company currently does not have any indefinite-lived intangible assets on
its balance sheets. Intangible assets that have finite useful lives will
continue to be amortized over their useful lives. During Fiscal 2004 and in
accordance with SFAS No. 142, the Company performed its annual impairment test
of its existing goodwill on a date established by the Company to be the first
day of the fourth quarter, March 28, 2004, and concluded that no impairment
existed at that date. Subsequent to that date, the Company's stock price
experienced a significant decline in market value indicating the possible
existence of impairment. Since the Company evaluates goodwill impairment at the
entity level utilizing a single reporting unit approach, it used the market
value of its Common Stock as the basis to compute the fair value of the entity.
Accordingly, the Company reassessed the realizability of goodwill as of July 3,
2004 and concluded its goodwill was impaired. As a result, the Company recorded
an impairment charge in the amount of $3.7 million for the full carrying value
of goodwill during Fiscal 2004.
58
NOTE 8 - OTHER ASSETS
(tables in thousands)
Other assets consist of:
July 1, July 2,
2006 2005
------- -------
Patents, trademarks and licenses, net $3,800 $5,227
Deferred compensation assets 234 1,878
Other 136 102
------ ------
Total other assets $4,170 $7,207
====== ======
Patents, trademarks, and licenses, net consist of the following:
Useful Lives July 1, July 2,
(in Years) 2006 2005
------------ ------- -------
Patents, trademarks and licenses 3 - 20 $10,109 $10,486
Less: accumulated amortization (6,309) (5,259)
------- -------
Patents, trademarks and licenses, net $ 3,800 $ 5,227
======= =======
As of July 1, 2006, the aggregate weighted average amortization period for
patents, trademarks, and licenses was approximately 11 years. For Fiscal 2006,
Fiscal 2005 and Fiscal 2004, intangible asset amortization expense was $0.4
million, $0.6 million and $0.3 million, respectively. Estimated future aggregate
annual amortization expense for each of the next five years is as follows:
Estimated Aggregate
Fiscal Year Amortization Expense
----------- --------------------
2007 $453
2008 426
2009 426
2010 237
2011 237
The current portion of total deferred compensation assets is recorded in
"Deferred compensation asset" in the accompanying balance sheets as of July 1,
2006 and July 2, 2005.
See Note 10, Other Long-Term Liabilities for a description of deferred
compensation, Note 15, Income Taxes for a description of deferred income tax
assets, and Note 16, Commitments and Contingencies for a description of license
and royalty agreements and the impairment charges related to the Jenoptik
license.
NOTE 9 - SHORT-TERM BORROWINGS AND FINANCING FACILITIES
HONG KONG FINANCING FACILITIES
In January 2006, Concord Camera HK Limited ("CCHK"), the Company's Hong Kong
subsidiary, accepted a proposal (the "January 2006 Agreement") from The Hongkong
and Shanghai Banking Corporation Limited ("HSBC") to provide various demand
financing facilities. The facilities provide an aggregate of approximately $8.3
million in borrowing capacity and consist of an import facility of approximately
$7.8 million and a guarantee facility of 380,000 Euros (equal to approximately
$0.5 million). Upon receipt of CCHK's acceptance of the proposal, HSBC agreed to
cancel (i) the Company's corporate guarantees up to the aggregate amount of
$13.7 million and 380,000 Euros; (ii) certain liens securing substantially all
of CCHK's assets; (iii) Letters of Undertaking from CCHK to HSBC, pursuant to
which, among other things, CCHK was subject to certain covenants; and (iv) any
and all obligations of
59
the Company and CCHK pursuant to two subordination agreements each dated March
31, 2005 (the "Subordination Agreements"). Pursuant to the January 2006
Agreement, CCHK and HSBC also agreed, among other things, that CCHK will provide
HSBC with cash deposits pledged as security in an aggregate amount of
approximately $8.3 million. On August 1, 2006, CCHK accepted a proposal from
HSBC to renew the financing facilities on the same terms and conditions as the
January 2006 Agreement. See Note 23, Subsequent Events, regarding the renewal of
the HSBC financing facilities.
The HSBC facilities are denominated in Hong Kong Dollars and bear interest at
variable rates, as follows: 1.75% over the Hong Kong Interbank Offered Rate on
import loans denominated in Hong Kong Dollars and 1.75% over the Singapore
Interbank Offered Rate for transactions denominated in currency other than the
Hong Kong Dollar. Since 1983, the Hong Kong Dollar has been pegged to the U.S.
Dollar.
Effective January 31, 2005, CCHK terminated and repaid its then outstanding
revolving financing facility, denominated in Euros, in an amount of
approximately $13 million (decreased from January 1, 2005 quarter-end due to
foreign currency rate fluctuations) constituting all obligations owed
thereunder. Neither the Company nor CCHK incurred any termination fees or
penalties in connection with the repayment and termination of the revolving
facility.
In February 2005, HSBC provided to CCHK an aggregate of approximately $15.9
million in borrowing capacity under a proposal from HSBC dated January 21, 2005
(the "January 2005 Agreement"). The January 2005 Agreement provided CCHK with
revolving financing facilities consisting of: (i) an import facility of
approximately $14.0 million with a packing credit and export sub-limit facility
of approximately $2.6 million; and (ii) a foreign exchange facility of
approximately $1.9 million. The Company guaranteed all of the amounts under the
financing facilities. Pursuant to an agreement dated June 10, 2004, CCHK granted
a security interest in substantially all of its assets to HSBC. Also in February
2005, the Company and HSBC agreed, among other things, to subordinate
approximately $20 million in inter-company payables from CCHK to the Company to
any amounts owing or that may in the future become owing to HSBC by CCHK, which
resulted in the Company and CCHK entering into the Subordination Agreements.
During Fiscal 2005, the financing facilities were subject to certain covenants,
and the Company was in compliance with all such covenants as of July 2, 2005.
In October 2005, CCHK accepted a proposal from HSBC dated September 20, 2005
(the "September Agreement") to reduce the financing facilities. Under the terms
of the September Agreement, HSBC provided CCHK with an aggregate of
approximately $9.6 million in total borrowing capacity, comprising an import
facility of approximately $7.8 million reduced from the $14.0 million available
under the January 2005 Agreement and an unchanged $1.9 million foreign exchange
facility. Under the September Agreement, CCHK also agreed to provide HSBC with
security over cash deposits in the amount of $2.0 million. All other material
terms of the September Agreement remained unchanged from the terms of the
January 2005 Agreement.
At July 1, 2006 and July 2, 2005, the Company had zero and $2.9 million,
respectively, in short-term borrowings outstanding under the import facility
described above. The weighted average borrowing rates on the short-term
borrowings as of July 1, 2006 and July 2, 2005, were 6.79% and 4.15%,
respectively.
At July 1, 2006 and July 2, 2005, the Company had $8.3 million and $8.4 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 HSBC financing
facilities.
60
NOTE 10 - OTHER LONG-TERM LIABILITIES
(tables in thousands)
Other long-term liabilities consist of the following:
July 1, July 2,
2006 2005
------- -------
Licensing and royalty related obligations $1,588 $1,891
Deferred compensation liabilities 52 1,228
Other 184 218
------ ------
Total other long-term liabilities $1,824 $3,337
====== ======
Deferred compensation obligations represent the total vested account balances
for all participants included in the Company's supplemental executive retirement
plans ("SERPs") and for those participants who have individual deferred
compensation arrangements under SERPs between the Company and certain of its
executive officers. The current portion related to deferred compensation
liabilities is recorded in "Deferred Compensation Liabilities" in the
accompanying balance sheets as of July 1, 2006 and July 2, 2005. Current and
long-term assets associated with such deferred compensation arrangements were
also recorded in "Deferred Compensation Assets" and "Other assets,"
respectively, in the accompanying balance sheets as of July 1, 2006 and July 2,
2005. In connection with the SERPs, the Company contributed funds into separate
trusts established for the purpose of satisfying the Company's obligations under
each SERP. The underlying assets are recorded at fair value and primarily
represent cash, marketable equity and fixed income securities invested at the
participants' direction. Changes in the vested account balances of the deferred
compensation obligations as well as changes in the fair value of the underlying
assets are recorded in earnings. Licensing and royalty related obligations
represent the total of future minimum royalty payment amounts and an amount
equal to the present value of future payments related to various licensing
agreements. See Note 16, Commitments and Contingencies.
NOTE 11 - 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.
The Company has not declared or paid any cash dividends for any of the fiscal
years presented in the accompanying consolidated financial statements.
