UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended January 1, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to ___________
Commission file number 0-17038
Concord Camera Corp.
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(Exact name of registrant as specified in its charter)
New Jersey 13-3152196
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4000 Hollywood Blvd., 6th Floor, North Tower, Hollywood, Florida 33021
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(Address of principal executive offices) (Zip Code)
(954) 331-4200
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |_| No |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, no par value - 28,681,342 shares as of March 18, 2005
Index
Concord Camera Corp. and Subsidiaries
Page No.
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets as of January 1, 2005 (Unaudited) and July 3, 2004.....................3
Condensed consolidated statements of operations (Unaudited) for the quarter and six months
ended January 1, 2005 and December 27, 2003..................................................................4
Condensed consolidated statements of cash flows (Unaudited) for the six months ended January 1, 2005
and December 27, 2003........................................................................................5
Notes to condensed consolidated financial statements.........................................................6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................19
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................................................33
Item 4. Controls and Procedures...........................................................................................33
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................................................35
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds........................................................35
Item 6. Exhibits..........................................................................................................35
2
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS
CONCORD CAMERA CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
JANUARY 1, 2005 JULY 3,
(UNAUDITED) 2004
--------------- ---------
ASSETS
Current Assets:
Cash and cash equivalents $ 10,698 $ 18,323
Short-term investments 50,800 39,600
Accounts receivable, net 42,026 29,367
Inventories 39,030 52,418
Prepaid expenses and other current assets 5,695 11,563
--------- ---------
Total current assets 148,249 151,271
Property, plant and equipment, net 20,566 20,597
Other assets 16,143 17,649
--------- ---------
Total assets $ 184,958 $ 189,517
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings under credit facilities $ 18,101 $ 9,170
Accounts payable 33,240 18,783
Accrued expenses 15,367 16,395
Other current liabilities 1,807 6,320
--------- ---------
Total current liabilities 68,515 50,668
Other long-term liabilities 11,553 11,724
--------- ---------
Total liabilities 80,068 62,392
Commitments and contingencies
Stockholders' equity:
Blank check preferred stock, no par value,
1,000 shares authorized, none issued - -
Common stock, no par value, 100,000 shares
authorized; 30,925 and 30,572 shares issued
as of January 1, 2005 and July 3, 2004, respectively 143,518 143,073
Additional paid-in capital 4,853 4,853
Deferred stock-based compensation (7) (29)
Deferred share arrangement 624 413
Accumulated deficit (38,481) (16,152)
--------- ---------
110,507 132,158
Less: treasury stock, at cost, 1,735 and 1,599
shares as of January 1, 2005 and July 3, 2004, respectively (4,993) (4,620)
Less: common stock held in trust, 509 and 331
shares as of January 1, 2005 and July 3, 2004, respectively (624) (413)
--------- ---------
Total stockholders' equity 104,890 127,125
--------- ---------
Total liabilities and stockholders' equity $ 184,958 $ 189,517
========= =========
See accompanying notes
3
CONCORD CAMERA CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)
FOR THE QUARTER ENDED FOR THE SIX MONTHS ENDED
------------------------------------- -------------------------------
JANUARY 1, DECEMBER 27, JANUARY 1, DECEMBER 27,
2005 2003 2005 2003
---------- ------------ ---------- ------------
Net sales $ 54,333 $ 65,063 $ 97,347 $ 122,464
Cost of products sold 57,731 58,602 100,279 105,262
--------- --------- --------- ---------
Gross (deficit) profit (3,398) 6,461 (2,932) 17,202
Selling expenses 4,879 3,707 8,903 6,088
General and
administrative expenses 5,703 5,538 12,144 11,496
Variable stock-based
compensation expense - 48 - 3,098
Interest expense 306 207 528 370
Other (income) expense,
net (1,357) 288 (2,318) 180
--------- --------- --------- ---------
Loss before income taxes (12,929) (3,327) (22,189) (4,030)
Provision (benefit) for
income taxes 80 (416) 140 (504)
--------- --------- --------- ---------
Net loss $ (13,009) $ (2,911) $ (22,329) $ (3,526)
========= ========= ========= =========
Basic and diluted loss per
common share $ (0.44) $ (0.10) $ (0.76) $ (0.12)
========= ========= ========= =========
Weighted average
common shares
outstanding - basic
and diluted 29,342 28,701 29,271 28,582
========= ========= ========= =========
See accompanying notes.
4
CONCORD CAMERA CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
FOR THE SIX MONTHS ENDED
---------------------------------
JANUARY 1, DECEMBER 27,
2005 2003
---------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(22,329) $ (3,526)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 3,841 3,328
(Gain) loss related to available-for-sale investments (1,124) 916
Variable stock-based compensation expense - 3,098
Provision for specific inventory obsolescence 8,766 2,601
Restructuring reserve 160 -
Changes in operating assets and liabilities:
Accounts receivable, net (12,659) (13,227)
Inventories 4,622 (15,811)
Prepaid expenses and other current assets 817 (1,546)
Other assets 1,319 (701)
Accounts payable 15,002 (5,912)
Accrued expenses (1,708) (1,765)
Other current liabilities (1,421) 843
Other liabilities (171) (245)
-------- --------
Net cash used in operating activities (4,885) (31,947)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (1,667) (2,130)
Proceeds from sales of available-for-sale investments 13,401 5,000
(Purchases) sales of short-term investments, net (23,477) 23,270
-------- --------
Net cash (used in) provided by investing activities (11,743) 26,140
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings under credit facilities, net 8,931 -
Net proceeds from issuance of common stock 72 1,122
-------- --------
Net cash provided by financing activities 9,003 1,122
-------- --------
Net decrease in cash and cash equivalents (7,625) (4,685)
Cash and cash equivalents at beginning of period 18,323 14,071
-------- --------
Cash and cash equivalents at end of period $ 10,698 $ 9,386
======== ========
See accompanying notes.
5
CONCORD CAMERA CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 1, 2005
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the quarter ended January 1, 2005 ("Second Quarter Fiscal 2005") and
the six months ended January 1, 2005 ("Fiscal 2005 YTD") are not necessarily
indicative of the results that may be expected for the fiscal year ending July
2, 2005 ("Fiscal 2005"). For comparative purposes, the quarter ended December
27, 2003 has been defined as the ("Second Quarter Fiscal 2004"), and the six
months ended December 27, 2003 has been defined as ("Fiscal 2004 YTD"). The
balance sheet at July 3, 2004 has been derived from the audited financial
statements at that date, but does not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. Concord Camera Corp., a New Jersey
corporation, and its consolidated subsidiaries (collectively referred to as the
"Company") manage their business on the basis of one reportable segment. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended July 3, 2004 ("Fiscal 2004").
The Second Quarter Fiscal 2005 and Fiscal 2005 YTD results include three and six
months, respectively, of operating results of Jenimage Europe GmbH, a German
corporation, acquired by the Company in the fourth quarter of Fiscal 2004. Pro
forma results for Fiscal 2004 are not presented as the Fiscal 2004 results of
Jenimage Europe GmbH were not significant.
The Company reclassified certain auction rate securities totaling $24.2 million
as of June 28, 2003 from cash and cash equivalents to short-term investments
which resulted in a reclassification in the condensed consolidated statements of
cash flows for the six months ended December 27, 2003.
NOTE 2 - SIGNIFICANT CUSTOMERS:
During Fiscal 2005 YTD, we experienced a significant reduction in sales to three
significant customers. This reduction in sales had a material adverse impact on
the Company's results of operations. The reduction in sales to one customer was
due to such customer's overstocked inventory levels of single use cameras. We
expect sales of single use cameras to this customer ("Customer A") to increase
as its inventory levels decrease. Sales to this customer constituted 3.1% and
6.8% of the Company's net sales in Second Quarter Fiscal 2005 and Second Quarter
Fiscal 2004, respectively, and 3.7% and 17.6% of the Company's net sales during
Fiscal 2005 YTD and Fiscal 2004 YTD, respectively. The reduction in sales to
another customer ("Customer B") was attributable to a reduction in sales of
digital cameras. Sales to this customer constituted 16.6% and 35.6% of the
Company's net sales in Second Quarter Fiscal 2005 and Second Quarter Fiscal
2004, respectively, and 17.3% and 25.2% of the Company's net sales during Fiscal
2005 YTD and Fiscal 2004 YTD, respectively.
As previously reported in our Form 10-K for Fiscal 2004, we received
notification from Kodak that it intends to cease purchases under our two design
and manufacturing services ("DMS") contracts by the end of the Second Quarter
Fiscal 2005. During the Second Quarter Fiscal 2005 and the Second Quarter Fiscal
2004, sales to Kodak totaled 8.6% and 11.5% of the Company's net sales,
respectively. During Fiscal 2005 YTD and Fiscal 2004 YTD, sales to Kodak totaled
12.8% and 15.7% of the Company's net sales, respectively. We expect that the
cessation of sales to Kodak will have a material adverse effect on our results
of operations unless we are able to substantially increase sales to other
customers. The loss of any other significant customers or substantially reduced
sales to any other significant customers could have a material adverse impact on
results of operations.
