UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 28, 2008
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 Nasdaq Global Market
------------------------------------ --------------------
(Title of class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes |_| No |X|
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes |_| No |X|
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated" in Rule 12b-2 of the Exchange Act.
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes |_| No |X|
The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant as of December 28, 2007, the last day of
business of our most recently completed second fiscal quarter, was approximately
$12,380,901 based on the closing price for the registrant's common stock as
traded on the NASDAQ Global Market of The NASDAQ Stock Market LLC on such date
of $3.11 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 November 3, 2008, there were 5,913,610 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for its 2008 Annual
Meeting of Shareholders are incorporated by reference in Items 10, 11, 12, 13
and 14 of Part III of this Annual Report on Form 10-K.
ii
TABLE OF CONTENTS
Item Page
---- ----
PART I
1. Business ............................................................. 1
1A. Risk Factors ......................................................... 7
1B. Unresolved Staff Comments ............................................ 22
2. Properties ........................................................... 22
3. Legal Proceedings .................................................... 22
4. Submission of Matters to a Vote of Security Holders .................. 24
PART II
5. Market for Registrant's Common Equity, Related Shareholder Matters
and Issuer Purchases of Equity Securities............................. 25
6. Selected Financial Data .............................................. 27
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................ 28
7A. Quantitative and Qualitative Disclosures About Market Risk ........... 45
8. Financial Statements and Supplementary Data .......................... 46
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ............................... 89
9A. Controls and Procedures .............................................. 89
9B. Other Information .................................................... 90
PART III
10. Directors and Executive Officers and Corporate Governance............. 91
11. Executive Compensation ............................................... 91
12. Security Ownership of Certain Beneficial Owners
and Management and Related Shareholder Matters ....................... 91
13. Certain Relationships and Related Transactions
and Director Independence............................................. 91
14. Principal Accountant Fees and Services ............................... 91
PART IV
15. Exhibits and Financial Statement Schedules ........................... 92
Signatures ........................................................... 103
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
2008 refers to the fiscal year ended June 28, 2008; fiscal 2007 refers to the
fiscal year ended on June 30, 2007; fiscal 2006 refers to the fiscal year ended
July 1, 2006; fiscal 2005 refers to the fiscal year ended July 2, 2005; and
fiscal 2004 refers to the fiscal year ended July 3, 2004. Also, for reference
purposes, the Company's fiscal year ending on June 27, 2009 is designated as
"fiscal 2009."
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
the dissolution and liquidation of our company, the amount and timing of any
liquidating distributions, expected cost reductions, anticipated or expected
results of the implementation of our cost-reduction initiatives, anticipated
revenues or capital expenditures, the expected market size for 35 mm single-use
and traditional film cameras, our expected fulfillment of backlog orders, our
assessment of and estimates of royalty payments in connection with intellectual
property claims, the sufficiency of our working capital and cash to fund our
operations in the next twelve months, our belief regarding the lack of merit in
pending litigations and our expectation that there is no material tax exposure
to the company on account of our operations in the People's Republic of China
("PRC"), and other statements contained in this report regarding matters that
are not historical facts, are only estimates or predictions. No assurance can be
given that future results will be achieved or that future liquidating
distributions will be made. Actual events or results may differ materially as a
result of risks facing us or actual results differing from the assumptions
underlying such statements. In particular, our expected results could be
adversely affected by, among other things, production difficulties or economic
conditions negatively affecting our suppliers, customers or the market for our
products, by our inability to develop and maintain relationships with suppliers,
customers or licensors by our inability to negotiate favorable terms with our
suppliers, customers or licensors, by our inability to liquidate our assets or
settle our liabilities on favorable terms or, subject to shareholder approval,
our decision to dissolve and liquidate our Company. 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 easy-to-use 35mm single-use and traditional film cameras. We
manufacture and assemble most of our single-use cameras and certain of our
traditional film cameras at our manufacturing facilities in the Peoples Republic
of China ("PRC") and outsource the manufacture of certain of our single-use and
traditional film cameras for sale to retail sales and distribution ("RSD")
customers. We sell our private label and brand-name products to our RSD
customers worldwide either directly or through third-party distributors.
In fiscal 2004, we initiated a strategic review process to determine how we may
better compete in the digital camera market, increase sales of our popular
single-use cameras and reduce our operating costs.
1
The strategic review, which continued through fiscal 2007, led to our initiating
a restructuring plan and cost-reduction initiatives and resulted in our exiting
the digital camera market in fiscal 2007. In addition, in Fiscal 2008, we ceased
our new business initiatives.
On August 14, 2006, our Board of Directors (the "Board") established a committee
("the Special Committee") consisting of three independent directors, to
investigate, evaluate and/or analyze strategic alternatives for us and make any
recommendations to our Board with respect to such strategic alternatives that
the Special Committee determines to be appropriate. With the assistance of its
financial advisor, the Special Committee considered several alternative
strategies, including: (i) continuing current operations; (ii) making strategic
acquisitions; (iii) a sale or other disposition of all or a significant part of
our Company or our business; (iv) a "going-private" transaction; and (v) a
liquidation of our Company. The Special Committee authorized their financial
advisor and management to conduct discussions and negotiate with potential
strategic and financial investors who expressed an interest in making an
investment in or acquiring us. However, to date, efforts by management and the
financial advisor to engage in a transaction with any of these third parties
have not been successful.
Accordingly, based on the Special Committee's review of strategic alternatives
and recommendation, on October 29, 2008 our Board recommended our dissolution
and the adoption of a plan of liquidation. The dissolution and plan of
liquidation are subject to approval by our shareholders at the 2008 annual
meeting of shareholders (the "Annual Meeting"), which is expected to be held in
December. Pending our shareholder's vote on the dissolution and plan of
liquidation, in order to protect shareholder value, we have ceased manufacturing
products, purchasing materials and products and undertaking commitments for
sales of our products except for those products that we have remaining in
inventory.
If our shareholders approve our dissolution and the plan of liquidation, we will
file a certificate of dissolution with the Department of Treasury of the State
of New Jersey. Thereafter, we will not engage in any business activities except
for the purpose of preserving the value of our assets, prosecuting and defending
lawsuits by or against us, winding up our business and affairs, selling and
liquidating our properties and assets, including our intellectual property and
other intangible assets, paying or otherwise settling our liabilities, including
contingent liabilities, terminating commercial agreements and relationships and
preparing to make distributions to our shareholders, in accordance with the plan
of liquidation.
If our shareholders do not approve our dissolution and the plan of liquidation,
our Board will explore the alternatives then available for the future of our
Company. We believe the value of our business will be materially and adversely
impacted after the announcement of the recommendation of our dissolution and
adoption of a plan of liquidation by our Board. In particular, pending our
shareholders' vote on our dissolution and plan of liquidation, we have ceased
manufacturing products, purchasing materials and products and undertaking
commitments for sales of our products except for those products that we have
remaining in inventory and, as a result, we believe that many, if not all, of
our customers, including our major customers, will transition their business to
our competitors. Therefore, if our shareholders do not approve our dissolution
and plan of liquidation, we will not be able to continue to operate our business
as it existed prior to our Board's approval of our dissolution and plan of
liquidation and may not be able to operate our business at all.
You can find more information on our fiscal 2008 results of operations and our
Board's decision to recommend our dissolution and plan of liquidation to our
shareholders in Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The mailing address of our headquarters is 4000 Hollywood Boulevard, 6th Floor,
North Tower, Hollywood, Florida 33021, and our telephone number is (954)
331-4200. Our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, amendments to those reports and our proxy
statements are available free of charge on our Internet website, at
http://www.concord-camera.com, as soon as reasonably practicable after such
reports are electronically filed with or furnished to the
2
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 Market for our Film Camera Products
Our products include 35mm single-use and traditional film cameras to our RSD
customers.
o Single-use cameras - Our single-use cameras are inexpensive,
easy-to-use cameras that are sold preloaded with 35mm silver halide
film and batteries and are designed to be used for only one roll of
film by the consumer. After use, the consumer returns the entire
camera to the photo processor. The processor then extracts the film
and either disposes of the used camera or returns and/or sells it
for recycling uses.
o Traditional film cameras - Our traditional film cameras are
inexpensive, easy-to-use cameras that are designed to be reloaded
with 35mm silver halide film multiple times by the consumer.
Film Camera Market Trends
Market trends for 35mm single-use and traditional film cameras include the
following:
o Single-use cameras - Based on our estimates of available third-party
market research data, after years of robust growth, the North
America single-use camera market reached its peak of 218 million
units sold in calendar year 2004. Total North America sales of
single-use cameras declined to 202 million units in calendar year
2005, declined to 172 million units in calendar year 2006, declined
to an estimated 129 million units in calendar year 2007 and are
projected to decline to 91 million units in calendar year 2008.
o Traditional film cameras - Traditional film cameras are being
displaced by digital cameras. Based on available third-party market
research data, in the U.S. market, digital cameras began to outsell
film cameras in calendar year 2005. The calendar year 2005
traditional film camera sales in the United States were reported at
4.3 million units, a 36% decrease from the previous year. The
decline of traditional film cameras continued during calendar year
2006 at approximately 53% and during calendar year 2007 at
approximately 45% and is projected to decline during calendar 2008 a
further 54%, with sales projected at 0.5 million units.
Film Camera Products
Our film camera products include 35mm single-use and traditional film cameras.
We sell private label and brand-name products to our RSD customers worldwide
either directly or through third-party distributors. We designed, developed and
manufactured most of our single-use cameras and certain of our traditional film
cameras and outsourced the manufacture of certain of our single-use and
traditional film cameras.
We offer a complete line of single-use cameras, including outdoor, flash, zoom
and underwater models. We believe that we are uniquely structured to provide
encasements, finishes, packaging and film speed and lengths to accommodate
different user and customer preferences.
Our traditional film cameras consist of two entry-level models and models used
by certain RSD customers to support loyalty programs offered to their customers.
Our expenditures for product engineering, design and development decreased to $
2.2 million in fiscal 2008 from $2.5 million in fiscal 2007, mainly as a result
of our reduction in development of new film camera models. For additional
information regarding product development costs, see Item 7,
3
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Sales and Marketing
Our film camera products are sold to retailers on a worldwide basis through
direct sales offices, independent sales representatives and distributors in the
United States, Latin America (the "Americas"), the United Kingdom, France and
Germany ("Europe"), and Hong Kong, China and Japan ("Asia"). We currently market
our film camera products to retailers on a private label basis and/or under the
Polaroid and Polaroid Fun Shooter brand names.
We have established our presence with our retail customers by offering
attractive, easy-to-use 35mm single-use and traditional film cameras. We market
many different styles of cameras that are sold through many retail outlets.
We have in-house sales and marketing personnel who make the majority of our
direct sales to our RSD customers. We also have independent sales
representatives who serve specific geographic areas and/or customers. 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 also act as sales representatives for manufacturers of other photographic
and non-photographic products. We also sell products to distributors on a
wholesale basis who, in turn, sell our products to retailers.
Competition in the Film Camera Market
The film camera market is highly competitive with many companies marketing
products to the retail market. As a producer and/or marketer of 35mm single-use
and traditional film camera products, we encounter substantial competition from
a number of companies, many of which have longer operating histories, more
established markets and brand recognition, and more extensive research,
development and manufacturing capabilities than we have. Our key competitors in
the 35 mm single-use camera market are FujiFilm Corporation ("Fuji") and Eastman
Kodak Company, both of whom have greater resources than we have or may
reasonably be expected to have in the foreseeable future and are our sole
suppliers of film for our 35mm single-use and traditional film camera products.
Backlog
Due to the lead time required for production and shipping and the need to build
inventory to meet seasonal demand, we may at times have a backlog of orders for
products. We define backlog as unfulfilled orders supported by signed contracts
or purchase orders for delivery of our products generally within the next six
months. Our backlog at June 28, 2008 was approximately $6.8 million. We
experience fluctuations in our backlog at various times during our fiscal year.
Approximately $6.5 million of the unfulfilled orders at June 28, 2008 were
shipped during our first quarter of fiscal 2009. 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 2008, sales to two of our retail customers represented in excess of
10% of our total net sales: (i) Wal-Mart Stores, Inc. ("Wal-Mart") represented
35.3% of total net sales; and (ii) Walgreen Co. ("Walgreens") represented 15.4%
of total net sales. See Note 20, Geographic Area and Significant Customer
Information, in the Notes to Consolidated Financial Statements.
4
Seasonality
Sales of our film camera products are linked to the timing of vacations,
holidays and other leisure activities. Sales are normally strongest in the first
and second quarters (summer, fall and early winter) of our fiscal year when
demand is high as retailers prepare for the holiday season. Sales are also
strong in the fourth quarter of our fiscal year (spring to early summer) due to
demand driven by heavy vacation activity and events such as weddings and
graduations. Sales are normally lowest in the third quarter of our fiscal year
(winter to early spring) with the absence of holidays and fewer people taking
vacations.
Licensing Activities
We have a worldwide non-exclusive license (which excluded Japan until January 1,
2005) to use certain of the single-use camera patents and patent applications of
Fuji 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 depends on the continuation of our right to use the
Fuji patents. As a result, we believe the loss of the Fuji license prior to the
expiration of the patents would have a material adverse effect on our financial
position and results of operation if our shareholders do not approve our
dissolution and plan of liquidation and we seek to continue our single-use
camera business.
We have the worldwide, exclusive right to use the Polaroid brand name and
trademark in connection with the manufacture, distribution, promotion and sale
of single-use and traditional film-based cameras, including zoom cameras and
certain related accessories but excluding instant and digital cameras, except
for products released by Polaroid Corporation ("Polaroid") into the distribution
chain before August 26, 2002. The single-use camera license agreement expires on
February 1, 2009 and provides for the payment of $3.0 million of minimum
royalties to Polaroid, which was fully credited against percentage royalties. As
of June 28, 2008, our single-use camera percentage royalties exceeded the
minimum royalty amount. The traditional film camera license agreement expires on
January 31, 2009 and provided for a minimum royalty payment of $50,000 to
Polaroid on or before October 31, 2006, which was fully credited against
percentage royalties during the first year of the term ended January 31, 2007.
There are no minimum guaranteed royalty payments under the traditional film
camera license agreement after the first year of the term. As of July 1, 2006,
our traditional film camera percentage royalties exceeded the minimum royalty
amount. We have engaged in discussions with Polaroid regarding the renewal of
the single-use camera license agreement but have suspended those discussions
pending our shareholders' vote on our dissolution and plan of liquidation. If
our shareholders do not approve our dissolution and plan of liquidation, it is
uncertain whether we will be able to renew the single-use camera license
agreement. We believe that the loss of the Polaroid single-use camera license
would have a material adverse effect on our financial position and results of
operations if our shareholders do not approve our dissolution and plan of
liquidation and we seek to continue our single-use camera business.
As part of our acquisition of Jenimage Europe GmbH ("Jenimage") in 2004, we
entered into a twenty-year, worldwide trademark license agreement with Jenoptik
AG for the exclusive use of the Jenoptik brand name and trademark on
non-professional consumer imaging products including, but not limited to,
digital, single-use and traditional film cameras, and other imaging products and
related accessories. The license provides for the payment of percentage
royalties but does not require any minimum guaranteed royalty payments. In
August 2008, we entered into an agreement with Jenoptik AG to terminate the
Jenoptik trademark license agreement, effective January 1, 2010, in exchange for
Jenoptik AG's reimbursement of a portion of the upfront license fee that we paid
to Jenoptik AG upon execution of the license agreement in 2004.
5
For further discussion of our license and royalty agreements, see Note 16,
Commitments and Contingencies, "License and Royalty Agreements," and Note 22,
Subsequent Events, in the Notes to Consolidated Financial Statements.
Manufacturing
We conducted 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. Beginning in fiscal 2008, as a result of our previous
restructuring plan, our manufacturing facility has focused predominantly on the
manufacture of high volume, low cost 35mm 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 and our active marketing of our PRC buildings and land rights for sale.
Our PRC manufacturing facilities have been certified under the Social
Accountability 8000 standard ("SA8000") since November 2001. The SA8000 is an
international standard designed to ensure safe working conditions, fair
management practices and the protection of workers' rights. Our PRC
manufacturing facilities are ISO 9000 and 9001 accredited.
In addition, we outsourced the manufacture of certain of our 35mm single-use and
traditional film cameras.
Equipment, Components, Raw Materials and Products from Outsourced Manufacturers
We own the tools and equipment necessary to manufacture a significant number of
our 35mm single-use camera products and components used in our 35mm single-use
camera products. Manufacturers and suppliers located in the Far East and other
parts of the world supply us with raw materials, components and finished
products that we do not manufacture. We may experience a shortage of supply of,
or a delay in receiving, certain materials, components and products as a result
of strong demand, capacity constraints, diminishing sources of supply or other
problems experienced by our suppliers. Our net sales, gross profits and margins
could be adversely affected if we encounter supplier issues and/or fail to
manage supplier issues properly. See Item 1A, Risk Factors.
PRC Operations
Our operations are substantially dependent upon our manufacturing and assembly
activities in the PRC. Our current processing agreement with the PRC
governmental entities, which allows us to operate in the PRC, was renewed in
October 2006 for an additional ten-year term until October 2016. In connection
with the recommendation by our Board of our dissolution and the adoption of the
plan of liquidation, on November 1, 2008, we provided the required twelve months
notice of termination of our processing agreement to the PRC governmental
entities. See Item 2, Properties, for information on the leases and land use
agreements related to our manufacturing facilities in the PRC. See Note 22,
Subsequent Events, in the Notes to Consolidated Financial Statements.
In 2002, we established, registered and commenced operations of a wholly-owned
foreign enterprise, Concord Camera (Shenzhen) Company Limited ("Concord
Shenzhen"), which is a wholly-owned subsidiary of Concord Camera HK Limited
("CCHK"), pursuant to the laws of the PRC relating to enterprises with a sole
foreign investor. The business license of Concord Shenzhen permits it to design,
develop, manufacture and sell single-use, traditional film and digital cameras
and camera components in the PRC and worldwide.
6
Trademarks and Patents
Our trademarks include, among others, CONCORD, CONCORD EYE Q, GO WIRELESS, FUN
SHOOTER, EASYSHOT, LE CLIC, KEYSTONE, APEX and GOLDLINE for cameras sold in the
United States and/or numerous foreign countries. We license the POLAROID
trademark for exclusive use worldwide in connection with the manufacture,
distribution, promotion and sale of single-use and traditional film cameras
(excluding instant and digital cameras). We also license the JENOPTIK trademark
for exclusive use worldwide for non-professional consumer imaging products and
accessories (both digital and film-based). We own numerous patents, some of
which are used in our current products. We have applied 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.
Employee Relations
As of October 1, 2008, we had 85 employees, of whom 59, or 69.4% were located in
Hong Kong/PRC, 2, or 2.4%, were located in Europe and 24, or 28.2%, were located
in the Americas. During fiscal 2008, pursuant to our agreements with PRC
governmental entities, and based upon production demand, approximately 1,300 to
3,300 people worked in our PRC manufacturing facilities. We believe that our
relationship with our employees and workers is satisfactory.
In connection with the Board's recommendation of our dissolution and the
adoption of a plan of liquidation, we have terminated certain of our employees
in Hong Kong and the PRC and, if our shareholders approve the dissolution and
plan of liquidation, we will terminate our remaining employees throughout the
wind-down period.
Financial Information about Geographic Areas
For financial information about geographic areas, see Note 20, 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.
Risks Related to our Dissolution and Plan of Liquidation
Our shareholders may not approve our dissolution and plan of liquidation.
Our dissolution in accordance with our plan of liquidation is dependent upon
approval by our shareholders. If our shareholders fail to approve our
dissolution and plan of liquidation, we will then evaluate the alternatives
available to us at that time, including, but not limited to, continuing to
operate our business or selling our business, non-cash assets or company. We
believe the announcement of the recommendation by our Board of our dissolution
and the adoption of the plan of liquidation and the filing of our proxy
statement for our Annual Meeting will result in the loss of customers, suppliers
and other business relationships. Pending our shareholders' vote on our
dissolution and plan of liquidation, we have ceased manufacturing products,
purchasing materials and products and undertaking commitments for sales of our
products except for those products that we have remaining in inventory. As a
result, we believe that many, if not all, of our customers, including our two
major customers, will transition their
7
business to our competitors. Therefore, if our shareholders fail to approve our
dissolution and plan of liquidation, our business will be materially and
adversely impacted and we will not be able to continue to operate our business
as it existed prior to the recommendation of our dissolution and the adoption of
the plan of liquidation by our Board and may not be able to operate our business
at all.
Timing of the dissolution and liquidation is uncertain.
As soon as practicable after the Annual Meeting, if our shareholders approve our
dissolution and the plan of liquidation, we intend to file a certificate of
dissolution with the Department of Treasury of the State of New Jersey and sell
and monetize our remaining non-cash assets. There are a number of factors that
could delay our anticipated timetable, including, but not limited to, the
following:
o lawsuits or other claims asserted against us;
o legal, regulatory or administrative delays;
o inability to sell and monetize or delays in selling and monetizing
certain non-cash assets on terms acceptable to us;
o delays in settling our remaining liabilities; and
o delays in liquidating and dissolving subsidiaries in domestic and
foreign jurisdictions.
We cannot determine with certainty the amount of the distributions to
shareholders.
We cannot determine at this time the amount of distributions to our shareholders
pursuant to the plan of liquidation. This determination depends on a variety of
factors, including, but not limited to, the amount required to satisfy or settle
known and unknown liabilities, the resolution of litigation, including our
existing lawsuits, and other contingent liabilities, the net proceeds, if any,
from the sale and monetization of our remaining non-cash assets, including our
inventory, our property in the PRC and our auction rate securities, and other
factors. Examples of uncertainties that could reduce the value of or eliminate
distributions to our shareholders include unanticipated costs relating to:
o the defense, satisfaction or settlement of lawsuits or other claims
that may be made or threatened against us in the future;
o the pending lawsuits and claims against us, including in the event a
proposed settlement in a pending lawsuit is rejected by the court or
is not effected for any other reason;
o delays in our liquidation and dissolution, including due to our
inability to sell and monetize non-cash assets or settle claims; and
o delays in our liquidating and dissolving subsidiaries in domestic
and foreign jurisdictions.
As a result, we cannot determine with certainty the amount of distributions to
our shareholders.
Continued failure of auctions of our auction rate securities or sales of our
auction rate securities below their current carrying value can affect the timing
of the dissolution and liquidation and the amount of distributions shareholders
receive in the dissolution and liquidation.
As of June 28, 2008, the carrying value of our auction rate securities was $18.5
million. This carrying value is net of an unrealized loss of approximately $5.1
million which was recorded as of June 28, 2008 due to our determination that the
estimated value of these securities as of that date was less than their par
value. During our fiscal year ended June 28, 2008, we received net proceeds of
$6.9 million from the sale
8
of auction rate securities at 100% of par value, of which $1.9 million was
received after market uncertainties and liquidity issues arose in the market for
auction rate securities. Additionally, we have experienced redemptions of
approximately $1.8 million of our auction rate securities at 100% of par value
subsequent to June 28, 2008 and have consented to tender $2.1 million in par
value of our auction rate securities pursuant to an offer by the issuer to
purchase such securities for approximately $1.9 million. However, we are unable
at this time to predict whether the purchase of the tendered auction rate
securities will be completed or when we will be able to sell our remaining
auction rate securities and for what amount. Issuers and market makers are
exploring alternatives that may improve liquidity of our auction rate securities
and the New York Attorney General and the Securities and Exchange Commission
recently entered into an agreement with the investment bank that sold us our
auction rate securities under which the investment bank agreed to use its best
efforts to facilitate issuer redemptions of auction rate securities of
institutional investors such as us. However, we cannot assure you that such
efforts will be successful and, therefore, there is a risk that there could be a
further decline in value of our auction rate securities. Continued failed
auctions may affect the fair value of these securities, and require us to
further adjust the carrying value of the investment through an impairment
assessment and we may receive less than anticipated proceeds when we sell these
securities, which would reduce the amount of distributions shareholders receive
in the dissolution and liquidation.
We may not be able to sell our property in the PRC or, if we are able to sell
our property, the net proceeds from such sale may be less than the amount
estimated.
Our ability to sell our property in the PRC is substantially dependent upon the
current real estate market and economic conditions in the area of the PRC where
our property is located. The PRC real estate market and business environment is
currently under significant pressure, in part due to the worldwide financial
crisis. Additionally, we are uncertain what impact our announcement of the
recommendation by our Board of our dissolution and the adoption of the plan of
liquidation will have on our ability to sell our property. We cannot assure you
that we will be able to sell our property in the PRC for the amount estimated or
its carrying value for purposes of calculating the potential distributions to
shareholders or at all.
We may not be able to settle all of our liabilities to creditors.
We have current and future liabilities to creditors. Our estimated distribution
to shareholders takes into account all of our known liabilities and certain
possible contingent liabilities and our best estimate of the amount reasonably
required to satisfy such liabilities. As part of the wind-down process, we will
attempt to settle all liabilities with our creditors. We cannot assure you that
unknown liabilities that we have not accounted for will not arise, that we will
be able to settle all of our liabilities or that they can be settled for the
amounts we have estimated for purposes of calculating the range of distribution
to shareholders. If we are unable to reach an agreement with a creditor relating
to a liability, that creditor may bring a lawsuit against us. Amounts required
to settle liabilities or defend lawsuits in excess of the amounts estimated by
us will reduce the amount of net proceeds available for distribution to
shareholders.
Shareholders could be liable to the extent of liquidating distributions received
if contingent reserves are insufficient to satisfy our liabilities.
If we fail to create an adequate contingency reserve for payment of our expenses
and liabilities, or if we transfer our assets to a liquidating trust and the
contingency reserve and the assets held by the liquidating trust are less than
the amount ultimately found payable in respect of expenses and liabilities, each
shareholder could be held liable for the payment to creditors of such
shareholder's pro rata portion of the deficiency, limited, however, to the
amounts previously received by the shareholder in distributions from us or the
liquidating trust. Accordingly, you could be required to return some or all
distributions made to you. In such an event, you could receive nothing under the
plan of liquidation.
9
If a court holds at any time that we have failed to make adequate provision for
our expenses and liabilities or if the amount ultimately required to be paid in
respect of such liabilities exceeds the amount available from the contingency
reserve and the assets of the liquidating trust, our creditors could seek an
injunction against the making of distributions under the plan of liquidation on
the grounds that the amounts to be distributed are needed to provide for the
payment of our expenses and liabilities. Any such action could delay or
substantially diminish the cash distributions to be made to shareholders and/or
holders of beneficial interests of the liquidating trust under the plan of
liquidation.
Shareholders may not be able to recognize a loss for federal income tax purposes
until they receive a final distribution from us.
As a result of our liquidation, for United States federal income tax purposes,
shareholders will recognize gain or loss equal to the difference between (i) the
sum of the amount of cash distributed to them and the aggregate fair market
value at the time of distribution of any property distributed to them (including
transfers of assets to a liquidating trust), and (ii) their tax basis in their
shares of our capital stock. Any loss may generally be recognized only when the
final distribution has been received from us.
In connection with the dissolution, our stock transfer books will close, after
which it may not be possible for shareholders to trade in, or transfer, our
stock.
In connection with the dissolution, we intend to delist our common stock from
the NASDAQ Global Market, close our stock transfer books and discontinue
recording transfers of our common stock at which time our common stock and stock
certificates evidencing the common stock will not be assignable or transferable
on our books except by will, intestate succession or operation of law.
We expect to terminate registration of our common stock under the Securities
Exchange Act of 1934, as amended, which will substantially reduce publicly
available information about our company.
Our common stock is currently registered under the Securities Exchange Act of
1934, as amended, or the Exchange Act, which requires that we, and our officers
and directors with respect to Section 16 of that Act, comply with certain public
reporting and proxy statement requirements thereunder. Compliance with these
requirements is costly and time-consuming. We anticipate that, if our
shareholders approve our dissolution and plan of liquidation, in order to
curtail expenses, we will, after filing a certificate of dissolution,
discontinue making filings under the Exchange Act. However, we anticipate that
we would continue to file with the SEC current reports on Form 8-K to disclose
material events relating to our dissolution and plan of liquidation until the
effectiveness of the termination of the registration of our common stock by
filing a Form 15 with the Commission.
No further shareholder approval will be required.
Approval of our dissolution and plan of liquidation requires the affirmative
vote of a majority of the votes cast at a meeting duly called at which a quorum
is present. If our shareholders approve our dissolution and plan of liquidation,
we will be authorized to cease operations, sell, license or otherwise dispose of
our assets and dissolve the Company and its subsidiaries without further
approval of our shareholders, unless required to do so by New Jersey law.
Our Board may abandon or delay implementation of the plan of liquidation even if
approved by our shareholders.
Even if our shareholders approve our dissolution and plan of liquidation, our
Board has reserved the right, in its discretion, to the extent permitted by New
Jersey law, to abandon or delay implementation of the plan of liquidation, in
order, for example, to permit us to pursue new business opportunities or
strategic transactions.
10
We may be the potential target of an acquisition.
Until we dissolve and terminate registration of our common stock under the
Exchange Act, we will continue to exist as a public company. We could become an
acquisition target, through a hostile tender offer or other means, as a result
of our business operations, non-cash assets, cash holdings or for other reasons.
If we become the target of a successful acquisition, the Board could potentially
decide to either delay or, subject to applicable New Jersey law, revoke our
dissolution and plan of liquidation, and our shareholders may not receive any
proceeds that would have otherwise been distributed in connection with the
liquidation.
Our Board members may have a potential conflict of interest in recommending
approval of our dissolution and plan of liquidation.
As a result of the right to acquire shares of our common stock pursuant to stock
options that may be exercised, compensation and benefits payable as a result of
termination of employment or other events, an indemnification insurance policy
purchased for the benefit of directors and our indemnification obligations to
directors, members of our Board may be deemed to have a potential conflict of
interest in recommending approval of our dissolution and the plan of
liquidation.
Risks Related to Our Business
If our shareholders do not approve our dissolution and plan of liquidation and
we seek to continue to operate our business, the following risks will apply.
Our auditor's have expressed substantial doubt as to our ability to continue as
a "going concern."
The auditors' report for our consolidated financial statements for the three
years ended June 28, 2008 state that since we have ceased manufacturing
products, purchasing materials and products and undertaking commitments for
sales of our products, except for products that we have remaining in inventory,
pending shareholder approval of our dissolution and plan of liquidation, there
is substantial doubt about our ability to continue as a going concern. A
"going-concern" opinion indicates that although there is substantial doubt, the
financial statements have been prepared on a going-concern basis and do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
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 our shareholders do not approve our dissolution and plan of
liquidation, it is uncertain whether we will be able to generate sufficient
sales of our products to meet our cash flow needs and avoid incurring continued
losses. If we require funding to meet our cash flow needs, we may seek to obtain
such funding through, among other things, loans or the issuance of debt or
equity securities. To the extent we raise additional capital by issuing equity
securities or by issuing debt that is convertible into equity, existing
shareholders will experience dilution in their ownership percentage. Moreover,
additional funding or capital may not be available to us on acceptable terms or
at all.