NOTE 12 - 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 136,269 fully paid and owned shares of Common Stock to the
Company in payment of the exercise price (the "Payment Shares") of his option to
purchase 314,312 shares of Common Stock ("2005 Delivery Plan Transaction"). Upon
consummation of the 2005 Delivery Plan Transaction, the 136,269 Payment Shares
were classified as "Treasury stock" and recorded at a cost of $373,375. The
Company issued 314,312 new shares of Common Stock and classified them as "Common
stock" at a cost of $373,375, of which 136,269 shares were issued to the
Chairman in exchange for the Payment Shares. The remaining 178,043 shares, the
delivery of which was deferred by the Chairman, were issued to a rabbi trust.
The 178,043 shares held in the rabbi trust 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
61
"Deferred share arrangement" in the stockholders' equity section of the
accompanying consolidated balance sheets. On August 9, 2006, the Chairman took
delivery of the 178,043 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. See Note 23, Subsequent Events.
Pursuant to an election previously made under the Deferred Delivery Plan on July
14, 2003, the Chairman exercised an option to purchase 387,000 shares of Common
Stock and tendered 55,989 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 2004 Delivery Plan Transaction, the 55,989 Payment
Shares were classified as "Treasury stock" and recorded at a cost of $482,625.
The Company issued 387,000 new shares of Common Stock and classified them as
"Common stock" at a cost of $482,625, of which 55,989 shares were issued to the
Chairman in exchange for the Payment Shares. The remaining 331,011 shares, the
delivery of which was deferred by the Chairman, were issued to a rabbi trust.
The 331,011 shares held in the rabbi trust 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.
NOTE 13 - STOCK OPTION PLANS
On September 4, 2002, the Company adopted a non-qualified stock option plan that
provides for a maximum number of 500,000 shares of Common Stock for awards
issuable to new employees ("SEP 2002 Plan"). The SEP 2002 Plan permits the
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 500,000 shares of Common Stock for awards
issuable to non-officer employees, new employees, and consultants ("APR 2002
Plan"). The APR 2002 Plan permits the 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 $7.00 per share for new options to
purchase 75% of the shares subject to the outstanding options at an exercise
price of $5.97 per share (the closing price of the Common Stock as reported on
the NASDAQ National Market on the date the Board approved the exchange offer).
The exchange offer expired on October 16, 2001. The Company accepted for
exchange and cancelled options to purchase a total of 1,375,876 shares of Common
Stock and issued new options to purchase a total of 1,031,908 shares of Common
Stock in exchange for the cancelled options. As a result of the exchange offer,
the Company applied variable accounting for these new stock options until July
3, 2005, when the Company adopted FASB 123R.
The Company's 1993 Incentive Plan permitted the Compensation Committee to grant
a variety of Common Stock awards. As amended as of July 1, 2006, 1,117,701
shares of Common Stock were subject to the 1993 Incentive Plan. The 1993
Incentive Plan expired on December 1, 2003.
In addition, the Company, from time to time, has granted stock options to
certain individuals as 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
62
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 2006 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 2006
-----------
Expected volatility 64%-73.4%
Expected dividend yield 0%
Expected term (in years) 5
Risk-free interest rate 4.0%-5.1%
A summary of stock option activity under the Company's stock option plans as of
July 1, 2006, 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 2, 2005 2,265,889 $4.40
Granted 80,000 $1.17
Exercised -- --
Canceled 707,436 $4.48
---------
Outstanding at July 1, 2006 1,638,453 $4.21 3.2 $--
=========
Exercisable at July 1, 2006 1,477,591 $4.40 2.7 $--
=========
The weighted average grant-date fair value of options granted during Fiscal
2006, Fiscal 2005 and Fiscal 2004 was $0.71, $1.29 and $4.71 respectively. No
options were exercised during Fiscal 2006. The total intrinsic value of options
exercised during Fiscal 2006, Fiscal 2005 and Fiscal 2004 was approximately, $0,
$508,000 and $1,590,000, 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.
63
A summary of the status of the Company's nonvested shares as of July 1, 2006,
and changes during Fiscal 2006 is presented below:
Weighted Average
Grant Date Fair
Nonvested Stock Options Shares Value
------------------------- -------- ----------------
Nonvested at July 2, 2005 344,414 $2.99
Granted 80,000 $0.71
Vested (130,887) $3.87
Canceled (132,665) $2.45
-------
Nonvested at July 1, 2006 160,862 $1.58
=======
As of July 1, 2006, there was approximately $167,000 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 2.7 years. The total fair
value of stock options vested during Fiscal 2006, Fiscal 2005 and Fiscal 2004
was approximately $506,000, $929,000 and $1,580,000, respectively.
NOTE 14 - 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 makes additional
discretionary contributions if the Company achieves certain profitability
requirements.
For Fiscal 2006, Fiscal 2005 and Fiscal 2004, the Company did not make any
contribution to the 401(k) plan.
NOTE 15 - INCOME TAXES
(in thousands)
Loss before income taxes in the accompanying consolidated statements of
operations consists of the following:
Fiscal Year
------------------------------
2006 2005 2004
-------- -------- --------
United States $ (1,224) $ (4,451) $ (1,138)
Foreign (18,280) (40,286) (28,325)
-------- -------- --------
Total $(19,504) $(44,737) $(29,463)
======== ======== ========
The provision (benefit) for income taxes is comprised of the following:
Fiscal Year
----------------------
2006 2005 2004
---- ------ ------
Current:
United States federal and state $ 17 $ -- $ 293
Foreign 90 186 40
Deferred
United States federal and state -- 7,298
Foreign -- (94)
---- ------ ------
$107 $ 186 $7,537
==== ====== ======
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
64
income tax purposes and (b) operating loss carryforwards. The tax effects of
significant items comprising the Company's deferred income tax assets as of July
1, 2006, were as follows:
UNITED STATES FOREIGN
--------------- -------------------
FEDERAL STATE HONG KONG EUROPE TOTAL
------- ----- --------- ------- --------
DEFERRED INCOME TAX ASSETS:
Operating loss carryforwards $ 5,841 $ 269 $ 8,173 $ 1,808 $ 16,091
Reserves not currently deductible 432 55 -- -- 487
Alternative minimum tax credit 227 -- -- -- 227
Depreciation 278 35 -- -- 313
Compensation accruals 997 127 -- -- 1,124
Difference between book and tax
basis of property 1,324 169 -- -- 1,493
Amortization 195 25 -- -- 220
Contributions carryover 58 7 -- -- 65
Other deferred income tax assets 9 1 -- -- 10
------- ----- ------- ------- --------
Total deferred income tax assets 9,361 688 8,173 1,808 20,030
Less: valuation allowance (9,361) (688) (8,173) (1,808) (20,030)
------- ----- ------- ------- --------
Net deferred income tax assets $ -- $ -- $ -- $ -- $ --
======= ===== ======= ======= ========
The Company has no net deferred income tax liabilities as of July 1, 2006.
The tax effects of significant items comprising the Company's deferred income
tax assets as of July 2, 2005, were as follows:
UNITED STATES FOREIGN
---------------- ------------------
FEDERAL STATE HONG KONG EUROPE TOTAL
-------- ----- --------- ------ --------
DEFERRED INCOME TAX ASSETS:
Operating loss carryforwards $ 4,411 $ 115 $ 6,640 $ 472 $ 11,638
Reserves not currently deductible 56 4 -- -- 60
Alternative minimum tax 138 -- -- -- 138
Depreciation 415 31 -- -- 446
Compensation accruals 4,200 316 -- -- 4,516
Difference between book and tax
basis of property 2,420 182 -- -- 2,602
Amortization (639) (48) -- -- (687)
Contributions carryover 58 4 -- -- 62
Other deferred income tax assets 2 -- -- 126 128
-------- ----- ------- ----- --------
Total deferred income tax assets 11,061 604 6,640 598 18,903
Less: valuation allowance (11,061) (604) (6,640) (598) (18,903)
-------- ----- ------- ----- --------
Net deferred income tax assets $ -- $ -- $ -- $ -- $ --
======== ===== ======= ===== ========
The Company had no net deferred income tax liabilities as of July 2, 2005.
65
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.
As a result of current and prior year losses realized by its foreign
subsidiaries, the foreign subsidiaries have an accumulated earnings deficit of
approximately $37.9 million as of July 1, 2006. 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 2006, the Company recorded an income tax provision of $0.1 million mostly
related to income tax liabilities incurred by certain of its foreign
subsidiaries. These foreign subsidiaries do not have net operating losses to
offset such liabilities.
As of July 1, 2006, the Company 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. Additionally, the
Company has approximately $51.4 million of net operating loss carryforwards
related to its 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 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 2006, 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 2006. 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 2006,
Fiscal 2005 and Fiscal 2004, the Company's effective income tax rate was 0.5 %,
0.4% and 25.6% respectively. The Company's future effective income 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.