For the quarter ended For the six months ended
--------------------------------------- --------------------------------------
January 1, December 27, January 1, December 27,
2005 2003 2005 2003
---------------- ---------------- --------------- ----------------
Percent of Net Sales Percent of Net Sales
Customer A 3.1% 6.8% 3.7% 17.6%
Customer B 16.6% 35.6% 17.3% 25.2%
Kodak 8.6% 11.5% 12.8% 15.7%
6
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The accompanying condensed consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
and include the accounts of the Company and its subsidiaries. All significant
intercompany balances and transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The more significant of the
Company's estimates include sales returns and other allowances, provision for
bad debts, inventory valuation charges, realizability of long-lived and other
assets, realizability of deferred income tax assets, and accounting for
litigation and settlements.
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.
Accordingly, 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 statement of
operations 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) expense, net" in the accompanying
condensed consolidated statements of operations. For the Second Quarter Fiscal
2005 and the Second Quarter Fiscal 2004, included in "Other (income) expense,
net" in the accompanying condensed consolidated statements of operations, are
approximately $1.1 million and $0.3 million, respectively, of net foreign
currency gains. For Fiscal 2005 YTD and Fiscal 2004 YTD, included in "Other
(income) expense, net" in the accompanying condensed consolidated statements of
operations, are approximately $2.1 million and $0, respectively, of net foreign
currency gains.
HEDGING ACTIVITIES
During the Second Quarter Fiscal 2005 and the Second Quarter Fiscal 2004, the
Company had no forward exchange contracts or other derivatives outstanding and
did not participate in any other type of hedging activities.
INVESTMENTS
At January 1, 2005 and July 3, 2004, the Company's "Short-term investments," as
classified in the accompanying condensed consolidated balance sheets, consisted
of auction rate debt securities and are considered available-for-sale
securities. During the Second Quarter Fiscal 2005, 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. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, net of tax, reported as a component of
accumulated other comprehensive income (loss) reported in the stockholders'
equity section unless the loss is other than temporary, and then it would be
recorded as an expense. Realized gains and losses, interest and dividends are
classified as investment income in "Other (income) expense, net" in the
accompanying condensed consolidated statements of operations. During the Second
Quarter Fiscal 2005, the Company recorded a $1.1 million gain on the sale of a
short-term investment denominated in European Central Bank Euros. The gain on
the short-term investment is included in "Other (income) expense, net" in the
accompanying condensed consolidated statements of operations. During the Second
Quarter Fiscal 2004, the Company recorded a $0.9 million loss as a result of a
sale of its short term investments on December 30, 2003. The loss on the short
term investments is included in "Other (income) expense, net" in the
accompanying condensed consolidated statements of operations. Investment income
of $0.3 million and $0.4 million related to the short-term investments is
included in "Other (income) expense, net" for the Second Quarter Fiscal 2005 and
the Second Quarter Fiscal 2004, respectively. Investment income of $0.5 million
and $0.9 million related to short-term investments was included in "Other
(income) expense, net" for Fiscal 2005 YTD and Fiscal 2004 YTD, respectively.
Investments held in deferred compensation rabbi trusts directed by participants
are classified as trading securities.
7
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 continually evaluates whether events and
circumstances have occurred that provide indications of impairment. The Company
records an impairment loss when indications of impairment are present and when
the undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amounts. The Company performs an impairment test by
summarizing the undiscounted cash flows expected to result from the use and
eventual sale of its long-lived assets. If the sum of the undiscounted cash
flows exceeds the carrying values of these assets then the Company concludes
these carrying values are recoverable. No impairment charges were recorded
during Fiscal 2005 YTD and Fiscal 2004.
For royalty-related assets, the Company will record an impairment loss if the
total expected royalty payments to be made over the life of an agreement,
excluding any minimum required payments, are less than the royalty-related
assets' carrying value. The total expected royalty payments to be made over the
life of an agreement are dependent on management's estimates about future sales
volumes. Because judgment is required to estimate future sales volumes, the
estimates are not necessarily indicative of the sales volumes that will actually
be realized in the future. Such assets reviewed include patents, prepaid amounts
related to licensing and royalty agreements and certain property, plant and
equipment.
REVENUE RECOGNITION
The Company recognizes revenue, in accordance with SAB Nos. 101 and 104, when
title and risk of loss are transferred to the customer, the sales price is fixed
or determinable, persuasive evidence of an arrangement exists, and
collectibility is probable. Title and risk of loss generally transfer when the
product is delivered to the customer or upon shipment, depending upon negotiated
contractual arrangements. Sales are recorded net of anticipated returns which
the Company estimates based on historical rates of return, adjusted for current
events as appropriate, in accordance with Statement of Financial Accounting
Standard No. 48, Revenue Recognition When Right of Return Exists ("SFAS No.
48"). If actual future returns are higher than estimated, then net sales could
be adversely affected. Management has assessed the appropriateness of the timing
of revenue recognition in accordance with SFAS No. 48. After considering the
requirements of SFAS No. 48, the Company concluded it would defer recognition of
revenue from one customer until such customer's transactions meet all of the
requirements of SFAS No. 48.
The Company 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), the
Company records the pricing discounts and allowances as a reduction of sales and
records the cost of free products ratably into cost of products sold based upon
the underlying revenue transaction.
ADVERTISING AND PROMOTIONAL ALLOWANCES
Advertising and promotional costs, which include advertising allowances and
other discounts, have been expensed as incurred. In accordance with EITF Issue
No. 01-09, Consideration Given by a Vendor to a Customer (Including a Reseller
of the Vendor's Products), which addresses the statement of operations
classification of consideration between a vendor and a retailer, the Company has
recorded certain variable selling expenses including advertising allowances,
other discounts and other allowances as a reduction of sales.
8
STOCK-BASED COMPENSATION
As currently permitted by SFAS No. 123, Accounting for Stock-Based Compensation
("SFAS No. 123"), as amended by SFAS No. 148, Accounting for Stock-Based
Compensation and Disclosure ("SFAS No. 148"), the Company has elected to follow
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees ("APB No. 25"), using the intrinsic value method and related
interpretations in accounting for its employee stock-based transactions and has
complied with the disclosure requirement of SFAS No. 148. Under APB No. 25,
compensation expense is calculated at the time of option grant based upon the
difference between the exercise price of the option and the fair market value of
the Company's no par value common stock ("Common Stock"). Compensation expense
is recognized over the option's vesting period. No compensation expense for
stock options is recognized for stock option awards granted at or above fair
market value.
In Fiscal 2002, the Company consummated an exchange offer for certain
outstanding stock options and, as a result, is required to apply variable
stock-based compensation accounting for the new options issued in the exchange
until they are exercised, cancelled or expired. For the repriced options, the
Company is only subject to variable stock-based compensation expense when the
Company's stock price is greater than $5.97. For the Second Quarter Fiscal 2005
and Fiscal 2005 YTD, the Company recorded $0 in variable stock-based
compensation expense in the condensed consolidated statements of operations
because its Common Stock price on January 1, 2005 was below the new repriced
stock options' exercise price of $5.97. For the Second Quarter Fiscal 2004, the
Company recorded $48,000 of variable stock-based compensation expense in the
condensed consolidated statements of operations because its Common Stock price
on December 27, 2003 was higher than the new repriced stock options' exercise
price of $5.97. For Fiscal 2004 YTD, the Company recorded $3.1 million of
variable stock-based compensation expense. Because the determination of variable
stock-based compensation expense or income associated with the repriced stock
options is significantly dependent upon the market price of the Common Stock at
the end of the applicable reporting period, it is not possible to determine its
future impact, either favorable or unfavorable, on the Company's consolidated
financial statements for prospective reporting periods. The Company considers
all of its variable stock-based compensation expense or income as a component of
general and administrative expenses.
For purposes of pro forma disclosures under SFAS No. 123, as amended by SFAS No.
148, the estimated fair value of the equity awards is amortized to expense over
the options' vesting period. The following table illustrates the effect on net
(loss) income and (loss) income per share if the fair value based method had
been applied to all outstanding and unvested awards in each period (in
thousands, except per share amounts):
For the quarter ended For the six months ended
---------------------------- -----------------------------
January 1, December 27, January 1, December 27,
2005 2003 2005 2003
---------- ------------ ---------- ------------
Net loss, as reported $(13,009) $ (2,911) $(22,329) $ (3,526)
Add: variable stock-based compensation
expense, net of related tax effects,
included in the determination of net
loss as reported - 42 - 2,711
Deduct: total stock-based compensation
expense determined under fair value
based method for all awards, net of
related tax effects (171) (353) (368) (694)
-------- -------- -------- --------
Pro forma net loss $(13,180) $ (3,222) $(22,697) $ (1,509)
======== ======== ======== ========
Loss per common share:
Basic and diluted - as reported $ (0.44) $ (0.10) $ (0.76) $ (0.12)
======== ======== ======== ========
Basic and diluted - pro forma $ (0.45) $ (0.11) $ (0.78) $ (0.05)
======== ======== ======== ========
9
INCOME TAXES
Management periodically evaluates the realizability of the Company's deferred
income tax assets. In the Second Quarter Fiscal 2005 and Fourth Quarter Fiscal
2004, based on all the available evidence, management determined that it was not
more likely than not that its deferred income tax assets will be fully realized.