We may experience liquidity issues if our reliance on financing facilities
increases.
Our primary source of liquidity has been provided by our short-term investments,
funds provided by the collection of accounts receivable and borrowing
availability under our financing facilities. Our borrowing
11
capacity under the import facility provided by The Hongkong and Shanghai Banking
Corporation Limited ("HSBC") was reduced during calendar year 2005 from $24.0
million in January 2005 to $14.0 million in September 2005. In January 2006, the
HSBC financing facilities were further reduced to an aggregate of approximately
$8.2 million and we were required to provide cash deposits pledged as security
in the amount of approximately $8.2 million against the facility. During fiscal
2007, we further reduced the HSBC financing facilities by $3.0 million to $5.2
million and obtained $3.0 million of alternative financing from two other Hong
Kong-based financial institutions. During fiscal 2008, we eliminated one of the
alternative financing facilities, leaving us with an aggregate of approximately
$6.2 million with our Hong Kong-based lenders, and established a demand
financing facility with The CIT Group/Commercial Services, Inc. ("CIT") for up
to $15 million and a credit line with Citigroup Global Markets, Inc.
("Citigroup") with a current aggregate credit limit of $10,925,000. The CIT
financing facility is secured by a first priority lien on, among other things,
our America's accounts receivable and inventory and the Citigroup financing
facility is secured by a first priority lien and security interest in our
remaining auction rate securities. See Part II, Item 7, Management's Discussion
and Analysis of Financial Condition and Results of Operations, "Liquidity and
Capital Resources," for additional information on our financing facilities.
On November 3, 2008, CIT notified us that an event of default existed under the
CIT financing facility as a result of our press release on October 30, 2008 that
we have elected to wind down operations and liquidate assets. Currently, CIT has
not exercised its rights to accelerate our obligation to repay the CIT financing
facility, but has temporarily discontinued making loans under the facility until
it receives additional financial information regarding our dissolution and the
plan of liquidation. If CIT was to demand repayment at a time when we did not
otherwise have sufficient borrowing capacity or liquid assets that would enable
us to repay the CIT financing facility in full, CIT would be entitled to
foreclose on our America's pledged inventory. This could result in inventory
being sold at a significant discount to its carrying value and could have a
material adverse effect on our liquidity and our ability to fund our operations.
Due to our recent losses, we may need to increase our reliance on financing
facilities, whether through our current lenders or other financial institutions
and, as a result, we may face liquidity issues due to potential funding limits
and debt service requirements imposed by lenders. Additionally, we may not be
able to secure such financing on reasonable terms or at all. A significant
increase in our indebtedness could increase our financing costs, interfere with
our ability to operate our business effectively and have a material adverse
effect on our financial condition and results of operations.
Continued failure of auctions of our auction rate securities can continue to
affect our liquidity.
As of June 28, 2008, the carrying value of our auction rate securities was $18.5
million, of which $16.8 million were classified as "Long-term investments" on
our consolidated balance sheet. Our portfolio of auction rate securities are AAA
rated, long-term debt obligations secured by student loans, with approximately
100% of such collateral being guaranteed by the U.S. Government under the
Federal Family Education Loan Program. Liquidity for these securities has been
provided by an auction process that resets the applicable interest rate at
pre-determined intervals usually every 28-35 days. In the past, the auction
process allowed investors to obtain immediate liquidity, if needed, by selling
the securities at face value. The current disruptions in the credit markets have
adversely affected the auction market for these types of securities. As
previously reported during Fiscal 2008, we have recently experienced failed
auctions for certain of our auction rate securities that have gone to auction
resulting in our inability to sell those securities. The auction rate securities
continue to pay interest at default interest rates which are generally higher
than the current market rate and there has been no change in the ratings of
these securities to date. However, in certain instances the interest rate for
some of the Company's auction rate securities may reset to a zero percent
interest rate due to a feature of the relevant formula for determining the
interest rate. To date, only a small percentage of the auction rate securities
have reset to a zero percent interest rate. These securities may reset to a
higher interest rate in the future. In the event that a greater percentage of
the Company's auction rate securities reset to a zero percent interest rate and
do not
12
subsequently reset to a higher interest rate, it could have a material adverse
effect on the Company's financial condition and results of operations.
Based on our expected operating cash flows and other sources of cash, cash
equivalents and short-term investments, it is possible that the potential lack
of liquidity in our auction rate security investments could adversely affect our
liquidity and our ability to fund our operations. During Fiscal 2008, we
received net proceeds of $6.9 million from the sale of auction rate securities
at 100% of par value, of which $1.9 million was received after market
uncertainties and liquidity issues arose in the market for auction rate
securities. Additionally, we have experienced redemptions of approximately $1.8
million of our auction rate securities at 100% of par value subsequent to June
28, 2008 and have consented to tender $2.1 million in par value of our auction
rate securities pursuant to an offer by the issuer to purchase such securities
for approximately $1.9 million. However, we cannot predict whether future
auctions for related to auction rate securities will be successful or whether we
will otherwise be able to sell such securities. We continue to seek alternative
short-term financing sources for reducing our exposure to the auction rate
market, but may not be able to identify any such alternative. Although we
currently have sufficient working capital to finance our operations in the near
term, if our working capital is insufficient in the future and we are not able
to monetize some or all of our auction rate securities or other assets at that
time, it could have a material adverse effect on our ability to finance our
future ongoing operations or other activities.
Continued failure of auctions of our auction rate securities or the foreclosure
of our pledged auction rate securities by Citigroup may impair the value of our
auction rate securities.
If any of the issuers of the auction rate securities are unable to successfully
close future auctions and/or their credit ratings deteriorate and if the market
values of our auction rate securities decline further, we may be required to
record an additional impairment charge on these investments. Additionally, if
Citigroup forecloses on our pledged auction rate securities to repay the
Citigroup Facility and sells such securities at a discount to their par value,
we may be required to record an other-than-temporary impairment charge on these
investments. If we are required to record an other-than-temporary impairment
charge on these investments, it could have a material adverse effect on our
financial condition and results of operations.
We face significant risks related to the 35mm single-use and traditional film
camera markets.
Based upon available third-party market research data, the 35mm single-use and
traditional film camera markets are in permanent decline and both markets are
expected to continue to decline further. See Item 1, Business, "Film Camera
Market Trends," above.
We depend on third-party suppliers, and our net sales, gross profits and margins
could be adversely affected if we encounter supplier issues and/or fail to
manage supplier issues properly.
We purchase certain components from our suppliers and outsource the manufacture
of certain of our 35mm single-use and traditional film camera and other products
for sale to our customers worldwide. The term "components" includes film,
batteries, packaging and any other items used in the manufacture of our products
by our company or outsourced manufacturers. Our manufacturing, sales and
distribution operations depend on our ability to anticipate our needs for
components and products and our suppliers' ability to deliver sufficient
quantities of quality components and products at reasonable prices in time to
meet critical manufacturing, sales and distribution schedules. Given the variety
of products that we offer and might offer in the future, the dispersal of our
suppliers and outsourced manufacturers across the globe, the diminishing number
of our suppliers of certain components and the long lead times that are required
to manufacture, assemble and deliver certain components and products, adverse
circumstances, issues and problems could arise in planning production,
procurement and managing inventory levels that could negatively impact our
business and increase our financial exposure and risk. Since we have suspended
purchases of materials and components pending our shareholders' vote on our
dissolution and
13
plan of liquidation, it is not certain whether we will be able to resume
purchasing materials and components from our suppliers, or what the terms of
such purchases will be, if our shareholders do not approve our dissolution and
plan of liquidation and we seek to continue to operate our business. Other
supplier problems that we could face include component and product shortages,
excess supply and risks related to fixed-price contracts that would require us
to pay more than the open market price, as more fully described below.
o Supply shortages. We may experience a shortage of supply of, or a delay
in receiving, certain components and products as a result of strong
demand, capacity constraints, diminishing sources of supply or other
problems experienced by suppliers. If shortages or delays occur or
persist, the price of these components and products may increase, we may
be exposed to quality issues or the components and products may not be
available at all. We may not be able to secure enough components and/or
products at reasonable prices or of acceptable quality to build, sell and
distribute new products in a timely manner in the quantities or
configurations needed. Accordingly, our revenue, gross profits and margins
could suffer as we could lose time-sensitive sales, incur additional
freight costs or be unable to pass on price increases to our customers. If
we cannot adequately address supply issues, we may have to re-engineer
and/or seek other sources for some components and products, resulting in
additional costs, delays or insufficient supply of products for our
customers. The number of film suppliers has diminished and we currently
rely on our two major competitors in the 35mm single-use camera market to
supply all of the film used in the manufacture of our single-use cameras.
If either of these suppliers reduces or eliminates its supply of film to
us and we are unable to secure film from alternative sources at reasonable
prices or of acceptable quality, we will not be able to manufacture the
quantities of 35mm single-use cameras necessary to fulfill our customer
orders and our financial condition and results of operations would be
materially adversely affected.
o Oversupply. In order to secure products or components for the production
of products, at times we may make advance payments to suppliers or might
purchase components in advance of forecasted requirements, or we may enter
into non-cancelable commitments with suppliers. If we fail to properly
anticipate customer demand, an oversupply of products and/or components
could result in excess or obsolete inventory. Our announcement of the
recommendation of our dissolution and the adoption of a plan of
liquidation by our Board will likely result in the loss of many, if not
all, of our customers, including our major customers and may increase our
risk of excess or obsolete inventory. This excess or obsolete inventory
may result in lowering the carrying value of these components and/or
products by recording an inventory charge which could adversely affect our
gross profits and margins.
o Long-term pricing commitments. As a result of binding price or purchase
commitments with suppliers, we may be obligated to purchase components
and/or products at prices that are higher than those available in the
current market and be limited in our ability to respond to changing market
conditions. In the event that we become committed to purchase components
and/or products in advance of forecasted requirements and/or for prices in
excess of the current market price, we may be at a disadvantage to
competitors who have access to components and/or products at the times
required and/or at lower prices. This excess in component purchases and in
purchase price over current market 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. Pending our shareholders' vote on our dissolution and plan of
liquidation, we have ceased making such component purchase commitments.
In many instances, we rely on offshore suppliers, including, but not limited to,
manufacturers in the PRC, for the production of cameras and other products and
other suppliers in Asia for product assembly and manufacture. Regional economic,
business, environmental, political, medical or military conditions or events
could disrupt supplies in foreign locations.
14
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 inventory is handled from two distribution facilities operated by
third-party service providers in San Pedro, California and Memphis, Tennessee;
and (ii) European inventory is currently handled from a distribution facility
operated by a third-party service provider in the United Kingdom. Our products
are prepared for shipment and shipped to our customers by such third-party
service providers from these distribution facilities. Any failure by these
third-party service providers to maintain a regular flow of products from us to
our customers or any significant interruption in the business of these service
providers or the operation of these distribution facilities due to natural
disasters, accidents, system failures, work stoppages or other causes would have
a material adverse effect on our business, financial condition and results of
operations. Our third-party distribution facility in the United Kingdom has
proposed an increase in the costs for their services due to the decrease in
volume of our business with such provider. If the cost of the services with any
of our third-party distribution facilities increases, our gross profits and
margins could decrease. Additionally, our announcement of the approval of our
dissolution and plan of liquidation by our Board and the likely resultant loss
of many, if not all, of our customers, including our major customers, may result
in the loss of services provided by one or more of our third-party distribution
facilities due to the decrease in volume of our business.
The camera and photographic products industry is highly competitive.
As a manufacturer, marketer and distributor of 35mm single-use and traditional
film cameras, we encounter intense competition from a number of companies,
including, without limitation, Fuji, Kodak and other 35mm single-use camera
manufacturers, each of which has or may have longer operating histories, more
established markets, better brand recognition, more extensive facilities and, in
some cases, greater resources than we have. Maintaining a competitive advantage
against our competitors depends on our ability to develop and manufacture or
purchase from outsourced manufacturers high quality cameras at the lowest cost
and our ability to market and sell cameras profitably. These competitive
pressures may result in decreased sales volumes, price reductions, and/or
increased operating costs, such as for marketing and sales incentives, resulting
in lower revenues, gross margins and income.
We are dependent on a small number of customers.
We have a small number of customers that represent a high percentage of our
revenues. Our products are sold in very competitive markets. Our competitors may
adopt more aggressive policies and devote greater resources to the development,
promotion and sale of their products, which could result in a loss of sales or
of customers. The loss of sales or of one or more of these important customers
could have a material adverse effect on our business, results of operations and
financial condition. The loss of Wal-Mart or Walgreens as customers would have a
material adverse effect on our financial condition and results of operations.
Our announcement of the recommendation of our dissolution and the adoption of a
plan of liquidation by our Board and our decision to cease manufacturing and
undertaking commitments for sales of our products except for products that we
have remaining in inventory pending our shareholders' vote on our dissolution
and the plan of liquidation, will likely result in the loss of many, if not all,
of our customers, including Wal-Mart, Walgreens and other important customers.
We are exposed to credit risk associated with sales to our customers.
We sell a significant number of products to a small number of customers.
Receivables arising from these sales are generally not collateralized. We
monitor the creditworthiness of our customers and review outstanding receivable
balances for collectibility on a regular basis and record provisions for
doubtful accounts, sales allowances and sales returns, as necessary. If we are
unable to collect or timely collect outstanding receivables from our customers
or our customers seek protection from their creditors under the federal
bankruptcy code or applicable foreign bankruptcy regulations, our business and
results of
15
operations may be materially adversely affected. One or more of our customers
may withhold or delay payment of outstanding receivables after our announcement
of the recommendation of our dissolution and the adoption of a plan of
liquidation by our Board.
Our strategies may not succeed.
During the normal course of our business, we evaluate, develop and implement
various short-term and long-term business strategies. These strategies required,
and may continue to require, significant financial and human resources. If our
shareholders do not approve our dissolution and plan of liquidation, we will
explore the alternatives and strategies, if any, then available to our company.
There can be no assurance that any such strategies, if implemented, will be
successful. The failure of such strategies could have a material adverse effect
on our business.
We may not be able to identify and integrate future acquisitions.
We may pursue strategic acquisitions that we consider reasonable in light of the
revenues and the results of operations we believe we will be able to achieve
from these acquisitions, once combined and integrated with us. We compete for
acquisitions with other industry competitors, some of which have greater
financial and other resources than us. Increased demand for acquisitions may
result in fewer acquisition opportunities for us as well as higher acquisition
prices. Acquisitions involve a number of potential risks, including the
potential loss of customers and contracts, increased leverage and debt service
requirements, combining disparate company cultures and facilities and operating
in geographically diverse markets. An inability to identify and/or integrate
future acquisitions may have a material adverse effect on our financial
condition and results of operations.
Our internal control over financial reporting may be insufficient to detect in a
timely manner misstatements that could occur in our financial statements in
amounts that may be material.
We have previously identified material weaknesses in our internal control over
financial reporting and they all were remediated as of June 30, 2007. We may,
however, experience significant deficiencies and material weaknesses in our
internal control over financial reporting in the future, which, if not
remediated, may render us unable to detect in a timely manner misstatements that
could occur in our financial statements in amounts that may be material and
which may require significant financial and human resources to address and
remediate. Our announcement of the recommendation of our dissolution and the
adoption of a plan of liquidation by our Board may result in the loss of certain
of our employees, which may impact our ability to detect in a timely manner
misstatements that could occur in our financial statements in amounts that may
be material.
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.
We may not continue to meet NASDAQ listing standards regarding minimum per-share
prices.
On February 19, 2008 and October 1, 2008, we received deficiency notices from
NASDAQ indicating that we did not file our Quarterly Report on Form 10-Q for the
period ended December 28, 2007 and our Annual Report on Form 10-K for the period
ended June 28, 2008, respectively, and, therefore, we were not in compliance
with NASDAQ Marketplace Rule 4310(c)(14). The letters stated that our common
stock would be subject to delisting unless we requested a hearing before a
NASDAQ Listing Qualifications Panel. Since we filed our Quarterly Report on Form
10-Q for the period ended December 28, 2007 on March 31, 2008, Nasdaq notified
us that at that time, we were in compliance with the listing requirements. With
respect to the delay in filing our Annual Report on Form 10-K for the period
ended June 28, 2008, we have requested a hearing before a NASDAQ Listing
Qualifications Panel. The hearing is currently scheduled for November 20, 2008.
Pending the Panel's decision, our common
16
stock will remain listed. However, there can be no assurance the Panel will
grant our request for continued listing.
Under NASDAQ continued listing standard one (Rule 4450(a)), companies listed on
the NASDAQ Global Market are required to have, among other criteria, a minimum
per-share price of at least $1.00. A company may be de-listed from the NASDAQ
Global Market if its common stock trades below $1.00 per share for 30
consecutive business days and, after receiving a deficiency notice from NASDAQ,
does not maintain a minimum bid price of at least $1.00 for 10 consecutive
trading days within a period of 180 days from the date of such notice.
If our common stock is de-listed from NASDAQ, we will face a significant
reduction in the liquidity of our common stock and a material reduction in the
per-share price of our common stock. In addition, any such de-listing could harm
our ability to raise capital through alternative financing sources on terms
acceptable to us, or at all, and may result in the loss of confidence in our
financial stability by suppliers, customers and employees. If our securities are
de-listed from the NASDAQ Global Market, we may face a lengthy process to
re-list our securities, if we are able to re-list them at all, and the liquidity
that NASDAQ provides will no longer be available to investors.
We cannot give investors in our common stock any assurance that we will be able
to continue to timely file our annual and quarterly reports with the SEC or
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.
If our shareholders approve our dissolution and plan of liquidation, we will
request that our common stock be delisted from the NASDAQ Global Market.
The market price of our common stock may fluctuate and/or continue to decline.
The stock markets have experienced extreme price and volume fluctuations that
have affected the market prices of equity securities of many companies and that
often have been unrelated or disproportionate to the operating results of such
companies. These broad market movements may adversely affect the market price of
our common stock. In many instances, securities class action litigation has been
instituted following periods of volatility in the market price of a company's
securities. Such litigation was previously instituted against us. If such
litigation is again instituted against us, it could result in substantial costs
and a diversion of management's attention and resources, which could harm our
business. See Item 3, Legal Proceedings, below and Note 15, Litigation and
Settlements, in the Notes to Consolidated Financial Statements.
Our future income tax rates could increase and our tax positions may be
challenged.
A number of factors will affect our income tax rate in the future, and the
combined effect of these factors could result in an increase in our effective
income tax rate as compared to our effective income tax rate in fiscal 2008.
This potential increase in future effective income tax rates would adversely
affect net income in future periods. We operate in different countries that have
different income tax rates. Based upon our apportionment of income, our
effective income tax rate could fluctuate. Changes in income tax laws in the
United States or countries where we presently have operations may further limit
our ability to utilize our net operating losses. Any further limitation on our
ability to utilize our net operating losses could adversely affect our financial
condition and results of operations.
Our cost-reduction initiatives may not be successful.
As a result of our continued evaluation of our cost structure and our
announcement of the recommendation by our Board of our dissolution and the
adoption of a plan of liquidation, we reduced certain costs including, among
other things, employee costs as a result of our eliminating certain employee
positions and reducing the size of our operations in the Americas, Europe and
Asia. The expected benefits from these initiatives are subject to many estimates
and assumptions, including, but not
17
limited to, assumptions regarding (i) the amount and timing of cost reductions
we can achieve; (ii) our ability to develop and maintain relationships with
outsourced manufacturers for the design, co-development and purchase of our
products; (iii) our ability to meet customer demands and fulfill customer
service obligations; and (iv) the costs and timing of activities undertaken in
connection with these initiatives. These estimates and assumptions are subject
to significant economic, competitive and other uncertainties that are difficult
to predict and beyond our control. If these assumptions are not realized, or if
other unforeseen events occur, the initiatives may not be successful and our
financial condition, results of operations and ability to compete could be
adversely affected. See Note 18, Other Charges, in the Notes to Consolidated
Financial Statements.
The termination of our processing agreement with the PRC would disrupt our
operations.
Our operations are substantially dependent upon our ability to manufacture and
assemble our products in the PRC. Our current processing agreement with the PRC
governmental entities, which allows us to operate in the PRC, expires in October
2016. As a result of our Board's recommendation of our dissolution and the
adoption of a plan of liquidation, we have provided the required twelve months
notice of termination of the processing agreement to the PRC governmental
entities. If our shareholders do not approve our dissolution and plan of
liquidation, and we cannot enter into an arrangement that will permit us to
continue to operate in the PRC under similar terms and conditions, our financial
condition, results of operations and ability to carry on our business could be
materially adversely affected.
Most of our operations in the PRC are subject to regulation by local
governmental agencies.
The continuing viability of our PRC agreements is critical to our business
operations. We manufacture a large number of the components used in our cameras
and assemble all of our own manufactured finished products at our facility in
the PRC. During fiscal 2008, based upon production demand, we had approximately
1,300 to 3,300 workers at our manufacturing facility in the PRC either employed
by our PRC subsidiary or provided through our agreements with various PRC
government or quasi-government entities. We are responsible for their wages,
food and housing and must comply with a variety of local labor and employee
benefit laws covering these workers. While we believe we are in substantial
compliance with applicable laws as currently enforced, these laws are subject to
modification and interpretation by local governmental authorities. We cannot
predict the effect of any future modifications to or strict enforcement of the
existing laws. In addition, the termination or material modification of any of
our agreements with the PRC governmental or quasi-government entities could have
a material adverse impact on our financial condition and results of operations.
Since we have ceased manufacturing our products pending our shareholders' vote
on our dissolution and plan of liquidation, we have terminated the employment of
many of the workers at our manufacturing facility. If our shareholders do not
approve our dissolution and plan of liquidation and we seek to continue to
operate our business, it is uncertain whether we will be able to rehire
sufficient, qualified workers to resume our manufacturing operations and what
the terms of the agreements with the PRC government or quasi-government entities
will be.
We are exposed to political, economic and other risks that arise from operating
a multinational business.
We have significant operations outside the United States. We currently have
operations in the Americas, Europe and Asia. Further, we obtain raw materials,
components and finished camera products from foreign suppliers, particularly in
Asia, and import into the PRC those materials, components and products obtained
from suppliers outside of the PRC which may require certain approvals by the
PRC, including but not limited to certificates, permits and licenses.
Accordingly, our business is subject to the political, economic, regulatory and
other risks that are inherent in operating in foreign countries. These risks
include, but are not limited to:
o the difficulty of ensuring that foreign suppliers and workers are
complying with applicable laws, rules and regulations regarding
manufacturing, safety and environmental standards;
18
o the difficulty of enforcing agreements, collecting receivables and
protecting assets through foreign legal systems;
o trade protection measures and import or export licensing
requirements;
o the imposition of tariffs, exchange controls or other restrictions;
o difficulty in staffing and managing widespread operations and the
application of foreign labor regulations;
o inability to obtain approvals or authorizations necessary to import
materials, components and/or products into our manufacturing
facility or increased costs relating thereto;
o required compliance with a variety of foreign laws and regulations;
o changes in the general political and economic conditions in the
countries where we operate, particularly in emerging markets; and
o increased costs and risks of doing business in a number of foreign
jurisdictions.
We are reliant on certain authorizations by the PRC to import materials used in
the manufacture of our products into our manufacturing facility. Our current
authorizations expire between January 13, 2009 and April 8, 2009 and include
limitations on our ability to import certain materials into the PRC. We are
uncertain whether further authorizations will be issued or what the terms of any
such further authorization will be. If our shareholders do not approve our
dissolution and plan of liquidation, our inability to obtain further
authorizations on reasonable terms, although not expected to impact our ability
to manufacture our products, may have a material adverse effect on our results
of operations.
Relocation time and expenses could result in substantial losses.
If we determine it is necessary to relocate our manufacturing facilities from
the PRC, or to another location within or outside of the PRC, due to
confiscation, expropriation, nationalization, embargoes, governmental
restrictions or for other regulatory, business and/or financial reasons, we
would incur substantial operating and capital losses, including losses resulting
from business interruption and delays in production. In addition, as a result of
a relocation of our manufacturing equipment and other assets, we may incur
relatively higher manufacturing costs, which could reduce sales and decrease the
gross profits and margins on the products we manufacture. Relocation of our
manufacturing operations could also result in disruption in the delivery of our
products, which could, in turn, reduce demand for our products in the future.
We are exposed to risks associated with intellectual property used in our
products.
Our products use technology which may be protected by United States or foreign
patents. The right to use such intellectual property is subject to the
availability of licenses from the owners of the intellectual property. If
licenses are not available, or are only available on onerous terms, our business
could be materially and adversely affected.
Third parties also may claim that we, or the customers we indemnify, are
infringing upon their intellectual property rights. Even if we believe that the
claims are without merit, the claims can be time-consuming and costly to defend
and divert management's attention and resources away from our business. Claims
of intellectual property infringement also may require us to redesign affected
products, enter into costly settlement or license agreements, pay costly damage
awards or cease marketing of certain products subject to the claims. Even if we
have an agreement with a third party to indemnify us against such costs, the
indemnifying party may be unable to uphold its contractual obligations to us. If
we cannot or do not license the infringed technology at all or on reasonable
terms or substitute similar technology from another source, our operations could
suffer.
Those claims for which legal proceedings have been initiated against us are
discussed in Item 3, Legal Proceedings, and in Note 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
19
customer, alleging that certain of our digital cameras infringe upon those
entities' respective patents. We have engaged in discussions with these entities
regarding resolution of the claims.
Based on our initial assessment of these two claims, infringement of one or more
patents is probable if the patents are valid. Based upon the licensing
discussions to date, we preliminarily estimate the potential royalties due to
these two claimants for digital camera sales through June 28, 2008 to be between
$0 and approximately $6.7 million in the aggregate. The actual royalty amounts,
if any, for past and future sales are dependent upon the outcome of the
negotiations. We have notified certain of our suppliers of our right to be
indemnified by the suppliers in the event we are required to pay royalties or
damages to either claimant. We are unable to reasonably estimate the amount of
the potential loss, if any, within the range of estimates relating to these
claims. Accordingly, no amounts have been accrued related to these claims as of
June 28, 2008. If these or other claims are determined to be valid, our
financial condition and results of operations could be materially adversely
affected.
Our ability to manufacture and sell single-use cameras is substantially
dependent on our licensing agreement with Fuji.
Our business is substantially dependent on our license from Fuji, which granted
us a worldwide non-exclusive right to use certain Fuji patents and patent
applications related to single-use cameras. The license extends until the later
of the expiration of the last of the licensed Fuji patents or February 26, 2021.
After the term of the license expires, we expect to continue to be able to
manufacture and sell single-use cameras without a license. If, however, the
license is terminated prior to the expiration of the patents, we may not be able
to continue to manufacture and sell single-use cameras and, as a result, our
financial position and results of operations could be materially adversely
affected.
The loss of our licensing agreement with Polaroid could impact our sales.
We currently market and sell our branded single-use and traditional film camera
products under the Polaroid brand name pursuant to license agreements with
Polaroid which expire on February 1, 2009 and January 30, 2009, respectively. We
have engaged in discussions with Polaroid regarding the renewal of the
single-use camera license agreement, but have suspended these discussions
pending our shareholders' vote on our dissolution and plan of liquidation. If
our shareholders do not approve our dissolution and plan of liquidation, it is
uncertain whether we will be able to renew the single-use camera license
agreement. If the single-use camera license agreement is terminated prior to its
expiration or if we are unable to renew it upon its expiration, our sales
volumes and/or prices will decrease, resulting in lower revenues, gross margins
and income and our financial condition and results of operations would be
materially adversely affected.
We are exposed to interest rate and exchange rate risk.
As a result of our global operating and financing activities, we are exposed to
fluctuation in currency exchange rates and interest rates, which may adversely
affect our results of operations and financial position. Exchange rates and
interest rates in certain markets in which we do business tend to be more
volatile than those in the United States and Western Europe. If there is a
significant devaluation of the currency in a specific country, the prices of our
products will increase relative to that country's currency and our products may
be less competitive in that country. We generally do not engage in currency
hedging activities.
The PRC government announced on July 21, 2005 that its currency will no longer
be pegged to the U.S. Dollar. Instead, the exchange rates for the Chinese Yuan,
or Renminbi, will be determined by a basket of foreign currencies and continues
to fluctuate. Currently, we generate nominal net sales valued in Renminbi. Net
sales recorded in Hong Kong are denominated in Hong Kong Dollars, the exchange
rate of which has not been affected by the Yuan revaluation and is still pegged
to the U.S. Dollar. Significant
20
fluctuations in the exchange rates on the currency revaluation could have a
materially adverse effect on our financial position and results of operations.
The interest rate related to our Hong Kong financing facilities provided by HSBC
and other Hong-Kong based financial institutions is based on a spread over the
Hong Kong Interbank Offered Rate on import loans denominated in Hong Kong
Dollars and over the U.S. Prime Rate, London Interbank Offered Rate or the
Singapore Interbank Offered Rate on import loans denominated in other
currencies. A significant change in these rates could have an adverse effect on
our business, financial condition and results of operations. Currently, we are
not utilizing any interest rate protection agreements to limit our exposure to
this risk.
We are dependent on a small group of key personnel.
Our business is managed by a small number of key management and operating
personnel. The loss of key management and operating personnel could have a
material adverse impact on our business. We believe our future success will
depend in large part on our continued ability to attract highly skilled and
qualified personnel. Competition for such personnel is intense. We may not be
able to hire the necessary personnel to implement our business strategies, or we
may need to pay higher compensation for employees than currently budgeted and/or
anticipated in the future. Our inability to attract and retain such personnel
could have a material adverse effect on our business, financial condition and
results of operations.
International trade restrictions could adversely affect our business and growth.
The United States, the PRC, Hong Kong, the European Union or other countries
where we do business may impose trade restrictions that could adversely affect
our operations. In addition, the United States is currently monitoring various
PRC practices, including trade, investment and government procurement, as well
as the PRC's compliance with various multilateral and bilateral agreements. We
cannot predict whether the United States will take future trade actions against
the PRC that may result in increased tariffs against PRC products, including
products that we import into the United States.
Our operations may be impaired as a result of disasters, business interruptions
or similar events.
Disasters such as hurricanes, typhoons, earthquakes, or other acts of nature,
terrorist attacks, fire, water or electricity failure, or accidents affecting
our operating activities, facilities, and employees' and customers' health could
materially and adversely affect our results of operations and financial
condition. In particular, our operations in the PRC, as well as most of our
outsourced manufacturers, suppliers and service providers involved in the
manufacturing of components and products are located within a relatively close
proximity of one another in the PRC. Therefore, any disaster that strikes within
close proximity of that geographic area could disrupt our business and could
materially and adversely affect our results of operations and financial
condition.
In the event of another outbreak of severe acute respiratory syndrome, or SARS,
or some other disease or health-related issue, our facilities and/or the
facilities of our outsourced manufacturers, suppliers and service providers
located in Hong Kong, the PRC and other parts of the world could be quarantined,
temporarily closed and/or disrupted. If such an outbreak occurs, it could delay
or prevent us from developing new products or manufacturing, testing or shipping
our current or future products, and may require us to find other providers of
such services and/or products, which may be unavailable or more expensive.