66
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
-----------------------------
2006 2005 2004
------- -------- --------
Computed benefit at U.S. federal statutory tax
rate of 35% $(6,826) $(15,658) $(10,312)
Increase in valuation allowance 1,127 6,761 11,616
Effect of foreign subsidiaries subject to a
different tax rate 5,013 10,832 6,653
Previously unrecorded provision (benefit) 762 (1,641) --
Tax effect of adjustment to U.S. net operating
loss carryforwards -- -- (1,825)
Permanent differences 20 (12) 1,183
State income tax, net of federal benefit 11 -- (14)
Other -- (96) 236
------- -------- --------
Provision for income taxes $ 107 $ 186 $ 7,537
======= ======== ========
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
2006 and 2005 and would 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.
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.
As the negative goodwill relating to the Jenimage acquisition is a permanent
income tax difference, no income taxes have been provided relating to the
extraordinary gain.
NOTE 16 - 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 leases, but no longer uses, a
warehouse of approximately 13,700 square feet in Fort Lauderdale, Florida. The
Company's leases for these facilities provide for rent of approximately $25,800
and $8,200 per month, respectively, with annual increases ranging from 2-3% and
3%, respectively, and expire on January 31, 2014, and January 31, 2009,
respectively. As of July 3, 2004, the Company ceased operations in the Fort
Lauderdale warehouse facility. The Company subleased these premises at the
prevailing market rate which was $0.1 million lower than the existing
contractual rate. Accordingly, at July 1, 2006 and July 2, 2005, 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
67
of approximately 13,200 square feet of office space comprised of two floors
under a lease expiring in October 2006 at a cost of approximately $10,300 per
month including rent and maintenance. The Company is currently negotiating an
extension of the lease for its Hong Kong office space. The land on which the
building is situated is subject to a governmental ground lease that will expire
in 2047.
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 and a canteen (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 2006. The
Company entered into a new processing agreement that will allow it to operate in
the PRC until October 2016. The new processing agreement is pending approval by
the applicable PRC governmental entities. 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 the year 2038. At the end of the term, title and ownership
to the land and Company Facility transfer to a PRC governmental agency. At that
time, the Company expects to be able to lease the PRC land and improvements
thereon at then prevailing rates.
OTHER JURISDICTIONS
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 also leases warehouse and/or office space in the United
Kingdom, France, Germany and Japan. The leases for office space in Germany and
Japan expire on December 15, 2006 and September 29, 2006, respectively. The
Company has provided notice of termination to the proper parties as to each such
lease. 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 will be terminated effective September 30, 2006.
LEASES
Future minimum rental payments for operating leases as of July 1, 2006 are as
follows: (in thousands)
Fiscal Year
2007 $ 746
2008 484
2009 413
2010 381
2011 385
Thereafter 902
------
Total minimum payments $3,311
======
Minimum payments have not been reduced by minimum sublease rentals of $0.6
million due in the future under noncancelable subleases.
Rental expense for operating leases of approximately $1.8 million, $2.1 million
and $2.6 million was incurred for Fiscal 2006, Fiscal 2005 and Fiscal 2004,
respectively.
68
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 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
Ira B. Lampert is terminated for cause, or he voluntarily resigns, he will only
receive the Accrued Amounts and benefits provided in
69
benefit plans.
Pursuant to the Lampert Agreement, the Company adopted a SERP for the benefit of
Ira B. Lampert (the "Lampert SERP"). A specified amount, currently $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 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 $210,000 to
$250,000, 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 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.
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. See Note 8, Other
Assets, and Note 11, Other Long-Term Liabilities.
DEFERRED LONG-TERM COMPENSATION
On August 6, 2003, the following executive officers were awarded the following
amounts of contingent deferred compensation under the Company's Amended and
Restated 2002 Long Term Cash Incentive Plan ("2002 LTCIP") with respect to the
Fiscal 2002-2003 performance period (the "Deferred LTCIP Awards"): (i) Ira B.
Lampert, $670,474; (ii) Brian F. King, $335,237; (iii) Keith L. Lampert,
$389,629; (iv) Urs W. Stampfli, $274,021; and (v) Richard M. Finkbeiner,
$224,722. The Deferred LTCIP Awards to Keith L. Lampert and Urs W. Stampfli
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
70
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 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 a result
of these elections, the assets held in the rabbi trusts and the obligations of
the Company were reclassified from "Other assets" and "Other long-term
liabilities" to "Deferred compensation" and "Deferred compensation obligations,"
respectively, in the accompanying consolidated balance sheets as of July 2,
2005.
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 will be disbursed on or before December
71
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 to date, or will be distributed, as the case may be,
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.
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) is 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 therefor 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.
72
LICENSE AND ROYALTY AGREEMENTS
On May 10, 2004, the Company entered into a twenty year, worldwide trademark
license agreement with Jenoptik AG for the exclusive use of the JENOPTIK brand
name and trademark on non-professional consumer imaging products including, but
not limited to, digital, single-use and traditional cameras, and other imaging
products and related accessories. The license agreement provides for a royalty
of one-half of one percent (0.5%) of net sales of non-professional consumer
imaging products bearing the JENOPTIK brand name for the first ten (10) years of
the license and a royalty fee of six-tenths of one percent (0.6%) for the second
ten (10) years of the license. There are no minimum guaranteed royalty payments.
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.
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 July 1, 2006 and July 2, 2005, 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 July 1, 2006 and July 2, 2005 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, which were fully credited against
percentage royalties. Pursuant to the terms of the license agreements, as of
August 2004, the Company paid a total of $6.0 million, which represented $3.0
million for each license agreement, as payment of the minimum royalties and
recorded these payments as prepaid assets. The Company amortized these assets
based upon a percentage of net sales of Polaroid branded cameras during the
initial term of the license agreements. 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. 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 provides for the payment by the Company of
$50,000 of minimum royalties on or before October 31, 2006, which will be 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. As of July 1, 2006, the Company's
35mm traditional film percentage royalties exceeded the minimum royalty amount.
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
73
agreements for Fiscal 2006, Fiscal 2005 and Fiscal 2004 was $8.4 million, $6.9
million and $5.6 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 17, 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.
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 July 1, 2006 to be
between $0 and approximately $6.6 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 July 1, 2006.
PURCHASE COMMITMENTS
At July 1, 2006, the Company had $15.0 million in non-cancelable purchase
commitments relating to the procurement of raw materials, components and
finished goods inventory from various suppliers.
NOTE 17 - LITIGATION AND SETTLEMENTS
In July 2002, a class action complaint was filed against the Company and certain
of its officers in the United States District Court for the Southern District of
Florida by individuals purporting to be shareholders of the Company's common
stock. On August 20, 2002, the Company filed a motion to dismiss the complaint
and in December 2002, the Company's motion was granted by the court and the
complaint was dismissed. In January 2003, an amended class action complaint (the
"Amended Complaint") was filed adding certain of the Company's current and
former directors as defendants. The lead plaintiffs in the Amended Complaint
sought to act as representatives of a class consisting of all persons who
purchased the Company's Common Stock (i) issued pursuant to the Company's
September 26, 2000 secondary offering (the "Secondary Offering") or (ii) during
the period from September 26, 2000 through June 22, 2001, inclusive. On April
18, 2003, the Company filed a motion to dismiss the Amended Complaint and on
August 27, 2004, the court (i) dismissed all claims against the defendants
related to the Secondary Offering and (ii) ruled that the allegations occurring
before January 2001 or after April 2001 were not actionable. 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
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, 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 have no alternative usage. The Amended Complaint claims that
such failures artificially inflated the price of the Common Stock. The Amended
Complaint seeks unspecified damages, interest, attorneys' fees, costs of suit
and unspecified other and further relief from the court. Pursuant to a
scheduling order of the court, trial in this matter is scheduled to commence on
November 13, 2006. The Company has reached an agreement in
74
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. See Note 23, Subsequent Events, for more
information regarding the pending settlement. 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 ultimate liability of the Company, which could be material, cannot be
ascertained.
On September 17, 2002, the Company was advised by the staff of the SEC that it
is conducting an informal inquiry related to the matters described above 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 SEC and NASDAQ and
has not received any further communication from 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 shareholders of the Company.