Accordingly, the Company recorded a valuation allowance for the entire balance
of its deferred income tax assets as of January 1, 2005 and July 3, 2004.
The Company estimates its interim effective tax rate before consideration of a
valuation allowance based upon its projected consolidated annual effective
income tax rate. This rate is largely a function of the amounts of pre-tax
income or loss attributed to both domestic and foreign operations, the
application of their respective statutory tax rates and the anticipated
utilization of available net operating loss carryforwards to reduce taxable
income. A significant portion of the Company's pre-tax loss was generated in
Hong Kong, where the statutory tax rate is 8.75%. The Company recorded a
provision (benefit) for income taxes of $0.1 million and $(0.4) million for
Second Quarter Fiscal 2005 and Second Quarter Fiscal 2004, respectively. The
Company recorded a provision (benefit) for income taxes of $0.1 million and
$(0.5) million for Fiscal 2005 YTD and Fiscal 2004 YTD, respectively. The Second
Quarter Fiscal 2005 and Fiscal 2005 YTD income tax provision relates to income
tax liabilities incurred by certain of the Company's foreign subsidiaries. These
foreign subsidiaries do not have net operating losses to offset such
liabilities.
COMPREHENSIVE (LOSS) INCOME
Comprehensive (loss) income in accordance with SFAS No. 130, Reporting
Comprehensive Income ("SFAS No. 130"), includes net (loss) income adjusted for
certain revenues, expenses, gains and losses that are excluded from net (loss)
income under accounting principles generally accepted in the U.S. Unrealized
gains and losses related to the Company's available-for-sale investments are
excluded from net (loss) income. During the Second Quarter Fiscal 2005 and
Fiscal Year 2005 YTD, the Company's total comprehensive loss totaled ($13.0)
million and ($22.3) million, respectively, same as net loss for both periods,
because the Company did not have any items of other comprehensive income. During
the Second Quarter Fiscal 2004 and Fiscal Year 2004 YTD, the Company's total
comprehensive loss totaled ($2.9) million and ($3.5) million, respectively, same
as net loss for both periods, because the Company did not have any items of
other comprehensive income. During the Second Quarter Fiscal 2004, the Company
recorded a realized loss of $0.9 million related to its available-for-sale
securities and reclassified an unrealized loss of $0.9 million into expense
previously classified within "Accumulated other comprehensive loss" in the
condensed consolidated balance sheet as of September 27, 2003. The $0.9 million
reclassification included $0.2 million of unrealized loss recorded in the Second
Quarter Fiscal 2004. See "Investments" above for a further discussion of
available-for-sale securities.
LOSS PER SHARE
Basic and diluted loss per share are calculated in accordance with SFAS No. 128,
Earnings per Share ("SFAS No. 128"). All applicable loss per share amounts have
been presented in conformity with SFAS No. 128 requirements. During the Second
Quarter Fiscal 2005 and the Second Quarter Fiscal 2004, the Company issued
26,666 and 112,316 shares of Common Stock, respectively, upon the exercise of
stock options. During Fiscal 2005 YTD and Fiscal 2004 YTD, the Company issued
39,166 and 505,679 shares of Common Stock, respectively, upon the exercise of
stock options. In the Second Quarter Fiscal 2005 and Fiscal 2005 YTD, the
delivery of 509,054 of the total shares issued in the first quarter of Fiscal
2005 and Fiscal 2004 under the Company's Deferred Delivery Plan were deferred
but the weighted average effect of those shares was included in the denominator
of both basic and diluted loss per share calculations for each respective
period. In the Second Quarter Fiscal 2004 and Fiscal 2004 YTD, the delivery of
331,011 of the shares issued under the Company's Deferred Delivery Plan were
deferred but the weighted average effect of those shares was included in the
denominator of both basic and diluted loss per share calculations for each
respective period. In the Second Quarter Fiscal 2005 and Second Quarter Fiscal
2004, potentially dilutive securities were comprised of stock options to
purchase 287,631 and 2,094,973 shares of Common Stock, respectively, that were
not included in the calculation of diluted loss per share because their impact
was antidilutive. In the Fiscal 2005 YTD and Fiscal 2004 YTD, potentially
dilutive securities were comprised of stock options to purchase 297,209 and
1,977,478 shares of Common Stock, respectively, that were not included in the
calculation of diluted loss per share because their impact was antidilutive.
10
NOTE 4 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
On December 16, 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123 (revised 2004), Share-Based Payment, which is a revision of SFAS
No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(R) supersedes APB
No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95,
Statement of Cash Flows. Generally, the approach in SFAS No. 123(R) is similar
to the approach described in SFAS 123. However, SFAS No. 123(R) requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the income statement based on their fair values. Pro forma
disclosure is no longer an alternative. SFAS No. 123(R) must be adopted no later
than the first interim or annual period beginning after June 15, 2005. Early
adoption will be permitted in periods in which financial statements have not yet
been issued. The Company expects to adopt SFAS No. 123(R) on July 3, 2005.
SFAS No. 123(R) permits public companies to adopt its requirements using one of
two methods:
1. A "modified prospective" method in which compensation cost is
recognized beginning with the effective date (a) based on the
requirements of SFAS No. 123(R) for all share-based payments granted
after the effective date and (b) based on the requirements of SFAS No.
123 for all awards granted to employees prior to the effective date of
SFAS No. 123(R) that remain unvested on the effective date.
2. A "modified retrospective" method which includes the requirements of
the modified prospective method described above, but also permits
entities to restate based on the amounts previously recognized under
SFAS No. 123 for purposes of pro forma disclosures either (a) all prior
periods presented or (b) prior interim periods of the year of adoption.
The Company plans to adopt SFAS No. 123 using the modified-prospective method.
As permitted by SFAS No. 123, the Company currently accounts for share-based
payments to employees using the intrinsic value method per APB No. 25,
Accounting for Stock Issued to Employees, and, as such, generally recognizes no
compensation cost for employee stock options. Accordingly, the adoption of
Statement 123(R)'s fair value method may have a significant impact on our
results of operations, although it will have no impact on our overall financial
position. The impact of adoption of SFAS No. 123(R) cannot be predicted at this
time because it will depend on levels of share-based awards granted in the
future. However, had we adopted SFAS No. 123(R) in prior periods, the impact of
that standard would have approximated the impact of SFAS No. 123 as described in
the disclosure of pro forma net loss and loss per share in Note 3 - Summary of
Significant Accounting Policies in the accompanying condensed consolidated
financial statements. SFAS No. 123(R) also requires the benefits of tax
deductions in excess of recognized compensation cost to be reported as a
financing cash flow, rather than as an operating cash flow as required under
current literature. This requirement may reduce net operating cash flows and
increase net financing cash flows in periods after adoption. While the Company
cannot estimate what those amounts will be in the future (because they depend
on, among other things, when employees exercise stock options), the Company has
not recognized any operating cash flows in prior periods for such excess tax
deductions.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of
ARB No. 43, Chapter 4. SFAS No. 151 amends ARB 43, Chapter 4 to clarify that
abnormal amounts of idle facility expense, freight, handling costs, and wasted
material (spoilage) should be recognized as current-period charges. In addition,
the statement requires that allocation of fixed production overheads to the cost
of conversion be based on the normal capacity of the production facilities. The
provisions of the statement will be effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. The Company is currently
evaluating whether this statement will have a material effect on the Company's
consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, as amended by Interpretation No. 46R. FASB
Interpretation No. 46R requires consolidation of a variable interest entity if a
company's variable interest absorbs a majority of the entity's losses or
receives a majority of the entity's expected residual returns, or both. The
Company does not have any significant interests in any variable interest
entities and, therefore, the adoption of FASB Interpretation No. 46R during
Fiscal 2004 had no impact on the Company's consolidated financial statements.
11
NOTE 5 - INVENTORIES:
Inventories consist of the following:
(in thousands)
JANUARY 1, JULY 3,
2005 2004
---------- --------
Raw materials, components, and work-in-
process $9,697 $12,378
Finished goods 29,333 40,040
--------- --------
Total inventories $39,030 $52,418
========= ========
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.
During the Second Quarter Fiscal 2005, the Company recorded inventory related
pre-tax charges of approximately $6.7 million to reduce the carrying value of
certain finished goods, components, work-in-process, raw material and return
camera inventories below their cost basis to their estimated market value at
January 1, 2005. This reduction is primarily due to restructuring related
charges of $3.6 million attributable to the Company's decision to significantly
reduce its reliance on internally designed and manufactured digital cameras and
to a lesser extent, price declines. For the Second Quarter Fiscal 2005, the
inventory related pre-tax charges had the effect of decreasing inventories by
$6.7 million and increasing cost of products sold by $6.7 million. For Fiscal
2005 YTD, the inventory pre-tax charges had the effect of decreasing inventories
by $8.8 million and increasing cost of products sold by $8.8 million. See Note
12 - Restructuring and Other Related Charges.