Further, if a SARS or other disease outbreak or other health-related issue has
an adverse impact on the businesses of our customers, it could reduce the size
and/or frequency of our customers' purchases, which could adversely impact our
results of operations.
Our business depends in part on our ability to successfully anticipate and
effectively manage these and other risks. Additionally, we are uncertain what
impact our announcement of the approval of our
21
dissolution and plan of liquidation by our Board will have on these risks or
what the impact of these risks might be if our shareholders do not approve our
dissolution and plan of liquidation and we seek to continue to operate our
business. We cannot assure you that such risks will not have a material adverse
effect on our business, financial condition and results of operations.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
In Hollywood, Florida, we lease approximately 20,000 square feet of office
space. The lease expires on January 31, 2014. As of August 1, 2006, we sublet
approximately 5,500 square feet of our office space. However, in January 2008,
our subtenant filed for bankruptcy protection and, in May 2008, the bankruptcy
court approved the subtenant's rejection of the sublease. In January 2008, we
exercised our right to accelerate the termination of the lease to January 31,
2009. We have engaged in discussions with the landlord regarding a lease for a
smaller portion of the office space as of February 1, 2009.
In Hong Kong, we lease approximately 6,600 square feet of office space occupying
one floor under a lease expiring in November 2009 and lease a warehouse
comprised of approximately 1,760 square feet under a lease expiring November 30,
2008. During fiscal year 2008, we sold our Hong Kong office space occupying one
floor that was previously collateralized by a mortgage in favor of a certain
financing facility. For more information on the financing facility, see Note 9,
Short-Term Borrowings and Financing Facilities, in the Notes to the Consolidated
Financial Statements. The land on which the office building is situated is
subject to a governmental ground lease that will expire in 2047.
The leases for office space in the United Kingdom, France, Germany and Japan
were terminated as of July 31, 2008, May 31, 2007, December 15, 2006 and
September 29, 2006, respectively.
In the PRC, we own manufacturing facilities in the Longgang District of Shenzhen
and we lease several employee dormitories and warehouse space. The size of the
entire facility is approximately 600,000 square feet. Pursuant to land use
agreements entered into with certain PRC governmental entities, we obtained the
title and rights to use approximately eight acres of land for factory buildings,
dormitories and related ancillary buildings. Under the land use agreements, we
have the right to use the land through September 22, 2038. At the end of the
term, a PRC governmental entity will own the facilities and we may have the
right to extend the usage term of the land and improvements at then prevailing
terms. We are actively marketing our PRC building and land rights for sale and
have classified these assets as "Assets held for sale" in the Consolidated
Financial Statements. See Note 7, Property, Plant and Equipment, Net in the
Notes to the Consolidated Financial Statements.
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 2009.
Item 3. Legal Proceedings.
In September 2004, a class action complaint was filed against the Company and
certain of its officers in the United States District Court for the Southern
District of Florida by individuals purporting to be holders of the Company's
Common Stock. In August 2005, an amended consolidated complaint (the "Amended
Complaint") was filed adding a former officer of the Company as a defendant. The
lead plaintiff under the Amended Complaint sought 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
22
August 31, 2004, inclusive. On March 23, 2007, the court granted the plaintiff's
motion for class certification and certified as plaintiffs all persons who
purchased the Common Stock between August 14, 2003 and August 31, 2004,
inclusive, and who were allegedly damaged thereby (the period August 14, 2003
through August 31, 2004 hereinafter referred as the "Class Period"). The
allegations in the Amended Complaint were centered around claims that the
Company failed to disclose, in periodic reports it filed with the SEC and in
press releases it made to the public during the Class Period regarding its
operations and financial results, (i) the full extent of the Company's excess,
obsolete and otherwise impaired inventory; (ii) the departure from the Company
of the aforementioned former officer defendant until several months after his
departure; and (iii) that Eastman Kodak Company ("Kodak") had notified the
Company that it would stop purchasing cameras from the Company under its two DMS
contracts with the Company due to the Company's alleged infringement of Kodak's
patents. The Amended Complaint also alleged that the Company improperly
recognized revenue contrary to generally accepted accounting principles due to
an alleged inability to reasonably estimate digital camera returns. The Amended
Complaint claimed that such failures artificially inflated the price of the
Common Stock. The Amended Complaint sought unspecified damages, interest,
attorneys' fees, costs of suit and unspecified other and further relief from the
court. On November 15, 2007, a Stipulation and Agreement of Settlement was filed
with the court and on June 19, 2008, the court issued a final order approving
the settlement set forth in the Stipulation and Agreement of Settlement and
dismissing the case with prejudice. The Company sought coverage from its
insurance carrier for this lawsuit under its directors' and officers' liability
insurance policy and the insurance carrier defended the action under a
reservation of rights. The settlement amount is within the policy limits and was
approved and paid by the Company's insurance carrier. In a letter dated November
19, 2004, the Company was advised by the staff of the SEC that it is conducting
an investigation related to the matters described above. The Company has
provided the requested information to the staff of the SEC and has not received
any further communication from the SEC with respect to its request since the
Company last responded in May 2005.
On November 16, 2004, a shareholder derivative suit was filed against certain of
the Company's current and former officers and directors, and the Company as a
nominal defendant, in the United States District Court for the District of New
Jersey by an individual purporting to be a holder of the Company's Common Stock.
The complaint alleged that the individual defendants breached their duties of
loyalty and good faith by causing the Company to misrepresent its financial
results and prospects, resulting in the class action complaint described in the
immediately preceding paragraph. The complaint sought unspecified damages,
repayment of salaries and other remuneration from the individual defendants,
interest, attorneys' fees, costs of suit and unspecified other and further
relief from the court. In March 2005, the court granted a motion by the
individual defendants and the Company to transfer the action to the United
States District Court for the Southern District of Florida where the related
class action suit was pending. In May 2005, the court consolidated this case
with the related class action suit for discovery purposes only. On March 6,
2008, a Stipulation and Agreement of Settlement was filed with the court and on
June 19, 2008, the court issued a final order approving the settlement set forth
in the Stipulation and Agreement of Settlement and dismissing the case with
prejudice. The Company sought coverage from its insurance carrier for this
lawsuit under its directors' and officers' liability insurance policy and the
insurance carrier defended the action under a reservation of rights. The
settlement amount is within the policy limits and was approved and paid by the
Company's insurance carrier.
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 executed and
delivered to the Company written undertakings to repay the Company all amounts
so advanced if it was ultimately determined that the individual defendants were
not entitled to be indemnified by the Company under the NJBCA.
23
On October 6, 2004, a patent infringement complaint was filed by Honeywell
International, Inc. and Honeywell Intellectual Properties, Inc., against 27
defendants, including the Company, in the United States District Court for the
District of Delaware. The complaint asserted that the defendants have conducted
activities which infringe U.S. Patent No. 5,280,371, entitled, "Directional
Diffuser for a Liquid Crystal Display." The complaint sought unspecified
damages, interest, attorneys' fees, costs of suit and unspecified other and
further relief from the court. The proceedings in this action against the
Company and other similarly situated defendants were stayed by the court pending
the resolution of the infringement actions against the liquid crystal display
manufacturers. It is too early to assess the probability of a favorable or
unfavorable outcome or the loss or range of loss, if any, and therefore, no
amounts have been accrued relating to this action. The Company has notified
several third parties of its intent to seek indemnity from such parties for any
costs or damages incurred by the Company as a result of this action.
In June 2006, St. Clair Intellectual Properties Consultants, Inc. filed a patent
infringement complaint against 22 defendants, including the Company, in the
United States District Court for the District of Delaware. The complaint
asserted that the defendants conducted activities which infringe U.S. Patent
Nos. 5,138,459, 6,094,219, 6,233,010 and 6,323,899. The complaint sought
injunctive relief, unspecified damages, interest, attorneys' fees, costs of suit
and unspecified other and further relief from the court. The proceedings in this
action against the Company and the other defendants were stayed by the court
until further order of the court. On October 16, 2008, the Court granted the
plaintiff's motion to lift the stay. It is too early to assess the probability
of a favorable or unfavorable outcome or the loss or range of loss, if any, and,
therefore, no amounts have been accrued relating to this action. The Company is
assessing potential claims of indemnification against certain of its suppliers
with respect to this action.
The Company is also involved from time to time in routine legal matters
incidental to its business. Based upon available information, the Company
believes that the resolution of such matters will not have a material adverse
effect on its financial position or results of operations. Our announcement of
the recommendation by our Board of our dissolution and the adoption of a plan of
liquidation and/or the implementation of such plan if it is approved by our
shareholders may give rise to legal claims, which may have a material adverse
effect on our financial position and results of operation.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
24
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 2008 and fiscal 2007, the high and low sales prices per share of our
common stock as reported by the NASDAQ Global Market.
On October 26, 2006, our Board approved, without action by the shareholders, a
Certificate of Amendment to our Certificate of Incorporation to implement a
one-for-five split of our common stock with an effective date of November 21,
2006. All shares of common stock and per-share and related stock option amounts
have been retroactively adjusted for the reverse stock split in the accompanying
financial tables and selected financial data.
Quarter Ended High Low
------------- ---- ---
June 28, 2008 $3.94 $3.18
March 29, 2008 $4.44 $2.21
December 29, 2007 $3.74 $2.63
September 29, 2007 $4.59 $2.76
June 30, 2007 $4.88 $3.97
March 31, 2007 $5.40 $4.28
December 30, 2006 $5.00 $2.20
September 30, 2006 $3.35 $2.10
On November 3, 2008, the last reported sale of our common stock as reported on
the NASDAQ Global Market was at $2.00 per share. According to the records of our
transfer agent, there were 828 shareholders of record of Concord's common stock
at November 3, 2008. 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.
In a press release dated February 12, 2008, we announced that we were delaying
the filing of our Quarterly Report on Form 10-Q for the second quarter of fiscal
2008. In that press release, we explained that our Special Committee that was
established to explore strategic alternatives for us was nearing the conclusion
of its work and expected to make its recommendations to the Board within
approximately the next sixty days. Because certain of the strategic alternatives
being considered by the Special Committee could have impacted our financial
statements, we explained that we were delaying the filing of our Form 10-Q for
the second quarter of fiscal 2008 until the Special Committee made its
recommendations to the Board and the Board determined whether or not to
implement such recommendations. On February 19, 2008, we received a notice from
NASDAQ indicating that our securities were subject to delisting due to our
failure to file our Quarterly Report on Form 10-Q for the second quarter of
fiscal 2008. On March 31, 2008, we filed our Quarterly Report on Form 10-Q for
the second quarter of fiscal 2008 with the SEC and NASDAQ, thereby regaining
compliance with all requirements for continued listing on the NASDAQ Global
Market. On April 1, 2008, we received a notice from NASDAQ indicating that our
filing delinquency resulting from our delay in filing our Quarterly Report on
Form 10-Q for the second quarter
25
of fiscal 2008 had been cured and therefore, our securities would remain listed
on the NASDAQ Global Market.
In a press release dated October 7, 2008, we announced that we received a notice
from NASDAQ on October 1, 2008 indicating that our securities were subject to
delisting due to our failure to file our Annual Report on Form 10-K for the
fiscal year ended June 28, 2008. Upon our filing of this Annual Report on Form
10-K for the fiscal year ended June 28, 2008 with the SEC and NASDAQ, we will
have regained compliance with all requirements for continued listing on the
NASDAQ Global Market. We have requested a hearing before a NASDAQ Listing
Qualifications Panel. The hearing is currently scheduled for November 20, 2008.
Pending the Panel's decision, our common stock will remain listed. However,
there can be no assurance that the Panel will grant our request for continued
listing. If our shareholders approve our dissolution and plan of liquidation, we
intend to delist our common stock from the NASDAQ Global Market, close our stock
transfer books and discontinue recording transfers of our common stock.
Dividend Policy
The Company has never declared or paid any cash dividends. If our shareholders
approve, and we implement, the dissolution and plan of liquidation, we expect to
make liquidating distributions to our shareholders in the future. See "Item 1A.
Risk Factors" above.
Stock Repurchase
We did not repurchase any of our shares during fiscal 2008.
Comparative Stock Performance
The following graph and table compare the cumulative total shareholder return in
U.S. dollars on our common stock for the years ended June 30, 2003 through June
30, 2008 with The NASDAQ Stock Market LLC - U.S. Index and a seven-company peer
group based on SIC Code 3861 (Photographic Equipment and Supplies) for the same
periods. The graph and table assume an investment of $100 in our common stock,
in the NASDAQ Index and in the peer group on June 30, 2003 and the reinvestment
of all dividends. The peer group cumulative total return is calculated on a
weighted average basis. The stock performance shown is not intended to forecast,
and may not be indicative of, future stock performance.
[GRAPHIC OMITTED]
6/03 6/04 6/05 6/06 6/07 6/08
---- ---- ---- ---- ---- ----
(dollars)
Concord Camera Corp. $100 $47.41 $17.96 $9.20 $13.07 $10.29
Nasdaq Stock Market - U.S. Index $100 $128.30 $129.70 $140.43 $169.61 $149.93
Peer Group Index $100 $116.86 $117.42 $153.46 $191.02 $163.03
26
Item 6. Selected Financial Data.
On October 29, 2008, our Board voted to adopt a plan of dissolution and
liquidation subject to shareholder approval. The information presented herein
does not include any adjustments necessary to reflect the possible future
effects on the recoverability of the assets or settlement of liabilities that
may result from adoption of the plan of dissolution and liquidation or our
potential inability to complete such a plan in an orderly manner. See Note 1,
Liquidation Proposal and Going Concern, in the Notes to Consolidated Financial
Statements for further discussion.
(Dollars in thousands, except per share data)
As of and for the
Fiscal Years Ended
-------------------------------------------------------------------------------
STATEMENTS OF June 28, June 30, July 1, July 2, July 3,
OPERATIONS DATA: 2008 2007 2006 2005 2004
-------- -------- --------- --------- ---------
Net sales $ 74,149 $ 86,653 $ 137,529 $ 174,348 $ 203,132
Cost of products sold 66,613 77,452 122,928 180,130 188,954
-------- -------- --------- --------- ---------
Gross profit (deficit) 7,536 9,201 14,601 (5,782) 14,178
Operating expenses 22,006(a) 22,584 34,873 39,794 43,426(b)
-------- -------- --------- --------- ---------
Operating loss (14,470) (13,383) (20,272) (45,576) (29,248)
Interest expense 501 336 374 931 715
Other income, net (1,566) (1,999) (1,142) (1,770) (500)
-------- -------- --------- --------- ---------
Loss before income taxes
and extraordinary item (13,405) (11,720) (19,504) (44,737) (29,463)
(Benefit) provision for income taxes (798) 6 107 186 7,537
-------- -------- --------- --------- ---------
Loss before extraordinary item (12,607) (11,726) (19,611) (44,923) (37,000)
Extraordinary gain -- -- -- -- 5,778(c)
-------- -------- --------- --------- ---------
Net loss $(12,607) $(11,726) $ (19,611) $ (44,923) $ (31,222)
======== ======== ========= ========= =========
Net loss per common share:
Basic and diluted:
Loss before extraordinary item $ (2.13) $ (1.99)(d) $ (3.36)(d) $ (7.70)(d) $ (6.45)(d)
Extraordinary gain -- -- -- -- 1.00(d)
-------- -------- --------- --------- ---------
Loss per common share $ (2.13) $ (1.99) $ (3.36) $ (7.70) $ (5.45)
======== ======== ========= ========= =========
27
BALANCE SHEET DATA:
As of and for the
Fiscal Years Ended
----------------------------------------------------------------------------
June 28, June 30, July 1, July 2, July 3,
2008 2007 2006 2005 2004
--------- --------- --------- --------- ---------
Working capital $ 16,931 $ 39,019 $ 46,843 $ 61,761 $ 100,603
========= ========= ========= ========= =========
Total assets $ 70,602 $ 82,504 $ 104,742 $ 146,756 $ 189,517
========= ========= ========= ========= =========
Total debt $ 17,621 $ 2,756 $ -- $ 2,936 $ 9,170
========= ========= ========= ========= =========
Total stockholders' equity $ 33,902 $ 51,644 $ 62,967 $ 82,303 $ 127,125
========= ========= ========= ========= =========
(a) Includes $5.9 million of asset impairment charges.
(b) Includes $0.7 million of variable stock-based compensation income. For
further discussion, see Note 2 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) Represents the excess of estimated fair value of net assets acquired over
cost (negative goodwill) for the Jenimage acquisition.
(d) On October 26, 2006, our Board approved, without action by the
shareholders, a Certificate of Amendment to our Certificate of
Incorporation to implement a one-for-five split of our common stock with
an effective date of November 21, 2006. All issued shares of our common
stock (including treasury shares and shares held in trust) and per-share
and related stock option amounts have been retroactively adjusted for the
reverse stock split in the accompanying selected financial data.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
You should read the following discussion and analysis of our financial condition
and results of operations in conjunction with Item 6, Selected Financial Data
and our audited consolidated financial statements and the related notes included
in Item 8, Financial Statements and Supplementary Data. In addition to
historical information, this discussion contains forward-looking statements that
involve risk and uncertainties, such as statements of our plans, objectives,
expectations and intentions. See our cautionary language preceding Item 1,
Business, of this report regarding these statements. Our actual results could
differ materially from those discussed here. See Item 1A, Risk Factors, for
factors that could cause future results to differ materially.
References to fiscal 2008, fiscal 2007 and fiscal 2006 in this section are to
fiscal years ended June 28, 2008, June 30, 2007 and July 1, 2006, respectively.
OVERVIEW
We market and sell easy-to-use 35mm single-use and traditional film cameras. We
design, develop, manufacture and assemble most of our 35mm single-use cameras
and certain of our traditional film cameras at our manufacturing facilities in
the Peoples Republic of China ("PRC") and outsource the manufacture of certain
of our 35mm single-use and traditional film cameras. In fiscal 2006, we
significantly de-emphasized the sale of digital cameras and, in fiscal 2007, we
exited the digital camera market. Digital camera sales in fiscal 2007 were not
material and we did not sell digital cameras in fiscal 2008. We sell our private
label and brand-name products to our customers worldwide either directly or
through third-party distributors.
28
Throughout fiscal 2008, we assessed our ability to continue manufacturing,
marketing and/or selling single-use cameras. We determined that it would not be
advisable to continue our business as a small public company based on a number
of factors, including the continuing single-use and traditional film camera
market decline, both in unit volumes and selling prices, the increased cost of
certain components and labor, the significant competition in this industry, the
lack of market acceptance of our new non-camera products, the likelihood that we
would continue to incur significant net losses for an extended period of time,
and, that even if successful, the realization of significant returns on our
investments in the film camera business or new products was uncertain and could
take years to achieve.
Accordingly, based on the Special Committee's review of strategic alternatives
and recommendation, on October 29, 2008, our Board recommended our dissolution
and the adoption of a plan of liquidation. The dissolution and plan of
liquidation are subject to approval by our shareholders at the Annual Meeting
which is expected to be held in December 2008. Before we can hold the meeting,
we must file our preliminary proxy statement with the SEC for its review. We
expect to file our preliminary proxy statement concurrently with this annual
report. The filing will be available for free on the SEC web site. Once the SEC
review process is complete, we will mail a copy of the definitive proxy
statement to our shareholders, together with instructions on voting procedures.
If our shareholders approve our dissolution and the plan of liquidation, we will
file a certificate of dissolution with the Department of Treasury of the State
of New Jersey. Thereafter, we will not engage in any business activities except
for the purpose of preserving the value of our assets, prosecuting and defending
lawsuits by or against us, winding up our business and affairs, selling and
monetizing our properties and non-cash assets, including our intellectual
property and other intangible assets, paying or otherwise settling our
liabilities, including contingent liabilities, terminating commercial agreements
and relationships and preparing to make distributions to our shareholders, in
accordance with the plan of liquidation.
If our shareholders do not approve our dissolution and the plan of liquidation,
our Board will explore the alternatives then available for the future of our
Company. We believe the value of our business will be materially adversely
impacted after the announcement of the recommendation by our Board of our
dissolution and the adoption of a plan of liquidation. In particular, pending
our shareholders' vote on our dissolution and plan of liquidation, we have
ceased manufacturing products, purchasing materials and products and undertaking
commitments for sales of our products except for products that we have remaining
in inventory and, as a result, we believe that many, if not all, of our
customers, including our major customers, will transition their business to our
competitors. These factors raise substantial doubt about our ability to continue
as a going concern. Consequently, our independent registered public accounting
firm has included an explanatory paragraph in their report addressing these
factors. Therefore, if our shareholders do not approve our dissolution and plan
of liquidation, we will not be able to continue to operate our business as it
existed prior to our Board's recommendation of our dissolution and the adoption
of a plan of liquidation and may not be able to operate our business at all.
Executive Summary
Year-over-Year Results of Operations
Our operating loss in fiscal 2008 increased $1.1 million to $(14.5) million as
compared to an operating loss of $(13.4) million for fiscal 2007. The increase
in our year-over-year operating loss is primarily related to a decrease in gross
profit and an increase in general and administrative expenses, together,
partially offset by a decrease in selling expenses.
Year-over-year gross profit decreased by a net of $1.7 million primarily due to
(i) asset impairment charges of $2.5 million related to certain long-lived
assets, (ii) an increase of $0.2 million in severance costs, (iii) a decrease of
$1.3 million related to a decrease in year-over-year sales, together, partially
offset
29
by (iv) a decrease of $2.3 million related to unfavorable manufacturing
material, labor, and overhead cost variances.
Year-over-year selling expenses decreased a net of $1.8 million due to (i) lower
freight and royalty costs in the amount of $0.4 million and $0.3 million,
respectively, as a result of a decrease in year-over-year net sales, (ii) lower
marketing costs in the amount of $0.4 million, (iii) lower selling-related
employee compensation costs in the amount of $0.3 million net of severance
charges resulting from the elimination of certain positions in connection with
our cost reduction initiatives, and (iv) lower selling-related occupancy and
other costs in the amount of $0.4 million.
Year-over-year general and administrative ("G&A") expenses increased a net of
$1.2 million primarily due to (i) asset impairment charges of $3.4 million
related to the lowering of the carrying values related to certain long-lived and
other assets, (ii) an increase in professional fees of $1.0 million incurred in
support of our cost reduction initiatives and our evaluation of strategic
alternatives related to the Special Committee's activities, together, partially
offset by (iii) a decrease in employee compensation costs of $1.6 million net of
severance costs resulting from the elimination of certain positions in
connection with our cost reduction initiatives, (iv) a reduction in professional
fees of $0.9 million related to our internal control remediation efforts, and
(v) a net reduction of certain other costs totaling $0.7 million.
Fiscal 2008 Results of Operations
Factors contributing to the fiscal 2008 operating loss were:
1. Asset Impairment Charges;
2. Insufficient Net Sales and Related Gross Profit to Fully Absorb
Non-Manufacturing Overhead Costs;
3. Unfavorable Manufacturing Material, Labor and Overhead Cost
Variances;
4. Severance Costs; and
5. Costs Incurred Related to the Evaluation of Cost Reduction and
Strategic Alternatives.
1. Asset Impairment Charges
During fiscal 2008, we lowered the carrying values of certain long-lived and
other assets based upon the results of our impairment test of our long-lived and
other assets as of June 28, 2008. As a result, we recorded asset impairment
charges of $5.9 million. See Note 18, Other Charges, in the Notes to the
Consolidated financial Statements.
2. Insufficient Net Sales and Related Gross Profit to Fully Absorb
Non-Manufacturing Overhead Costs
During fiscal 2008, we experienced a significant decrease in net sales and
related gross profit resulting in insufficient gross profit to fully absorb our
non-manufacturing overhead costs. This net sales and related gross profit
reduction contributed approximately $4.7 million to the operating loss.
3. Unfavorable Manufacturing Material, Labor and Overhead Cost Variances
During fiscal 2008, we experienced unfavorable manufacturing material, labor and
overhead cost variances of $1.8 million primarily attributable to lower than
anticipated production volume during the period.
30
4. Severance Costs
During fiscal 2008, we continued to reduce our cost structure which included,
among other things, the elimination of certain employee positions. As a result,
we recorded a charge of $1.1 million related to severance costs.
5. Costs Incurred Related to the Evaluation of Cost Reduction and Strategic
Alternatives
During fiscal 2008, we incurred professional fees of $1.0 million in support of
our evaluation of cost reduction initiatives and our evaluation of strategic
alternatives related to the Special Committee's activities.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes. Our
application of accounting policies affects these estimates and assumptions.
Actual results could differ from these estimates under different assumptions or
conditions. We believe the following critical accounting policies affect our
more significant estimates and assumptions used in the preparation of our
consolidated financial statements and accompanying notes.
Revenue Recognition
We recognize revenue, in accordance with Staff Accounting Bulletin ("SAB") No.
101, Revenue Recognition in Financial Statements, as amended by SAB No. 104,
Revenue Recognition: Corrected Copy, when title and risk of loss are transferred
to the customer, the sales price is fixed or determinable, persuasive evidence
of an arrangement exists, and collectibility is probable. Title and risk of loss
generally transfer when the product is delivered to the customer or upon
shipment, depending upon negotiated contractual arrangements. Sales are recorded
net of anticipated returns which we estimate based on historical rates of
return, adjusted for current events as appropriate, in accordance with Statement
of Financial Accounting Standard No. 48, Revenue Recognition When Right of
Return Exists ("SFAS No. 48"). If actual future returns are higher than
estimated, then net sales could be adversely affected.
We may enter into arrangements to offer certain pricing discounts and allowances
that do not provide an identifiable separate benefit or service or may enter
into arrangements to provide certain free products. In accordance with Emerging
Issues Task Force ("EITF") Issue No. 01-09, Consideration Given by a Vendor to a
Customer (Including a Reseller of the Vendor's Products), we record the pricing
discounts and allowances as a reduction of sales and record the cost of free
products ratably into cost of products sold based upon the underlying revenue
transaction.
Sales Returns
We establish a provision for estimated sales returns based on historical product
return trends. If the actual future returns are higher than we originally
estimated, which we based upon historical data, our net sales could be adversely
affected.
Provision for Doubtful Accounts
We establish a provision for doubtful accounts based on our assessment of the
collectibility of specific customer accounts and the aging of accounts
receivable. If there is a deterioration of a major customer's credit worthiness
or actual amounts of recoverability are lower than our historical experience,
our estimates of the recoverability of amounts owed to us could be adversely
affected.
31
Inventories
Inventory purchases and commitments are based upon estimates of future demand
that are difficult to forecast. If (i) there is a sudden and significant
decrease in demand for our products; (ii) there is a higher rate of inventory
obsolescence because of rapidly changing technology and customer requirements;
and/or (iii) the market value and selling prices of our products to our
customers decline or the price at which these customers can purchase similar
products from other manufacturers is lower than ours, we may be required to
reduce our inventory values which would result in lower-of-cost-or-market value
adjustments. Such a reduction could have a material adverse effect on our gross
profit. See Item 1A, Risk Factors, above.
Deferred Income Taxes
The deferred income tax asset valuation allowance is based on our assessment of
the realizability of our deferred income tax assets on an ongoing basis and may
be adjusted from time to time as necessary. In determining the valuation
allowance, we have considered future taxable income and the feasibility of tax
planning initiatives and strategies. We have a full valuation allowance on all
of our deferred income tax assets as of June 28, 2008 and June 30, 2007. 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 and other 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 operating losses in fiscal 2008,
fiscal 2007 and fiscal 2006, a potential impairment indicator, we performed an
impairment test of our long-lived and other assets as of June 28, 2008 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 and other assets exceed
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. As a result of our impairment
test, we recorded asset impairment charges of $5.9 million during fiscal year
2008. See Note 7, Property, Plant and Equipment, Net, Note 8, Other Assets and
Note 18, 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.
32
RESULTS OF OPERATIONS
Fiscal 2008 Compared to Fiscal 2007
Net Sales
Net sales for fiscal 2008 were $74.1 million, a decrease of $12.5 million, or
14.4%, as compared to net sales for fiscal 2007. The decrease in net sales was
due to a reduction in sales of 35mm single-use and traditional film cameras.
Net sales from our operations in the Americas for fiscal 2008 were $53.1
million, a decrease of $13.6 million, or 20.5%, as compared to fiscal 2007. The
decrease in net sales in the Americas was due primarily to a reduction in sales
of 35mm single-use and, to a lesser extent, traditional film cameras to our
significant customers.
Net sales from our operations in Europe for fiscal 2008 were $14.9 million, a
decrease of $0.2 million, or 1.09%, as compared to fiscal 2007. The decrease in
net sales in Europe was due primarily to a decrease in sales of 35mm single-use
cameras.
Net sales from our operations in Asia for fiscal 2008 were $6.1 million, an
increase of $1.2 million, or 26.1%, as compared to fiscal 2007. The increase in
net sales in Asia was due to an increase in sales of 35mm single-use cameras in
Japan partially offset by decreased sales of digital cameras.
See Note 20, Geographic Area and Significant Customers, in the Notes to
Consolidated Financial Statements.
Gross Profit
Gross profit for fiscal 2008 was $7.5 million, or 10.2% of net sales, versus
gross profit of $9.2 million, or 10.6 % of net sales, in fiscal 2007. The
decrease in the gross profit for fiscal 2008 was primarily due to (i) asset
impairment charges of $2.5 million related to certain long-lived assets, (ii) an
increase of $0.2 million in severance costs, (iii) a decrease of $1.3 million
related to a decrease in year-over-year sales resulting from a decrease in unit
volume, together, partially offset by (iv) a decrease of $2.3 million related to
unfavorable manufacturing material, labor, and overhead cost variances resulting
from manufacturing related cost reductions. See Note 18, Other Charges, in the
Notes to Consolidated Financial Statements.
Product engineering, design and development costs for fiscal 2008 and fiscal
2007, in dollars and as a percentage of net sales, were $2.2 million, or 3.0%,
and $2.5 million, or 2.9%, respectively.
Operating Expenses
Selling expenses for fiscal 2008 were $7.3 million, or 9.8% of net sales,
compared to $9.1 million, or 10.5% of net sales, for fiscal 2007. The decrease
of $1.8 million was primarily due to (i) lower freight and royalty costs in the
amount of $0.4 million and $0.3 million, respectively, as a result of a decrease
in year-over-year net sales, (ii) lower marketing costs in the amount of $0.4
million, (iii) lower selling-related employee compensation costs in the amount
of $0.3 million net of severance charges resulting from the elimination of
certain positions in connection with our cost reduction initiatives, and (iv)
lower selling-related occupancy and other costs in the amount of $0.4 million.
General and administrative expenses for fiscal 2008 were $14.7 million, or 19.8%
of net sales, compared to $13.5 million, or 15.5% of net sales, for fiscal 2007.