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
in 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 (the "Class Period"), and who
were allegedly damaged thereby. 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 of the newly added a former officer defendant from the Company until
several months after his departure; and (iii) that Kodak would cancel its DMS
contracts with the Company due to the Company's alleged infringement of Kodak's
patents. The Amended Complaint also alleges that the Company improperly
recognized revenue contrary to GAAP due to an alleged inability to reasonably
estimate digital camera returns. The Amended Complaint claims that such failures
artificially inflated the price of the Common Stock. The Amended Complaint seeks
unspecified damages, interest, attorneys' fees, costs of suit and unspecified
other and further relief from the court. The Company intends to vigorously
defend the lawsuit. Although the Company believes the lawsuit is without merit,
the outcome cannot be predicted, and if adversely determined, the ultimate
liability of the Company, 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 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 initiated 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 shareholder of the
Company. The complaint alleges 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 seeks
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
75
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 and the related class action suit
under its directors and officers liability insurance policy, and the insurance
carrier is defending the actions 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. In April
2004, a patent infringement complaint was filed by Compression Labs, Inc.
against 28 defendants, including the Company, in the United States District
Court for the Eastern District of Texas. The complaint asserts that the
defendants have conducted activities which infringe U.S. Patent No. 4,698,672
(the "672 Patent"), entitled, "Coding System for Reducing Redundancy." The
complaint seeks unspecified damages, interest, attorneys' fees, costs of suit
and unspecified other and further relief from the court. In February 2005,
pursuant to an order of the Judicial Panel on Multi-District Litigation, this
action was transferred to the United States District Court for the Northern
District of California. The defendants in this action have reached an agreement
in principle with the plaintiffs on a group settlement of this lawsuit. The
settlement is subject to the defendant's agreement as to the allocation of the
settlement amount amongst the defendants, the execution of a mutually agreeable
settlement agreement and approval by the court. Based on the current proposed
allocation, the settlement amount allocated to the Company is not material and
will not have a material adverse effect on our financial position or results of
operations. The Company accrued the settlement amount as of July 1, 2006.
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 ultimate liability of the Company, which could
be material, cannot be ascertained. 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.
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 asserts 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 seeks 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 have been 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 November 2005, Flashpoint Technology, Inc. filed a patent infringement
complaint against the Company in the United States District Court for the
District of Delaware. The complaint asserted that the Company conducted
activities which infringed U.S. Patent Nos. 6,177,956, 6,249,316, 6,847,388,
6,278,447 and 6,233,190. The complaint sought injunctive relief, unspecified
damages, interest, attorneys' fees, costs of suit and unspecified other and
further relief from the court. The Company has reached a settlement with the
plaintiffs and the suit has been dismissed with prejudice. The amount of the
76
settlement is not material and does not have a material adverse effect on our
financial position or results of operations. The Company accrued the settlement
amount as of July 1, 2006.
In June 2006, St. Clare Intellectual Properties Consultants, Inc. filed a patent
infringement complaint against 22 companies, including the Company, in the
United States District Court for the District of Delaware. The Company has not
yet been served with the complaint. The complaint asserts that the defendants
have conducted activities which infringe U.S. Patent Nos. 5,138,459, 6,094,219,
6,233,010 and 6,323,899. The complaint seeks injunctive relief, unspecified
damages, interest, attorneys' fees, costs of suit and unspecified other and
further relief from 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 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 18 - RELATED PARTY TRANSACTIONS
From May 1, 2002 through June 15, 2003, William J. Lloyd, who was a member of
the Company's Board of Directors during that time, provided consulting services
to the Company on an as needed basis in exchange for a $5,000 per month retainer
and reimbursement of all reasonable business expenses. The Company accepted Mr.
Lloyd's resignation from the Board of Directors, effective July 31, 2003, and
the consulting relationship was terminated effective June 15, 2003. In
connection with Mr. Lloyd's resignation, the Board approved an extension of the
expiration dates of certain options held by Mr. Lloyd, and the continued vesting
through January 2005 of 12,000 shares subject to one of his options. The
modification of the options' terms resulted in a non-recurring charge of
$105,000 to compensation expense recorded in the First Quarter Fiscal 2004.
Effective December 1, 2004, J. David Hakman resigned from the Company's Board of
Directors. In connection with Mr. Hakman's resignation, the Board approved an
extension of the expiration dates of certain options held by Mr. Hakman. The
modification of the terms of the options did not result in any compensation
expense.
77
NOTE 19 - RESTRUCTURING AND OTHER CHARGES
RESTRUCTURING INITIATIVES
During Fiscal 2005, the Company announced restructuring initiatives designed to
eliminate its reliance on internally designed and manufactured digital cameras
and increase the design, co-development and purchase of digital cameras from
outsourced manufacturers to provide competitive products to the retail market
(the "Restructuring Initiatives"). The Restructuring Initiatives were a result
of the Company's previously announced strategic review process to determine how
it might better compete in the digital camera market. The Company's reliance on
internally designed and manufactured digital cameras ended at the end of Fiscal
2005.
Table I - Restructuring Liability reconciles the beginning and ending balances
of the restructuring liability.
(in thousands)
Restructuring Liability
Severance
---------
Balance as of July 3, 2004 $ --
Charges 1,217
Payments (1,107)
-------
Balance as of July 2, 2005 $ 110
Charges --
Payments (110)
-------
Balance as of July 1, 2006 $ --
=======
Table II -- Restructuring Charges presents the related expenses and their
classification in the consolidated statements of operations.
(in thousands)
Restructuring Charges
Inventory
Fiscal 2005 Severance Impairment Total
----------- --------- ---------- ------
Cost of products sold $1,176 $4,272 $5,448
Selling Expense 4 -- 4
General and administrative expense 37 -- 37
------ ------ ------
Total Fiscal 2005 $1,217 $4,272 $5,489
====== ====== ======
During Fiscal 2005, the Company recorded an additional $1.4 million in
depreciation expense, which is included in cost of products sold in the
consolidated statement of operations, related to the reduction in the remaining
useful lives of the molds and tooling formerly used in the manufacturing of
digital cameras.
In connection with the Restructuring Initiatives, the Company also incurred
other charges related to retention costs of employees who were not terminated in
Fiscal 2005. The services of these employees benefited parts of the business
other than the manufacture of digital cameras. Accordingly, these retention
costs are classified as "Other Charges" in Table IV below. During Fiscal 2006,
the Company incurred approximately $0.2 million in expenses related to employee
retention costs associated with the Restructuring Initiatives implemented in
Fiscal 2005.
78
COST-REDUCTION INITIATIVES
The Company continues to evaluate its cost structure and implement
cost-reduction initiatives as appropriate. During Fiscal 2006, cost-reduction
initiatives included, among other things, the separation of three executives and
the elimination of certain employee positions. As a result, during Fiscal 2006,
the Company recorded total charges of $1.2 million related to severance costs
for the separation of the three executives and 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 is realigning its
operations in Europe, including relocating certain operations from its Jena,
Germany office to its United Kingdom office. As a result of the German office
relocation 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.
During fiscal 2005, cost-reduction initiatives included, among other things, the
elimination of certain employee positions and consolidation of certain
operations in the United Kingdom, France and Germany into its operations in
Jena, Germany. As part of the consolidation of the Company's European operations
in Jena, Germany during Fiscal 2005, the Company entered into severance and
retention agreements with certain employees affected by its decision to
consolidate these European operations.
Table III -- Other Charges Liability reconciles the beginning and ending
balances of the other charges liability.
(in thousands)
Other Charges Liability
Severance Retention Total
--------- --------- ------
Balance as of July 3, 2004 $ -- $ -- $ --
Charges 377 336 713
Reversals (117) -- (117)
Payments (70) (207) (277)
------ ----- ------
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
====== ===== ======
79
Table IV -- 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 Total
-------------------------- --------- --------- ---------- ------
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, the
Company expects to make cash payments totaling $1.2 million during fiscal 2007
related to severance and retention.
NOTE 20 - OTHER INCOME, NET
Included in the accompanying consolidated statements of operations under the
caption, "Other income, net" is the following:
(in thousands)
Fiscal Year
---------------------------
2006 2005 2004
------- ------- -------
Investment income $(1,525) $ (947) $(1,282)
(Gain) loss on sale of securities -- (1,124) 916
Gain on sale of building -- (450) --
Foreign currency loss (gain), net 276 426 (691)
Other expense, net 107 325 557
------- ------- -------
Other income, net $(1,142) $(1,770) $ (500)
======= ======= =======
NOTE 21 - 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 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 RSD sales to the region where the customer's home office was
located and all DMS sales were attributed to Asia. A summary of selected
financial information regarding the Company's
80
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 and the PRC.