During the Second Quarter Fiscal 2004, the Company recorded a pre-tax inventory
provision of $2.6 million primarily attributable to lowering the carrying amount
of finished goods related to a certain 3.0 megapixel charged-couple device
digital camera to the estimated market value and to the write-off of certain
components and raw materials related to the production of this product and
certain other digital cameras. For Fiscal 2004 YTD, the inventory provision had
the effect of decreasing inventory by $2.6 million and increasing cost of
products sold by $2.6 million.
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net are carried at cost less accumulated
depreciation and amortization. Depreciation is computed by use of the
straight-line method over the estimated useful lives of the respective assets.
Small tools and accessories used in production in the Peoples' Republic of China
("PRC") are charged to operations when purchased. Leasehold costs and
improvements are amortized on a straight-line basis over the term of their lease
or their estimated useful lives, whichever is shorter.
During the Second Quarter Fiscal 2005 and Second Quarter Fiscal 2004, the
Company reduced the carrying value of certain molds and tooling used in the
production of certain digital cameras because the products are either no longer
in production or have a shortened product life due to market conditions and
these specific molds and tooling do not have alternative production uses. For
the Second Quarter Fiscal 2005 and Fiscal 2005 YTD, the reduction in carrying
value of the molds and tooling had the effect of decreasing property, plant and
equipment, net by $0.5 million and increasing depreciation expense by $0.5
million, which is included in the cost of products sold. For the Second Quarter
Fiscal 2004 and Fiscal 2004 YTD, the reduction in carrying value of the molds
and tooling had the effect of decreasing property, plant and equipment, net by
$0.5 million and increasing depreciation expense by $0.5 million, which is
included in the cost of products sold. See Note 12 - Restructuring and Other
Related Charges.
12
NOTE 7 - SHORT-TERM BORROWINGS AND FINANCING FACILITIES:
The Company's Hong Kong subsidiary has various revolving demand credit
facilities providing an aggregate of approximately $38.3 million in borrowing
capacity. The revolving credit facilities are comprised of: 1) an approximate
$24.0 million Import Facility with an approximate $2.6 million Packing Credit
and Export sub-limit Facility, 2) an approximate $1.9 million Foreign Exchange
Facility and 3) an approximate $13.6 million Revolving Facility (collectively,
the "Hong Kong Financing Facilities"). The approximately $13.6 million Revolving
Facility is denominated in European Central Bank Euros, whereas the other
facilities are denominated in Hong Kong dollars. Since 1983, the Hong Kong
Dollar has been pegged to the United States Dollar. The Company guarantees all
of the amounts under the Hong Kong Financing Facilities. Pursuant to an
agreement dated June 10, 2004, the Company's Hong Kong subsidiary granted a
security interest in substantially all of its assets to HSBC. All of the Hong
Kong Financing Facilities are subject to certain covenants, and the Company was
in compliance with such covenants as of January 1, 2005 and July 3, 2004,
respectively. The Hong Kong Financing Facilities bear interest at variable
rates. At January 1, 2005, the Company had $13.6 million and $4.5 million in
short-term borrowings outstanding under the Revolving Facility and Import
Facility, respectively. At July 3, 2004, the Company had $6.2 million and $3.0
million in short-term borrowings outstanding under the Revolving Facility and
Import Facility, respectively. The weighted average borrowing rates on the
short-term borrowings as of January 1, 2005 and July 3, 2004, were 3.74% and
3.44%, respectively. On January 31, 2005, the Company's Hong Kong subsidiary
terminated and repaid the Revolving Facility. On or around February 24, 2005,
the Company and HSBC agreed, among other things, to reduce the Company's
borrowing capacity under the Import Facility from approximately $24 million to
approximately $14 million, and to subordinate approximately $20 million in
inter-company payables from the Company's Hong Kong subsidiary to the Company to
any amounts owing or which may in the future become owing to HSBC by the
Company's Hong Kong subsidiary. See Note 13 - Subsequent Events.
NOTE 8 - DEFERRED SHARE ARRANGEMENT:
The Company's Deferred Delivery Plan allows designated executive officers to
elect, subject to the approval of the Compensation Committee of the Company's
Board of Directors, 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
thereunder, on August 9, 2004, the Company's Chairman, Chief Executive Officer
and President ("Chairman") tendered 136,269 fully paid and owned shares of
Common Stock to the Company in payment of the exercise price (the "Payment
Shares") of his option to purchase 314,312 shares of Common Stock ("2005
Delivery Plan Transaction"). Upon the 2005 Delivery Plan Transaction, the
136,269 Payment Shares were classified as "Treasury stock" and recorded at a
cost of $373,375. The Company issued 314,312 new shares of Common Stock and
classified them as "Common stock" at a cost of $373,375, of which 136,269 shares
were issued to the Chairman in exchange for the Payment Shares. The remaining
178,043 shares, the delivery of which was deferred by the Chairman, were issued
to a rabbi trust. The 178,043 shares held in the rabbi trust have been recorded
at a cost of $211,500 and are classified as "Common stock held in trust." The
corresponding liability to the Chairman has been recorded at $211,500 and is
classified as "Deferred share arrangement" in the stockholders' equity section
of the condensed consolidated balance sheet.
Pursuant to an election previously made under the Deferred Delivery Plan, on
July 14, 2003, the Chairman exercised an option to purchase 387,000 shares of
Common Stock and tendered 55,989 fully paid and owned shares of Common Stock to
the Company in payment of the exercise price ("2004 Delivery Plan Transaction").
Upon the 2004 Delivery Plan Transaction, the 55,989 Payment Shares were
classified as "Treasury stock" and recorded at a cost of $482,625. The Company
issued 387,000 new shares of Common Stock and classified them as "Common stock"
at a cost of $482,625 of which 55,989 shares were issued to the Chairman in
exchange for the Payment Shares. The remaining 331,011 shares, the delivery of
which was deferred by the Chairman, were issued to a rabbi trust. The 331,011
shares held in the rabbi trust have been recorded at a cost of $412,825 and have
been classified as "Common stock held in trust." The corresponding liability to
the Chairman has been recorded at $412,825 and is classified as "Deferred share
arrangement" in the stockholders' equity section of the condensed consolidated
balance sheet.
NOTE 9 - COMMITMENTS AND CONTINGENCIES:
LICENSE AND ROYALTY AGREEMENTS
In May 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 provided for a one-time
payment of (euro)1,500,000 or approximately $1.8 million, a royalty of one-half
of one percent (0.5%) of net sales of non-professional consumer imaging products
bearing the JENOPTIK brand name for the first ten (10) years of the license and
a royalty of six-tenths of one percent (0.6%) for the second ten (10) years of
the license. There are no minimum guaranteed royalty payments.
13
In August 2002, the Company entered into two worldwide trademark license
agreements with Polaroid Corporation ("Polaroid"). These agreements provide for
the exclusive (with the exception of products already released by Polaroid into
the distribution chain), worldwide use by the Company of the POLAROID brand
trademark in connection with the manufacture, distribution, promotion and sale
of single use cameras and traditional film based cameras, including zoom
cameras, and certain related accessories. The licenses do not include instant or
digital cameras. Each license includes an initial term of three and a half years
and may be renewed under the same economic terms at the Company's option for an
additional three-year period. Each license agreement provides for the payment by
the Company of $3.0 million of minimum royalties, or $6.0 million in total,
which amounts have been paid and will be fully credited against percentage
royalties. The minimum royalty payments were recorded as prepaid assets. These
royalty-related assets are amortized based upon a percentage of estimated sales
expected over the remaining life of the licensing agreements.
Effective January 1, 2001, the Company entered into a twenty-year license
agreement with Fuji Photo Film Ltd ("Fuji"). Under the license agreement, Fuji
granted to the Company a worldwide (excluding Japan until January 1, 2005)
non-exclusive license to use certain of Fuji's patents and patent applications
related to single-use cameras. 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 condensed consolidated balance sheets at
January 1, 2005 and July 3, 2004, was an asset associated with the Fuji license.
The Company has also recorded as a liability a corresponding amount that was
included in licensing related obligations in "Other long-term liabilities" in
the accompanying condensed consolidated balance sheets at January 1, 2005 and
July 3, 2004, which was equal to the present value of future license fee
payments. These assets are amortized based on quantities of units produced.
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. The Company's license and royalty agreements expire at various dates
through Fiscal 2021. Total amortization and royalty expense for all licensing
and royalty agreements for Second Quarter Fiscal 2005 and Second Quarter Fiscal
2004, was $1.6 million and $1.5 million, respectively. Total amortization and
royalty expense for all licensing and royalty agreements for Fiscal 2005 YTD and
Fiscal 2004 YTD, was $3.0 million and $3.3 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 10 - Litigation and
Settlements. The Company has also received notifications from three entities,
one of which was a significant customer of the Company (the "customer"),
alleging that certain of the Company's digital products infringe upon those
entities' respective patents. The Company is engaged in discussions with these
three entities regarding resolution of the potential claims.