The increase of $1.2 million in general and administrative expenses in fiscal
2008 was primarily due to (i) asset impairment charges of $3.4 million related
to the lowering of the carrying values related to certain long-lived and other
assets, (ii) an increase
33
in professional fees of $1.0 million incurred in support of cost reduction
initiatives and our evaluation of strategic alternatives related to the Special
Committee's activities, together, partially offset by (iii) a decrease in
employee compensation costs of $1.6 million net of severance costs resulting
from the elimination of certain positions in connection with our cost reduction
initiatives, (iv) a reduction in professional fees of $0.9 million related to
our internal control remediation efforts, and (v) a net reduction of certain
other costs totaling $0.7 million. For further discussion, see Note 18, Other
Charges, in the Notes to Consolidated Financial Statements.
Share-Based Compensation Expenses
During fiscal 2008 and fiscal 2007, we recorded approximately $8,000 and
$61,000, respectively, of share-based compensation expenses. We consider all of
our share-based compensation as a component of general and administrative
expenses. In addition, no amount of share-based compensation expense was
capitalized as part of capital expenditures or inventory for the periods
presented. For further discussion, see Note 2, Description of Business and
Summary of Significant Accounting Policies, Share-Based Compensation Expense, in
the Notes to the Consolidated Financial Statements.
Interest Expense
Interest expense increased to $0.5 million in fiscal 2008 as compared to $0.3
million in fiscal 2007. The increase of $0.2 million was primarily the result of
new borrowings under the U.S. credit facilities.
Other Income, Net
Other income, net was $1.6 million and $2.0 million for fiscal 2008 and fiscal
2007, respectively. The decrease was primarily attributable to a decrease in
investment income resulting from lower invested balances during fiscal 2008 as
compared to fiscal 2007. See Note 4, Investments, in the Notes to Consolidated
Financial Statements.
Income Taxes
We recorded a (benefit) provision for income taxes of ($0.8) million and $6,000
in fiscal 2008 and fiscal 2007, respectively. The fiscal 2008 income tax benefit
relates primarily to the favorable settlement of previous uncertain tax
positions offset partially by income tax liabilities incurred for state tax
liabilities.
As a result of current and prior year losses realized by our foreign
subsidiaries, the foreign subsidiaries have an accumulated earnings deficit of
approximately $58.0 million as of June 28, 2008. Although we have an accumulated
earnings deficit related to most of our foreign subsidiaries, one of our foreign
subsidiaries has undistributed earnings. Historically, we do not provide for
U.S. federal and state income taxes on such undistributed earnings based on the
reinvestment of such earnings outside of the United States.
As of June 28, 2008, we had net operating loss carryforwards for U.S. federal
tax purposes of approximately $19.8 million. The net operating loss
carryforwards are scheduled to expire between 2010 and 2028. The U.S. net
operating loss carryforwards include a portion arising from the exercise of
stock options and will be credited to additional paid-in capital when the
related tax benefit is realized.
Additionally, we have approximately $58.0 million of net operating loss
carryforwards related to our foreign operations, of which $53.1 million relates
to Hong Kong. A significant portion of these net operating loss carryforwards
have no expiration dates.
In fiscal 2008, 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
34
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 2008, 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
2008. Historically, we have recorded a full valuation allowance against all of
our deferred tax assets in each fiscal year subsequent to and including fiscal
2005. For fiscal 2008 and fiscal 2007, our effective tax rate was (6.0%) and 0%,
respectively. Our future effective tax rate will depend on the apportionment
between foreign and domestic taxable income and losses, the statutory rates of
the related tax jurisdictions, results of pending tax audits and any changes to
the valuation allowance.
Effective July 1, 2007, the Company adopted Financial Accounting Standards Board
("FASB") Interpretation No. 48, "Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109," ("FIN 48") which clarifies the
accounting and disclosure for uncertain tax positions. The Company previously
had accounted for tax contingencies in accordance with Statement of Financial
Accounting Standards No. 5, "Accounting for Contingencies."
As a result of the implementation of FIN 48, the Company recorded a $0.1 million
increase in the liability for unrecognized tax benefits, which was accounted for
as an increase in the July 1, 2007 accumulated deficit balance.
The following is a rollforward of the Company's liability for income taxes
associated with unrecognized tax benefits:
(in millions)
Balance as of June 30, 2007 $1.0
Tax positions related to prior years:
Increase 0.1
Decreases (0.8)
Settlements (0.2)
----
Balance as of June 28, 2008 $0.1
====
The Company recognizes interest and penalties accrued related to unrecognized
tax benefits as components of its provision for income taxes. The Company had
approximately $25,000 for interest and penalties associated with uncertain tax
benefits accrued as of July 1, 2007. Subsequent changes to accrued interest and
penalties through June 28, 2008 have not been significant.
The Company files U.S. Federal income tax returns as well as income tax returns
in various states and foreign jurisdictions. At the beginning of fiscal 2008,
the Company was subject to examination by the Internal Revenue Service ("IRS")
for fiscal years 2005 through 2006, by the German Taxing Authorities for fiscal
years 2000 through 2005 and by taxing authorities in various state and other
foreign jurisdictions for fiscal years 2003 through 2007, with few exceptions.
During Fiscal 2008, the Company and the German Taxing Authorities settled the
net income tax liabilities resulting from an audit of the Company's German
subsidiary for fiscal years 2000 through 2005 in the amount of approximately
$0.1 million, inclusive of interest. Additionally, during fiscal 2008, the
Company recognized approximately $0.1 million of net expense related to value
added taxes as part of the settlement with the German Taxing Authorities. In May
2008, the Company received notice from the IRS regarding the results of their
U.S. Federal income tax examination for fiscal years 2005 through 2006. The
examination resulted in no U.S. Federal income tax liability and an approximate
$1.5 million reduction in the Company's U. S. Federal net operating loss
carryforward.
35
For further discussion, see Note 2 Description of Business and Summary of
Significant Accounting Policies and Note 15, Income Taxes, respectively, in the
Notes to Consolidated Financial Statements.
Net Loss
We incurred a net loss of $(12.6) million, or $(2.13) per common share, for
fiscal 2008 as compared to a net loss of $(11.7) million, or $(1.99) per common
share, for fiscal 2007.
Fiscal 2007 Compared to Fiscal 2006
Net Sales
Net sales for fiscal 2007 were $86.7 million, a decrease of $50.8 million, or
37.0%, as compared to net sales for fiscal 2006. The decrease in net sales was
due primarily to a decrease in sales of digital cameras in fiscal 2007
attributable to our decision in fiscal 2006 to de-emphasize digital camera sales
and to a lesser extent, a reduction in traditional film camera sales and in 35mm
single-use camera sales.
Net sales from our operations in the Americas for fiscal 2007 were $66.8
million, a decrease of $21.4 million, or 24.3%, as compared to fiscal 2006. The
decrease in net sales was due primarily to a reduction in sales of 35mm
single-use cameras, traditional film cameras and digital cameras.
Net sales from our operations in Europe for fiscal 2007 were $15.1 million, a
decrease of $33.4 million, or 68.9%, as compared to fiscal 2006. The decrease
was primarily due to reduced digital camera sales attributable to our decision
in fiscal 2006 to de-emphasize sales of digital cameras and, to a lesser extent,
traditional film cameras, partially offset by an increase in 35mm single-use
cameras.
Net sales from our operations in Asia for fiscal 2007 were $4.8 million, an
increase of $4.0 million, or 500.0%, as compared to fiscal 2006. The increase in
net sales in Asia was due to an increase in sales of 35mm single-use cameras in
Japan.
See Note 20, Geographic Area and Significant Customers, in the Notes to
Consolidated Financial Statements.
Gross Profit
Gross profit for fiscal 2007 was $9.2 million, or 10.6% of net sales, versus
gross profit of $14.6 million, or 10.6 % of net sales, in fiscal 2006. The
decrease in the gross profit for fiscal 2007 was primarily due to unfavorable
manufacturing material, labor and overhead cost variances of $5.4 million and
unanticipated air freight costs of $1.1 million, partially offset by improved
gross margin percentages due to a change in our product mix totaling $1.1
million.
Product engineering, design and development costs for fiscal 2007 and fiscal
2006, in dollars and as a percentage of net sales, were $2.5 million, or 2.9%,
and $3.8 million, or 2.8%, respectively.
Operating Expenses
Selling expenses for fiscal 2007 were $9.1 million, or 10.5% of net sales,
compared to $13.9 million, or 10.1% of net sales, for fiscal 2006. The decrease
of $4.8 million was primarily due to a reduction in selling-related employee
compensation costs of $2.4 million including a year-over-year increase in other
charges of $0.1 million, resulting from the elimination of certain positions in
connection with our cost-reduction initiatives and a reduction in freight and
royalty costs in the amounts of $1.3 million and $1.1 million, respectively, as
a result of the decrease in year-over-year net sales.
36
General and administrative expenses for fiscal 2007 were $13.5 million, or 15.6%
of net sales, compared to $21.0 million, or 15.3% of net sales, for fiscal 2006.
The decrease of $7.5 million in general and administrative expenses in fiscal
2007 was primarily due to a reduction in employee compensation costs of $3.9
million, including a year-over-year decrease in other charges of $2.2 million,
resulting from the elimination of certain positions in connection with our
fiscal 2006 cost-reduction initiatives, a reduction in professional fees of $1.1
million related to our internal control remediation efforts and $0.6 million of
certain other professional fees, and a decrease in amortization and depreciation
expense of $1.4 million due primarily to a year-over-year reduction of
long-lived assets and in property, plant and equipment asset balances resulting
from the prior year's reductions in carrying values, and a net reduction
totaling $0.5 million of certain other costs. For further discussion, see Note
18, Other Charges, in the Notes to Consolidated Financial Statements.
Share-Based Compensation Expenses
During fiscal 2007 and fiscal 2006, we recorded approximately $61,000 and
$275,000, respectively, of share-based compensation expenses. We consider all of
our share-based compensation as a component of general and administrative
expenses. In addition, no amount of share-based compensation expense was
capitalized as part of capital expenditures or inventory for the periods
presented. For further discussion, see Note 2, Description of Business and
Summary of Significant Accounting Policies, Share-Based Compensation, in the
Notes to the Consolidated Financial Statements.
Interest Expense
Interest expense decreased to $0.3 million in fiscal 2007 as compared to $0.4
million in fiscal 2006. The decrease of $0.1 million was the result of the
reduction in the interest expense associated with the amortization of intangible
assets.
Other Income, Net
Other income, net was $2.0 million and $1.1 million for fiscal 2007 and fiscal
2006, respectively. The increase was primarily attributable to an increase in
investment income and higher interest rates on the invested balances during
fiscal 2007 as compared to fiscal 2006, See Note 4, Investments, in the Notes to
Consolidated Financial Statements.
Income Taxes
We recorded a provision for income taxes of $6,000 and $0.1 million in fiscal
2007 and fiscal 2006, respectively. The fiscal 2007 income tax provision relates
primarily to income tax liabilities incurred for state and federal tax
liabilities.
As a result of current and prior year losses realized by our foreign
subsidiaries, the foreign subsidiaries have an accumulated earnings deficit of
approximately $44.3 million as of June 30, 2007. Although, we have an
accumulated earnings deficit related to most of our foreign subsidiaries,
certain of our foreign subsidiaries have undistributed earnings. Historically,
we do not provide for U.S. federal and state income taxes on such undistributed
earnings based on the re-investment of such earnings outside the United States.
As of June 30, 2007, we had net operating loss carryforwards for U.S. federal
tax purposes of approximately $18.2 million. The net operating loss
carryforwards are scheduled to expire between 2010 and 2027. The U.S. net
operating loss carryforwards include a portion arising from the exercise of
stock options and will be credited to additional paid-in capital when the
related tax benefit is realized.
37
Additionally, we have approximately $53.9 million of net operating loss
carryforwards related to our foreign operations, of which $48.5 million relates
to Hong Kong. A significant portion of these net operating loss carryforwards
have no expiration dates.
In fiscal 2007, management evaluated the realizability of our deferred income
tax assets. As part of assessing the realizability of our deferred income tax
assets, management evaluated whether it is more likely than not that some
portion, or all, of our deferred income tax assets, will be realized. The
realization of U.S., Europe and Hong Kong deferred income tax assets relates
directly to our tax planning initiatives and strategies for U.S. federal and
state, Europe and Hong Kong tax purposes. In fiscal 2007, based on all the
available evidence, management determined that it is not more likely than not
that our deferred income tax assets will be fully realized. Accordingly, we
recorded a full valuation allowance against all of our deferred income tax
assets in fiscal 2007. Historically, we have recorded a full valuation allowance
against all of our deferred tax assets in each fiscal year subsequent to and
including fiscal 2005. For fiscal 2007 and fiscal 2006, our effective tax rate
was 0% and 0.6%, respectively. Our future effective tax rate will depend on the
apportionment between foreign and domestic taxable income and losses, the
statutory rates of the related tax jurisdictions, results of pending tax audits
and any changes to the valuation allowance.
For further discussion, see Note 2 and Note 15, Description of Business and
Summary of Significant Accounting Policies and Income Taxes, respectively, in
the Notes to Consolidated Financial Statements.
Net Loss
We incurred a net loss of $(11.7) million, or $(1.99) per common share, for
fiscal 2007 as compared to a net loss of $(19.6) million, or $(3.36) per common
share, for fiscal 2006.
Other Charges
Asset Impairment Charges
During fiscal 2008, we recorded impairment charges of $5.9 million related to
the impairment of certain long-lived and other assets that included reductions
in the carrying value of a license and certain property, plant and equipment
used primarily in the manufacturing of single-use cameras.
During fiscal 2006, we 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.
Cost-Reduction Initiatives and Related Costs
During fiscal 2008 and fiscal 2007, we implemented cost-reduction initiatives,
including among other things, the elimination of certain employee positions. As
a result, during fiscal 2008 and fiscal 2007, we recorded total charges of $1.1
million and $0.9 million, respectively, related to severance costs for the
elimination of certain employee positions.
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 35mm single-use and traditional film cameras.
In connection with this strategy, we realigned our operations in Europe,
including ceasing our operations in France and Germany. As a result of the
France and Germany office closures, in fiscal 2007, we recorded charges of
approximately $0.4 million for severance costs. In addition, as a result of the
de-emphasis of digital camera sales, we reduced our outsourcing organization in
Asia and recorded a total of $0.1 million for employee severance costs.
38
Table I -- Other Charges Liability reconciles the beginning and ending balances
of the other charges liability.
(in thousands)
Other Charges Liability
-----------------------
Severance Retention Leases Total
--------- --------- ------ -------
Balance as of July 2, 2005 $ 190 $ 129 $ -- $ 319
Charges 1,630 177 -- 1,807
Reversals -- (24) -- (24)
Payments (645) (275) -- (920)
------- ----- ---- -------
Balance as of July 1, 2006 $ 1,175 $ 7 $ -- $ 1,182
Charges 943 9 26 978
Reversals (44) (7) (1) (52)
Payments (1,838) -- (25) (1,863)
------- ----- ---- -------
Balance as of June 30, 2007 $ 236 $ 9 $ -- $ 245
------- ----- ---- -------
Charges 1,104 -- -- 1,104
Reversals -- -- -- --
Payments (797) (9) -- (806)
------- ----- ---- -------
Balance as of June 28, 2008 $ 543 $ -- $ -- $ 543
======= ===== ==== =======
Table II -- Other Charges presents the related expenses and their classification
in the consolidated statements of operations.
(in thousands) Long-Lived
Asset
Other Charges Severance Retention Impairment Leases Total
------------- --------- --------- ---------- ------ ------
Fiscal 2008
Cost of products sold $ 548 $ -- $2,455 $ -- $3,003
Selling expense 380 -- 8 -- 388
General and administrative expense 176 -- 3,444 -- 3,620
------ ----- ------ ----- ------
Total $1,104 $ -- $5,907 $ -- $7,011
====== ===== ====== ===== ======
Fiscal 2007
Cost of products sold $ 341 $ -- $ -- $ -- $ 341
Selling expense 470 (7) -- 16 479
General and administrative expense 88 9 -- 9 106
------ ----- ------ ----- ------
Total $ 899 $ 2 $ -- $ 25 $ 926
====== ===== ====== ===== ======
Fiscal 2006
Cost of products sold $ 29 $ 96 $ 788 $ -- $ 913
Selling expense 357 14 -- -- 371
General and administrative expense 1,244 43 1,039 -- 2,326
------ ----- ------ ----- ------
Total $1,630 $ 153 $1,827 $ -- $3,610
====== ===== ====== ===== ======
39
As a result of the cost-reduction initiatives implemented in fiscal 2008, we
expect to make cash payments totaling $0.5 million during fiscal 2009 related to
severance.
LIQUIDITY AND CAPITAL RESOURCES
We are not engaged in hedging activities and had no forward exchange contracts
outstanding at June 28, 2008. 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.
Uncertainties in the Credit Markets - As of June 28, 2008, the carrying value of
our auction rate securities was $18.5 million of which $16.8 million were
classified as "Long-term investments" on our consolidated balance sheet because
of the market uncertainties and the liquidity issues in the market for auction
rate securities.
Our portfolio of auction rate securities are AAA rated, long-term debt
obligations secured by student loans, with approximately 100% of such collateral
being guaranteed by the U.S. Government under the Federal Family Education Loan
Program. Liquidity for these securities has been provided by an auction process
that resets the applicable interest rate at pre-determined intervals usually
every 28-35 days. In the past, the auction process allowed investors to obtain
immediate liquidity if needed by selling the securities at face value. The
current disruptions in the credit markets have adversely affected the auction
market for these types of securities. As previously reported, during Fiscal 2008
we experienced failed auctions for certain of our auction rate securities that
have gone to auction, resulting in our inability to sell those securities. These
auction rate securities continue to pay interest at default rates which are
generally higher than the current market rate and there has been no change in
the ratings of these securities to date. However, in certain instances the
interest rate for some of the Company's auction rate securities may reset to a
zero percent interest rate due to a feature of the relevant formula for
determining the interest rate. To date, only a small percentage of the auction
rate securities have reset to a zero percent interest rate for a period of time.
These securities then may reset to a higher interest rate in the future. In the
event that a greater percentage of the Company's auction rate securities reset
to a zero percent interest rate and do not subsequently reset to a higher
interest rate, it could have a material adverse effect on the Company's
financial condition and results of operations.
Based on our expected operating cash flows and other sources of cash, cash
equivalents and short-term investments, it is possible that the potential lack
of liquidity in our auction rate security investments could adversely affect our
liquidity and our ability to fund our operations. As of June 28, 2008, we
determined that the estimated value of our auction rate securities was less than
their par value and recorded an unrealized loss of approximately $5.1 million.
During Fiscal 2008, we received net proceeds of $6.9 million from the sale of
auction rate securities at 100% of par value, of which $1.9 million was received
after market uncertainties and liquidity issues arose in the market for auction
rate securities. Additionally, the Company has experienced redemptions of
approximately $1.8 million of its auction rate securities at 100% of par value
subsequent to June 28, 2008 and has consented to tender $2.1 million in par
value of its auction rate securities pursuant to an offer by the issuer to
purchase such securities for approximately $1.9 million. See Note 22, Subsequent
Events, in the Notes to the Consolidated Financial Statements for further
discussion. Currently, the Company has the ability and intent to hold its
auction-rate securities until a recovery of par value and does not consider its
auction-rate securities to be other-than-temporarily impaired as of June 28,
2008. However we cannot predict whether the purchase of the tendered auction
rate securities will be completed, whether future auctions related to our
auction rate securities will be successful or whether we will otherwise be able
to sell such securities. We continue to seek alternative short-term financing
sources for reducing our exposure to the auction rate market, but may not be
able to
40
identify any such alternative. Although we currently have sufficient working
capital to finance our operations in the near term, if our working capital is
insufficient in the future and we are not able to monetize some or all of our
auction rate securities or other assets at that time, it could have a material
adverse effect on the our ability to finance our future ongoing operations.
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 HSBC was reduced during calendar year 2005 from
$24.0 million in January 2005 to $14.0 million in September 2005. In January
2006, the HSBC financing facilities were further reduced to an aggregate of
approximately $8.2 million and we were required to provide cash deposits pledged
as security in the amount of approximately $8.2 million against the facility.
During fiscal 2007, we further reduced the HSBC financing facilities by $3.0
million to $5.2 million and obtained $3.0 million of alternative financing from
two other Hong Kong-based financial institutions. During fiscal 2008, we
eliminated one of the alternative financing facilities, leaving us with an
aggregate of approximately $6.2 million with our Hong Kong-based lenders.
On October 16, 2007, Concord Keystone Sales Corp. ("Keystone"), our United
States wholly-owned subsidiary, entered into a demand financing facility with
The CIT Group/Commercial Services, Inc. ("CIT") for a $15 million secured
revolving line of credit (the "CIT Facility"), which includes a letter of credit
sub-line of $10 million. The CIT Facility is secured by a first priority lien
on, among other things, Keystone's accounts receivable and inventory.
On March 4, 2008, Keystone received notice from CIT that an event of default
existed under the CIT Facility as a result of Keystone's failure to provide CIT
with our financial information for the Second Quarter Fiscal 2008. As previously
reported, we delayed the filing of our Quarterly Report on Form 10-Q for the
Second Quarter Fiscal 2008. We subsequently filed our Quarterly Report on Form
10-Q for the Second Quarter Fiscal 2008 on March 31, 2008. As a result of this
event of default, CIT notified Keystone that it would increase the availability
reserve under the CIT Facility, thereby decreasing the borrowing base, by
$500,000.
On November 3, 2008, CIT notified Keystone that an event of default existed
under the CIT Facility as a result of our press release on October 30, 2008 that
we have elected to wind down operations and liquidate assets. Currently, CIT has
not exercised its rights to accelerate our obligation to repay the CIT financing
facility, but has temporarily discontinued making loans under the facility until
it receives additional financial information regarding our dissolution and the
plan of liquidation.
If CIT was to demand repayment at a time when we did not otherwise have
sufficient borrowing capacity or liquid assets that would enable Keystone to
repay the CIT Facility in full, CIT would be entitled to foreclose on Keystone's
pledged inventory. This could result in Keystone's inventory being sold at a
significant discount to its carrying value and could have a material adverse
effect on our liquidity and ability to fund our operations.
Effective April 17, 2008, we entered into an Express Creditline Loan Agreement
(the "Loan Agreement") with Citigroup Global Markets, Inc. ("Citigroup") for a
$9 million secured revolving credit line (the "Citigroup Facility"). In addition
to the $9 million credit line for advances, the Citigroup Facility provides for
the accrual of up to $1 million of interest, resulting in an aggregate credit
limit of $10 million (the "Loan Limit") under the Citigroup Facility. Effective
October 20, 2008, the aggregate credit limit under the Citigroup Facility was
increased to $10,925,000. The Citigroup Facility is secured by a first priority
lien and security interest in our remaining auction rate securities (the
"Collateral"). Citigroup may, in its sole discretion and without cause, demand
full or partial payment of any outstanding balance under the Citigroup Facility
or reduce the Loan Limit at any time.
Although the establishment of Citigroup Facility may mitigate the risk that we
may not have sufficient liquidity to fund our operations in the near term, in
the event that we were to utilize all or a portion of the
41
Citigroup Facility and Citigroup was to demand repayment at a time when we did
not otherwise have sufficient borrowing capacity or liquid assets that would
enable us to repay the Citigroup Facility in full, Citigroup would be entitled
to foreclose on our pledged auction rate securities. This could result in our
auction rate securities being sold at a significant discount to their face
amount and a significant reduction in the net realizable value of such
securities and could have a material adverse effect on our liquidity and ability
to fund our operations.
If our shareholders do not approve our dissolution and plan of liquidation and
we seek to continue operations, our ability to fund our operating requirements
and maintain an adequate level of working capital will depend primarily on our
ability to generate sales of our single-use and traditional film cameras and/or
new products, on our ability to continue to access our existing financing
facilities and on our ability to further reduce operating expenses. Our failure
to generate profitable sales of our single-use and traditional film cameras
and/or new products, our failure to further reduce operating expenses, and other
events including our ability to manufacture or have manufactured products at an
economically feasible cost and in sufficient quantities and changes in economic
or competitive conditions or our planned business could cause us to require
additional capital. It is uncertain whether our financing facilities will remain
available or, if they do remain available, what the terms of such facilities
will be, after our announcement of the recommendation by our Board of our
dissolution and the adoption of a plan of liquidation. In the event that we must
raise additional capital to fund our working capital needs, we may seek to raise
such capital through borrowings and/or the issuance of debt securities or equity
securities. To the extent we raise additional capital by issuing equity
securities or obtaining borrowings convertible into equity, existing
shareholders may experience ownership dilution and future investors may be
granted rights superior to those of existing shareholders. Moreover, additional
capital may not be available to us on acceptable terms, or at all.
Cash and Cash Equivalents - Cash and cash equivalents increased by $15.1 million
from $3.9 million at June 30, 2007 to $19.0 million at June 28, 2008. The
increase was primarily the result of net borrowings related to short-term debt
of $14.9 million, net proceeds related to sales/purchases of short-term
investments of $6.9 million and net proceeds received from the sale of property,
plant and equipment of $0.6 million partially offset by $7.3 million in net cash
used in operating activities.
Short-Term Investments - Short-term investments, including available-for-sale
investments, decreased by $28.8 million from $30.5 million at June 30, 2007 to
$1.7 million at June 28, 2008, primarily as a result of a reclassification of
$16.8 million of auction rate securities as long-term investments, sales of $6.9
million of short-term investments and an unrealized loss of $5.1 million.
Cash Used in Operating Activities - Cash used in operations in fiscal 2008 was
$7.3 million which compares unfavorably to cash used in operating activities of
$1.1 million and $27,000 for fiscal 2007 and fiscal 2006, respectively. The
changes in cash used in operating activities for the respective fiscal years
were primarily attributable to changes in net loss, as adjusted for non-cash
items of income and expense, accounts receivable as a result of improved
collections, decreases in inventories as a result of a focused effort to control
inventory balances, decreases in accounts payable and accrued expenses as a
result of lower overall inventory levels and costs.
Cash Provided by (Used in) Investing Activities - For fiscal 2008, the increase
in cash provided by investing activities was primarily due to the net proceeds
related to the sales/purchases of short-term investments of $6.9 million and net
proceeds received from the sale of property, plant and equipment in the amount
of $0.8 million. During fiscal 2007, restricted cash decreased by $2.1 million,
representing a decrease in cash deposits as security for borrowings under our
financing facilities. For fiscal 2006, the increase in cash provided by
investing was primarily due to proceeds from the sale of short-term investments
partially offset by the increase in restricted cash. During fiscal 2006,
restricted cash increased by $8.3 million representing required minimum cash
deposits as security for borrowings under our financing facilities. Capital
expenditures for fiscal 2008, fiscal 2007 and fiscal 2006 were $0.1 million,
42
$0.6 million and $1.6 million, respectively, and related primarily to
expenditures on plant and equipment for our manufacturing facilities in the PRC.
Cash Provided by (Used in) Financing Activities - Cash provided by financing
activities in fiscal 2008 was $14.9 million resulting primarily from net
borrowings under our U.S. credit facilities. Cash provided by financing
activities in fiscal 2007 was $3.1 million resulting from the net borrowings
under the credit facilities of $2.8 million and $0.3 million from net proceeds
for the issuance of common stock from the exercise of stock options. Cash used
in financing activities in fiscal 2006 was $(2.9) million resulting from the
repayment of net borrowings under the credit facilities.
OFF-BALANCE SHEET ARRANGEMENTS
Under SEC regulations, in certain circumstances, we are required to make certain
disclosures regarding the following off-balance sheet arrangements, if material:
- Any obligation under certain guarantee contracts;
- Any retained or contingent interest in assets transferred to an
unconsolidated entity or similar arrangement that serves as credit,
liquidity or market risk support to that entity for such assets;
- Any obligation under certain derivative instruments; and
- Any obligation arising out of a material variable interest held by
us in an unconsolidated entity that provides financing, liquidity,
market risk or credit risk support to us, or engages in leasing,
hedging or research and development services with us.
As of June 28, 2008, we had $1.5 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 $5.7 million import facilities from our Hong Kong financing
facilities. See "Hong Kong Financing Facilities" below.
We do not have any off-balance sheet arrangements pursuant to these regulations,
other than those described above and in the Notes to Consolidated Financial
Statements. We do not participate in transactions that generate relationships
with unconsolidated entities or financial partnerships including variable
interest entities. We are not engaged in hedging activities and had no forward
exchange contracts or other derivatives outstanding as of June 28, 2008. 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 of America and are more fully discussed herein
under the caption "Liquidity and Capital Resources."
43
CONTRACTUAL OBLIGATIONS AS OF JUNE 28, 2008
(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 $ 9.3 $ 9.3 $ -- $ -- $ --
Borrowings under Financing Facilities 17.6 17.6
Letters of Credit 1.5 1.5
Employment Contract Obligations 4.2 3.1 1.1
Operating Leases 0.3 0.3
Patent, Trademark, Licensing and Royalty Obligations 1.8 0.3 0.6 0.6 0.3
----- ----- ----- ----- -----
Total $34.7 $32.1 $ 1.7 $ 0.6 $ 0.3
===== ===== ===== ===== =====
Operating Leases - We enter into operating leases in the ordinary course of
business (e.g., warehouse facilities, office space and equipment). The effects
of outstanding leases are not material to us either in terms of annual costs or
in total future minimum payments. See Note 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.
Other Contractual Obligations - We do not have any material financial guarantees
or other contractual commitments that are reasonably likely to adversely affect
liquidity. See Hong Kong Financing Facilities below for information about our
financial guarantees.
Hong Kong Financing Facilities - At June 28, 2008 and June 30, 2007, we had $1.5
million and $2.1 million, respectively, in letters of credit outstanding, which
were issued primarily to certain suppliers to guarantee payment of our purchase
orders with such suppliers. The letters of credit were issued under our
financing facilities that have been granted to CCHK. See Note 9, Short-Term
Borrowings and Financing Facilities, in the Notes to the Consolidated Financial
Statements.
Reverse Split of Common Stock - On October 26, 2006, our Board approved, without
action by the shareholders, a Certificate of Amendment to our Certificate of
Incorporation to implement a one-for-five split of our common stock with an
effective date of November 21, 2006. On the effective date of the reverse split,
each five shares of issued common stock (including treasury shares and shares
held in trust) were converted automatically into one share of common stock. Our
authorized common stock was reduced from 100,000,000 shares to 20,000,000
shares. All shares of our common stock and per-share and related stock option
amounts have been retroactively adjusted for the reverse stock split in the
accompanying consolidated financial statements and footnotes.
License Agreements - See Note 16, Commitments and Contingencies, in the Notes to
Consolidated Financial Statements for a discussion of our licensing activities.
44
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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
For a discussion of recently issued accounting pronouncements, see Note 2,
Description of Business and Summary of Significant Accounting Policies,
"Recently Issued Accounting Pronouncements," in the Notes to Consolidated
Financial Statements.
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.