(in thousands)
Fiscal Year
------------------------------
Sales made to unaffiliated
customers: 2006 2005 2004
-------- -------- --------
Americas $ 88,167 $ 87,211 $106,025
Asia 813 18,860 49,723
Europe 48,549 68,277 47,384
-------- -------- --------
Total $137,529 $174,348 $203,132
======== ======== ========
July 1, July 2,
Identifiable assets: 2006 2005
-------- --------
Americas $ 54,396 $ 82,173
Asia 45,326 47,054
Europe 5,020 17,529
-------- --------
Total $104,742 $146,756
======== ========
(Percentage of net sales)
Fiscal Year
---------------------
Product groups: 2006 2005 2004
----- ----- -----
Single-use cameras 60.4% 45.9% 54.2%
Digital cameras 28.3 41.1 29.4
35mm traditional film cameras 11.3 13.0 16.4
----- ----- -----
Total 100.0% 100.0% 100.0%
===== ===== =====
During Fiscal 2006, 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 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, Eastman Kodak Company
("Kodak"), of its intent to cease purchases under its two DMS 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 customers or
substantially reduced sales to any other significant customers could have a
material adverse impact on results of operations.
During Fiscal 2004, each of the following customers accounted for at least 10%
of the Company's net sales: Kodak, Wal-Mart and Walgreens. These companies
represented the Company's three largest customers generating net sales in Fiscal
2004 of approximately $39.7 million (19.5% of total net sales), $39.1 million
(19.1% of total net sales) and $23.1 million (11.3% of total net sales),
respectively.
No other customer accounted for 10% or more of consolidated net sales of the
Company during Fiscal 2006, Fiscal 2005 or Fiscal 2004.
81
NOTE 22 - QUARTERLY RESULTS (UNAUDITED)
(in thousands, except per share data)
Quarter Ended
--------------------------------------
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 $ (0.20) $ (0.20) $ (0.16) $ (0.11)
Diluted loss per share $ (0.20) $ (0.20) $ (0.16) $ (0.11)
Quarter Ended
---------------------------------------
Oct. 2, Jan. 1, Apr. 2, July 2,
2004 2005 2005 2005
------- -------- -------- -------
Net sales $43,014 $ 54,333 $ 26,150 $50,851
Gross profit (deficit) 420 (3,546) (5,513) 2,857
Loss before income taxes (9,261) (12,929) (14,762) (7,785)
Net loss (9,321) (13,009) (14,872) (7,721)
Basic loss per share $ (0.32) $ (0.44) $ (0.51) $ (0.26)
Diluted loss per share $ (0.32) $ (0.44) $ (0.51) $ (0.26)
See Note 19, Restructuring and Other Charges for a description of items that had
a significant effect on certain fiscal quarters.
NOTE 23 - SUBSEQUENT EVENTS
On August 1, 2006, CCHK accepted a proposal from HSBC to renew the revolving
demand financing facilities under the same terms that CCHK previously accepted
in January 2006. See Note 9, Short-Term Borrowings and Financing Facilities for
more information regarding the HSBC financing facilities. The renewed financing
facilities are subject to review by HSBC at any time, and, in any event, by June
15, 2007.
On August 9, 2006, Ira B. Lampert took delivery of 178,043 shares of the
Company's common stock that had been held in a rabbi trust for his benefit
pursuant to the terms and conditions of the Company's Deferred Delivery Plan.
See Note 12, Deferred Share Arrangement for more information regarding the
transaction.
On August 11, 2006, the parties in the class action suit styled Underwood et al.
v. Concord Camera Corp. et al. advised the court that they reached a settlement
in principle. The settlement is subject to the completion of a stipulation of
settlement and related documents, including a class notice, mutually acceptable
to the parties, and to court approval. The agreed upon pending settlement amount
is within the policy limits of the Company's directors and officers liability
insurance policy. See Item 3, Legal Proceedings, and Note 17, Litigation and
Settlements, for more information regarding this class action suit and the
settlement in principle.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On June 16, 2005, the Audit Committee of our Board of Directors engaged BDO
Seidman, LLP ("BDO") to serve as our independent registered public accounting
firm effective immediately and we dismissed
82
Ernst & Young LLP ("E&Y") as our independent registered public accounting firm.
Our Audit Committee approved the decision to dismiss E&Y.
The report of E&Y on our financial statements for the fiscal year ended July 3,
2004 contained no adverse opinion or disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principle.
During the fiscal years ended July 3, 2004 and June 28, 2003, and through June
16, 2005, there were no disagreements with E&Y on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of E&Y,
would have caused E&Y to make reference thereto in its reports on the financial
statements of the Company for such periods.
During the fiscal years ended July 3, 2004 and June 28, 2003, and through June
16, 2005, there were no reportable events (as defined in Item 304(a)(1)(v) of
Regulation S-K), except that in connection with the audit for the fiscal year
ended July 3, 2004 and the review of the Company's quarterly results for the
first, second and third quarters of fiscal 2005, our management and E&Y
identified several deficiencies, including deficiencies that rose to the level
of material weaknesses, in our internal control over financial reporting
("Internal Control"). A complete description of the material weaknesses in
Internal Control and our efforts to remediate them can be found under Item 9A,
Controls and Procedures of this report. The material weaknesses identified by
our management and E&Y related to the following areas:
o Planning and implementation of the Company's Enterprise Resource
Planning System;
o Financial Statement closing process;
o Ineffective Information Technology control environment, including the
design of the Company's information security and data protection
controls;
o Untimely detection and assessment of impairment of long-lived assets
where indicators of impairment are present;
o Inadequate review of the valuation of certain inventory balances in
its worldwide inventory that resulted in post-closing journal entries
to write down certain inventory items to market value;
o Foreign currency translation, including the ability of certain
managers to record journal entries without adequate review or
supporting documentation and an inability by management to adequately
explain fluctuations in quarterly analyses;
o Inadequate resources and senior management's involvement in the
detailed compilation and preparation of the Company's financial
reports and analysis, as a result of which senior management is unable
to provide quality assurance in the financial statement review
process; and
o Lack of the necessary depth of personnel with sufficient technical
accounting experience with U.S. GAAP to perform an adequate and
effective secondary review of technical accounting matters.
We furnished a copy of the above disclosures to E&Y and requested that E&Y
furnish us with a letter addressed to the SEC stating whether or not E&Y agrees
with the above disclosures, and if not, stating the respects in which it does
not agree. E&Y's response was attached as Exhibit 16.1 to the Current Report on
Form 8-K that we filed with the SEC on June 20, 2005.
Prior to the engagement of BDO, neither we nor anyone on our behalf consulted
with BDO during our two most recent fiscal years, or the first three fiscal
quarters of fiscal 2005, in any manner regarding either: (i) the application of
accounting principles to a specified transaction, either completed or proposed,
83
or the type of audit opinion that might be rendered on the Company's financial
statements; or (ii) any matter that was the subject of either a disagreement or
a reportable event with E&Y.
ITEM 9A. CONTROLS AND PROCEDURES.
DISCLOSURE CONTROLS AND PROCEDURES
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 recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms. Our management has
reviewed and evaluated our disclosure controls and procedures as of the end of
the period covered by this report. Based on that evaluation, our principal
executive and financial officers concluded that our disclosure controls and
procedures were ineffective in providing reasonable assurance of achieving their
objectives because of the material weaknesses in internal control over financial
reporting described below.
Because of these material weaknesses, we performed additional manual controls,
procedures and analyses and other pre- and post-closing procedures designed to
ensure that our consolidated financial statements are presented fairly in all
material respects in accordance with accounting principles generally accepted in
the United States. We relied on increased monitoring and review to compensate
for the material weaknesses in our internal control over financial reporting.
Accordingly, management believes that the consolidated financial statements
included in this report fairly present in all material respects our financial
position, results of operations, cash flows and stockholders' equity for the
periods presented.
Material Weaknesses in Internal Control over Financial Reporting
As disclosed in our fiscal 2005 Annual Report on Form 10-K, as amended,
management and our independent registered public accounting firm identified ten
material weaknesses in our internal control over financial reporting. See also
Part I, Item 1A, Risk Factors, above.
In our fiscal 2006 Quarterly Reports on Form 10-Q, we disclosed our remediation
efforts and the material weaknesses not yet remediated as of the date of each
such report.
Management's Remediation Initiatives
During fiscal 2006, management developed a plan and a timeline for remediating
our material weaknesses. As a result of our remediation efforts, management
believes the following material weaknesses were remediated as of July 1, 2006:
o Inventory: Management believes that the controls related to valuation
of certain inventory balances in our worldwide inventory and the
controls regarding the review and approval of inventory movement and
record-keeping are now operating effectively.
o Value Added Tax: Management believes that the controls related to the
collection, remittance, reconciliation, preparation and filing of
value added taxes at our German subsidiary are now operating
effectively.
o Foreign Currency Translation: Management believes that recorded
journal entries and the related supporting documentation are
adequately reviewed and that fluctuations in quarterly analyses can be
adequately explained.