Based on our initial assessment of the first 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
the customer and the other entity for digital camera sales through February 28,
2005 to be between $0 and approximately $4.0 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 the Company's right to be indemnified by the suppliers in the event the
Company is required to pay royalties to either the customer or the other entity
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, no
amounts have been accrued related to these claims as of January 1, 2005. With
respect to the third claim, it is too early to assess the probability of a
favorable or unfavorable outcome or the loss or range of loss, if any. The
Company is assessing potential claims of indemnification against certain of its
suppliers with respect to this claim.
14
PURCHASE COMMITMENTS
At January 1, 2005, the Company had $15.7 million in non-cancelable purchase
commitments relating to the procurement of raw materials, components, and
finished goods inventory from various suppliers.
NOTE 10 - LITIGATION AND SETTLEMENTS:
In July 2002, a class action complaint was filed against the Company and certain
of its officers in the United States District Court for the Southern District of
Florida by individuals purporting to be shareholders of the Company. On August
20, 2002, the Company filed a motion to dismiss the complaint and in December
2002, the Company's motion was granted by the court and the complaint was
dismissed. In January 2003, an amended class action complaint (the "Amended
Complaint") was filed adding certain of the Company's current and former
directors as defendants. The lead plaintiffs in the Amended Complaint sought to
act as representatives of a class consisting of all persons who purchased the
Company's Common Stock (i) issued pursuant to the Company's September 26, 2000
secondary offering (the "Secondary Offering") or (ii) during the period from
September 26, 2000 through June 22, 2001, inclusive. On April 18, 2003, the
Company filed a motion to dismiss the Amended Complaint and on August 27, 2004,
the court (i) dismissed all claims against the defendants related to the
Secondary Offering and (ii) dismissed all claims against the defendants related
to allegations of misconduct occurring before February 2001 or after April 2001
(the period February 2001 through April 2001 hereinafter referred to as the
"Shortened Class Period"). The allegations remaining in the Amended Complaint
are centered around claims that the Company failed to disclose, in periodic
reports it filed with the Securities and Exchange Commission ("SEC") and in
press releases it made to the public during the Shortened Class Period regarding
its operations and financial results, that a large portion of its accounts
receivable was represented by a delinquent and uncollectible balance due from
then customer, KB Gear Interactive, Inc ("KB Gear"), and claims that such
failures artificially inflated the price of the Common Stock. The Amended
Complaint seeks unspecified damages, interest, attorneys' fees, costs of suit
and unspecified other and further relief from the court. Pursuant to a
scheduling order of the court, trial in this matter is scheduled to commence on
November 13, 2006. The Company intends to vigorously defend the lawsuit and will
continue to engage in motion practice to dismiss or otherwise limit the claims
set forth in the Amended Complaint. Although the Company believes this lawsuit
is without merit, its outcome cannot be predicted, and if adversely determined,
the ultimate liability of the Company, which could be material, cannot be
ascertained. On September 17, 2002, the Company was advised by the staff of the
SEC that it is conducting an informal inquiry related to the matters described
above and requested certain information and materials related thereto. On
October 15, 2002, the staff of Nasdaq also requested certain information and
materials related to the matters described above and as to matters related to
the previously reported embezzlement of Company funds by a former employee,
uncovered in April 2002. The Company provided the requested information to the
SEC and Nasdaq. The Company has not received any further communication from the
SEC with respect to the informal inquiry or from Nasdaq with respect to its
request since the Company last responded in February 2003.
Between September and November of 2004, a number of related class action
complaints were filed against the Company and certain of its officers in the
United States District Court for the Southern District of Florida by individuals
purporting to be shareholders of the Company. If not dismissed by the court, the
Company expects these cases to be consolidated into one case. The plaintiffs in
these complaints seek to act as representatives of a class consisting of all
persons who purchased the Company's Common Stock during either the period from
August 14, 2003 through May 10, 2004, inclusive, or the period from August 14,
2003 through October 4, 2004, inclusive (the "Class Period"), and who were
allegedly damaged thereby. The allegations in the complaints are centered around
claims that the Company failed to disclose, in periodic reports it filed with
the SEC and in press releases it made to the public during the Class Period
regarding its operations and financial results, the full extent of the Company's
excess, obsolete and otherwise impaired inventory, and claims that such failures
artificially inflated the price of the Common Stock. The complaints seek
unspecified damages, interest, attorneys' fees, costs of suit and unspecified
other and further relief from the court. The Company intends to vigorously
defend the lawsuits. The lawsuits are in the earliest stage and discovery has
not yet commenced. Although the Company believes the lawsuits are without merit,
the outcome cannot be predicted, and if adversely determined, the ultimate
liability of the Company, which could be material, cannot be ascertained. In a
letter dated November 19, 2004, the Company was advised by the staff of the SEC
that it is conducting an investigation related to the matters described above.
The Company has provided requested information to the SEC and continues to
communicate and cooperate with the SEC with respect to the investigation and any
further requests for information.
15
On November 16, 2004, a shareholder derivative suit was initiated against
certain of the Company's current and former officers and directors, and the
Company as a nominal defendant, in the United States District Court for the
District of New Jersey by an individual purporting to be a shareholder of the
Company. The complaint alleges that the individual defendants breached their
duties of loyalty and good faith by causing the Company to misrepresent its
financial results and prospects, resulting in the class action complaints
described in the preceding paragraph. The complaint seeks unspecified damages,
repayment of salaries and other remuneration from the individual defendants,
interest, attorneys' fees, costs of suit and unspecified other and further
relief from the court. In March 2005, the Court granted a motion by the
individual defendants and the Company to transfer the action to the United
States District Court for the Southern District of Florida where the related
class action suits are currently pending. The lawsuit is in the earliest stage
and discovery has not yet commenced. Although the Company believes this lawsuit
is without merit, its outcome cannot be predicted, and if adversely determined,
the ultimate effect on the Company, which could be material, cannot be
ascertained.
Pursuant to the Company's Certificate of Incorporation, as amended, the personal
liability of the Company's directors is limited to the fullest extent permitted
under the New Jersey Business Corporation Act ("NJBCA"), and the Company is
required to indemnify its officers and directors to the fullest extent permitted
under the NJBCA. In accordance with the terms of the Certificate of
Incorporation and the NJBCA, the Board of Directors approved the payment of
expenses for each of the current and former officers and directors named as
defendants (the "individual defendants") in the above described class action and
derivative action litigations (collectively, the "actions") in advance of the
final disposition of such actions. The individual defendants have executed and
delivered to the Company written undertakings to repay the Company all amounts
so advanced if it shall ultimately be determined that the individual defendants
are not entitled to be indemnified by the Company under the NJBCA.
In April 2004, a patent infringement complaint was filed by Compression Labs,
Inc. against 28 defendants, including the Company, in the United States District
Court for the Eastern District of Texas. The complaint asserts that the
defendants have conducted activities which infringe U.S. Patent No. 4,698,672,
entitled Coding System for Reducing Redundancy. The complaint seeks unspecified
damages, interest, attorneys' fees, costs of suit and unspecified other and
further relief from the court. In February 2005, pursuant to an order of the
Judicial Panel on Multi-District Litigation, this action was transferred to the
United States District Court for the Northern District of California. It is too
early to assess the probability of a favorable or unfavorable outcome or the
loss or range of loss, if any. The Company has notified several third parties of
its intent to seek indemnity from such parties with respect to this action.
On October 6, 2004, a patent infringement complaint was filed by Honeywell
International, Inc. and Honeywell Intellectual Properties, Inc., against 27
defendants, including the Company, in the United States District Court for the
District of Delaware. The complaint asserts that the defendants have conducted
activities which infringe U.S. Patent No. 5,280,371, entitled Directional
Diffuser for a Liquid Crystal Display. The complaint seeks unspecified damages,
interest, attorneys' fees, costs of suit and unspecified other and further
relief from the court. The lawsuit is in the earliest stage, and discovery has
not yet commenced. It is too early to assess the probability of a favorable or
unfavorable outcome or the loss or range of loss, if any. The Company has
notified several third parties of its intent to seek indemnity from such parties
with respect to this action. The Company is involved from time to time in
routine legal matters incidental to its business. Based upon information known
to management, the Company believes that the resolution of such matters will not
have a material adverse effect on its financial position or results of
operations.
16
NOTE 11 - RELATED PARTY TRANSACTIONS:
From May 1, 2002 through June 15, 2003, William J. Lloyd, who was a member of
the Company's Board of Directors during that time, provided consulting services
to the Company on an as needed basis in exchange for a $5,000 per month retainer
and reimbursement of all reasonable business expenses. The Company accepted Mr.
Lloyd's resignation from the Board of Directors, effective July 31, 2003, and
the consulting relationship was terminated effective June 15, 2003. In
connection with Mr. Lloyd's resignation, the Board approved an extension of the
expiration dates of certain options held by Mr. Lloyd, and the continued vesting
through January 2005 of 12,000 shares subject to one of his options. The
modification of the options' terms resulted in a non-recurring charge of
$105,000 to compensation expense recorded in the First Quarter Fiscal 2004. In
accordance with FASB Interpretation No. 44, Accounting for Certain Transactions
Involving Stock Compensation, an interpretation of APB Opinion No. 25, the
modification of the options' terms did not affect any other options granted
under the relevant stock option plan and did not result in the application of
variable accounting to these options.