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. As described in
Note 9, Short-Term Borrowings and Financing Facilities, in the Notes to the
Consolidated Financial Statements, our credit facilities consist of outstanding
debts that bear interest at variable rates utilizing various base market
interest rates plus an interest rate premium. Therefore, our interest rate risk
with respect to such debt is the increase in interest expenses which would
result from higher interest rates associated with an increase in base market
interest rates. At June 28, 2008, the outstanding debt under our Hong Kong
Financing facilities was $3.2 million at a weighted average interest rate of
6.30%. A hypothetical 10% increase in the base market interest rates would have
resulted in incremental interest expenses of approximately $14,000 during fiscal
2008. At June 28, 2008, the outstanding debt under our United States Financing
Facilities was $14.4 million at weighted average interest rate of 4.70%. A
hypothetical 10% increase in the base market interest rates would have resulted
in incremental interest expense of approximately $46,000 during fiscal 2008.
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 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 consolidated statements of operations. Although we have
previously analyzed the benefits and costs associated with hedging against
foreign currency fluctuations, as of June 28, 2008, we were not engaged in any
hedging activities and we had no forward exchange contracts outstanding.
45
Item 8. Financial Statements and Supplementary Data.
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm 47
Consolidated Balance Sheets at June 28, 2008 and June 30, 2007 48
Consolidated Statements of Operations for the years ended
June 28, 2008, June 30, 2007 and July 1, 2006 49
Consolidated Statements of Stockholders' Equity for the years
ended June 28, 2008, June 30, 2007 and July 1, 2006 50
Consolidated Statements of Cash Flows for the years
ended June 28, 2008, June 30, 2007 and July 1, 2006 51
Notes to Consolidated Financial Statements 52
46
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Concord Camera Corp.
We have audited the accompanying consolidated balance sheets of Concord Camera
Corp. and its subsidiaries as of June 28, 2008 and June 30, 2007 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years ended June 28, 2008. We have also audited the schedule
for the three years ended June 28, 2008 listed in the accompanying index. These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and schedule are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements and schedule, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedule. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Concord
Camera Corp. and its subsidiaries at June 28, 2008 and June 30, 2007, and the
results of its operations and its cash flows for each of the three years ended
June 28, 2008, in conformity with accounting principles generally accepted in
the United States of America.
Also, in our opinion, the 2008, 2007 and 2006 schedule presents fairly, in all
material respects, the information set forth therein.
The accompanying consolidated financial statements have been prepared assuming
that Concord Camera Corp. will continue as a going concern. As discussed in Note
1 to the financial statements, on October 29, 2008, the Board of Directors of
the Company recommended its dissolution and the adoption of a plan of
liquidation (the "Liquidation Proposal"). The Liquidation Proposal is subject to
approval by the Company's shareholders. Pending the shareholders' vote on the
Liquidation Proposal, the Company has ceased manufacturing products, purchasing
materials and products and undertaking commitments for sales of Company's
products except for products that the Company has remaining in its inventory.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. Management's plans in regard to these matters are also
described in Note 1. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ BDO Seidman, LLP
Certified Public Accountants
Miami, Florida
November 6, 2008
47
Concord Camera Corp. and Subsidiaries
Consolidated Balance Sheets
(in thousands)
June 28, June 30,
2008 2007
--------- ---------
Assets
Current Assets:
Cash and cash equivalents $ 19,041 $ 3,853
Restricted cash 6,200 6,200
Short-term investments 1,750 30,475
Accounts receivable, net 10,478 10,702
Inventories 10,431 15,806
Prepaid expenses and other current assets 821 1,401
Assets held for sale 3,814 -
--------- ---------
Total current assets 52,535 68,437
Long-term investments 16,768 -
Property, plant and equipment, net 868 10,616
Other assets 431 3,451
--------- ---------
Total assets $ 70,602 $ 82,504
========= =========
Liabilities and Stockholders' Equity
Current Liabilities:
Short-term borrowings under financing facilities $ 17,621 $ 2,756
Accounts payable 10,583 17,042
Accrued royalties 2,206 2,499
Accrued expenses 4,364 5,775
Other current liabilities 830 1,346
--------- ---------
Total current liabilities 35,604 29,418
Other long-term liabilities 1,096 1,442
--------- ---------
Total liabilities 36,700 30,860
Commitments and contingencies
Stockholders' Equity:
Blank check preferred stock, no par value,
1,000 shares authorized, none issued - -
Common stock, no par value, 20,000 shares
authorized; 6,261 shares issued
as of June 28, 2008 and June 30, 2007 143,860 143,860
Additional paid-in capital 5,197 5,189
Deferred share arrangement - 413
Accumulated other comprehensive loss (5,082) -
Accumulated deficit (105,080) (92,412)
--------- ---------
38,895 57,050
Less: treasury stock, at cost, 347 shares as
of June 28, 2008 and June 30, 2007 (4,993) (4,993)
Less: common stock held in trust, 0 and 66 shares as
of June 28, 2008 and June 30, 2007 - (413)
--------- ---------
Total stockholders' equity 33,902 51,644
--------- ---------
Total liabilities and stockholders' equity $ 70,602 $ 82,504
========= =========
See accompanying notes to consolidated financial statements.
48
Concord Camera Corp. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
Fiscal Year Ended
-------------------------------------------------
June 28, June 30, July 1,
2008 2007 2006
-------- -------- ---------
Net sales $ 74,149 $ 86,653 $ 137,529
Cost of products sold 66,613 77,452 122,928
-------- -------- ---------
Gross profit 7,536 9,201 14,601
Selling expenses 7,294 9,133 13,895
General and administrative expenses 14,712 13,451 20,978
-------- -------- ---------
Operating loss (14,470) (13,383) (20,272)
Interest expense 501 336 374
Other income, net (1,566) (1,999) (1,142)
-------- -------- ---------
Loss before (benefit) provision for income taxes (13,405) (11,720) (19,504)
(Benefit) provision for income taxes (798) 6 107
-------- -------- ---------
Net loss $(12,607) $(11,726) $ (19,611)
======== ======== =========
Net loss per common share:
Basic and diluted
loss per common share $ (2.13) $ (1.99) $ (3.36)
======== ======== =========
Weighted average
common shares outstanding - basic and diluted 5,914 5,878 5,838
======== ======== =========
See accompanying notes to consolidated financial statements.
49
Concord Camera Corp. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(in thousands)
----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Common Stock Additional Deferred Other
Issued Stated Paid-in Share Comprehensive Accumulated
Shares Value Capital Arrangement Loss Deficit
----------------------------------------------------------------------------------------------------------------------------------
Balance as of July 2, 2005 6,185 $143,518 $4,853 $ 624 $ -- $ (61,075)
----------------------------------------------------------------------------------------------------------------------------------
Net loss -- -- -- -- -- (19,611)
Share-based compensation expense -- -- 275 -- -- --
----------------------------------------------------------------------------------------------------------------------------------
Balance as of July 1, 2006 6,185 $143,518 $5,128 $ 624 $ -- $ (80,686)
----------------------------------------------------------------------------------------------------------------------------------
Net loss -- -- -- -- -- (11,726)
Exercise of stock options 76 342 -- -- -- --
Share-based compensation expense -- -- 61 -- -- --
Deferred share arrangement -- -- -- (211) -- --
----------------------------------------------------------------------------------------------------------------------------------
Balance as of June 30, 2007 6,261 $143,860 $5,189 $ 413 $ -- $ (92,412)
Net Loss (12,607)
Unrealized losses on available
for sale securities -- -- -- -- (5,082) --
Comprehensive loss -- -- -- -- -- --
Share-based compensation expense -- -- 8 -- -- --
Deferred share arrangement -- -- -- (413) -- --
Cumulative effect of adopting
FIN 48 -- -- -- -- -- (61)
----------------------------------------------------------------------------------------------------------------------------------
Balance as of June 28, 2008 6,261 $143,860 $5,197 $ -- $(5,082) $(105,080)
==================================================================================================================================
------------------------------------------------------------------------------------------------------------------
Common Stock
Treasury Stock Held in Trust
Shares Cost Shares Cost Total
------------------------------------------------------------------------------------------------------------------
Balance as of July 2, 2005 347 $(4,993) 102 $(624) $ 82,303
------------------------------------------------------------------------------------------------------------------
Net loss -- -- -- -- (19,611)
Share-based compensation expense -- -- -- -- 275
------------------------------------------------------------------------------------------------------------------
Balance as of July 1, 2006 347 $(4,993) 102 $(624) $ 62,967
------------------------------------------------------------------------------------------------------------------
Net loss -- -- -- -- (11,726)
Exercise of stock options -- -- -- -- 342
Share-based compensation expense -- -- -- -- 61
Deferred share arrangement -- (36) 211 --
------------------------------------------------------------------------------------------------------------------
Balance as of June 30, 2007 347 $(4,993) 66 $(413) $ 51,644
Net Loss (12,607)
Unrealized losses on available
for sale securities -- -- -- -- (5,082)
Comprehensive loss -- -- -- -- (17,689)
Share-based compensation expense -- -- -- -- 8
Deferred share arrangement -- -- (66) 413 --
Cumulative effect of adopting
FIN 48 -- -- -- -- (61)
------------------------------------------------------------------------------------------------------------------
Balance as of June 28, 2008 347 $(4,993) -- $ -- $ 33,902
==================================================================================================================
50
Concord Camera Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Fiscal Year Ended
----------------------------------------------
June 28, June 30, July 1,
2008 2007 2006
-------- -------- --------
Cash flows from operating activities:
Net loss $(12,607) $(11,726) $(19,611)
Adjustments to reconcile net loss to net cash used in
operating activities:
Provision for inventory charges 367 418 1,586
Depreciation and amortization 3,079 3,981 5,164
Gain on disposal of property, plant and equipment (387) (48) --
Impairment of long-lived assets 5,907 -- 1,828
Share-based compensation 8 61 275
Unrecognized tax benefit (61) -- --
Changes in operating assets and liabilities:
Accounts receivable, net 224 5,946 15,212
Inventories 5,008 12,036 6,536
Deferred compensation assets 248 112 8,339
Prepaid expenses and other current assets 332 1,549 (197)
Other assets (377) 267 583
Accounts payable (6,459) (9,547) (8,720)
Accrued expenses (1,412) (2,490) (42)
Accrued royalty (292) (724) 584
Restructuring reserve net of payments -- -- (110)
Deferred compensation liabilities (218) (97) (8,373)
Other current liabilities (299) (430) (1,568)
Other long-term liabilities (346) (381) (1,513)
-------- -------- --------
Net cash used in operating activities (7,285) (1,073) (27)
-------- -------- --------
Cash flows from investing activities:
Proceeds from sales of available-for-sale
investments 51,925 78,400 52,650
Purchase of available-for-sale investments (45,050) (85,325) (41,000)
Restricted cash -- 2,064 (8,264)
Purchases of property, plant and equipment (115) (597) (1,644)
Proceeds from sale of property, plant and equipment 847 491 --
-------- -------- --------
Net cash provided by (used in) investing activities 7,607 (4,967) 1,742
-------- -------- --------
Cash flows from financing activities:
Borrowings (repayments) under financing facilities,
net 14,866 2,756 (2,936)
Net proceeds from issuance of common stock -- 342 --
-------- -------- --------
Net cash provided by (used in) financing activities 14,866 3,098 (2,936)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 15,188 (2,942) (1,221)
Cash and cash equivalents at beginning of the year 3,853 6,795 8,016
-------- -------- --------
Cash and cash equivalents at end of the year $ 19,041 $ 3,853 $ 6,795
======== ======== ========
See Note 3, Supplemental Cash Flow Information, and accompanying notes to
consolidated financial statements.
51
CONCORD CAMERA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - LIQUIDATION PROPOSAL AND GOING CONCERN
On August 14, 2006, the Board of Directors (the "Board") of Concord Camera
Corp., a New Jersey corporation (collectively with its consolidated
subsidiaries, the "Company" or "Concord"), established a committee ("the Special
Committee") consisting of three independent directors, to investigate, evaluate
and/or analyze strategic alternatives for the Company and make any
recommendations to the Board with respect to such strategic alternatives that
the Special Committee determines to be appropriate. With the assistance of its
financial advisor, the Special Committee considered several alternative
strategies, including: (i) continuing current operations; (ii) making strategic
acquisitions; (iii) a sale or other disposition of all or a significant part of
the Company or its business; (iv) a "going-private" transaction; and (v) a
liquidation of the Company. The Special Committee authorized its financial
advisor and management to conduct discussions and negotiate with potential
strategic and financial investors who expressed an interest in making an
investment in or acquiring the Company. However, to date, efforts by the Special
Committee's financial advisor and management to engage in a transaction with any
of these third parties have not been successful.
On October 29, 2008, based on the Special Committee's review of strategic
alternatives and recommendation, the Board recommended the dissolution of the
Company and the adoption of a plan of liquidation (the "Liquidation Proposal").
The Liquidation Proposal is subject to approval by the Company's shareholders at
the 2008 Annual Meeting of Shareholders (the "Annual Meeting") that is expected
to be held in December 2008. Pending the shareholders' vote on the Liquidation
Proposal, the Company has ceased manufacturing products, purchasing materials
and products and undertaking commitments for sales of its products except for
products that the Company has remaining in inventory.
The Company expects to file its preliminary proxy statement with the SEC
concurrently with this annual report. Once the SEC review process is complete,
the Company will mail a copy of the definitive proxy statement to its
shareholders.
If the Company's shareholders approve the Liquidation Proposal, the Company will
file a certificate of dissolution with the Department of Treasury of the State
of New Jersey. Thereafter, the Company will not engage in any business
activities except for the purpose of preserving the value of its assets,
prosecuting and defending lawsuits by or against it, winding up its business and
affairs, selling and monetizing its properties and non-cash assets, including
its intellectual property and other intangible assets, paying or otherwise
settling its liabilities, including contingent liabilities, terminating
commercial agreements and relationships and preparing to make distributions to
shareholders, in accordance with the plan of liquidation.
If the Company's shareholders do not approve the Liquidation Proposal, the Board
will explore the alternatives then available for the future of the Company. The
Company believes the value of its business will be materially and adversely
impacted after the announcement of the recommendation by its Board of the
Liquidation Proposal. In particular, pending the shareholders' vote on the
Liquidation Proposal, the Company has ceased manufacturing products, purchasing
materials and products and undertaking commitments for sales of its products
except for products that it has remaining in inventory and, as a result, the
Company believes that many, if not all, of its customers, including its major
customers, will transition their business to the Company's competitors.
Therefore, if the Company's shareholders do not approve the Liquidation
Proposal, the Company will not be able to continue to operate its business as it
existed prior to the Board's recommendation of the Liquidation Proposal and may
not be able to operate its business at all.
52
The accompanying consolidated financial statements have been prepared on the
going concern basis of accounting, which contemplates realization of assets and
liabilities in the normal course of business. Accordingly, the accompanying
statements do not include any adjustments necessary to reflect the possible
future effects on the recoverability of assets and settlement of liabilities
that may result from adoption of the plan of orderly liquidation or the
Company's inability to complete such a plan in an orderly manner.
NOTE 2 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
The Company designs, develops, manufactures, outsources and sells easy-to-use
film camera products worldwide. The Company's products include 35mm single-use
and traditional film cameras. The Company manufactures and assembles most of its
single-use cameras and certain of its traditional cameras at its manufacturing
facility in the Peoples Republic of China ("PRC") and outsources the manufacture
of certain of its single-use and its traditional film cameras. In Fiscal 2006,
the Company de-emphasized the sale of digital cameras and in Fiscal 2007, the
Company exited the digital camera market. Digital camera sales in Fiscal 2007
were not material and the Company had no digital camera sales in Fiscal 2008.
The Company sells its private label and brand-name products to its customers
worldwide either directly or through third-party distributors.
Fiscal Periods
The Company's fiscal year is comprised of 52 or 53 weeks, ending on the Saturday
closest to June 30. Fiscal 2008 and 2007 were each comprised of 52 weeks,
whereas Fiscal 2006 was comprised of 53 weeks.
References to Fiscal 2008, Fiscal 2007 and Fiscal 2006 in this section are to
the fiscal years ended June 28, 2008, June 30, 2007 and July 1, 2006,
respectively.
For reference purposes, the Company's Fiscal 2008 quarters are defined as the
quarter ended: September 29, 2007 ("First Quarter Fiscal 2008"), December 29,
2007 ("Second Quarter Fiscal 2008"), March 29, 2008 ("Third Quarter Fiscal
2008"), and June 28, 2008 ("Fourth Quarter Fiscal 2008"). Also for reference
purposes, the Company's fiscal year ending on June 27, 2009 is designated as
"Fiscal 2009."
Reverse Split of Common Stock
On October 26, 2006, the Board approved, without action by the shareholders of
the Company, a Certificate of Amendment to the Company's Certificate of
Incorporation to implement a one-for-five split of the Company's Common Stock
with an effective date of November 21, 2006. On the effective date of the
reverse split, each five shares of issued Common Stock (including treasury
shares and shares held in trust) were converted automatically into one share of
Common Stock. The number of authorized shares of the Company's Common Stock was
reduced from 100,000,000 shares to 20,000,000 shares. All Common Stock shares
and per-share and related stock option amounts have been retroactively adjusted
for the reverse stock split in the accompanying consolidated financial
statements and footnotes.
Principles of Consolidation
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the United States of
America and include the accounts of the Company. All significant intercompany
balances and transactions have been eliminated.
53
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. The more
significant of the Company's estimates includes sales returns and allowances,
provision for bad debts, inventory valuation charges, realizability of
intangibles, realizability of deferred tax assets, and accounting for litigation
and settlements, among others.
Foreign Currency Transactions
The Company operates on a worldwide basis and its results may be adversely or
positively affected by fluctuations of various foreign currencies against the
U.S. Dollar, specifically, the Canadian Dollar, European Euro, British Pound
Sterling, PRC Renminbi, Hong Kong Dollar and the Japanese Yen. Although certain
net sales to customers and purchases of certain components and services are
transacted in local currencies, each of the Company's foreign subsidiaries
purchases substantially all of its finished goods inventories in U.S. Dollars.
Therefore, the Company has determined the U.S. Dollar is the functional currency
for all of its subsidiaries. The accounting records for subsidiaries that are
maintained in a local currency are remeasured into the U.S. Dollar. Accordingly,
most non-monetary balance sheet items and related income statement accounts are
remeasured from the applicable local currency to the U.S. Dollar using average
historical exchange rates, producing substantially the same result as if the
entity's accounting records had been maintained in the U.S. Dollar. Adjustments
resulting from the remeasurement process are recorded into earnings. Gains or
losses resulting from foreign currency transactions and remeasurement are
included in "Other income, net" in the accompanying consolidated statements of
operations. For Fiscal 2008, Fiscal 2007 and Fiscal 2006 included in "Other
income, net" in the accompanying consolidated statements of operations are
approximately $0.3 million, $ 0.1 million and $0.3 million, respectively, of net
foreign currency losses.
Hedging Activities
During Fiscal 2008, Fiscal 2007 and Fiscal 2006, 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 2008, there were two such
customers. See Note 20, Geographic Area and Significant Customer Information.
Estimated Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents; restricted cash; short-term
investments; accounts receivable, net; short-term borrowings under credit or
revolving facilities; accounts payable; and accrued expenses approximate fair
value because of their liquidity, short duration to maturity or short repayment
term. Because judgment is required in interpreting market data to develop
estimates of fair value, the
54
estimates are not necessarily indicative of the amounts that could be realized
or would be paid in a current market exchange. The effect of using different
market assumptions or estimation methodologies may be material to the estimated
fair value amounts.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of
three months or less when purchased to be cash equivalents.
Restricted Cash
The Company's financing facilities require a minimum cash deposit as security in
the amount of $6.2 million for borrowings outstanding under its revolving demand
financing facilities. The restricted cash amount is classified as a current
asset in the accompanying consolidated balance sheets since the borrowings it
secures are classified as a current liability. The total amount of restricted
cash was $6.2 million as of June 28, 2008 and June 30, 2007, respectively.
Investments
At June 28, 2008 and June 30, 2007, the Company's "Short-term investments" and
"Long-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 2008, the Company recorded a $5.1
million unrealized loss related to its auction rate debt securities. During
Fiscal 2007 and 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. Investment income of $1.7 million, $1.9 million and $1.5 million
related to the investments is included in "Other income, net" for Fiscal 2008,
Fiscal 2007 and Fiscal 2006, 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. See Note 4, Investments.
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 6,
Inventories.
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 2008,
Fiscal 2007 and Fiscal 2006 was approximately $3.0 million, $3.5 million and
$4.8 million, respectively. See Note 7, Property, Plant and Equipment, Net and
Note 18, Other Charges.
55
Useful Lives
Asset Class (in years)
----------- ----------
Buildings and improvements 30-50
Equipment, including tooling 1-10
Office furniture and equipment 3-7
Transportation equipment 5-7
Leasehold improvements 3-11
Intangible Assets
Identifiable intangible assets that have finite useful lives are amortized over
their useful lives. The Company's amortizable intangible assets include patents,
trademarks and licenses and their respective costs are amortized on a
straight-line basis over their estimated useful lives. See Note 8, Other Assets,
and Note 18, Other Charges.
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 and other 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 operating losses during
Fiscal 2008, Fiscal 2007 and Fiscal 2006, a potential impairment indicator, it
performed an impairment test of its long-lived and other assets as of June 28,
2008, June 30, 2007 and July 1, 2006. 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 and other assets for each year tested. 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 and other assets 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. As a result of the Company's impairment test, it recorded asset
impairment charges of $5.9 million in the accompanying consolidated statements
of operations during Fiscal 2008. See Note 7, Property, Plant and Equipment,
Net, Note 8, Other Assets and Note 18, Other Charges.
56
Revenue Recognition
The Company recognizes revenue, in accordance with Staff Accounting Bulletin
("SAB") No. 101, Revenue Recognition in Financial Statements, as amended by SAB
No. 104, Revenue Recognition: Corrected Copy, when title and risk of loss are
transferred to the customer, the sales price is fixed or determinable,
persuasive evidence of an arrangement exists, and collectibility is probable.
Title and risk of loss generally transfer when the product is delivered to the
customer or upon shipment, depending upon negotiated contractual arrangements.
Sales are recorded net of anticipated returns which the Company estimates based
on historical rates of return, adjusted for current events as appropriate, in
accordance with Statement of Financial Accounting Standard No. 48, Revenue
Recognition When Right of Return Exists ("SFAS No. 48"). If actual future
returns are higher than estimated, then net sales could be adversely affected.
Shipping, Handling and Related Costs
The Company incurred shipping, handling and related costs of approximately $1.5
million, $2.0 million and $3.1 million during Fiscal 2008, Fiscal 2007 and
Fiscal 2006, respectively, which are included in the accompanying consolidated
statements of operations under the caption "Selling expenses." Shipping,
handling and related costs incurred by the Company to ready products for sale
(i.e., freight, duty and custom charges incurred to deliver products to the
Company's manufacturing facility and warehouses) are included in the
accompanying consolidated statements of operations under the caption "Cost of
products sold."
Product Design and Development Costs
Product design and development costs, which include costs in connection with new
product development, product design, fundamental and exploratory research,
process improvement, product use technology, and product quality assurance, are
part of the production process and are expensed as incurred. Certain of the
Company's products are developed, designed and engineered by its own engineers
in the Company's facilities located in Hong Kong and the PRC. The Company
incurred $2.2 million, $2.5 million and $3.8 million during Fiscal 2008, Fiscal
2007 and Fiscal 2006, respectively, for product design and development. These
costs are included in the accompanying consolidated statements of operations
under the caption, "Cost of products sold."
Sales Allowances
The Company may enter into arrangements to offer certain pricing discounts and
allowances that do not provide an identifiable separate benefit or service. In
accordance with Emerging Issues Task Force Issue No. 01-09, Consideration Given
by a Vendor to a Customer (Including a Reseller of the Vendor's Products) ("EITF
Issue No. 01-09"), the Company records these pricing discounts and allowances as
a reduction of sales. Advertising and promotional costs, which include
advertising allowances and other discounts, have been expensed as incurred. In
accordance with EITF Issue No. 01-09, which addresses the statement of
operations classification of consideration between a vendor and a retailer, the
Company records certain variable selling expenses, including advertising
allowances, other discounts and other allowances, as a reduction of sales. The
Company may enter into arrangements to provide certain free products. In
accordance with EITF Issue No. 01-09, the Company records the cost of free
products ratably into cost of products sold based upon the underlying revenue
transaction.
Share-Based Compensation Expense
The Company has four share-based employee compensation plans, which are
described more fully in Note 13, Stock Option Plans. Effective July 3, 2005, the
Company adopted the fair value recognition provisions of Statement of Accounting
Standards ("SFAS") No. 123R, "Share-Based Payment," as
57
interpreted by Financial Accounting Standards Board ("FASB") Staff Positions No.
123R-1, 123R-2, 123R-3, 123R-4, 123R-5 and 123R-6. The Company's loss before
income taxes for the years ended June 28, 2008, June 30, 2007 and July 1, 2006
includes approximately $8,000, $61,000 and $275,000, respectively, of
share-based compensation expense.
The total income tax benefit recognized in the consolidated statement of
operations for the share-based compensation arrangements was $0 for each of
Fiscal 2008, Fiscal 2007 and Fiscal 2006. The Company considers all of its
share-based compensation expense as a component of general and administrative
expenses in the accompanying consolidated statements of operations. In addition,
no amount of share-based compensation was capitalized as part of capital
expenditures or inventory for Fiscal 2008, Fiscal 2007 and Fiscal 2006.
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 (Loss) Income
Comprehensive income in accordance with SFAS No. 130, Reporting Comprehensive
Income, ("SFAS No. 130") includes net (loss) income adjusted for certain
revenues, expenses, gains and losses that are excluded from net (loss) income
under accounting principles generally accepted in the United States of America.
During Fiscal 2008, Fiscal 2007 and Fiscal 2006, the Company's comprehensive
(loss) was $(17.7) million, $(11.7) million and $(19.6) million, respectively.
During Fiscal 2008, the Company recorded a $5.1 million unrealized loss related
to its auction rate debt securities. The Company did not have any items of other
comprehensive income or (loss) during Fiscal 2007 and Fiscal 2006.
(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 2008 (0 shares),
Fiscal 2007 (75,532 shares) and Fiscal 2006 (0 shares). In Fiscal 2008, Fiscal
2007 and Fiscal 2006, potentially dilutive securities, comprised of options to
purchase 18 shares, 39,896 shares and 67,470 shares of Common Stock,
respectively, were not included in the calculation of diluted loss per share
because their impact was antidilutive.
For Fiscal 2007, the weighted average effect of the 66,202 shares for which
delivery was deferred under the Company's Deferred Delivery Plan was included in
the denominator of both the basic and diluted loss per share calculations. For
Fiscal 2006, the weighted average effect of the 101,811 shares for which
delivery was deferred under the Company's Deferred Delivery Plan, was included
in the denominator of both basic and diluted loss per share calculations. See
Note 12, Deferred Share Arrangement.
Recently Issued Accounting Pronouncements
In October 2008, the Financial Accounting Standards Board ("FASB") issued FASB
Staff Position (FSP") FAS 157-3 that clarifies the application of Statement of
Financial Accounting Standards ("SFAS")
58
No. 157 in a market that is not active. FSP No. FAS 157-3 is effective October
2008, including prior periods for which financial statements have not been
issued. The adoption of FSP No. FAS 157-3 did not have a material impact on our
consolidated financial statements.
In February 2008, the FASB issued FSP 157-2 that delays the effective date of
SFAS No. 157 for nonfinancial assets and nonfinancial liabilities until fiscal
years beginning after November 15, 2008 and interim periods within those fiscal
years.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements, an Amendment of ARB No. 51" ("SFAS No. 160").
SFAS No. 160 clarifies the accounting for noncontrolling interests and
establishes accounting and reporting standards for the noncontrolling interest
in a subsidiary, including classification as a component of equity. SFAS No. 160
is effective for fiscal years beginning after December 15, 2008. The Company
does not currently have any minority interests.
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations" (SFAS
No. 141(R)"), which replaces SFAS No. 141. SFAS No. 141(R) requires assets and
liabilities acquired in a business combination, contingent consideration, and
certain acquired contingencies to be measured at their fair values as of the
date of acquisition. SFAS No. 141(R) also requires that acquisition-related
costs and restructuring costs be recognized separately from the business
combination. SFAS No. 141(R) is effective for fiscal years beginning after
December 15, 2008 and will be effective for business combinations entered into
after January 1, 2009.
In May 2007, the FASB issued FSP No. FIN 48-1, Definition of Settlement in FASB
Interpretation No.48 ("FSP No. FIN 48-1"), which provides guidance on how an
enterprise should determine whether a tax position is effectively settled for
the purpose of recognizing previously unrecognized tax benefits. The guidance in
FSP No. FIN 48-1 must be applied upon the initial adoption of "FIN 48" (as
defined below). The adoption of FSP No. FIN 48-1 did not have a material impact
on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115," ("SFAS No. 159") which provides companies with an option to
report selected financial assets and liabilities at their fair values. The
election is made on an instrument-by-instrument basis and is irrevocable. If the
fair value option is elected for an instrument, FASB No. 159 specifies that all
subsequent changes in fair value for that instrument must be reported in
earnings. FASB No. 159 is effective as of the beginning of an entity's first
fiscal year that begins after November 15, 2007, which for us is our fiscal year
beginning June 29, 2008.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements ("SFAS
No. 157"). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value under generally accepted accounting principles and expands
disclosure about fair value measurements. SFAS No. 157 applies under other
accounting pronouncements that require or permit fair value measurements, the
FASB having previously concluded in those accounting pronouncements that fair
value is the relevant measurement attribute. Accordingly, SFAS No. 157 does not
require any new fair value measurements. SFAS No. 157 is effective for fiscal
years beginning after November 15, 2007. The adoption of SFAS No. 157 will not
have a material impact on our consolidated financial statements.
In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes, an interpretation of FAS 109, Accounting for Income Taxes"
("FIN 48"), to create a single model to address accounting for uncertainty in
income tax positions. FIN 48 clarifies the accounting for income taxes by
prescribing a minimum probability threshold a tax position must meet to be
recognized in the financial statements. FIN 48 also provides guidance on the
measurement, derecognition and classification of recognized tax benefits,
interest and penalties, accounting for interim periods and the transition of the
59
accounting method upon the adoption of FIN 48. FIN 48 is effective for years
beginning after December 15, 2006. Accordingly, we adopted FIN 48 effective as
of July 1, 2007. The effect of the adoption is disclosed in Note 15 -Income
Taxes.
Reclassifications
Certain amounts in prior years have been reclassified to conform to the current
year presentation.
NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION
(in thousands)
Fiscal Year
------------------------------
2008 2007 2006
---- ---- ----
Cash paid for interest $274 $166 $184
==== ==== ====
Cash paid for income taxes $357 $ 26 $134
==== ==== ====
Non-Cash Investing Activities:
Deferred Share Arrangement 2008 2007 2006
----- ----- -----
Deferred share arrangement
obligation to participant $(413) $(211) $ --
Common stock received
and held in trust 413 211 --
----- ----- -----
$ -- $ -- $ --
===== ===== =====
See Note 12, Deferred Share Arrangement for a description of the deferred share
arrangement transactions in Fiscal 2008, Fiscal 2007 and Fiscal 2006.