84
o Asset Impairment: Management believes that the controls related to the
timely assessment of impairment of long-lived assets where indicators
of impairment are present are now operating effectively.
o Financial Statement Closing Process: Management believes that controls
related to the financial statement closing process, including review
of reconciliations, account analysis and review of journal entries by
those responsible for the oversight of the process, are now operating
effectively. Although management believes that we have remediated the
material weakness in this process, certain control deficiencies remain
within certain operating entities that do not rise to the level of a
material weakness.
o Inadequate Evidence of Review: Management believes that we now have
adequate finance and accounting personnel, allowing management to
provide necessary evidence of review in the financial statement review
process.
o Accounting Personnel: Management believes that we have an adequate
number of accounting personnel with knowledge of, and technical
expertise in, U.S. GAAP for our U.S. operations and foreign offices.
In addition, management believes we have adequate controls related to
the training and supervision of our accounting staff and to the
segregation of duties of accounting personnel necessary throughout the
organization.
Although management believes these material weaknesses in our internal control
over financial reporting have been remediated to the extent disclosed, they have
not been tested or opined upon by our independent registered public accounting
firm and we cannot assure you that these remediation efforts have been
successful or that we will not identify additional weaknesses in our controls
and procedures in the future. However, we will continue to monitor the
effectiveness of these actions and will make any changes that management
determines appropriate.
Management anticipates that the following remaining material weaknesses in our
internal control over financial reporting will be remediated by December 31,
2006, in accordance with the following timetable:
o ERP System: Effective training for employees on the use of the ERP
system, including on-line training, and correction of certain
configuration deficiencies should be fully operational during fiscal
2007.
o Information Technology: We have reduced excessive user access rights
and expect to reduce any remaining excess user access rights during
fiscal 2007. In addition, we expect to complete the tasks necessary to
remediate the controls related to validating and maintaining our
master data during fiscal 2007. Regarding segregation of duties, we
have reduced potential segregation of duties conflicts through our
remediation work related to excessive user access rights. We expect to
remediate all significant remaining segregation of duties control
deficiencies during fiscal 2007.
o Sales, Accounts Receivable and Revenue Recognition: We anticipate
completing the work necessary to begin remediating this material
weakness and expect to complete its full remediation during fiscal
2007.
We cannot assure you, however, that our remediation efforts will be successful
within this time frame or at all.
Under new SEC rules defining "accelerated filer," we will not be required to
report on our internal control over financial reporting until our first fiscal
year ending on or after December 15, 2007, which for us will be our 2008 fiscal
year, unless we re-qualify as an accelerated filer during fiscal 2007. See Item
7, Management's Discussion and Analysis of Financial Condition and Results of
Operation, "Accelerated Filer Status," above for more information regarding the
new SEC rules.
85
ITEM 9B. OTHER INFORMATION.
None.
86
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
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 2006 (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.
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.
87
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 C
Column A Column B Additions Column D Column E
------------ ------------ --------------------------- ---------- ---------
Balance at Charged to Balance
beginning of costs and Charged to at end
Description period expenses other accounts Deductions of period
------------ ------------ ---------- -------------- ---------- ---------
1. Allowances for sales returns and allowances, discounts, and doubtful accounts
FISCAL YEAR:
2004 $ 3,111 17,589 -- 10,969 $ 9,731
2005 $ 9,731 24,225 -- 25,845 $ 8,111
2006 $ 8,111 7,527 -- 11,811 $ 3,827
2. Deferred income tax valuation allowance
FISCAL YEAR:
2004 $ 526 11,616 -- -- $12,142
2005 $12,142 6,761 -- -- $18,903
2006 $18,903 1,127 $20,030
(3) Exhibits: The exhibits listed in the accompanying Exhibit Index
are filed as part of this report. The Exhibit Index specifically
identifies each management contract or compensatory plan required to
be filed as an exhibit to this report with an asterisk.
88
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 13, 2006 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 Financial
Blaine A. Robinson 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.
89
EXHIBIT INDEX
No. Description Method of Filing
--- ----------- ----------------
2.1 Purchase of Share and Claims and Transfer Incorporated by reference to the Company's
Agreement, dated May 10, 2004, by and between Current Report on Form 8-K ("8-K") filed
Concord Camera GmbH and 4MBO International with the SEC on May 25, 2004.
Electronic AG for the purchase of Jenimage
Europe GmbH and Jenimage UK Limited
3.1 Certificate of Incorporation, as amended Incorporated by reference to the Company's
through May 9, 2000 Annual Report on Form 10-K ("10-K") for the
year ended July 1, 2000.
3.2 Restated By-Laws, as amended through July 12, Incorporated by reference to the Company's
2004 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 10-K for the year ended July 1, 2000.
signatory thereto, including among others,
Ira B. Lampert, Brian King and Arthur
Zawodny, as amended on various dates in 1998
to add certain additional shares of the
Company's Common Stock owned by Ira B.
Lampert, Brian King and Keith Lampert and as
further amended on January 6, 2000
10.1 Settlement Agreement between the Company and Incorporated by reference to the Company's
the SEC effective September 1, 1994 10-K for the year ended June 28, 2003.
10.2 Second renewal agreement of Master Processing Incorporated by reference to the Company's
Contract No. (86)507, dated March 15, 1996, quarterly report on Form 10-Q ("10-Q") for
and approval notice issued by the Longgang the quarter ended September 30, 2000.
Economic Development Bureau (English
translations)
10.3 Contract for Grant of State-Owned Land Use Incorporated by reference to the Company's
Right, dated November 8, 1994, with the 10-Q for the quarter ended September 30,
Shenzhen Land Bureau (English translation) 2000.
9O
10.4 Hong Kong Credit Facility and Factoring Incorporated by reference to the Company's
Agreement, dated September 8, 1999, between 10-Q for the quarter ended January 1, 2000.
The Hongkong and Shanghai Banking Corporation
Limited ("HSBC") and Concord Camera HK
Limited ("CCHK")
10.5 Letter agreements between HSBC and CCHK dated Incorporated by reference to the Company's
June 1, 2002 and June 4, 2002, relating to 10-K for the year ended June 29, 2002.
and amending the Hong Kong Credit Facility
and Factoring Agreement
10.6 Letter agreement between HSBC and CCHK dated Incorporated by reference to the Company's
December 13, 2003, relating to cancellation 10-K for the year ended July 3, 2004.
of Hong Kong Factoring Facility
10.7 Letter agreement between HSBC and CCHK, dated Incorporated by reference to the Company's
as of November 7, 2003, relating to the 10-Q for the quarter ended December 27,
provision of certain financing facilities and 2003.
the guarantee of same by the Company
10.8 Letter agreement between HSBC and CCHK, dated Incorporated by reference to the Company's
as of April 23, 2004, relating to the 10-K for the year ended July 3, 2004.
provision of certain financing facilities and
the guarantee of same by the Company
10.9 Debenture, dated June 10, 2004, by CCHK in Incorporated by reference to the Company's
favor of HSBC 10-K for the year ended July 3, 2004.
10.10 Form of Guarantee from the Company to HSBC Incorporated by reference to the Company's
in connection with the Hong Kong financing 10-K for the year ended July 3, 2004.
facilities, with schedule of outstanding
Guarantees
10.11 Letter agreement between HSBC and CCHK, dated Incorporated by reference to the Company's
January 21, 2005, relating to the provision 8-K filed with the SEC on October 24, 2005.
of certain financing facilities and the
guarantee of same by the Company
10.12 Capitalization and Subordination Agreement Incorporated by reference to the Company's
dated as of March 31, 2005 between the 8-K filed with the SEC on October 24, 2005.
Company and CCHK
10.13 Subordination Agreement dated as of March 31, Incorporated by reference to the Company's
2005 between the Company and CCHK 8-K filed with the SEC on October 24, 2005.
91
10.14 Letter Agreement between HSBC and CCHK, dated Incorporated by reference to the Company's
September 20, 2005, relating to the provision 8-K filed with the SEC on October 24, 2005.
of certain financing facilities and the
guarantee of same by the Company
10.15 Letter Agreement between HSBC and CCHK, dated Incorporated by reference to the Company's
January 4, 2006, relating to the provision of 8-K filed with the SEC on January 26, 2006.
certain financing facilities to CCHK and the
conditions thereof
10.16 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)
10.17* Incentive Plan (1993), as amended through Incorporated by reference to the Company's
April 24, 2000 10-K for the year ended July 1, 2000.