Effective December 1, 2004, J. David Hakman resigned from the Company's Board of
Directors. In connection with Mr. Hakman's resignation, the Board approved an
extension of the expiration dates of certain options held by Mr. Hakman. The
modification of the options' terms did not result in any compensation expense.
In accordance with FASB Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation, an interpretation of APB Opinion No.
25, the modification of the options' terms did not affect any other options
granted under the relevant stock option plan and did not result in the
application of variable accounting to these options.
NOTE 12 - RESTRUCTURING AND OTHER RELATED CHARGES:
During Second Quarter Fiscal 2005, the Company announced a restructuring plan
and cost-reduction initiatives ("Restructuring Initiative") designed to
significantly reduce the Company's reliance on internally designed and
manufactured digital cameras and increase the design, co-development and
purchase of digital cameras from contract manufacturers so as to continue to
provide competitive products to the retail market. The Company's reliance on
internally designed and manufactured digital cameras is expected to be
significantly reduced by the end of the fourth quarter of Fiscal 2005. The
Restructuring Initiative is a result of the Company's previously announced
strategic review process to determine how the Company may better compete in the
digital camera market.
The Restructuring Initiative was substantially implemented by the end of Second
Quarter Fiscal 2005 and consisted of the termination of approximately 1,200
employees either as a result of voluntary or involuntary terminations. These
employees were primarily employed in manufacturing, engineering, sales,
marketing and administration functions in the PRC. During the Second Quarter
Fiscal 2005, the Company incurred approximately $0.7 million in expense related
to employee severance costs and expects to incur an additional $0.7 million
related to employee severance costs relating to the Restructuring Initiative
during the remainder of Fiscal 2005. At January 1, 2005, the Company had a
restructuring reserve recorded in the amount of $0.2 million representing the
unpaid amount of the accrued employee severance costs, and such expenses are
included in the financial statement caption "Accrued expenses" in the
accompanying condensed consolidated financial statements.
In connection with the Restructuring Initiative, the Company recorded
restructuring-related inventory charges in the amount of $3.6 million during the
Second Quarter Fiscal 2005 primarily related to raw material, component, and
finished goods inventories related to digital cameras the Company will no longer
manufacture. Since the Company has ceased the production of most of its digital
cameras, the Company reduced the carrying value of certain molds and tooling
used in the production of these digital cameras during Second Quarter Fiscal
2005 because the products are either no longer in production or have a shortened
product life and these specific molds and tooling do not have alternative
production uses. The Company recorded an additional $0.5 million in depreciation
expense related to the reduction in useful lives of the molds and tooling. See
Note 5 - Inventories and Note 6 - Property, Plant, and Equipment, Net.
17
(in thousands)
Restructuring Liability Severance
----------------------- ---------
Charges $702
Payment (542)
--------
Accrual at 1/1/05 $160
========
Inventory
Restructuring Charges Severance Impairment Total
--------------------- --------- ---------- --------
Cost of products sold $701 $3,601 $4,302
General and administrative expense 1 - 1
------- -------- -------
Total $702 $3,601 $4,303
======= ======== =======
In connection with the Restructuring Initiative, the Company also incurred other
charges related to retention costs of employees that were not terminated. The
services of these employees benefit parts of the business other than the
manufacture of digital cameras. During Second Quarter Fiscal 2005, the Company
incurred approximately $30,000 in expenses related to employee retention costs
and expects to incur a total expense of approximately $0.5 million in retention
costs through December 31, 2005, provided that such employees are retained
through that date.
NOTE 13 - SUBSEQUENT EVENTS:
Termination and Repayment of Revolving Facility. On January 31, 2005, the
Company's Hong Kong subsidiary terminated its approximately $13.6 million
Revolving Facility (the "Facility") and repaid approximately $13.0 million
(decreased from January 1, 2005 quarter-end due to foreign currency rate
fluctuations), constituting all obligations owed thereunder. The Facility was
guaranteed by the Company. Neither the Company nor the Company's Hong Kong
subsidiary incurred any termination fees or penalties in connection with the
repayment and termination of the Facility.
Nasdaq Delisting Notification. The Company previously announced that it received
a letter from the Nasdaq Listing Qualifications Staff notifying the Company
that, because of the Company's delay in timely filing its Quarterly Report on
Form 10-Q for its first fiscal quarter ended October 2, 2004 ("First Quarter
Form 10-Q"), the Company is not in compliance with the filing requirements for
continued listing on Nasdaq as set forth in Nasdaq Marketplace Rule 4310(c)(14).
The conversion of the Company's management information systems in August 2004
from its existing Legacy systems to a new world-wide, fully integrated
Enterprise Resource Planning ("ERP") System resulted in inefficiencies and
delays in providing certain information necessary to timely file the Company's
First Quarter Form 10-Q. As a result, the Company's common shares are subject to
delisting from the Nasdaq National Market, and the trading symbol for the
Company's common stock was changed from "LENS" to "LENSE" at the opening of
business on November 26, 2004. The Company appealed Nasdaq's determination and
requested an exception to regain compliance with the Nasdaq listing standards.
In its appeal, the Company advised Nasdaq that it expected to file its First
Quarter Form 10-Q on or before January 31, 2005. The Company subsequently
modified its request for an exception to regain compliance with the listing
standards and advised Nasdaq that it expected to file its First Quarter Form
10-Q on or before February 14, 2005 and its Quarterly Report on Form 10-Q for
the second quarter of Fiscal 2005 ("Second Quarter Form 10-Q") on or before
March 31, 2005. Nasdaq notified the Company on February 10, 2005 that it granted
the Company's request for an exception and for continued listing on the Nasdaq
National Market, subject to (a) the Company disclosing preliminary unaudited
financial results for First Quarter Fiscal 2005 on or before February 15, 2005;
(b) the Company filing its First Quarter Form 10-Q on or before February 18,
2005; and (c) the Company filing its Second Quarter Form 10-Q on or before March
31, 2005. The Company has complied with each of these requirements. In addition,
Nasdaq specified that the Company must be able to demonstrate compliance with
all requirements for continued listing on the Nasdaq National Market. The
Company's trading symbol for its common stock will remain "LENSE" pending a
determination by Nasdaq that the Company is fully compliant with all Nasdaq
listing requirements. Nasdaq reserves the right to reconsider the terms of this
exception based on any event, condition, or circumstance that exists or develops
that would make continued listing of the Company's securities on the Nasdaq
National Market inadvisable or unwarranted. Furthermore, the Nasdaq Listing and
Hearing Review Council may, on its own motion, review the decision within 45
calendar days, and may affirm, modify, reverse, dismiss or remand the decision.
On February 25, 2005, the Company received another notice from the Nasdaq
Listing Qualifications Staff indicating that because the Company had not filed
its Second Quarter Form 10-Q which was due February 10, 2005, the Company was
not in compliance with Market Place Rule 4310(c)(14). Consistent with prior
communication to and from Nasdaq, the Company filed this Second Quarter Form
10-Q on or before March 31, 2005. The Company's securities have remained listed
pending the conclusion of the appeal.
Reduction in Borrowing Capacity Under Import Facility. On or around February 24,
2005, the Company and HSBC agreed, among other things, to reduce the Company's
borrowing capacity under the Import Facility from approximately $24 million to
approximately $14 million, and to subordinate approximately $20 million in
inter-company payables from the Company's Hong Kong subsidiary to the Company to
any amounts owing or which may in the future become owing to HSBC by the
Company's Hong Kong subsidiary.
18
Additional Cost-Reduction Initiatives. As a result of the Company's continued
evaluation of its cost structure and the strategic review process, subsequent to
January 1, 2005, the Company made a decision to reduce certain additional costs,
including the elimination of certain employee positions. The Company anticipates
incurring a charge in the amount of approximately $0.6 million in the third
quarter of Fiscal 2005 for employee severance costs in connection with these
additional cost-reduction initiatives. The cost reductions resulting from these
additional cost-reduction initiatives are expected to be realized principally in
Fiscal 2006.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Annual Report on Form 10-K, including the consolidated financial statements, and
the related notes thereto, for the fiscal year ended July 3, 2004 ("Fiscal
2004"), of Concord Camera Corp. and subsidiaries (collectively referred to as
"Concord," the "Company," "we," "us," or "our"). Except for historical
information contained herein, the matters discussed below are forward-looking
statements made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Such statements involve risks and uncertainties,
including but not limited to, economic, governmental, political, competitive and
technological factors affecting our operations, markets, products, prices and
other factors discussed elsewhere in this report and other reports filed by us
with the Securities and Exchange Commission ("SEC"). These factors may cause
results to differ materially from the statements made in this report or
otherwise made by or on our behalf. See "Forward-Looking Information: Certain
Cautionary Statements" below.
OVERVIEW
--------
This overview should be read in conjunction with the overview in Management's
Discussion and Analysis of Financial Condition and Results of Operations in our
Annual Report on Form 10-K for Fiscal 2004 and our First Quarter Form 10-Q.