NOTE 4 - INVESTMENTS
(in thousands)
The Company's short-term investments and long-term investments consist of the
following debt securities:
Auction-rate Securities June 28, June 30,
2008 2007
-------- -------
Cost $ 23,600 $30,475
Unrealized loss (5,082) --
-------- -------
Estimated value $ 18,518 $30,475
======== =======
The Company's portfolio of auction rate securities are AAA rated, long-term debt
obligations secured by student loans, with approximately 100% of such collateral
being guaranteed by the U.S. Government under the Federal Family Education Loan
Program. Liquidity for these securities has been provided by an auction process
that resets the applicable interest rate at pre-determined intervals, usually
every 28-35 days. In the past, the auction process allowed investors to obtain
immediate liquidity, if needed, by selling the securities at face value. The
current disruptions in the credit markets have adversely affected the auction
market for these types of securities. As previously reported, during Fiscal
2008, the Company experienced failed auctions for certain of its auction rate
securities that have gone to auction resulting in the Company's inability to
sell those securities. The auction rate securities continue to pay interest at
default interest rates which are generally higher than the current market rate
and there has been no change in the ratings of these securities to date.
However, in certain instances the interest rate for some of the
60
Company's auction rate securities may reset to a zero percent interest rate, for
a period of time, due to a feature of the relevant formula for determining the
interest rate. To date, only a small percentage of the auction rate securities
have reset to a zero percent interest rate. These securities then may reset to a
higher interest rate in the future. In the event that a greater percentage of
the Company's auction rate securities reset to a zero percent interest rate and
do not subsequently reset to a higher interest rate, it could have a material
adverse effect on the Company's financial condition and results of operations
Available-for-sale securities are carried at fair value, with the unrealized
gains and losses, net of tax, if incurred, reported as a component of
accumulated other comprehensive loss in the stockholders' equity section or
recorded as an expense if the loss is other than temporary. The current market
for the auction rate securities held by the Company is uncertain. The Company
evaluated its entire auction-rate securities portfolio in accordance with
Financial Accounting Standard Board ("FASB"), FASB Staff Position ("FSP"),
Statement of Financial Accounting Standards ("SFAS") 115-1 and 124-1, The
Meaning of Other-Than-Temporary Investment and Its Application to Certain
Investments, to determine when an investment is considered impaired, whether
that impairment is other than temporary and the measurement of the loss. The
evaluation included a review of a variety of inputs, including (i) observable
market transactions for identical or similar investments at or subsequent to the
balance sheet date, (ii) pricing provided by the firm managing its investments,
and (iii) estimates derived internally utilizing a discounted cash flow
valuation model. As a result of this review, the Company determined that the
estimated value of its auction-rate securities at June 28, 2008 was less than
its carrying value and recorded an unrealized loss of approximately $5.1
million. The Company understands that issuers and financial markets are working
on alternatives that may improve liquidity although it is not yet clear when or
if such efforts will be successful. During Fiscal 2008, the Company received net
proceeds of $6.9 million from the sale of auction rate securities at 100% of par
value, of which $1.9 million was received after market uncertainties and
liquidity issues arose in the market for auction rate securities. Additionally,
the Company has experienced redemptions of approximately $1.8 million of its
auction-rate securities at 100% of par value subsequent to June 28, 2008 and has
consented to tender $2.1 million in par value of its auction rate securities
pursuant to an offer by the issuer to purchase such securities for approximately
$1.9 million. Currently, the Company has the ability and intent to hold its
auction-rate securities until a recovery of par value and does not consider its
auction-rate securities to be other-than-temporarily impaired at June 28, 2008.
If any of the issuers of the auction rate securities are unable to successfully
close future auctions and/or their credit ratings deteriorate and if the market
values of the Company's auction rate securities permanently decline, the Company
may be required to record an other-than-temporary impairment charge on these
investments. If the Company is required to record an other-than-temporary
impairment charge on these investments, it could have a material adverse effect
on the Company's financial condition.
It is possible that the potential lack of liquidity in the Company's auction
rate security investments could adversely affect the Company's liquidity and its
ability to fund its operations. The Company cannot predict whether future
auctions for its auction rate securities will be successful. The Company
continues to seek alternative short-term financing sources for reducing its
exposure to the auction rate market, but may not be able to identify any such
alternative. Although the Company currently has sufficient working capital to
finance its operations in the near term, if the Company's working capital is
insufficient in the future and the Company is not able to monetize some or all
of its auction rate securities at that time, it could have a material adverse
effect on the Company's ability to finance its future ongoing operations or
other activities.
61
NOTE 5 - ACCOUNTS RECEIVABLE, NET
(in thousands)
Accounts receivable, net consists of the following:
June 28, June 30,
2008 2007
-------- --------
Trade accounts receivable $ 11,176 $ 12,738
Less: allowances for sales returns,
discounts, and doubtful accounts (698) (2,036)
-------- --------
Total accounts receivable, net $ 10,478 $ 10,702
======== ========
NOTE 6 - INVENTORIES
(table in thousands)
Inventories consist of the following:
June 28, June 30,
2008 2007
-------- --------
Raw material, components
and work-in-process $ 4,866 $ 5,431
Finished goods 5,565 10,375
-------- --------
Total inventories $ 10,431 $ 15,806
======== ========
During Fiscal 2008, Fiscal 2007 and Fiscal 2006, the Company recorded inventory
related pre-tax charges of approximately $0.4 million, $0.4 million and $1.6
million, respectively. The inventory charges were primarily attributable to
price declines and increased competitive pricing pressures. For Fiscal 2008, the
inventory related pre-tax charges had the effect of decreasing inventory by $0.4
million and increasing cost of products sold by $0.4 million. For Fiscal 2007,
the inventory related pre-tax charges had the effect of decreasing inventory by
$0.4 million and increasing cost of products sold by $0.4 million. For Fiscal
2006, the inventory related pre-tax charges had the effect of decreasing
inventory by $1.6 million and increasing cost of products sold by $1.6 million.
62
NOTE 7 - PROPERTY, PLANT AND EQUIPMENT, NET
(in thousands)
Property, plant and equipment, net consist of the following:
June 28, June 30,
2008 2007
-------- --------
Buildings and improvements $ -- $ 6,804
Equipment, including tooling 19,541 34,065
Office furniture and equipment 9,220 12,891
Transportation equipment 509 509
Leasehold improvements 1,828 5,474
-------- --------
31,098 59,743
Less: accumulated depreciation and amortization (30,230) (49,127)
-------- --------
Total property, plant and equipment, net $ 868 $ 10,616
======== ========
During Fiscal 2008, the Company recorded an impairment charge of $2.9 million to
lower the carrying value of certain property, plant and equipment and
reclassified $3.8 million carrying value of certain land, building and
improvements held for sale to current assets in the accompanying balance sheets
at June 28, 2008. The certain land, building and improvements met the criteria
to be considered held for sale under SFAS No. 144, Accounting for Impairment of
Disposal of Long-Lived Assets at June 28, 2008. As the net carrying value of the
certain land, building and improvements was lower than its respective estimated
fair value less costs to sell, there was no impairment charge recorded in Fiscal
2008 upon management's commitment to dispose of the assets. The Company
currently anticipates that the sale of these assets will occur with the next
twelve months. During Fiscal 2006, the Company recorded an impairment charge of
$0.8 million to lower the carrying value of certain machinery. See Note 18,
Other Charges.
NOTE 8 - OTHER ASSETS
(tables in thousands)
Other assets consist of:
June 28, June 30,
2008 2007
-------- --------
Patents, trademarks and licenses, net $ 189 $ 3,347
Other 242 104
-------- --------
Total other assets $ 431 $ 3,451
======== ========
Patents, trademarks, and licenses, net consist of the following:
Useful Lives June 28, June 30,
(in Years) 2008 2007
------------ -------- --------
Patents, trademarks and licenses 2 $ 10,348 $10,109
Less: accumulated amortization (10,159) (6,762)
-------- -------
Patents, trademarks and licenses, net $ 189 $ 3,347
======== =======
During Fiscal 2008, the Company recorded an asset impairment charge of $3.0
million to lower the carrying value of a certain license. See Note 16,
Commitments and Contingencies, License and Royalty Agreements.
63
As of June 28, 2008, the aggregate weighted average amortization period for
patents, trademarks, and licenses was approximately two years. For Fiscal 2008,
Fiscal 2007 and Fiscal 2006, intangible asset amortization expense was $0.4
million, excluding the $3.0 million asset impairment charge, $0.5 million and
$0.4 million, respectively. Estimated future aggregate annual amortization
expense for each of the next five years is as follows:
Estimated Aggregate
Fiscal Year Amortization Expense
--------------- --------------------
2009 95
2010 94
See Note 16, Commitments and Contingencies for a description of license and
royalty agreements and Note 18, Other Charges for impairment charges related to
certain licenses.
NOTE 9 - SHORT-TERM BORROWINGS AND FINANCING FACILITIES
Hong Kong Financing Facilities
During Fiscal 2008, Concord Camera HK Limited ("CCHK"), the Company's Hong Kong
subsidiary, (i) reduced the demand financing facility with Dah Sing Bank,
Limited ("Dah Sing") by approximately US$1.3 million from approximately US$2.3
million to US$1.0 million and (ii) terminated the approximately US$1.1 million
demand financing facility with Shanghai Commercial Bank Ltd ("SCB") in
conjunction with the sale of the Hong Kong office property owned by CCHK that
was securing the SCB financing facility. In addition, CCHK has a US$5.2 million
demand financing facility with The Hongkong and Shanghai Banking Corporation
("HSBC") consisting of an import facility of approximately US$4.7 million and a
guarantee facility of 380,000 Euros (equal to approximately US$0.5 million). The
HSBC and Dah Sing financing facilities provide CCHK with an aggregate borrowing
capacity of approximately US$6.2 million. As security for the financing
facilities, among other things, CCHK provided to HSBC and Dah Sing pledged
deposits in the amount of approximately US$5.2 million and US$1.0 million,
respectively. The HSBC financing facility is subject to review by HSBC by June
15, 2009 and the Dah Sing financing facility is subject to review by Dah Sing at
any time.
The Dah Sing facilities may be used by CCHK for opening letters of credit, draft
loans, negotiating export letters of credit with a letter of guarantee, outward
bills loans, trust receipts, invoice financing, packing loans and/or advances
against receivables. The Dah Sing facilities bear interest at variable rates, as
follows: 1.5% per annum over the Hong Kong Interbank Offered Rate on facilities
denominated in Hong Kong Dollars; 1.5% per annum over the London Interbank
Offered Rate on facilities denominated in U.S. Dollars; and 1.5% per annum over
Dah Sing's Base Rate on facilities denominated in any other foreign currency.
The HSBC facilities 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.
64
United States Financing Facilities
On October 16, 2007, Concord Keystone Sales Corp. ("Keystone"), the Company's
United States wholly-owned subsidiary, entered into a Financing Agreement (the
"Agreement") with The CIT Group/Commercial Services, Inc. ("CIT") for a $15
million secured revolving line of credit (the "CIT Facility"), which includes a
letter of credit ("L/C") sub-line of $10 million. The CIT Facility is secured by
a first priority lien and security interest in CIT's favor on, among other
things, Keystone's accounts receivable, other payment rights and inventory.
The borrowing base under the CIT Facility consists of (i) 90% of the eligible
accounts receivable plus (ii) the lesser of (a) 60% of the sum of the eligible
inventory and the eligible in-transit inventory or (b) 90% of the eligible
accounts receivable, minus (iii) the amount of the availability reserves. All
loans, advances and extensions of credit will be made at CIT's discretion.
Interest on the CIT Facility is payable monthly in arrears at the prime rate
announced by JP Morgan Chase Bank plus 0.25% per annum, or in Keystone's
discretion, at the one-month London Interbank Offered Rate (LIBOR) plus 2.25%
per annum. The current term of the CIT Facility expires on October 16, 2009,
with annual renewals thereafter, unless terminated by either party upon 30 days'
written notice before the expiration of the initial term or any renewal term. In
addition, Keystone may terminate the Agreement at any time upon 30 days' written
notice to CIT. See Note 22, Subsequent Events.
Upon the occurrence of certain events of default, including the Company ceasing
to own and control 100% of Keystone's voting shares, CIT's obligation under the
Agreement to make revolving loans and assist Keystone with opening L/Cs shall
cease and CIT may declare all obligations immediately due and payable (including
principal and accrued but unpaid interest on all then outstanding obligations).
On March 4, 2008, Keystone received notice from CIT that an event of default
existed under the CIT Facility as a result of Keystone's failure to provide CIT
with the Company's financial information for the Second Quarter Fiscal 2008. As
previously reported, the Company delayed the filing of its Quarterly Report on
Form 10-Q for the Second Quarter Fiscal 2008. The Company subsequently filed its
Quarterly Report on Form 10-Q for the Second Quarter Fiscal 2008 on March 31,
2008. As a result of this event of default, CIT notified Keystone that it would
increase the availability reserve under the CIT Facility, thereby decreasing the
borrowing base, by $500,000. CIT has not exercised its right to accelerate
Keystone's obligation to repay the CIT Facility and CIT continues to make loans
to Keystone under the CIT Facility.
In the event Keystone was to utilize all or a portion of the CIT Facility and
CIT was to demand repayment at a time when the Company did not otherwise have
sufficient borrowing capacity or liquid assets that would enable Keystone to
repay the CIT Facility in full, CIT would be entitled to foreclose on Keystone's
pledged inventory. This could result in Keystone's inventory being sold at a
significant discount to its carrying value and could have a material adverse
effect on the Company's liquidity, ability to fund its operations, results of
operations and financial condition.
Effective April 17, 2008, the Company entered into an Express Creditline Loan
Agreement (the "Loan Agreement") with Citigroup Global Markets, Inc.
("Citigroup") for a $9 million secured revolving credit line (the "Citigroup
Facility"). Advances under the Citigroup Facility may only be used by the
Company to finance business operations and general working capital and cannot be
used to purchase, carry or trade in securities, or reduce or retire indebtedness
incurred to purchase, carry or trade in securities. In addition to the $9
million credit line for advances, the Citigroup Facility provides for the
accrual of up to $1 million of interest, resulting in an aggregate credit limit
of $10 million (the "Loan Limit") under the Citigroup Facility. Effective
October 20, 2008, the Loan Limit was increased to $10,925,000. The Citigroup
Facility is secured by a first priority lien and security interest in the
Company's remaining auction rate securities that have experienced failed
auctions (the "Collateral").
Under the terms of the Loan Agreement, interest on amounts outstanding under the
Citigroup Facility was payable monthly at the Open Federal Funds rate plus 1.50%
per annum from April 17, 2008 through
65
October 21, 2008. In order to maintain its eligibility for this interest rate,
the Company was to continue to attempt to sell the Collateral at future
auctions. Effective October 22, 2008, the interest rate was increased to the
Open Federal Funds rate plus 3.25% per annum. Citigroup may, in its sole
discretion and without cause, demand full or partial payment of any outstanding
balance under the Citigroup Facility or reduce the Loan Limit at any time. The
Loan Agreement may be terminated by either party upon thirty calendar days prior
written notice to the other party.
At June 28, 2008 and June 30, 2007, the Company had $3.2 million and $2.8
million, respectively, in short-term borrowings outstanding under the Hong Kong
financing facilities described above. The weighted average borrowing rates on
the short-term borrowings as of June 28, 2008 and June 30, 2007, were 6.3% and
6.85%, respectively.
At June 28, 2008 and June 30, 2007, the Company had $14.4 million and $0.0
million, respectively, in short-term borrowings outstanding under the United
States Financing Facilities. The weighted average borrowing rates on the
short-term borrowings as of June 28, 2008 and June 30, 2007 were 4.7% and 0.0%,
respectively.
At June 28, 2008 and June 30, 2007, the Company had $1.5 million and $2.1
million, respectively, in letters of credit outstanding, which were issued
primarily to certain suppliers to guarantee payment for our purchase orders with
such suppliers. The letters of credit are issued under the Company's import
facilities that have been granted to CCHK.
NOTE 10 - OTHER LONG-TERM LIABILITIES
(tables in thousands)
Other long-term liabilities consist of the following:
June 28, June 30,
2008 2007
-------- --------
Licensing and royalty related obligations $1,096 $1,257
Other -- 185
------ ------
Total other long-term liabilities $1,096 $1,442
====== ======
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.
On October 26, 2006, the Board of Directors of the Company approved, without
action by the shareholders of the Company, a Certificate of Amendment to the
Company's Certificate of Incorporation to implement a one-for-five split of the
Company's Common Stock with an effective date of November 21, 2006. On the
effective date of the reverse split, each five shares of issued Common Stock
(including treasury shares and shares held in trust) were converted
automatically into one share of Common Stock, resulting in the total number of
shares outstanding being reduced from 28,859,385 shares to 5,771,877 shares, and
the number of authorized shares of the Company's Common Stock reduced from
100,000,000 shares to 20,000,000 shares. All Common Stock shares and per-share
and related stock option amounts have been retroactively adjusted for the
reverse stock split in the accompanying consolidated financial statements and
footnotes.
66
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 27,254 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 62,862 shares of Common Stock ("2005 Delivery Plan Transaction"). Upon
consummation of the 2005 Delivery Plan Transaction, the 27,254 Payment Shares
were classified as "Treasury stock" and recorded at a cost of $373,375. The
Company issued 62,862 new shares of Common Stock and classified them as "Common
stock" at a cost of $373,375, of which 27,254 shares were issued to the Chairman
in exchange for the Payment Shares. The remaining 35,609 shares, the delivery of
which was deferred by the Chairman, were issued to a rabbi trust. The 35,609
shares held in the rabbi trust were recorded at a cost of $211,500 and were
classified as "Common stock held in trust." The corresponding liability to the
Chairman was recorded as $211,500 and was classified as "Deferred share
arrangement" in the stockholders' equity section of the accompanying
consolidated balance sheets. On August 9, 2006, the Chairman took delivery of
the 35,609 shares held in trust upon expiration of the two-year deferral period,
reducing the deferred share arrangement in the stockholders' equity section by
$211,500.
Pursuant to an election previously made under the Deferred Delivery Plan on July
14, 2003, the Chairman exercised an option to purchase 77,400 shares of Common
Stock and tendered 11,198 fully paid and owned shares of Common Stock to the
Company in payment of the exercise price ("2004 Delivery Plan Transaction").
Upon the consummation of the 2004 Delivery Plan Transaction, the 11,198 Payment
Shares were classified as "Treasury stock" and recorded at a cost of $482,625.
The Company issued 77,400 new shares of Common Stock and classified them as
"Common stock" at a cost of $482,625, of which 11,198 shares were issued to the
Chairman in exchange for the Payment Shares. The remaining 66,202 shares, the
delivery of which was deferred by the Chairman, were issued to a rabbi trust.
The 66,202 shares held in the rabbi trust were recorded at a cost of $412,825
and were classified as "Common stock held in trust." The corresponding liability
to the Chairman was recorded at $412,825 and was classified as "Deferred share
arrangement" in the stockholders' equity section of the accompanying
consolidated balance sheets at June 30, 2007. On July 2, 2007, the Chairman took
delivery of the 66,202 shares held in trust upon the expiration of the extended
deferral period, reducing the deferred share arrangement and increasing the
common stock held in trust balance in the stockholders' equity section by
$412,825.
67
NOTE 13 - STOCK OPTION PLANS
On October 24, 2007, subject to shareholder approval (which was obtained at the
annual meeting of shareholders on December 13, 2007), the Company adopted the
Fiscal 2008 Incentive Plan ("Fiscal 2008 Plan") that provides for a maximum
number of 400,000 shares of common stock for awards issuable to executive
officers, other than the Company's current CEO, Ira B. Lampert, who voluntarily
opted not to receive awards under the Fiscal 2008 Plan. The Fiscal 2008 Plan
permits the Compensation Committee to grant, at its discretion, a variety of
common stock awards on a stand-alone, combination, or tandem basis. The Fiscal
2008 Plan expires in December 2017. To date, no awards have been granted under
the Fiscal 2008 Plan.
On September 4, 2002, the Company adopted a non-qualified stock option plan that
provides for a maximum number of 100,000 shares of Common Stock for awards
issuable to new employees ("SEP 2002 Plan"). The SEP 2002 Plan permits the
Compensation Committee or the Board to grant, at their discretion, a variety of
Common Stock awards on a stand-alone, combination, or tandem basis. The SEP 2002
Plan expires in September 2012.
On April 26, 2002, the Company adopted a non-qualified stock option plan that
provides for a maximum number of 100,000 shares of Common Stock for awards
issuable to non-officer employees, new employees, and consultants ("APR 2002
Plan"). The APR 2002 Plan permits the Compensation Committee or the Board to
grant, at their discretion, a variety of Common Stock awards on a stand-alone,
combination or tandem basis. The APR 2002 Plan expires in April 2013.
The Company's 1993 Incentive Plan permitted the Compensation Committee to grant
a variety of Common Stock awards. As of June 28, 2008, 86,407 shares of Common
Stock were outstanding in the amended 1993 Incentive Plan. The 1993 Incentive
Plan expired on December 1, 2003.
In addition, the Company, from time to time, has granted stock options to
certain individuals as an inducement to employment.
Option awards are granted with an exercise price equal to the market price of
the Company's stock at the date of grant. For all plans, options granted have a
maximum term of ten years and generally vest annually over a three- to five-year
period, provided that the optionee remains a full-time employee of the Company.
The Company uses the Black-Scholes-Merton option valuation model to calculate
the fair value of a stock option grant. The share-based compensation expense
recorded in Fiscal 2008, Fiscal 2007 and 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 2008 Fiscal 2007
----------- -----------
Expected volatility 59.6%-60.5% 61.9%-64.7%
Expected dividend yield 0% 0%
Expected term (in years) 3 4
Risk-free interest rate 3.6% 4.6%-4.8%
68
A summary of stock option activity under the Company's stock option plans as of
June 28, 2008, 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 June 30, 2007 203,951 $ 23.24
Granted 8,000 $ 4.04
Exercised -- $ --
Canceled 72,267 $ 17.58
-------
Outstanding at June 28, 2008 139,684 $ 25.07 2.3 $3,502,000
=======
Exercisable at June 28, 2008 131,284 $ 26.33 2.1 $3,457,000
=======
The weighted average grant-date fair value of options granted during Fiscal
2008, Fiscal 2007 and Fiscal 2006 was $2.07, $2.36 and $3.57 respectively. No
options were exercised during Fiscal 2008 and Fiscal 2006. During Fiscal 2007,
75,532 options were exercised. The total intrinsic value of options exercised
during Fiscal 2008, Fiscal 2007 and Fiscal 2006 was approximately, $0, $1,511
and $0, 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.
A summary of the status of the Company's nonvested shares as of June 28, 2008,
and changes during Fiscal 2008 is presented below:
Weighted
Average Grant
Nonvested Stock Options Shares Date Fair Value
-------------------------- -------- ---------------
Nonvested at June 30, 2007 25,293 $3.68
Granted 8,000 $2.07
Vested (9,273) $3.74
Canceled (15,620) $3.19
-------
Nonvested at June 28, 2008 8,400 $3.02
=======
As of June 28, 2008, there was approximately $21,000 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 2.8 years. The total fair
value of stock options vested during Fiscal 2008, Fiscal 2007 and Fiscal 2006
was approximately $35,000, $132,000 and $506,000, 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 may make additional
discretionary contributions if the Company achieves certain profitability
requirements.
During Fiscal 2007, the Company contributed a 2% matching contribution to the
401(k) plan in the amount of $65,000 for employees who were participants in the
plan from July 1, 2005 through June 30, 2006. For Fiscal 2008 and Fiscal 2006,
the Company did not make any contribution to the 401(k) plan.
69
NOTE 15 - INCOME TAXES
(in thousands)
Loss before income taxes in the accompanying consolidated statements of
operations consists of the following:
Fiscal Year
------------------------------------------
2008 2007 2006
-------- -------- --------
United States $ (1,453) $ 88 $ (1,224)
Foreign (11,952) (11,808) (18,280)
-------- -------- --------
Total $(13,405) $(11,720) $(19,504)
======== ======== ========
The (benefit) provision for income taxes is comprised of the following:
Fiscal Year
--------------------------
2008 2007 2006
----- ---- ----
Current:
United States federal and state $ 17 $ 6 $ 17
Foreign (815) -- 90
Deferred
United States federal and state -- -- --
Foreign -- -- --
----- ---- ----
$(798) $ 6 $107
===== ==== ====
70
Deferred income tax assets and liabilities reflect the net tax effects of (a)
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes and
(b) operating loss carryforwards. The tax effects of significant items
comprising the Company's deferred income tax assets and liabilities as of June
28, 2008 and June 30, 2007 were as follows:
Fiscal Year
---------------------
2008 2007
-------- --------
Deferred Income Tax Liabilities:
--------------------------------
Depreciation $ -- $ (65)
Other deferred tax liabilities -- (4)
-------- --------
Total deferred income tax liabilities $ -- $ (69)
-------- --------
Deferred Income Tax Assets:
---------------------------
Operating loss carryforwards $ 17,823 $ 17,205
Difference between book and tax basis of inventory 290 1,228
Compensation accruals 763 834
Reserves not currently deductible 9 114
Alternative minimum tax credit 227 227
Depreciation and amortization 1,467 231
Unrealized loss on auction rate securities 1,779 --
Contributions carryover 65 65
Other deferred income tax assets 21 --
-------- --------
Total deferred income tax assets 22,444 19,904
Less: valuation allowance (22,444) (19,835)
-------- --------
Net deferred income tax assets $ -- $ --
======== ========
Income attributable to Hong Kong business activities is taxed separately from
income attributable to the PRC business activities. The annual effective income
tax rate of the Company's Hong Kong subsidiary is 8.25%.
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
71
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 had an accumulated earnings deficit of
approximately $58.0 million as of June 28, 2008. Although we have an accumulated
earnings deficit related to most of our foreign subsidiaries, one of our foreign
subsidiaries has undistributed earnings. Historically, we do not provide for
U.S. federal and state income taxes on such undistributed earnings based on the
reinvestment of such earnings outside of the United States. For Fiscal 2008 and
Fiscal 2007, the Company recorded an income tax provision of $16,000 and $6,000,
respectively, related to income tax liabilities incurred for U.S. state taxes.
As of June 28, 2008, the Company had net operating loss carryforwards for U.S.
federal tax purposes of approximately $19.8 million. The net operating loss
carryforwards are scheduled to expire between 2010 and 2028. The U.S. net
operating loss carryforwards include a portion arising from the exercise of
stock options and will be credited to additional paid-in capital when the
related tax benefit is realized. Additionally, as of June 28, 2008, the Company
had approximately $58.0 million of net operating loss carryforwards related to
its foreign operations, of which $53.1 million relates to Hong Kong. A
significant portion of these net operating loss carryforwards have no expiration
dates.
As of June 28, 2008, 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 2008,
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 2008. 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 2008,
Fiscal 2007 and Fiscal 2006, the Company's effective income tax rate was 6.0%, 0
% and 0.6 % respectively. The Company's future effective income tax rate will
depend on the apportionment between domestic and foreign taxable income and
losses, the statutory rates of the related tax jurisdictions and any changes to
the valuation allowance.
72
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
-----------------------------
2008 2007 2006
------- ------- -------
Computed benefit at U.S. federal
statutory tax rate of 35% $(4,692) $(4,102) $(6,826)
Increase (decrease) in valuation allowance 709 (195) 1,127
Effect of foreign subsidiaries
subject to a different tax rate 3,026 3,049 5,013
Previously unrecorded provision 382 944 762
Permanent differences (217) 263 20
State income tax, net of federal
benefit 11 4 11
Statutory change in foreign
income tax rates 830 -- --
Impact of German income tax
settlement (815) -- --
Other (32) 43 --
------- ------- -------
(Benefit) provision for income taxes $ (798) $ 6 $ 107
======= ======= =======
In Fiscal 2008 and Fiscal 2007, the Company identified net adjustments totaling
$0.4 and $0.9 million, respectively, related to a prior year, primarily related
to U.S. operations. In Fiscal 2006, the Company identified net adjustments
totaling approximately $0.8 million related to the prior year, primarily related
to U.S. operations. These amounts were fully offset by changes in a valuation
allowance in each of Fiscal 2008, Fiscal 2007 and 2006 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.
Effective July 1, 2007, the Company adopted Financial Accounting Standards Board
("FASB") Interpretation No. 48, "Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109," ("FIN 48") which clarifies the
accounting and disclosure for uncertain tax positions. The Company previously
had accounted for tax contingencies in accordance with Statement of Financial
Accounting Standards No. 5, "Accounting for Contingencies."
As a result of the implementation of FIN 48, the Company recorded a $0.1 million
increase in the liability for unrecognized tax benefits, which was accounted for
as an increase in the July 1, 2007 accumulated deficit balance.
The following is a roll-forward of the Company's liability for income taxes
associated with unrecognized tax benefits:
(in millions)
Balance as of June 30, 2007 $1.0
Tax positions related to prior years:
Increase 0.1
Decreases (0.8)
Settlements (0.2)
----
Balance as of June 28, 2008 $0.1
====
The Company recognizes interest and penalties accrued related to unrecognized
tax benefits as components of its provision for income taxes. The Company had
approximately $25,000 for interest and
73
penalties associated with uncertain tax benefits accrued as of July 1, 2007.
Subsequent changes to accrued interest and penalties through June 28, 2008 have
not been significant.
The Company files U.S. Federal income tax returns as well as income tax returns
in various states and foreign jurisdictions. At the beginning of Fiscal 2008,
the Company was subject to examination by the Internal Revenue Service ("IRS")
for fiscal years 2005 through 2006, by the German Taxing Authorities for fiscal
years 2000 through 2005 and by taxing authorities in various state and other
foreign jurisdictions for fiscal years 2003 through 2007, with few exceptions.
During Fiscal 2008, the Company and the German Taxing Authorities settled the
net income tax liabilities resulting from an audit of the Company's German
subsidiary for fiscal years 2000 through 2005 in the amount of approximately
$0.1 million, inclusive of interest. Additionally, during Fiscal 2008, the
Company recognized approximately $0.1 million of net expense related to value
added taxes as part of the settlement with the German Taxing Authorities. In May
2008, the Company received notice from the IRS regarding the results of their
U.S. Federal income tax examination for fiscal years 2005 through 2006. The
examination resulted in no U.S. Federal income tax liability and an approximate
$1.5 million reduction in the Company's U. S. Federal net operating loss
carryforward.