10.18* Amendments to Incentive Plan (1993) dated as Incorporated by reference to the Company's
of April 19, 2001 and August 2, 2001 Schedule TO/A-1 filed August 28, 2001.
10.19* Amendment to Incentive Plan (1993) dated as Incorporated by reference to the Company's
of January 20, 2003 10-Q for the quarter ended March 29, 2003.
10.20* Amendments to Incentive Plan (1993) dated as Incorporated by reference to the Company's
of February 10, 2003 and June 2, 2003 10-K for the year ended June 28, 2003.
10.21* 2002 Incentive Plan for Non-Officer Incorporated by reference to the Company's
Employees, New Recruits and Consultants, and 10-K for the year ended June 29, 2002.
Amendment No. 1 to same dated September 4,
2002
10.22* Amendment No. 2 dated as of June 2, 2003 to Incorporated by reference to the Company's
2002 Incentive Plan for Non-Officer 10-K for the year ended June 28, 2003.
Employees, New Recruits and Consultants
10.23* 2002 Incentive Plan for New Recruits, and Incorporated by reference to the Company's
Amendment No. 1 to same dated as of June 2, 10-K for the year ended June 28, 2003.
2003
10.24* Stock Option (Plan and) Agreement, dated as Incorporated by reference to the Company's
of May 15, 1998, between Urs W. Stampfli and 10-K for the year ended June 29, 2002.
the Company
92
10.25* Amendment, effective as of February 11, 2003, Incorporated by reference to the Company's
to Stock Option (Plan and) Agreement, dated 10-K for the year ended June 28, 2003.
as of May 15, 1998, between Urs W. Stampfli
and the Company
10.26* Amended and Restated Deferred Delivery Plan, Incorporated by reference to the Company's
as amended through June 30, 2004 10-K for the year ended July 3, 2004.
10.27* Amended and Restated Annual Incentive Incorporated by reference to the Company's
Compensation Plan, as amended through June 10-K for the year ended July 3, 2004.
30, 2004
10.28* Amended and Restated Long Term Incentive Plan Incorporated by reference to the Company's
Commencing Fiscal 2004, as amended through 10-K for the year ended July 3, 2004.
June 30, 2004, and 2004-2006 Performance
Criteria
10.29* Restated Flexible Perquisite Spending Account Incorporated by reference to the Company's
Program for Corporate Officers, as amended 10-K for the year ended July 3, 2004.
through July 12, 2004
10.30* Appendix A, dated June 6, 2002, to Flexible Incorporated by reference to the Company's
Perquisite Spending Account Program quarterly report on Form 10-Q for the
quarter ended December 28, 2002.
10.31* Amended and Restated Employment Agreement, Incorporated by reference to the Company's
dated as of May 1, 1997, between the Company 10-K for the year ended July 3, 2004.
and Ira B. Lampert
10.32* 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, 10-K for the year ended June 30, 2001.
and Amendment No. 4 dated as of January 1,
2001, to Amended and Restated Employment
Agreement dated as of May 1, 1997, between
Ira B. Lampert and the Company
10.33* Amendment No. 2, dated as of January 1, 1999, Incorporated by reference to the Company's
to Amended and Restated Employment Agreement 10-Q for the quarter ended January 2, 1999.
dated as of May 1, 1997, between Ira B.
Lampert and the Company
93
10.34* Amendment No. 5, dated as of December 2, Incorporated by reference to the Company's
2002, to Amended and Restated Employment 10-Q for the quarter ended December 28,
Agreement dated as of May 1, 1997, between 2002.
Ira B. Lampert and the Company
10.35* Amendment No. 6, dated February 10, 2003, to Incorporated by reference to the Company's
Amended and Restated Employment Agreement 10-Q for the quarter ended March 29, 2003.
dated as of May 1, 1997, between Ira B.
Lampert and the Company
10.36* Amendment No. 7, dated July 1, 2005, to Incorporated by reference to the Company's
Amended and Restated Employment Agreement 8-K filed with the SEC on September 9,
dated as of May 1, 1997, between Ira B. 2005.
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* Memorandum from Ira B. Lampert dated July 28, Incorporated by reference to the Company's
2004 to the Company regarding the waiver of 10-K for the year ended July 3, 2004.
certain compensation and modification to
vesting dates, along with releases signed by
Ira B. Lampert
10.38* Amended and Restated SERP for Ira B. Lampert, Incorporated by reference to the Company's
dated as of August 18, 2004, between Ira B. 10-K for the year ended July 3, 2004.
Lampert and the Company
10.39* Amended and Restated SERP for Keith L. Incorporated by reference to the Company's
Lampert, dated as of August 18, 2004, between 10-K for the year ended July 3, 2004.
Keith L. Lampert and the Company
10.40* Terms of Employment between Brian F. King and Incorporated by reference to the Company's
the Company, effective as of January 1, 2000 10-K for the year ended June 30, 2001.
10.41* Amendment, dated as of November 20, 2002, to Incorporated by reference to the Company's
Terms of Employment dated as of January 1, 10-Q for the quarter ended December 28,
2000, between Brian F. King and the Company 2002.
94
10.42* Amendment No. 2 dated as of February 26, Incorporated by reference to the Company's
2003, and Amendment No. 3 dated as of March 10-Q for the quarter ended March 29, 2003.
30, 2003, to Terms of Employment dated as of
January 1, 2000, between Brian F. King and
the Company
10.43* Separation Agreement dated as of March 29, Incorporated by reference to the Company's
2004 between Brian F. King and the Company 10-K for the year ended July 3, 2004.
10.44* Terms of Employment between Urs W. Stampfli Incorporated by reference to the Company's
and the Company, effective as of January 1, 10-K for the year ended June 30, 2001.
2000
10.45* Amendment, dated as of November 20, 2002, to Incorporated by reference to the Company's
Terms of Employment dated as of January 1, 10-Q for the quarter ended December 28,
2000, between Urs W. Stampfli and the Company 2002.
10.46* Amendment No. 2 dated as of February 26, Incorporated by reference to the Company's
2003, and Amendment No. 3 dated as of March 10-Q for the quarter ended March 29, 2003.
30, 2003, to Terms of Employment dated as of
January 1, 2000, between Urs W. Stampfli and
the Company
10.47* Extension and Amendment of Terms of Incorporated by reference to the Company's
Employment of Urs W. Stampfli with Concord 8-K filed with the SEC on December 27,
Camera Corp. effective as of January 1, 2006, 2005.
by and between the Company and Urs W.
Stampfli
10.48* Terms of Employment between Keith L. Lampert Incorporated by reference to the Company's
and the Company, effective as of November 11, 10-Q for the quarter ended December 28,
2002 2002.
10.49* Amendment No. 1, dated as of March 2, 2004, Incorporated by reference to the Company's
to Terms of Employment effective as of 10-Q for quarter ended March 27, 2004.
November 11, 2002, between Keith L. Lampert
and the Company
10.50* Separation Agreement between the Company and Incorporated by reference to the Company's
Keith L. Lampert dated as of December 24, 10-Q for the quarter ended December 31,
2005 2005.
10.51* Terms of Employment between Richard Incorporated by reference to the Company's
Finkbeiner and the Company, effective as of 10-K for the year ended June 28, 2003.
July 22, 2002, and Amendment No. 1 to same
dated as of January 1, 2003
95
10.52* Separation Agreement dated as of August 18, Incorporated by reference to the Company's
2004 between Richard Finkbeiner and the 10-K for the year ended July 3, 2004.
Company
10.53* Terms of Employment between Alan Schutzman Incorporated by reference to the Company's
and the Company, effective as of September 10-K for the year ended July 3, 2004.
15, 2003, and Amendment No. 1 to same dated
January 23, 2004
10.54* Separation Agreement between the Company and Incorporated by reference to the Company's
Alan Schutzman dated as of December 24, 2005 10-Q for the quarter ended December 31,
2005.
10.55* Terms of Employment between Harlan I. Press Incorporated by reference to the Company's
and the Company, effective as of January 1, 10-K for the year ended June 30, 2001.
2000
10.56* Amendment dated as of November 20, 2002, Incorporated by reference to the Company's
Amendment No. 2 dated as of February 26, 10-Q for the quarter ended October 2, 2004.
2003, and Amendment No. 3 dated as of March
30, 2003, to Terms of Employment dated as of
January 1, 2000 between Harlan I. Press and
the Company
10.57* 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.
10.58* Gerald J. Angeli Terms of Employment with the Incorporated by reference to the Company's
Company as of April 17, 2000 8-K filed with the SEC on November 29,
2005.