We design, develop, manufacture and sell on a worldwide basis popularly priced,
easy-to-use image capture products. Our products include digital, 35 mm
traditional and single use cameras. We manufacture and assemble products in the
Peoples Republic of China ("PRC") for sales to our retail sales and distribution
("RSD") customers and to our design and manufacturing services ("DMS")
customers. We also purchase a significant amount of products from third-party
manufacturers for sale to our RSD customers. We expect purchases from
third-party manufacturers to continue to increase in Fiscal 2005 and ensuing
years as a result of our previously announced restructuring plan and to ensure
that we deliver the optimal product mix on a timely and cost effective basis to
our customers.
During the fourth quarter of Fiscal 2004, the Company acquired Jenimage Europe
GmbH, a German corporation ("Jenimage"). Accordingly, the Second Quarter Fiscal
2005 and Fiscal 2005 YTD results include three months and six months,
respectively, of Jenimage's operating results. Pro forma results for Fiscal 2004
are not presented as the Fiscal 2004 results of Jenimage were not significant.
As previously reported, Fiscal 2004 losses were primarily attributable to our
digital camera products. As a result, in Fiscal 2004, we initiated a strategic
review process to determine how we may better compete in the digital camera
market. As part of this process, we evaluated and continue to evaluate a number
of strategies related to digital cameras. The strategic review process led to
the restructuring plan and other cost-reduction initiatives announced and
substantially implemented in December 2004. The restructuring plan involves
significantly reducing our reliance on internally designed and manufactured
digital cameras and increasing the design, co-development and purchase of
digital cameras from contract manufacturers. The objective of the restructuring
plan and other cost-reduction initiatives is to significantly reduce costs and
expenses and to achieve a more competitive business model with a goal to return
to profitability. We are continuing to review our strategies, including the
implementation of additional cost-reduction initiatives and more stringent sales
guidelines to improve gross profit margins on the sale of the Company's products
in the Americas, Europe, and elsewhere, as well as the extent of our future
participation in the digital camera market.
19
During First Quarter Fiscal 2005, the Company implemented its new world-wide,
fully integrated Enterprise Resource Planning System ("ERP System"), in part to
address certain reportable conditions and material weaknesses in the Company's
internal controls and to improve the overall effectiveness of the Company's
internal controls and disclosure controls. Although the Company believes that
effective and efficient operation of the ERP System will reduce the reportable
conditions and material weaknesses and improve the overall effectiveness of the
Company's internal controls and disclosure controls, the Company experienced
significant operational issues in connection with the implementation of the ERP
System that caused significant delays in accumulating data, performing analysis
and evaluating results necessary to support the timely preparation of the
Company's First Quarter Form 10-Q. As a result, the financial statement closing
process deteriorated significantly during First Quarter Fiscal 2005, and the
delay in filing the First Quarter Form 10-Q negatively impacted the Company's
ability to timely file its Second Quarter Form 10-Q. During the Second Quarter
Fiscal 2005, the Company believes that it was able to stabilize and prevent
further deterioration of its internal controls. Moreover, the Company did not
detect or identify any new material weaknesses or reportable conditions. During
the Second Quarter Fiscal 2005 and subsequent thereto, the Company believes that
it made progress in operating the ERP System. Nevertheless, the Company
continues to experience inefficiencies and delays with the ERP system and the
financial statement closing process generally, and the reportable conditions and
material weaknesses in the Company's internal controls continue to exist. As we
become more proficient in operating the ERP System, we believe our internal
controls and disclosure controls will improve. See Item 4 - Controls and
Procedures.
The loss in Second Quarter Fiscal 2005, was higher than Second Quarter Fiscal
2004 due to the following factors:
1 Restructuring and other related charges;
2. Lower single use and digital camera net sales and gross
profit;
3. Digital camera and component inventory provisions;
4. Lower single use and digital camera production volumes
resulting in under absorption of manufacturing labor and
overhead and other costs; and
5. Higher selling costs.
1. Restructuring and Other Related Charges
During Second Quarter Fiscal 2005, we incurred expenses relating to the
restructuring and other related charges totaling approximately $4.3 million, of
which approximately $0.6 million in cash was disbursed during the quarter.
Although during Second Quarter Fiscal 2005, we incurred approximately $4.3
million in restructuring and other related charges, we expect to incur
additional charges of approximately $2.4 million during the third and fourth
quarters of Fiscal 2005 and $0.2 million during Fiscal 2006. During the Second
Quarter Fiscal 2005, the Company recorded additional depreciation expense
related to equipment, tooling, and other fixed assets of $0.5 million and
expects to incur additional depreciation expense of approximately $1.0 million
during the third and fourth quarters of Fiscal 2005. See Note 12 - Restructuring
and Other Related Charges in the Notes to Condensed Consolidated Financial
Statements. The cost reductions resulting from the previously announced
restructuring plan and other cost-reduction initiatives are expected to be
realized in the second half of Fiscal 2005 and in Fiscal 2006. The Company
expects to make payments relating to the restructuring and other related charges
of $0.8 million during the third and fourth quarters of Fiscal 2005 and expects
to make payments of $0.4 million during Fiscal 2006. The Company plans to fund
these disbursements from its cash and cash equivalents.
2. Lower Single Use and Digital Camera Net Sales and Gross Profit.
During Second Quarter Fiscal 2005, we experienced a reduction in single use
camera sales resulting primarily from (a) reduced sales to a significant RSD
customer due to overstocked inventory levels, and (b) reduced sales to Kodak as
a result of winding down of purchases under our two DMS contracts with Kodak.
Reduced single use camera sales volume resulted in lower gross profit.
Additionally, we continued to experience significant competition in the digital
camera market in the United States and Europe, and we experienced a reduction in
sales of digital cameras to a significant RSD customer. See Note 2 - Significant
Customers in the Notes to Condensed Consolidated Financial Statements. While the
aggregate volume of digital camera sales increased over last year's comparable
period due to the inclusion of Jenimage, average digital camera selling prices
declined because of competitive pricing and weak sell through with certain
retail customers. As needed, we reduced the selling prices of certain of our
digital camera products to meet this significant competition. These reduced
selling prices led to lower gross profit on digital cameras.
20
3. Digital Camera and Component Inventory Provisions
Significant competition resulted in substantial price declines in digital
cameras. These price declines resulted in lower gross profit and a $3.1 million
inventory charge to lower the carrying values of certain digital camera
components, finished goods and return camera inventory below their cost basis to
their estimated market values. Sales of certain digital cameras whose carrying
values have been lowered in the prior and current periods to estimated market
values resulted in significantly lower gross profit, or a higher gross deficit.
Further, we continue to anticipate that for the remainder of Fiscal 2005 sales
of certain digital cameras whose carrying values were reduced previously and in
this quarter will result in significantly lower gross profit, or a higher gross
deficit, in both dollars and as a percentage of net sales as there will be lower
selling prices on the sales of these products.
4. Lower Single Use and Digital Camera Production Volumes Resulting in Under
Absorption of Manufacturing Labor and Overhead and Other Costs.
Decreased demand for single use and digital cameras and, therefore, lower
production volumes in our manufacturing facilities created significant under
absorption of manufacturing labor and overhead and other costs. These factors
led to significantly lower gross profit, or a higher gross deficit, both in
dollars and as a percentage of sales.
5. Higher Selling Costs
We incurred higher selling costs primarily from the cost of additional sales and
marketing personnel, royalty expense related to the Polaroid brand licenses and
increases in freight-related shipping costs. In addition, selling costs
increased due to Jenimage.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the Condensed Consolidated Financial Statements and Notes thereto. Our
application of accounting policies affects these estimates and assumptions.
Actual results could differ from these estimates under different assumptions or
conditions. We believe the following critical accounting policies affect the
more significant estimates and assumptions used in the preparation of our
Condensed Consolidated Financial Statements and Notes thereto:
REVENUE RECOGNITION
The Company recognizes revenue, in accordance with SAB Nos. 101 and 104, when
title and risk of loss are transferred to the customer, the sales price is fixed
or determinable, persuasive evidence of an arrangement exists and collectibility
is probable. Title and risk of loss generally transfer when the product is
delivered to the customer or upon shipment, depending upon negotiated
contractual arrangements. Sales are recorded net of anticipated returns which
the Company estimates based on historical rates of return, adjusted for current
events as appropriate, in accordance with Statement of Financial Accounting
Standard No. 48, Revenue Recognition When Right of Return Exists ("SFAS No.
48"). If actual future returns are higher than estimated, then net sales could
be adversely affected. Management has assessed the appropriateness of the timing
of revenue recognition in accordance with SFAS No. 48. After considering the
requirements of SFAS No. 48, the Company concluded it would defer recognition of
revenue from one customer until such customer's transactions meet all of the
requirements of SFAS No. 48.
21
The Company 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), the
Company records the pricing discounts and allowances as a reduction of sales and
records the cost of free products ratably into cost of products sold based upon
the underlying revenue transaction.