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 lease expires on January 31, 2014. In
January 2008, the Company's subtenant filed for bankruptcy protection and, in
May 2008, the bankruptcy court approved the subtenant's rejection of the
sublease. In January 2008, the Company exercised its right to accelerate the
termination of the lease to January 31, 2009. The Company has engaged in
discussions with the landlord regarding a lease for a smaller portion of the
office space as of February 1, 2009. The Company also leases, but no longer
uses, a warehouse of approximately 13,700 square feet in Fort Lauderdale,
Florida, which was sublet as of January 7, 2005. The warehouse sublease provides
for rental income of approximately $11,000 per month, with annual increases of
3%, and expires on the expiration date of the Company's lease on January 31,
2014. The Company subleased the warehouse at the prevailing market rate which
was $0.1 million lower than the existing contractual rate. Accordingly, at June
28, 2008 and June 30, 2007, 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 leases 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 under
a lease expiring in November 2009 at a cost of approximately $5,050 per month
including rent and maintenance. On June 25, 2008, the Company sold its office
space on another floor of the same building.
The Company leases a warehouse for document storage comprised of approximately
1,760 square feet at Hing Yip Center, Room 1105, 72-76 Texaco Road, Tsuen Wan,
Hong Kong for approximately $770 per month including rent and maintenance under
a lease expiring November 30, 2008.
74
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 two employee dormitories (the "Dormitories") comprising approximately
42,000 square feet at a cost of approximately $4,300 per month. The lease will
be terminated as of November 30, 2008. The aggregate square footage of the
Company Facility and the Dormitories is approximately 600,000 square feet.
The current processing agreement with the PRC expires in October 2016. See Note
22, Subsequent Events. Pursuant to a land use agreement, the Company has the
title and right to use the land upon which the Company Facility is situated
through September 22, 2038. At the end of the term, title and ownership to the
land and Company Facility transfer to a PRC governmental agency. At that time,
the Company may be able to extend the usage term of the PRC land and
improvements thereon at then prevailing rates.
Other Jurisdictions
The leases for office space in the United Kingdom, France, Germany and Japan
were terminated as of July 31, 2008, May 31, 2007, December 15, 2006 and
September 29, 2006, respectively. The Company's lease for its facility in Canada
expired October 31, 2005. The Company relocated its Canadian warehousing
activity to a third-party service provider under a contract that was terminated
effective September 30, 2006.
Leases
Future minimum rental payments for operating leases as of June 28, 2008 are as
follows: (in thousands)
Fiscal Year
2009 $ 292
2010 20
2011 --
2012 --
2013 --
Thereafter --
------
Total minimum payments $ 312
======
Minimum payments have not been reduced by minimum sublease rentals of
approximately $72,000 due in the future under non-cancelable subleases.
Rental expense for operating leases of approximately $1.2 million, $1.4 million
and $1.8 million in the accompanying consolidated statements of operations was
incurred for Fiscal 2008, Fiscal 2007 and Fiscal 2006, respectively.
Employment Agreements and Executive SERPS
Effective as of July 1, 2005, the employment agreement between the Company and
Ira B. Lampert was amended (the "Lampert Agreement") to provide a four-year term
that expires on July 1, 2009 and to end the Company's obligation to make a
$500,000 annual contribution to a Supplemental Executive Retirement Plan and
Agreement ("SERP") adopted for the benefit of Ira B. Lampert. The Lampert
Agreement provides for an annual base salary of $900,000. Mr. Lampert
voluntarily reduced his base salary from $900,000 to $800,000 per annum for the
period from July 1, 2004 to June 30, 2005 and also
75
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. A
change in control under the Lampert Agreement includes, among other things, the
approval by the Company's shareholders of the Liquidation Proposal. If Mr.
Lampert is terminated for cause, or he voluntarily resigns, he will only receive
the Accrued Amounts and benefits provided in benefit plans.
Pursuant to the Lampert Agreement, the Company adopted a SERP for the benefit of
Ira B. Lampert (the "Lampert SERP"). Initially, $500,000 was credited to the
Lampert SERP account each year. These yearly credits were 100% vested and not
subject to forfeiture. Mr. Lampert voluntarily reduced the
76
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.
Beginning in fiscal 2000, as a result of the deferral of certain incentive
compensation awards, additional credits were made to the Lampert SERP for, among
other things, the LTCIP award described below. In August 2007, the remaining
vested account balance in the Lampert SERP was distributed to him, following
which Mr. Lampert had no undistributed nonqualified deferred compensation.
On November 5, 2008, the Lampert Agreement was amended to bring it into
compliance with Section 409A of the Internal Revenue Code of 1986, as amended
("Section 409A"). Current Internal Revenue Service regulations require
documentary compliance with Section 409A by January 1, 2009. The November 5,
2008 amendment to the Lampert Agreement does not provide any additional
compensation, benefits or other entitlements to Mr. Lampert or otherwise alter
any obligations under the Lampert Agreement.
The Company also has employment agreements with its other executive officers
that provide for annual salaries ranging from approximately $220,000 to
$275,000, plus certain other fringe benefits. These agreements prohibit the
executives from competing with the Company for one year following termination of
employment with the Company. These agreements contain, among other things,
termination provisions that may result in the Company being obligated to make
severance payments equal to one year's base salary plus certain other fringe
benefits.
In connection with grants of deferred compensation to five of its former and/or
current executive officers other than Ira B. Lampert, the Company adopted
various SERPs for the benefit of those executives. A total of $1,090,000 was
contributed to rabbi trusts established by the Company in connection with the
executive SERPs (other than the Lampert SERP), which ranged from $100,000 to
$550,000 per executive, before giving effect to deferred compensation awards
that were added to the SERPs. Generally, the amounts in the executive SERPs
vested in installments over a period of not less than three years, subject to
the executive's continued employment, and many provide for accelerated vesting,
in whole or in part, if the executive's employment is terminated by the Company
without cause. Additionally, Mr. Lampert and another executive officer elected
to defer compensation from time to time, pursuant to their respective SERP
agreements with the Company.
Each time the Company made an initial credit to an executive's account under a
SERP agreement, the Company simultaneously contributed an equal amount to a
trust established for the purpose of accumulating funds to satisfy the
obligations incurred by the Company pursuant to the SERP.
The SERP and other deferred compensation account balances, including investment
earnings, were recorded as a deferred compensation asset and the related vested
balances were recorded as a deferred compensation liability in the accompanying
consolidated balance sheets.
Deferred Long-Term Compensation
On August 6, 2003, the following former and/or current executive officers were
awarded the following amounts of contingent deferred compensation under the
Company's Amended and Restated 2002 Long Term Cash Incentive Plan ("2002 LTCIP")
with respect to the Fiscal 2002-2003 performance period (the "Deferred LTCIP
Awards"): (i) Ira B. Lampert, $670,474; (ii) Brian F. King, $335,237; (iii)
Keith L. Lampert, $389,629; (iv) Urs W. Stampfli, $274,021; and (v) Richard M.
Finkbeiner, $224,722. The Deferred LTCIP Awards to Keith L. Lampert and Urs W.
Stampfli vested, so long as the executive
77
continued to be employed by the Company, in three equal annual installments on
August 6, 2004, 2005 and 2006, or immediately upon: (i) a change of control of
the Company; or (ii) the executive's death or disability. The Deferred LTCIP
Awards to Brian King and Rick Finkbeiner were forfeited when their employment
terminated before any vesting had occurred. Ira B. Lampert voluntarily agreed to
delay the vesting of his Deferred LTCIP Award by one year, such that it vested
in three equal installments on August 6, 2005, 2006 and 2007 instead of August
6, 2004, 2005 and 2006. Otherwise, the Deferred LTCIP Award granted to Ira B.
Lampert had substantially the same terms and conditions as the other Deferred
LTCIP Awards; however, in addition to the events that will accelerate the
vesting of the other Deferred LTCIP Awards, it provides for immediate vesting in
the event of termination without cause, a constructive termination of employment
without cause, or the non-renewal of his employment contract. The Lampert SERP
and the other SERPs were all amended to include appropriate terms to govern the
Deferred LTCIP Awards. The Company contributed the foregoing amounts to trusts
established for the purpose of holding funds to satisfy the Company's
obligations under the Deferred LTCIP Awards. Pursuant to the Separation
Agreement between Mr. Keith Lampert and the Company, the vesting date of the
installment of his Deferred LTCIP Award that was to have vested on August 6,
2006, was accelerated to March 31, 2006, the effective date of the termination
of Mr. Keith Lampert's employment with the Company. See "Executive Separation
Agreements" below.
Deferred Compensation Distribution Election
Effective April 5, 2005, Ira B. Lampert and Keith L. Lampert, then the Company's
Executive Vice President and Chief Operating Officer, made elections to have
their vested deferred compensation account balances that were earned and vested
prior to December 31, 2004 under their respective Amended and Restated SERPs
paid to them in one lump sum payment on the business day following the first
anniversary of the effective date of the election. Messrs. Ira Lampert and Keith
Lampert advised the Company that they made these elections primarily because of
the potential exposure to penalties and the uncertainty of tax consequences
related to the deferred compensation arrangements under The American Jobs
Creation Act of 2004. The amounts payable to Messrs. Ira Lampert and Keith
Lampert under their respective SERPs and Deferred LTCIP Awards were $7.0 million
and $1.6 million, respectively. An amount equal to the then current deferred
compensation account balances of the SERPS was held in "rabbi trusts" previously
established by the Company to fund its obligations under the SERPs.
As disclosed in a Current Report on Form 8-K filed with the SEC on November 29,
2005, on November 28, 2005, the Company entered into amendments to the SERP
between the Company and each of executive officers Ira B. Lampert, Keith L.
Lampert, Gerald J. Angeli, Harlan I. Press, Alan Schutzman and Urs W. Stampfli.
The amendments modified each SERP in response to new Section 409A ("Section
409A") of the Internal Revenue Code of 1986, as amended, that affects
non-qualified deferred compensation plans such as the SERPs. As discussed below
under the caption, "Executive Separation Agreements," Messrs. Keith Lampert,
Press and Schutzman separated from the Company effective as of April 1, 2006.
Mr. Angeli separated from the Company effective as of July 1, 2008.
The amendments addressed two types of deferred compensation governed by the
SERPs: amounts deferred and vested on or before December 31, 2004 that were not
subject to Section 409A ("Grandfathered Amounts") and amounts deferred on or
before December 31, 2004 but not vested on such date that were subject to
Section 409A ("409A Amounts"). The amendments addressing Grandfathered Amounts
terminated each SERP as to all Grandfathered Amounts and provided for the
payment of such Grandfathered Amounts to be disbursed during calendar year 2005,
except that the SERP between the Company and Ira B. Lampert was amended to
permit Mr. Lampert, on or before November 30, 2005, to make an immediately
effective election to withdraw his Grandfathered Amounts on January 3, 2006. The
amendments addressing 409A Amounts permitted a SERP participant to elect, prior
to December 31, 2005, to terminate his participation in his respective SERP as
to all or a portion of the 409A Amounts, provided that all such vested 409A
Amounts would be disbursed on or before
78
December 31, 2005 or, if not earned and vested on such date, during the calendar
year in which such 409A Amounts will be earned and vested.
As disclosed in the Company's Quarterly Report on Form 10-Q for the period ended
December 31, 2005, the Grandfathered Amounts were distributed to the SERP
participants in accordance with the elections made by each participant. The 409A
Amounts were distributed immediately upon vesting. No elective or non-elective
contributions have been made to any of the SERPs since Section 409A was adopted.
Executive Separation Agreements
On December 24, 2005, the Company and each of Keith L. Lampert, Alan Schutzman
and Harlan I. Press entered into Separation Agreements, pursuant to which their
employment was terminated effective April 1, 2006.
Each Separation Agreement provided that the separating executive was to receive,
among other things, in addition to the benefits to which he was entitled under
the Company's 401(k) plan and his individual SERP: (a) the equivalent of his
base salary per annum plus his auto allowance for a period of twelve (12) months
from and after the effective date of his termination other than for "cause" (as
defined in his respective Terms of Employment) (March 31, 2006 or the date of
any earlier voluntary termination or termination without cause) (the
"Post-Employment Period") in accordance with the severance provisions of his
Terms of Employment, payable in accordance with the Company's normal payroll
practices; (b) his full vacation allotment for calendar year 2006 as though he
was in the employ of the Company throughout calendar year 2006; (c) payment for
his accrued but unused vacation allotment; (d) reimbursement of premiums for the
continuation of his health insurance coverage under COBRA during the
Post-Employment Period; and (e) reimbursement of certain agreed upon amounts for
life and disability insurance coverage during the Post-Employment Period. Mr.
Keith Lampert's Separation Agreement also provided for the acceleration of the
vesting date of one of his deferred compensation accounts under his SERP from
August 6, 2006 to the earlier of (i) March 31, 2006 or (ii) the effective date
of any earlier termination without cause or any earlier voluntary termination.
Under the terms of their respective Separation Agreements, each of Messrs. Keith
Lampert, Schutzman and Press (a) was prohibited from competing with the Company
for a period of one year following the effective date of his separation from the
Company; (b) agreed to provide to the Company certain cooperation and assistance
(without additional compensation 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.
On June 24, 2008, the Company and Gerald J. Angeli entered into an amendment to
his Terms of Employment, pursuant to which Mr. Angeli's employment was
terminated effective July 1, 2008. Pursuant to this agreement, Mr. Angeli will
receive: (a) a payment equal to up to twelve months' of his base salary and
automobile allowance and (b) reimbursement by the Company of premiums for the
one year post-employment period for (i) COBRA continuation coverage under the
Company's insurance policies or (ii) comparable medical, dental and vision
insurance coverages if COBRA continuation under the Company's insurance policies
is not available for any portion of the one year post-employment period.
Pursuant to his Terms of Employment, Mr. Angeli is prohibited from competing
with the Company for one year following the termination of his employment with
the Company.
License and Royalty Agreements
On May 10, 2004, the Company entered into a twenty year, worldwide trademark
license agreement with Jenoptik AG for the exclusive use of the Jenoptik brand
name and trademark on non-professional consumer imaging products including, but
not limited to, digital, single-use and traditional cameras, and other imaging
products and related accessories. The license agreement provides for a royalty
of one-half
79
of one percent (0.5%) of net sales of non-professional consumer imaging products
bearing the JENOPTIK brand name for the first ten (10) years of the license and
a royalty of six-tenths of one percent (0.6%) for the second ten (10) years of
the license. There are no minimum guaranteed royalty payments. In August 2008,
the Company entered into an agreement with Jenoptik AG to terminate the Jenoptik
trademark license agreement effective January 1, 2010 in exchange for Jenoptik
AG's waiver of certain royalty payments and reimbursement to the Company of a
portion of the upfront license fee paid by the Company upon entering into the
license agreement in 2004. See Note 22, Subsequent Events.
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 FujiFilm Corporation ("Fuji"). Under the new license agreement,
Fuji granted the Company a worldwide non-exclusive license (excluding Japan
until January 1, 2005) to use certain of Fuji's patents and patent applications
related to single-use cameras. The license extends until the later of the
expiration of the last of the licensed Fuji patents or February 26, 2021. In
consideration of the license, the Company agreed to pay a license fee and
certain royalty payments to Fuji. Accordingly, a significant portion of the
balance for patents, trademarks and licenses, net in "Other assets" in the
accompanying consolidated balance sheets at June 28, 2008 and June 30, 2007 was
an asset associated with the Fuji license. The Company also recorded as a
liability a corresponding amount that was included in licensing related
obligations in "Other liabilities" in the accompanying consolidated balance
sheets at June 28, 2008 and June 30, 2007 which was equal to the present value
of future license fee payments. The Company previously amortized these assets
based upon quantities of units produced. During Fiscal 2008, the Company
recorded an impairment charge of $3.0 million to lower the carrying value of the
Fuji license. The license's carrying value was reduced to $0 as a result of the
impairment.
On August 26, 2002, the Company entered into two Polaroid licensing agreements.
The two license agreements provided it with the exclusive (with the exception of
products already released by Polaroid into the distribution chain), worldwide
use of the Polaroid brand trademark in connection with the manufacture,
distribution, promotion and sale of single-use and traditional film based
cameras, including zoom cameras and certain related accessories. The license
agreements did not include instant or digital cameras. Each license agreement
included an initial term expiring on February 1, 2006, provided the Company the
right to renew the license under the same economic terms for an additional
three-year period and provided for the payment by the Company of $3.0 million of
minimum royalties, or $6.0 million in total for both license agreements, which
were fully credited against percentage royalties. On November 28, 2005, the
Company exercised its right to renew the single-use camera license agreement
with Polaroid for an additional three-year term expiring on February 1, 2009 in
accordance with the same economic terms included in the original agreement.
Pursuant to the terms of the single-use camera license agreement, as of February
1, 2008, the Company paid $3.0 million of minimum royalties and recorded the
payment as a prepaid asset. The Company amortizes this asset based upon a
percentage of net sales of Polaroid branded single-use cameras during the
three-year renewal term expiring February 1, 2009. In January 2006, the Company
entered into a new license agreement with Polaroid providing it with the
exclusive, worldwide use of the Polaroid brand trademark in connection with the
manufacture, distribution, promotion and sale of traditional film cameras. The
new license agreement is for a term of three years expiring on January 31, 2009
and provided for the payment by the Company of $50,000 of minimum royalties on
or before October 31, 2006, which was fully credited against percentage
royalties during the first year of the term. There are no minimum guaranteed
royalty payments under the traditional film license agreement after the first
year of the term. The Company has engaged in discussions with Polaroid regarding
the renewal of the single-use camera license agreement, but has suspended those
discussions pending the Company's shareholders' vote on the Liquidation
Proposal. If the shareholders do not approve the Liquidation Proposal, it is
uncertain whether the Company will be able to renew the single-use camera
license agreement.
80
Additionally, the Company has other license and royalty agreements that require
the payment of royalties based on the manufacture and/or sale of certain
products. Its license and royalty agreements expire at various dates through
Fiscal 2023. Total amortization and royalty expense for all licensing and
royalty agreements for Fiscal 2008, Fiscal 2007 and Fiscal 2006 was $8.0
million, $6.7 million and $9.4 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 June 28, 2008 to be
between $0 and approximately $6.7 million in the aggregate. The actual royalty
amounts, if any, for past and future sales are dependent upon the outcome of the
negotiations. The Company has notified certain of its suppliers of its right to
be indemnified by the suppliers if it is required to pay royalties or damages to
either claimant. The Company is unable to reasonably estimate the amount of the
potential loss, if any, within the range of estimates relating to these claims.
Accordingly, the Company has not accrued any amounts related to these claims as
of June 28, 2008.
Purchase Commitments
At June 28, 2008, the Company had $9.3 million in non-cancelable purchase
commitments relating to the procurement of raw materials, components and
finished goods inventory from various suppliers. In the aggregate, such
commitments are not at prices in excess of current marker values and typically
do not exceed one year.
NOTE 17 - LITIGATION AND SETTLEMENTS
In September 2004, a class action complaint was filed against the Company and
certain of its officers in the United States District Court for the Southern
District of Florida by individuals purporting to be holders of the Company's
Common Stock. In August 2005, an amended consolidated complaint (the "Amended
Complaint") was filed adding a former officer of the Company as a defendant. The
lead plaintiff under the Amended Complaint sought to act as a representative of
a class consisting of all persons who purchased the Company's Common Stock
during the period from August 14, 2003 through August 31, 2004, inclusive. On
March 23, 2007, the court granted the plaintiff's motion for class certification
and certified as plaintiffs all persons who purchased the Common Stock between
August 14, 2003 and August 31, 2004, inclusive, and who were allegedly damaged
thereby (the period August 14, 2003 through August 31, 2004 hereinafter referred
as the "Class Period"). The allegations in the Amended Complaint were centered
around claims that the Company failed to disclose, in periodic reports it filed
with the SEC and in press releases it made to the public during the Class Period
regarding its operations and financial results, (i) the full extent of the
Company's excess, obsolete and otherwise impaired inventory; (ii) the departure
from the Company of the aforementioned former officer defendant until several
months after his departure; and (iii) that Eastman Kodak Company ("Kodak") had
notified the Company that it would stop purchasing cameras from the Company
under its two design and manufacturing services ("DMS") contracts with the
Company due to the Company's alleged infringement
81
of Kodak's patents. The Amended Complaint also alleged that the Company
improperly recognized revenue contrary to generally accepted accounting
principles due to an alleged inability to reasonably estimate digital camera
returns. The Amended Complaint claimed that such failures artificially inflated
the price of the Common Stock. The Amended Complaint sought unspecified damages,
interest, attorneys' fees, costs of suit and unspecified other and further
relief from the court. On November 15, 2007, a Stipulation and Agreement of
Settlement was filed with the court and on June 19, 2008, the court issued a
final order approving the settlement set forth in the Stipulation and Agreement
of Settlement and dismissing the case with prejudice. The Company sought
coverage from its insurance carrier for this lawsuit under its directors' and
officers' liability insurance policy and the insurance carrier defended the
action under a reservation of rights. The settlement amount is within the policy
limits and was approved and paid by the Company's insurance carrier. In a letter
dated November 19, 2004, the Company was advised by the staff of the SEC that it
is conducting an investigation related to the matters described above. The
Company has provided the requested information to the staff of the SEC and has
not received any further communication from the SEC with respect to its request
since the Company last responded in May 2005.
On November 16, 2004, a shareholder derivative suit was filed against certain of
the Company's current and former officers and directors, and the Company as a
nominal defendant, in the United States District Court for the District of New
Jersey by an individual purporting to be a holder of the Company's Common Stock.
The complaint alleged that the individual defendants breached their duties of
loyalty and good faith by causing the Company to misrepresent its financial
results and prospects, resulting in the class action complaint described in the
immediately preceding paragraph. The complaint sought unspecified damages,
repayment of salaries and other remuneration from the individual defendants,
interest, attorneys' fees, costs of suit and unspecified other and further
relief from the court. In March 2005, the court granted a motion by the
individual defendants and the Company to transfer the action to the United
States District Court for the Southern District of Florida where the related
class action suit was pending. In May 2005, the court consolidated this case
with the related class action suit for discovery purposes only. On March 6,
2008, a Stipulation and Agreement of Settlement was filed with the court and on
June 19, 2008, the court issued a final order approving the settlement set forth
in the Stipulation and Agreement of Settlement and dismissing the case with
prejudice. The Company sought coverage from its insurance carrier for this
lawsuit under its directors' and officers' liability insurance policy and the
insurance carrier defended the action under a reservation of rights. The
settlement amount is within the policy limits and was approved and paid by the
Company's insurance carrier.
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 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 executed and delivered to
the Company written undertakings to repay the Company all amounts so advanced if
it was ultimately determined that the individual defendants were not entitled to
be indemnified by the Company under the NJBCA.
On October 6, 2004, a patent infringement complaint was filed by Honeywell
International, Inc. and Honeywell Intellectual Properties, Inc., against 27
defendants, including the Company, in the United States District Court for the
District of Delaware. The complaint asserted that the defendants have conducted
activities which infringe U.S. Patent No. 5,280,371, entitled, "Directional
Diffuser for a Liquid Crystal Display." The complaint sought unspecified
damages, interest, attorneys' fees, costs of suit and unspecified other and
further relief from the court. The proceedings in this action against the
Company and other similarly situated defendants were stayed by the court pending
the resolution of the infringement actions against the liquid crystal display
manufacturers. It is too early to assess the
82
probability of a favorable or unfavorable outcome or the loss or range of loss,
if any, and therefore, no amounts have been accrued relating to this action. The
Company has notified several third parties of its intent to seek indemnity from
such parties for any costs or damages incurred by the Company as a result of
this action.
In June 2006, St. Clair Intellectual Properties Consultants, Inc. filed a patent
infringement complaint against 22 defendants, including the Company, in the
United States District Court for the District of Delaware. The complaint
asserted that the defendants conducted activities which infringe U.S. Patent
Nos. 5,138,459, 6,094,219, 6,233,010 and 6,323,899. The complaint sought
injunctive relief, unspecified damages, interest, attorneys' fees, costs of suit
and unspecified other and further relief from the court. The proceedings in this
action against the Company and the other defendants were stayed by the court
until further order of the court. On October 16, 2008, the court granted the
plaintiff's motion to lift the stay. It is too early to assess the probability
of a favorable or unfavorable outcome or the loss or range of loss, if any, and,
therefore, no amounts have been accrued relating to this action. The Company is
assessing potential claims of indemnification against certain of its suppliers
with respect to this action.
The Company is also involved from time to time in routine legal matters
incidental to its business. Based upon available information, the Company
believes that the resolution of such matters will not have a material adverse
effect on its financial position or results of operations. The Company's
announcement of the Liquidation Proposal by the Board and/or the implementation
of the plan of liquidation if it is approved by the Company's shareholders may
give rise to legal claims, which may have a material adverse effect on the
Company's financial position and results of operations.
NOTE 18 - OTHER CHARGES
Asset Impairment Charges
During fiscal 2008, the Company recorded impairment charges of $5.9 million
related to the impairment of certain long-lived and other assets that included
reductions in the carrying value of a license and certain property, plant and
equipment used primarily in the manufacturing of 35mm single-use cameras.
During fiscal 2006, the Company 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.
Cost-Reduction Initiatives and Related Costs
During fiscal 2008 and fiscal 2007, the Company implemented cost-reduction
initiatives, including among other things, the elimination of certain employee
positions. As a result, during fiscal 2008 and fiscal 2007, the Company recorded
total charges of $1.1 million and $0.9 million, respectively, related to
severance costs for the elimination of certain employee positions.
During the fourth quarter of fiscal 2006, the Company began implementing an
operating strategy designed to significantly de-emphasize the sale of digital
cameras and increase its focus on the sales of 35mm single-use and traditional
film cameras. In connection with this strategy, the Company realigned its
operations in Europe, including ceasing its operations in France and Germany. As
a result of the France and Germany office closures, in fiscal 2007, the Company
recorded charges of approximately $0.4 million for severance costs. In addition,
as a result of the de-emphasis of digital camera sales, the Company reduced its
outsourcing organization in Asia and recorded a total of $0.1 million for
employee severance costs.
83
Table I -- Other Charges Liability reconciles the beginning and ending balances
of the other charges liability.
(in thousands)
Other Charges Liability
-----------------------
Severance Retention Leases Total
--------- --------- ------ -------
Balance as of July 2, 2005 $ 190 $ 129 $ -- $ 319
Charges 1,630 177 -- 1,807
Reversals -- (24) -- (24)
Payments (645) (275) -- (920)
------- ----- ---- -------
Balance as of July 1, 2006 $ 1,175 $ 7 $ -- $ 1,182
Charges 943 9 26 978
Reversals (44) (7) (1) (52)
Payments (1,838) -- (25) (1,863)
------- ----- ---- -------
Balance as of June 30, 2007 $ 236 $ 9 $ -- $ 245
Charges 1,104 -- -- 1,104
Reversals -- --
Payments (797) (9) -- (806)
------- ----- ---- -------
Balance as of June 28, 2008 $ 543 $ -- $ -- $ 543
======= ===== ==== =======
84
Table II -- Other Charges presents the related expenses and their classification
in the consolidated statements of operations.
(in thousands) Long-Lived
Asset
Other Charges Severance Retention Impairment Leases Total
------------- --------- --------- ---------- ------ ------
Fiscal 2008
-----------
Cost of products sold $ 548 $ -- $2,455 $ -- $3,003
Selling expenses 380 -- 25 -- 405
General and administrative expense 176 -- 3,427 -- 3,603
------ ----- ------ ----- ------
Total $1,104 $ -- $5,907 $ -- $7,011
====== ===== ====== ===== ======
Fiscal 2007
-----------
Cost of products sold $ 341 $ -- $ -- $ -- $ 341
Selling expense 470 (7) -- 16 479
General and administrative expense 88 9 -- 9 106
------ ----- ------ ----- ------
Total $ 899 $ 2 $ -- $ 25 $ 926
====== ===== ====== ===== ======
Fiscal 2006
-----------
Cost of products sold $ 29 $ 96 $ 788 $ -- $ 913
Selling expense 357 14 -- -- 371
General and administrative expense 1,244 43 1,039 -- 2,326
------ ----- ------ ----- ------
Total $1,630 $ 153 $1,827 $ -- $3,610
====== ===== ====== ===== ======
As a result of the cost-reduction initiatives implemented in fiscal 2008, we
expect to make cash payments totaling $0.5 million during fiscal 2009 related to
severance.
NOTE 19 - OTHER INCOME, NET
Included in the accompanying consolidated statements of operations under the
caption, "Other income, net" is the following:
(in thousands)
Fiscal Year
-----------------------------------
2008 2007 2006
------- ------- -------
Investment income $(1,702) $(1,927) $(1,525)
Gain on sale of equipment (387) -- --
Foreign currency loss, net 288 105 276
Other expense (income), net 235 (177) 107
------- ------- -------
Other income, net $(1,566) $(1,999) $(1,142)
======= ======= =======
NOTE 20 - 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
85
devices to external customers and no additional segment reporting is required.
SFAS No. 131 also requires certain revenue disclosures of geographic information
based upon the Company's determination as to which regions such revenues were
attributed. Accordingly, for purposes of this disclosure, the Company attributed
sales to the region where the customer's home office was located. A summary of
selected financial information regarding the Company's geographic operations is
set forth below. The Americas consist of the United States, Canada and Latin
America; Europe consists of Germany, the United Kingdom, France and certain
other countries in the European Union; Asia consists of Hong Kong, Japan and the
PRC.
(in thousands)
Fiscal Year
----------------------------------
Sales made to unaffiliated customers: 2008 2007 2006
------- ------- --------
Americas $53,126 $66,767 $ 88,167
Asia 6,120 4,829 813
Europe 14,903 15,057 48,549
------- ------- --------
Total $74,149 $86,653 $137,529
======= ======= ========
June 28, June 30,
Identifiable assets: 2008 2007
-------- --------
Americas $44,558 $51,733
Asia 24,471 29,096
Europe 1,573 1,675
------- -------
Total $70,602 $82,504
======= =======
(Percentage of net sales)
Product groups: Fiscal Year
-------------------------------
2008 2007 2006
----- ----- -----
35mm single-use cameras 93.1% 89.0% 60.4%
----- ----- -----
35mm traditional film cameras 6.9% 8.5% 11.3
Digital cameras --% 2.5% 28.3
----- ----- -----
Total 100.0% 100.0% 100.0%
===== ===== =====
During Fiscal 2008, Wal-Mart Stores, Inc. ("Wal-Mart") and Walgreen Co.
("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 2008 of approximately $26.1 million (35.3% of total net sales) and
$11.4 million (15.4% of total net sales), respectively.
During Fiscal 2007, 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 2007 of approximately $35.5 million
(40.9% of total net sales) and $18.0 million (20.8% of total net sales),
respectively.
During Fiscal 2006, 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 2006 of approximately $46.5 million
(33.8% of total net sales) and $20.9 million (15.2% of total net sales),
respectively.
86
If the Company's shareholders do not approve the Liquidation Proposal, the loss
of any significant customer or substantially reduced sales to any significant
customer could have a material adverse impact on the Company's financial
condition and results of operations. The Company believes that many if not all
of its customers, including its significant customers, will transition their
business to the Company's competitors as a result of the Company's announcement
of the recommendation by its Board of the Liquidation Proposal and the Company's
cessation of manufacturing and undertaking commitments for sales of its
products, except for products remaining in the Company's inventory, pending the
shareholders' vote.