10.59* Amendment to Terms of Employment of Gerald J. Incorporated by reference to the Company's
Angeli with the Company dated as of June 11, 8-K filed with the SEC on November 29,
2001 2005.
10.60* Amendment No. 2 to Terms of Employment of Incorporated by reference to the Company's
Gerald J. Angeli with the Company dated as of 8-K filed with the SEC on November 29,
August 12, 2002 2005.
10.61* Amendment No. 3 to Terms of Employment of Incorporated by reference to the Company's
Gerald J. Angeli with the Company dated as of 8-K filed with the SEC on November 29,
January 1, 2003 2005.
96
10.62* Amendment No. 4 to Terms of Employment of Incorporated by reference to the Company's
Gerald J. Angeli with the Company dated as of 8-K filed with the SEC on November 29,
March 22, 2004 (exclusive of Exhibit A 2005.
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)
10.63* Confidentiality/Intellectual Property Incorporated by reference to the Company's
Restrictions and Non-Compete (Rev. February 8-K filed with the SEC on November 29,
12, 2001) between the Company and Gerald J. 2005.
Angeli
10.64* Amendment No. 5 to Terms of Employment of Incorporated by reference to the Company's
Gerald J. Angeli with the Company dated April 8-K filed with the SEC on April 6, 2006.
3, 2006
10.65* Terms of Employment between Blaine Robinson Incorporated by reference to the Company's
and the Company, effective as of February 11, 10-Q for the quarter ended October 2, 2004.
2003 and Amendment No. 1 to same dated as of
January 7, 2005.
10.66* Amendment No. 2 to Terms of Employment of Incorporated by reference to the Company's
Blaine Robinson with the Company dated April 8-K filed with the SEC on April 6, 2006.
1, 2006
10.67* Amendment No. 3 to Terms of Employment of Incorporated by reference to the Company's
Blaine Robinson with the Company dated April 8-K filed with the SEC on April 6, 2006.
1, 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)
10.68* Terms of Employment of Scott L. Lampert with Incorporated by reference to the Company's
the Company effective August 1, 2001. 8-K filed with the SEC on April 6, 2006.
10.69* Amendment No. 1 to Terms of Employment of Incorporated by reference to the Company's
Scott L. Lampert with The Company dated April 8-K filed with the SEC on April 6, 2006.
1, 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)
97
10.70* Form of SERP, dated as of April 19, 2000, Incorporated by reference to the Company's
between the Company and each of certain 10-K for the year ended July 1, 2000.
executive officers
10.71* Form of Amendment to the SERP, dated as of Incorporated by reference to the Company's
April 19, 2000, between the Company and each 10-K for the year ended June 30, 2001.
of certain executive officers
10.72* Form of Amendment No. 2, dated as of June 1, Incorporated by reference to the Company's
2002, to the SERP between the Company and 10-K for the year ended June 29, 2002.
each of Brian King, Urs Stampfli and Harlan
Press
10.73* Form of Amendment No. 3, dated as of August Incorporated by reference to the Company's
6, 2003, to the SERP between the Company and 10-Q for quarter ended March 27, 2004.
each of Brian King and Urs Stampfli
10.74* SERP, dated as of July 22, 2002, between the Incorporated by reference to the Company's
Company and Richard Finkbeiner 10-K for the year ended June 28, 2003.
10.75* Amendment No. 1, dated as of August 6, 2003, Incorporated by reference to the Company's
to SERP dated as of July 22, 2002, between 10-Q for quarter ended March 27, 2004.
Richard Finkbeiner and the Company
10.76* SERP, dated as of September 15, 2003, between Incorporated by reference to the Company's
the Company and Alan Schutzman 10-K for the year ended July 3, 2004.
10.77* Amendment No. 2 to Amended and Restated SERP Incorporated by reference to the Company's
for Ira B. Lampert dated as of November 28, 8-K filed with the SEC on November 29,
2005 2005.
10.78* Amendment No. 3 to Amended and Restated SERP Incorporated by reference to the Company's
for Ira B. Lampert dated as of November 28, 8-K filed with the SEC on November 29,
2005 2005.
10.79* Amendment No. 1 to Amended and Restated SERP Incorporated by reference to the Company's
for Keith L. Lampert dated as of November 28, 8-K filed with the SEC on November 29,
2005 2005.
10.80* Amendment No. 2 to Amended and Restated SERP Incorporated by reference to the Company's
for Keith L. Lampert dated as of November 28, 8-K filed with the SEC on November 29,
2005 2005.
10.81* SERP for Gerald J. Angeli dated as of July Incorporated by reference to the Company's
31, 2001 10-Q for the quarter ended December 31,
2005.
98
10.82* Amendment No. 1 to the SERP for Gerald J. Incorporated by reference to the Company's
Angeli dated as of March 22, 2004 10-Q for the quarter ended December 31,
2005.
10.83* Amendment No. 2 to SERP for Gerald J. Angeli Incorporated by reference to the Company's
dated as of November 28, 2005 8-K filed with the SEC on November 29,
2005.
10.84* Amendment No. 3 to SERP for Gerald J. Angeli Incorporated by reference to the Company's
dated as of November 28, 2005 8-K filed with the SEC on November 29,
2005.
10.85* Amendment to the SERP for Harlan I. Press Incorporated by reference to the Company's
dated as of July 31, 2001 10-Q for the quarter ended December 31,
2005.
10.86* Amendment No. 3 to SERP for Harlan I. Press Incorporated by reference to the Company's
dated as of November 28, 2005 8-K filed with the SEC on November 29,
2005.
10.87* Amendment No. 1 to SERP for Alan Schutzman Incorporated by reference to the Company's
dated as of November 28, 2005 8-K filed with the SEC on November 29,
2005.
10.88* Amendment to the SERP for Urs W. Stampfli Incorporated by reference to the Company's
dated as of July 31, 2001 10-Q for the quarter ended December 31,
2005.
10.89* Amendment No. 4 to Amended and Restated SERP Incorporated by reference to the Company's
for Urs W. Stampfli dated as of November 28, 8-K filed with the SEC on November 29,
2005 2005.
10.90* Amendment No. 5 to Amended and Restated SERP Incorporated by reference to the Company's
for Urs W. Stampfli dated as of November 28, 8-K filed with the SEC on November 29,
2005 2005.
10.91* The Company Executive Management Tax Incorporated by reference to the Company's
Equalization Policy 10-K for the year ended June 29, 2002.
10.92 Lease Agreement, undated between Prologis Incorporated by reference to the Company's
Trust, a Maryland real estate investment 10-Q for the quarter ended January 2, 1999.
trust, and the Company
10.93 Lease Agreement, dated as of August 12, 1998, Incorporated by reference to the Company's
between CarrAmerica Realty Corp. and the 10-Q for the quarter ended January 2, 1999.
Company
10.94 First Amendment, dated October 12, 1999, to Incorporated by reference to the Company's
Lease dated as of August 12, 1998, between 10-Q for the quarter ended October 2, 1999.
CarrAmerica Realty Corp. and the Company
99
10.95 Second Amendment, dated January 3, 2000, to Incorporated by reference to the Company's
Lease dated as of August 12, 1998, between 10-K for the year ended July 1, 2000.
CarrAmerica Realty Corp. and the Company
10.96 Third Amendment, dated January 6, 2003, to Incorporated by reference to the Company's
Lease dated as of August 12, 1998, between 10-Q for the quarter ended December 28,
CRD Presidential, LLC and the Company 2002.
10.97 Tenancy Agreement, dated September 18, 2002, Incorporated by reference to the Company's
between Southnice Investments Limited and 10-Q for the quarter ended December 28,
CCHK Limited 2002.
10.98* Terms of Employment between Robert Bosi and Incorporated by reference to the Company's
the Company, effective as of October 21, 2004 10-Q for the quarter ended October 2, 2004
and Amendment to same extending the Terms of and Amendment to same incorporated by
Employment beginning June 2, 2005. reference to the Company's 8-K filed with
the SEC on June 3, 2005.
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.
16.1 Letter from Ernst & Young LLP to the SEC Incorporated by reference to the Company's
dated June 20, 2005. 8-K filed with the SEC on June 20, 2005.
17.1 Resignation of J. David Hakman as a member of Incorporated by reference to the Company's
the Board of Directors 8-K filed with the SEC on November 23,
2004.
21 Subsidiaries of the Company Filed herewith.
23.1 Consent of BDO Seidman, LLP Filed herewith.
23.2 Consent of Ernst & Young 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. Section 1350
32.2 Certification of Principal Financial Officer Filed herewith.
pursuant to 18 U.S.C. Section 1350
100