No other customer accounted for 10% or more of consolidated net sales of the
Company during Fiscal 2008, Fiscal 2007 or Fiscal 2006.
NOTE 21 - QUARTERLY RESULTS (UNAUDITED)
(in thousands, except per share data)
Quarter Ended
-----------------------------------------------------------------------
Sept. 29, Dec. 29, March 29, June 28,
Fiscal 2008 2007 2007 2008 2008
----------- --------- -------- --------- --------
Net sales $ 21,698 $ 18,404 $ 12,320 $ 21,727
Gross profit 3,015 1,306 1,306 1,909
Loss before income taxes (1,762) (3,000) (3,142) (5,501)
Net loss (1,763) (2,213) (3,136) (5,495)
Basic loss per share $ (0.30) $ (0.37) $ (0.53) $ (0.93)
Diluted loss per share $ (0.30) $ (0.37) $ (0.53) $ (0.93)
Quarter Ended
-----------------------------------------------------------------------
Sept. 30, Dec.30, March 31, June 30,
Fiscal 2007 2006 2006 2007 2007
----------- --------- -------- --------- --------
Net sales $ 28,825 $ 19,338 $ 16,375 $ 22,115
Gross profit 4,503 1,501 1,133 2,064
Loss before income taxes (1,623) (3,529) (3,362) (3,206)
Net loss (1,640) (3,547) (3,361) (3,178)
Basic loss per share $ (0.28) $ (0.61) $ (0.57) $ (0.54)
Diluted loss per share $ (0.28) $ (0.61) $ (0.57) $ (0.54)
See Note 18, Other Charges for a description of items that had a significant
effect on certain fiscal quarters.
NOTE 22 - SUBSEQUENT EVENTS
On November 3, 2008, Keystone received notice from CIT that an event of default
existed under the CIT Facility as a result of the Company's press release on
October 30, 2008 that it has elected to wind down operations and liquidate
assets. Currently, CIT has not exercised its rights to accelerate Keystone's
obligation to repay the CIT Facility, but has temporarily discontinued making
loans under the CIT facility until it receives additional financial information
regarding the Liquidation Proposal. As of June 28, 2008, the Company has
approximately $5.4 million of debt outstanding under the CIT Facility.
On November 1, 2008, in connection with the recommendation by our Board of our
dissolution and the adoption of the plan of liquidation, we provided the
required twelve months notice of termination of our processing agreement with
the PRC governmental entities, which allows us to operate in the PRC.
87
On October 29, 2008, our Board recommended the Company's dissolution and the
adoption of a plan of liquidation. The dissolution and plan of liquidation is
subject to approval by the Company's shareholders at the 2008 Annual Meeting,
which is expected to be held in December 2008. Pending the Company's
shareholders' vote on the dissolution and plan of liquidation, in order to
protect shareholder value, the Company has ceased manufacturing products,
purchasing materials and products and undertaking commitments for sales of its
products except for those products that the Company has remaining in inventory.
If the Company's shareholders approve its dissolution and the plan of
liquidation, the Company will file a certificate of dissolution with the
Department of Treasury of the State of New Jersey. Thereafter, the Company will
not engage in any business activities except for the purpose of preserving the
value of its assets, prosecuting and defending lawsuits by or against the
Company, adjusting and winding up its business and affairs, selling and
liquidating its properties and non-cash assets, including its intellectual
property and other intangible assets, paying or otherwise settling its
liabilities, including contingent liabilities terminating commercial agreements
and relationships and preparing to make distributions to its shareholders, in
accordance with the plan of liquidation.
If the Company's shareholders do not approve its dissolution and the plan of
liquidation, the Company's Board will explore the alternatives then available
for the future of the Company. The Company believes the value of its business
will be materially and adversely impacted after the announcement of the
recommendation by the Board of the Company's dissolution and the adoption of a
plan of liquidation by the Board. In particular, pending the Company's
shareholders' vote on its dissolution and the plan of liquidation, the Company
has ceased manufacturing products, purchasing materials and products and
undertaking commitments for sales of its products except for those products that
the Company has remaining in inventory and, as a result, the Company believes
that many, if not all, or its customers, including its major customers, will
transition their business to its competitors. Therefore, if the Company's
shareholders do not approve its dissolution and plan of liquidation, the Company
will not be able to continue to operate its business as it existed prior to the
Board's recommendation of its dissolution and the adoption of a plan of
liquidation and may not be able to operate its business at all. See Note 1,
Liquidation Proposal and Going Concern.
On October 20, 2008, the Company's Loan Limit under the Citigroup Facility was
increased to $10,925,000 and the Company increased its outstanding borrowings
under the Citigroup Facility equal to the Loan Limit.
On October 17, 2008, the Company consented to tender $2.1 million in par value
of its auction rate securities in connection with a tender offer by Leon Higher
Education Authority, Inc. ("Leon") that has Brazos Higher Education Service
Corporation, Inc. ("Brazos") acting as its master servicer. The tender offer
requires certain levels of participation by the auction rate securities holders.
If these levels of participation by auction rate securities holders are
attained, the Company should receive cash proceeds equal to 92% of par value of
the securities tendered or approximately $1,932,000. On November 3, 2008, Brazos
announced that the minimum tender conditions have not been met for the thirteen
previously announced offers to purchase or exchange student loan booked
securities, almost all of which are auction rate securities. As a result, Leon
has not selected offers in respect of which to pursue a collateral
resecuritization. The previously announced expiration date for the offer remains
unchanged at this time and therefore will expire on December 4, 2008 unless
further extended. If the offer is selected at a future time to proceed to the
resecuritization phase, Leon will announce an updated date related to this
offer, including a new expiration date. Consummation of the tender offer is
subject to additional conditions, including Leon's ability to raise the
necessary funds by resecuritizing the assets underlying the auction rate
securities to be purchased in the tender offer.
In August 2008, the Company entered into an agreement with Jenoptik AG to
terminate the Jenoptik trademark license agreement effective January 1, 2010 in
exchange for Jenoptik AG's waiver of certain
88
royalty payments and reimbursement to the Company of approximately $1.1 million
related to a portion of the upfront license fee paid by the Company upon
entering into the license agreement in 2004. See Note 16, Commitments and
Contingencies.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Item 9A. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures. We maintain disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), designed to
ensure that information required to be disclosed in our filings under the
Exchange Act is (1) recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms, and (2)
accumulated and communicated to our management, including the principal
executive officer and the principal financial officer, to allow timely decisions
regarding required disclosures.
Our management has reviewed and evaluated the effectiveness of the design and
operation of our disclosure controls and procedures as of the end of the period
covered by this Annual Report on Form 10-K. Based on this evaluation, our
principal executive officer and principal financial officer concluded that as of
June 28, 2008, our disclosure controls and procedures were effective in
providing reasonable assurance of achieving their objectives in internal control
over financial reporting as described above.
Management's Report on Internal Control Over Financial Reporting. Management,
under the supervision of the Chief Executive Officer and the Chief Financial
Officer, is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d(f) under the Exchange Act) is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles in the United States of
America ("GAAP"). Internal control over financial reporting includes those
policies and procedures which (a) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of assets, (b) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with GAAP, (c) provide reasonable assurance that receipts and
expenditures are being made only in accordance with appropriate authorization of
management and the board of directors, and (d) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of assets that could have a material effect on the financial
statements. In connection with the preparation of this Report, our management,
under the supervision and with the participation of our Chief Executive Officer
and Chief Financial Officer, conducted an evaluation of the effectiveness of our
internal control over financial reporting as of June 28, 2008 based on the
criteria established in Internal Control -- Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). As a
result of that evaluation, management has concluded that our internal control
over financial reporting was effective as of June 28, 2008.
Since we are not an accelerated filer, our independent registered public
accounting firm is not required to issue a separate attestation report on the
effectiveness of our internal control over financial reporting under Item 308(b)
of Regulation S-K.
(b) Changes in Internal Control over Financial Reporting. There was no change in
the our internal control over financial reporting that occurred during the
period ended June 28, 2008 that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.
89
Item 9B. Other Information.
None.
90
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information about directors required for this item is incorporated into this
report by reference to our definitive proxy statement to be filed in connection
with our Annual Meeting of Shareholders that is expected to be held in December
2008 (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" in our definitive proxy statement in connection with the
Annual Meeting. That information is incorporated into this report by reference.
Item 13. Certain Relationships and Related Transactions, and Director
Independence.
Information required by this item relating to certain relationships of our
directors, executive officers and 5% shareholders and related transactions will
be presented under the caption "Certain Relationships and Related Party
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.
91
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) (1) Financial Statements: Consolidated financial statements filed as
part of this report are set forth under Part II, Item 8 of this report.
(2) Financial Statement Schedule
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in thousands)
Column A Column B Column C Column D Column E
Additions
-----------------------
Balance at Charged to Charged to Balance at
beginning of costs and other end of
Description period expenses accounts Deductions period
----------- ------------ ---------- ---------- ---------- ----------
1. Allowances for sales returns and allowances, discounts, and doubtful accounts
Fiscal Year:
2008 $ 2,034 199 -- 1,535 $ 698
2007 $ 3,827 1,766 -- 3,557 $ 2,036
2006 $ 8,111 7,527 -- 11,811 $ 3,827
2. Deferred income tax valuation allowance
Fiscal Year:
2008 $19,835 709 1,900 -- $22,444
2007 $20,030 -- -- 195 $19,835
2006 $18,903 1,127 -- -- $20,030
92
(3) Exhibits: Each management contract or compensatory plan listed
below is identified with an asterisk. The exhibits listed in the
accompanying Exhibit Index are filed as part of this report.
No. Description Method of Filing
--- ----------- ----------------
2.1 Purchase of Share and Claims and Transfer Agreement, Incorporated by reference to the Company's Current
dated May 10, 2004, by and between Concord Camera GmbH Report on Form 8-K ("8-K") filed with the SEC on
and 4MBO International Electronic AG for the purchase of May 25, 2004.
Jenimage Europe GmbH and Jenimage UK Limited
3.1 Certificate of Incorporation, as amended through Incorporated by reference to the Company's Annual
November 3, 2006 Report on Form 10-K ("10-K") for the year ended
June 30, 2007.
3.2 Restated By-Laws, as amended through July 12, 2004 Incorporated by reference to the Company's 10-Kfor
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 February Incorporated by reference to the Company's 10-K
28, 1997, among the parties signatory thereto, including for the year ended July 1, 2000.
among others, Ira B. Lampert, Brian King and Arthur
Zawodny, as amended on various dates in 1998 to add
certain additional shares of the Company's Common Stock
owned by Ira B. Lampert, Brian King and Keith Lampert
and as further amended on January 6, 2000
10.1 Second renewal agreement of Master Processing Contract Incorporated by reference to the Company's
No. (86)507, dated March 15, 1996, and approval notice Quarterly Report on Form 10-Q ("10-Q") for the
issued by the Longgang Economic Development Bureau quarter ended September 30, 2000.
(English translations)
10.2 Contract for Grant of State-Owned Land Use Right, dated Incorporated by reference to the Company's 10-Q
November 8, 1994, with the Shenzhen Land Bureau (English for the quarter ended September 30, 2000.
translation)
93
No. Description Method of Filing
--- ----------- ----------------
10.3 Agreement for Contract Processing among Shenzhen Incorporated by reference to the Company's 8-K
Henggang Investment Co., Ltd., Shenzhen Longgang filed with the SEC on September 21, 2006.
Henggang Xietao Electronics Factory and Concord Camera
HK Limited ("CCHK") dated July 11, 2006 (English
translation)
10.4 Debenture, dated June 10, 2004, by CCHK in favor of The Incorporated by reference to the Company's 10-K
Hongkong and Shanghai Banking Corporation Limited for the year ended July 3, 2004.
("HSBC")
10.5 Capitalization and Subordination Agreement dated as of Incorporated by reference to the Company's 8-K
March 31, 2005 between the Company and CCHK filed with the SEC on October 24, 2005.
10.6 Subordination Agreement dated as of March 31, 2005 Incorporated by reference to the Company's 8-K
between the Company and CCHK filed with the SEC on October 24, 2005.
10.7 Letter agreement between HSBC and CCHK, dated January 4, Incorporated by reference to the Company's 8-K
2006, relating to the provision of certain financing filed with the SEC on January 26, 2006.
facilities to CCHK and the conditions thereof
10.8 Renewal of Business License of Concord Camera (Shenzhen) Incorporated by reference to the Company's 10-K
Company Limited, issued by the Shenzhen Municipal for the year ended July 3, 2004.
Administration for Industry and Commerce on May 17, 2004
(English translation)
10.9 Special Permitted Business License No. 06999 issued to Incorporated by reference to the Company's 8-K
Concord Camera Henggang Electronic Factory (listed as filed with the SEC on September 21, 2006.
"Concord Camera H.G. Limited" on the license), Longgang,
Shenzhen, valid from October 1991 to October 26, 2016
(English translation)
10.10 Letter agreement between HSBC and CCHK, dated October Incorporated by reference to the Company's 10-Q
18, 2006, relating to the reduction of the financing for the quarter ended December 30, 2006.
facilities provided to CCHK and the conditions thereof
10.11 Letter agreement between Dah Sing Bank Limited ("Dah Incorporated by reference to the Company's 10-Q
Sing") and CCHK, dated June 19, 2006, relating to for the quarter ended December 30, 2006.
certain financing facilities provided to CCHK and the
conditions thereof (the "Dah Sing Facilities")
94
No. Description Method of Filing
--- ----------- ----------------
10.12 Letter agreement between Shanghai Commercial Bank Ltd. Incorporated by reference to the Company's 10-Q
and CCHK, dated June 12, 2006, relating to certain for the quarter ended December 30, 2006.
financing facilities provided to CCHK and the conditions
thereof
10.13 Letter agreement between Dah Sing and CCHK, dated Incorporated by reference to the Company's 10-K
June 27, 2006, extending the Dah Sing Facilities until for the year ended June 30, 2007.
August 31, 2007 under existing conditions
10.14 Letter Agreement between Dah Sing and CCHK, dated August Incorporated by reference to the Company's 10-K
27, 2007, extending the Dah Sing Facilities until for the year ended June 30, 2007.
September 30, 2007 under existing conditions
10.15 Letter agreement between Dah Sing and CCHK, dated Filed herewith.
September 30, 2008, relating to certain financing
facilities provided to CCHK and the conditions thereof
10.16* Incentive Plan (1993), as amended through April 24, 2000 Incorporated by reference to the Company's 10-K
for the year ended July 1, 2000.
10.17* Amendments to Incentive Plan (1993) dated as of April Incorporated by reference to the Company's
19, 2001 and August 2, 2001 Schedule TO/A-1 filed August 28, 2001.
10.18* Amendment to Incentive Plan (1993) dated as of January Incorporated by reference to the Company's 10-Q
20, 2003 for the quarter ended March 29, 2003.
10.19* Amendments to Incentive Plan (1993) dated as of February Incorporated by reference to the Company's 10-K
10, 2003 and June 2, 2003 for the year ended June 28, 2003.
10.20* 2002 Incentive Plan for Non-Officer Employees, New Incorporated by reference to the Company's 10-K
Recruits and Consultants, and Amendment No. 1 to same for the year ended June 29, 2002.
dated September 4, 2002
10.21* Amendment No. 2 dated as of June 2, 2003 to 2002 Incorporated by reference to the Company's 10-K
Incentive Plan for Non-Officer Employees, New Recruits for the year ended June 28, 2003.
and Consultants
10.22* 2002 Incentive Plan for New Recruits, and Amendment No. Incorporated by reference to the Company's 10-K
1 to same dated as of June 2, 2003 for the year ended June 28, 2003.
10.23* Stock Option (Plan and) Agreement, dated as of May 15, Incorporated by reference to the Company's 10-K
1998, between Urs W. Stampfli and the Company for the year ended June 29, 2002.
95
No. Description Method of Filing
--- ----------- ----------------
10.24* Amendment, effective as of February 11, 2003, to Stock Incorporated by reference to the Company's 10-K
Option (Plan and) Agreement, dated as of May 15, 1998, for the year ended June 28, 2003.
between Urs W. Stampfli and the Company
10.25* Amended and Restated Deferred Delivery Plan, as amended Incorporated by reference to the Company's 10-K
through June 30, 2004 for the year ended July 3, 2004.
10.26* Amended and Restated Annual Incentive Compensation Plan, Incorporated by reference to the Company's 10-K
as amended through June 30, 2004 for the year ended July 3, 2004.
10.27* Amended and Restated Long Term Incentive Plan Commencing Incorporated by reference to the Company's 10-K
Fiscal 2004, as amended through June 30, 2004, and for the year ended July 3, 2004.
2004-2006 Performance Criteria
10.28* Restated Flexible Perquisite Spending Account Program Incorporated by reference to the Company's 10-K
for Corporate Officers, as amended through July 12, 2004 for the year ended July 3, 2004.
10.29* Appendix A, dated June 6, 2002, to Flexible Perquisite Incorporated by reference to the Company's 10-Q
Spending Account Program for the quarter ended December 28, 2002.
10.30* The Company Executive Management Tax Equalization Policy Incorporated by reference to the Company's 10-K
for the year ended June 29, 2002.
10.31* Amended and Restated Employment Agreement, dated as of Incorporated by reference to the Company's 10-K
May 1, 1997, between the Company and Ira B. Lampert for the year ended July 3, 2004.
10.32* Amendment No. 1 dated as of August 25, 1998, Amendment Incorporated by reference to the Company's 10-K
No. 3 dated as of April 19, 2000, and Amendment No. 4 for the year ended June 30, 2001.
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, to Amended Incorporated by reference to the Company's 10-Q
and Restated Employment Agreement dated as of May 1, for the quarter ended January 2, 1999.
1997, between Ira B. Lampert and the Company
96
No. Description Method of Filing
--- ----------- ----------------
10.34* Amendment No. 5, dated as of December 2, 2002, to Incorporated by reference to the Company's 10-Q
Amended and Restated Employment Agreement dated as of for the quarter ended December 28, 2002.
May 1, 1997, between Ira B. Lampert and the Company
10.35* Amendment No. 6, dated February 10, 2003, to Amended and Incorporated by reference to the Company's 10-Q
Restated Employment Agreement dated as of May 1, 1997, for the quarter ended March 29, 2003.
between Ira B. Lampert and the Company
10.36* Memorandum from Ira B. Lampert dated July 28, 2004 to Incorporated by reference to the Company's 10-K
the Company regarding the waiver of certain compensation for the year ended July 3, 2004.
and modification to vesting dates, along with releases
signed by Ira B. Lampert
10.37* Amendment No. 7, dated July 1, 2005, to Amended and Incorporated by reference to the Company's 8-K
Restated Employment Agreement dated as of May 1, 1997, filed with the SEC on September 9, 2005.
between Ira B. Lampert and the Company and Amendment No.
1 to Amended and Restated Supplemental Executive
Retirement Plan and Agreement ("SERP") for Ira B.
Lampert, dated as of August 18, 2004, between Ira B.
Lampert and the Company
10.38* Amendment No. 8, dated November 5, 2008, to Amended and Filed herewith.
Restated Employment Agreement dated as of May 1, 1997,
between Ira B. Lampert and the Company
10.39* Terms of Employment between Urs W. Stampfli and the Incorporated by reference to the Company's 10-K
Company, effective as of January 1, 2000 for the year ended June 30, 2001.
10.40* Amendment, dated as of November 20, 2002, to Terms of Incorporated by reference to the Company's 10-Q
Employment dated as of January 1, 2000, between Urs W. for the quarter ended December 28, 2002.
Stampfli and the Company
10.41* Amendment No. 2 dated as of February 26, 2003, and Incorporated by reference to the Company's 10-Q
Amendment No. 3 dated as of March 30, 2003, to Terms of for the quarter ended March 29, 2003.
Employment dated as of January 1, 2000, between Urs W.
Stampfli and the Company
97
No. Description Method of Filing
--- ----------- ----------------
10.42* Extension and Amendment of Terms of Employment of Urs W. Incorporated by reference to the Company's 8-K
Stampfli with Concord Camera Corp. effective as of filed with the SEC on December 27, 2005.
January 1, 2006, by and between the Company and Urs W.
Stampfli
10.43* Amendment No. 5 to Terms of Employment of Urs W. Incorporated by reference to the Company's 8-K
Stampfli with the Company, effective as of January 1, filed with the SEC on January 9, 2007.
2007
10.44* Amendment No. 6 to Terms of Employment of Urs. W. Incorporated by reference to the Company's 8-K
Stampfli with the Company, effective as of January 1, filed with the SEC on December 27, 2007.
2008.
10.45* Amendment No. 7 to Terms of Employment of Urs. W. Incorporated by reference to the Company's 8-K
Stampfli with the Company, effective as of June 24, 2008. filed with the SEC on June 30, 2008.
10.426 Gerald J. Angeli Terms of Employment with the Company as Incorporated by reference to the Company's 8-K
of April 17, 2000 filed with the SEC on November 29, 2005.
10.47* Amendment to Terms of Employment of Gerald J. Angeli Incorporated by reference to the Company's 8-K
with the Company dated as of June 11, 2001 filed with the SEC on November 29, 2005.
10.48* Amendment No. 2 to Terms of Employment of Gerald J. Incorporated by reference to the Company's 8-K
Angeli with the Company dated as of August 12, 2002 filed with the SEC on November 29, 2005.
10.49* Amendment No. 3 to Terms of Employment of Gerald J. Incorporated by reference to the Company's 8-K
Angeli with the Company dated as of January 1, 2003 filed with the SEC on November 29, 2005.
10.50* Amendment No. 4 to Terms of Employment of Gerald J. Incorporated by reference to the Company's 8-K
Angeli with the Company dated as of March 22, 2004 filed with the SEC on November 29, 2005.
(exclusive of Exhibit A thereto, "the Company Executive
Management Tax Equalization Policy" which is
incorporated by reference to the Company's Annual Report
on Form 10-K for the year ended June 29, 2002; and
exclusive Exhibit B thereto, "Concord Camera Corp. Code
of Conduct," which is posted on the Company's website,
www.concord-camera.com)
10.51* Confidentiality/Intellectual Property Restrictions and Incorporated by reference to the Company's 8-K
Non-Compete (Rev. February 12, 2001) between the Company filed with the SEC on November 29, 2005.
and Gerald J. Angeli
98
No. Description Method of Filing
--- ----------- ----------------
10.52* Amendment No. 5 to Terms of Employment of Gerald J. Incorporated by reference to the Company's 8-K
Angeli with the Company dated April 3, 2006 filed with the SEC on April 6, 2006.
10.53* Amendment No. 6 to Terms of Employment of Gerald J. Incorporated by reference to the Company's 8-K
Angeli with the Company, effective as of January 1, 2007 filed with the SEC on January 9, 2007.
10.54* Amendment No. 7 to Terms of Employment of Gerald J. Incorporated by reference to the Company's 8-K
Angeli with the Company, effective as of June 24, 2008 filed with the SEC on June 30, 2008.
10.55* Terms of Employment between Blaine Robinson and the Incorporated by reference to the Company's 10-Q
Company, effective as of February 11, 2003 and Amendment for the quarter ended October 2, 2004.
No. 1 to same dated as of January 7, 2005.
10.56* Amendment No. 2 to Terms of Employment of Blaine Incorporated by reference to the Company's 8-K
Robinson with the Company dated April 1, 2006 filed with the SEC on April 6, 2006.
10.57* Amendment No. 3 to Terms of Employment of Blaine Incorporated by reference to the Company's 8-K
Robinson with the Company dated April 1, 2006 (exclusive filed with the SEC on April 6, 2006.
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)
10.58* Amendment No. 4 to Terms of Employment of Blaine Incorporated by reference to the Company's 8-K
Robinson with the Company dated January 7, 2008 filed with the SEC on January 11, 2008.
10.59* Amendment No. 5 to Terms of Employment of Blaine Incorporated by reference to the Company's 8-K
Robinson with the Company dated June 24, 2008 filed with the SEC on June 30, 2008.
10.60* Terms of Employment of Scott L. Lampert with the Company Incorporated by reference to the Company's 8-K
effective August 1, 2001. filed with the SEC on April 6, 2006.
10.61* Amendment No. 1 to Terms of Employment of Scott L. Incorporated by reference to the Company's 8-K
Lampert with the Company dated April 1, 2006 (exclusive filed with the SEC on April 6, 2006.
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)
10.62* Amendment No. 2 to Terms of Employment of Scott L. Incorporated by reference to the Company's 8-K
Lampert with the Company dated January 7, 2008 filed with the SEC on January 11, 2008.
99
No. Description Method of Filing
--- ----------- ----------------
10.63* Amendment No. 3 to Terms of Employment of Scott L. Incorporated by reference to the Company's 8-K
Lampert with the Company dated June 24, 2008 filed with the SEC on June 30, 2008.
10.64* Amendment No. 2 to Amended and Restated SERP for Ira B. Incorporated by reference to the Company's 8-K
Lampert dated as of November 28, 2005 filed with the SEC on November 29, 2005.
10.65* Amendment No. 3 to Amended and Restated SERP for Ira B. Incorporated by reference to the Company's 8-K
Lampert dated as of November 28, 2005 filed with the SEC on November 29, 2005.
10.66* Amendment No. 1 to Amended and Restated SERP for Keith Incorporated by reference to the Company's 8-K
L. Lampert dated as of November 28, 2005 filed with the SEC on November 29, 2005.
10.67* Amendment No. 2 to Amended and Restated SERP for Keith Incorporated by reference to the Company's 8-K
L. Lampert dated as of November 28, 2005 filed with the SEC on November 29, 2005.
10.68* Amendment No. 2 to SERP for Gerald J. Angeli dated as of Incorporated by reference to the Company's 8-K
November 28, 2005 filed with the SEC on November 29, 2005.
10.69* Amendment No. 3 to SERP for Gerald J. Angeli dated as of Incorporated by reference to the Company's 8-K
November 28, 2005 filed with the SEC on November 29, 2005.
10.70* Amendment No. 3 to SERP for Harlan I. Press dated as of Incorporated by reference to the Company's 8-K
November 28, 2005 filed with the SEC on November 29, 2005.
10.71* Amendment No. 1 to SERP for Alan Schutzman dated as of Incorporated by reference to the Company's 8-K
November 28, 2005 filed with the SEC on November 29, 2005.
10.72* Amendment No. 4 to Amended and Restated SERP for Urs W. Incorporated by reference to the Company's 8-K
Stampfli dated as of November 28, 2005 filed with the SEC on November 29, 2005.
10.73* Amendment No. 5 to Amended and Restated SERP for Urs W. Incorporated by reference to the Company's 8-K
Stampfli dated as of November 28, 2005 filed with the SEC on November 29, 2005.
10.74* Separation Agreement between the Company and Harlan Incorporated by reference to the Company's 10-Q
I. Press dated as of December 24, 2005 for the quarter ended December 31, 2005.
10.75* Separation Agreement between the Company and Alan Incorporated by reference to the Company's 10-Q
Schutzman dated as of December 24, 2005 for the quarter ended December 31, 2005.
100
No. Description Method of Filing
--- ----------- ----------------
10.76* Separation Agreement between the Company and Keith Incorporated by reference to the Company's
L. Lampert dated as of December 24, 2005 10-Q for the quarter ended December 31, 2005.
10.77 Lease Agreement, undated between Prologis Trust, a Incorporated by reference to the Company's 10-Q
Maryland real estate investment trust, and the Company for the quarter ended January 2, 1999.
10.78 Lease Agreement, dated as of August 12, 1998, between Incorporated by reference to the Company's 10-Q
CarrAmerica Realty Corp. and the Company for the quarter ended January 2, 1999.
10.79 First Amendment, dated October 12, 1999, to Lease dated Incorporated by reference to the Company's 10-Q
as of August 12, 1998, between CarrAmerica Realty Corp. for the quarter ended October 2, 1999.
and the Company
10.80 Second Amendment, dated January 3, 2000, to Lease dated Incorporated by reference to the Company's 10-K
as of August 12, 1998, between CarrAmerica Realty Corp. for the year ended July 1, 2000.
and the Company
10.81 Third Amendment, dated January 6, 2003, to Lease dated Incorporated by reference to the Company's 10-Q
as of August 12, 1998, between CRD Presidential, LLC and for the quarter ended December 28, 2002.
the Company
10.82 Letter agreement between Dah Sing and CCHK, dated Incorporated by reference to the Company's 10-K
September 25, 2007, extending the Dah Sing Facilities for the year ended June 30, 2007.
until October 31, 2007 under existing conditions
10.83 Renewal letter from Dah Sing to CCHK, dated November 21, Incorporated by reference to the Company 10-Q
2007, renewing the financing facility until June 30, for the quarter ended December 29, 2007.
2008 under revised conditions
10.84 Financing Agreement between Concord Keystone Sales Incorporated by reference to the Company 10-Q
Corp. and The CIT Group/Commercial Services, Inc. for the quarter ended December 29, 2007.
dated October 26, 2007
10.85 Express Creditline Loan Agreement with Citigroup Incorporated by reference to the Company 10-Q
dated April 17, 2008 for the quarter ended March 29, 2008.
10.86* Memorandum from Ira B. Lampert dated November 7, Filed herewith.
2008 to the Company regarding the waiver of certain
change in control payments
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 dated June 20, Incorporated by reference to the Company's 8-K
2005. filed with the SEC on June 20, 2005.
17.1 Resignation of J. David Hakman as a member of the Board Incorporated by reference to the Company's 8-K
of Directors filed with the SEC on November 23, 2004.
21 Subsidiaries of the Company Filed herewith.
23.1 Consent of BDO Seidman, LLP Filed herewith.
31.1 Certification of Principal Executive Officer pursuant to Filed herewith.
Rule 13a-14(a)/15d-14(a)
101
No. Description Method of Filing
--- ----------- ----------------
31.2 Certification of Principal Financial Officer pursuant to Filed herewith.
Rule 13a-14(a)/15d-14(a)
32.1 Certification of Principal Executive Officer pursuant to Filed herewith.
18 U.S.C. ss.1350
32.2 Certification of Principal Financial Officer pursuant to Filed herewith.
18 U.S.C. ss.1350
102
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: November 7, 2008 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.
/s/ Roger J. Beit Director
------------------------------
Roger J. Beit
103
Exhibit Index
No. Description
--- -----------
10.15 Letter agreement between Dah Sing and CCHK, dated
September 30, 2008
10.38 Amendment No. 8, dated November 5, 2008, to Amended and
Restated Employment Agreement dated as of May 1, 1997
10.86 Memorandum from Ira B. Lampert dated November 7,
2008 to the Company
21 Subsidiaries of the Company
23.1 Consent of BDO Seidman, LLP
31.1 Certification of Principal Executive Officer pursuant to
Rule 13a-14(a)/15d-14(a)
31.2 Certification of Principal Financial Officer pursuant to
Rule 13a-14(a)/15d-14(a)
32.1 Certification of Principal Executive Officer pursuant to
18 U.S.C. ss.1350
32.2 Certification of Principal Financial Officer pursuant to
18 U.S.C. ss.1350
104