ADVERTISING AND PROMOTIONAL ALLOWANCES
Advertising and promotional costs, which include advertising allowances and
other discounts, have been expensed as incurred. In accordance with EITF Issue
No. 01-09, Consideration Given by a Vendor to a Customer (Including a Reseller
of the Vendor's Products), which addresses the statement of operations
classification of consideration between a vendor and a retailer, the Company has
recorded certain variable selling expenses including advertising allowances,
other discounts and other allowances as a reduction of net sales.
PROVISION FOR DOUBTFUL ACCOUNTS
The provision for doubtful accounts is based on our assessment of the
collectibility of specific customer accounts and the aging of accounts
receivable. If there is a deterioration of a major customer's credit worthiness
or actual defaults are higher than our historical experience, our estimates of
the recoverability of amounts owed to us could be adversely affected.
INVENTORIES
Inventory purchases and commitments are based upon future demand forecasts. 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 resulting from lower of
cost or market value adjustments and our gross profit could be adversely
affected. The obsolescence risk related to digital cameras and digital camera
components is more significant than traditional 35 mm and single use cameras due
to rapid technological changes in the digital camera market.
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. 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. Conversely, 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 such conclusion was made. Such charge could have an adverse effect on our
provision for income taxes included in our results of operations. Currently, the
Company has recorded a valuation allowance for the entire balance of its
deferred income tax assets as of January 1, 2005.
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 estimated our net
sales could be adversely affected.
IMPAIRMENT OF LONG-LIVED AND OTHER ASSETS
The Company continually evaluates whether events and circumstances have occurred
that provide indications of impairment. The Company records an impairment loss
when indications of impairment are present and when undiscounted cash flows
estimated to be generated by those assets are less than the assets' carrying
amounts. For royalty-related assets, we will record an impairment loss if the
total expected royalty payments to be made over the life of an agreement,
excluding any minimum required payments, are less than the royalty-related
assets' carrying value. The total expected royalty payments to be made over the
life of an agreement are dependent on management's estimates about future sales
volumes. Because judgment is required to estimate future sales volumes, the
estimates are not necessarily indicative of the sales volumes that will actually
be realized in the future. Such assets that are reviewed include patents,
prepaid amounts related to licensing and royalty agreements, and certain
property, plant and equipment.
22
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 information known to
management to date that the ultimate resolution of such legal proceedings will
not have a material adverse effect on its financial position or results of
operations of the Company taken as a whole.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
For a discussion of recently issued accounting pronouncements, see Note 4 -
Recently Issued Accounting Pronouncements in the Notes to Condensed Consolidated
Financial Statements.
RESULTS OF OPERATIONS
QUARTER ENDED JANUARY 1, 2005 COMPARED TO THE QUARTER ENDED DECEMBER 27, 2003
NET SALES
Net sales for the Second Quarter Fiscal 2005 were $54.3 million, a decrease of
$10.8 million, or 16.5 %, as compared to net sales for the quarter ended
December 27, 2003 ("Second Quarter Fiscal 2004"). The decrease in net sales was
mostly due to a reduction in single use cameras sold to RSD and DMS customers, a
reduction in digital camera sales to a significant RSD customer, and lower
average selling prices for digital cameras resulting from significant pricing
competition. This reduction in net sales was partially offset by net sales
related to Jenimage.
DMS net sales were $4.8 million for the Second Quarter Fiscal 2005, a decrease
of $4.8 million, or 50.1 %, as compared to the Second Quarter Fiscal 2004, and
accounted for 8.9 % of total net sales. The decrease in DMS net sales was
primarily attributable to lower sales to Kodak, for whom the Company
manufactured products under two DMS agreements. Sales to Kodak in the Second
Quarter Fiscal 2005 accounted for 8.6% of total net sales, while in Second
Quarter Fiscal 2004, sales to Kodak accounted for 11.5% of total net sales. As
previously reported, Kodak ceased purchases under the two DMS contracts during
the Second Quarter Fiscal 2005. We expect that the cessation of sales to Kodak
will have a material adverse effect on our results of operations in the third
and fourth quarters of Fiscal 2005 unless we are able to substantially increase
sales to other customers. See Note 2 - Significant Customers in the Notes to
Condensed Consolidated Financial Statements.
RSD net sales were $49.5 million for Second Quarter Fiscal 2005, a decrease of
$5.9 million, or 10.7 %, as compared to the Second Quarter Fiscal 2004, and
accounted for 91.1 % of total net sales.
RSD net sales from our operations in the Americas for the Second Quarter Fiscal
2005 were $19.9 million, a decrease of $17.6 million, or 46.9%, as compared to
the Second Quarter Fiscal 2004. The decrease in RSD net sales was due primarily
to reduced sales to two significant customers. This decrease in sales had a
material adverse impact on Second Quarter Fiscal 2005 results of operations. The
reduction in sales to one RSD customer was due to such customer's overstocked
inventory levels of single use cameras. We expect sales of single use cameras to
this customer to increase as its inventory levels decrease. The reduction in
sales to the other RSD customer was attributable to a reduction in sales of
digital cameras. See Note 2 - Significant Customers in the Notes to Condensed
Consolidated Financial Statements. Lower digital camera average selling prices
also contributed to the sales decline.
RSD net sales from our operations in Europe for the Second Quarter Fiscal 2005
were $26.1 million, an increase of $9.2 million, or 54.4%, as compared to the
Second Quarter Fiscal 2004. This increase was attributable to the inclusion of
Jenimage.
23
Net sales from our operations in Asia for the Second Quarter Fiscal 2005 were
$8.3 million, a decrease of $2.4 million, or 22.4%, as compared to the Second
Quarter Fiscal 2004. The decrease was attributable primarily to a reduction in
sales volume to Kodak partially offset by sales from our new subsidiary in
Japan.
GROSS (DEFICIT) PROFIT
Gross (deficit) for the Second Quarter Fiscal 2005 was $(3.4) million, or (6.3)%
of net sales, versus gross profit of $6.5 million, or 9.9% of net sales, in the
Second Quarter Fiscal 2004. During Second Quarter Fiscal 2005, gross profit
(deficit), in dollars and as a percentage of net sales, was negatively affected
by the following factors: (i) restructuring charges of $4.3 million consisting
of $3.6 million reduction in the carrying value of certain finished good,
components, work-in process, raw material, and return cameras inventory below
their cost basis to their estimated market value and $0.7 million related to
employee severance costs attributable to the Company's decision to significantly
reduce its reliance on internally designed and manufactured digital cameras,
(ii) a $3.1 million charge to reduce the carrying value of certain finished
good, components, work-in process, raw material, and return camera inventory
below their cost basis to their estimated market value resulting from price
declines, (iii) reduced sales volume of single use cameras and lower average
selling prices for digital cameras, (iv) lower production volumes in our
manufacturing facilities created under absorption of manufacturing labor and
overhead and other costs, and (v) increased depreciation of $0.5 million for
molds and tooling related to certain digital cameras.
Product engineering, design and development costs for the Second Quarter Fiscal
2005 and the Second Quarter Fiscal 2004, in dollars and as a percentage of net
sales, were $3.1 million (5.8 %) and $2.5 million (3.8%), respectively. We
expect engineering, design and product development expenses to decrease during
the remainder of Fiscal 2005 as we increase our purchases of digital cameras
from third-party manufacturers in connection with our restructuring plan. For
further discussion, see "Inventories" in the Critical Accounting Policies above,
and Note 12 - Restructuring and Other Related Charges in the Notes to Condensed
Consolidated Financial Statements.
OPERATING EXPENSES
Selling expenses for the Second Quarter Fiscal 2005 were $4.9 million, or 9.0%
of net sales, compared to $3.7 million, or 5.7% of net sales, for the Second
Quarter Fiscal 2004. The increase was primarily due to the cost of additional
sales and marketing personnel, royalty expense related to the Polaroid brand
licenses, and increases in freight-related shipping costs. Selling expenses in
the Second Quarter Fiscal 2005 included costs incurred by Jenimage.
General and administrative ("G&A") expenses for the Second Quarter Fiscal 2005
were $5.7 million, or 10.5% of net sales compared to $5.5 million, or 8.5% of
net sales, for the Second Quarter Fiscal 2004. The increase in G&A expenses was
primarily due to increases in professional fees associated with audit and review
services partially offset by a decrease in legal costs. G&A expenses in the
Second Quarter Fiscal 2005 include costs incurred by Jenimage. We expect costs
associated with Section 404 of the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley")
compliance measures will increase during the third and fourth quarters of Fiscal
2005.
Variable stock-based compensation expense for the Second Quarter Fiscal 2005 was
$0 because the common stock price was lower than the repriced options' exercise
price of $5.97 at the beginning and end of the fiscal period. Variable
stock-based compensation expense for the Second Quarter Fiscal 2004 was $48,000
because the Company's stock price on December 27, 2003 was above the repriced
options' exercise price of $5.97. See Note 3 - Summary of Significant Accounting
Policies in the Notes to Condensed Consolidated Financial Statements.
INTEREST EXPENSE
Interest expense was $0.3 million and $0.2 million for the Second Quarter Fiscal
2005 and the Second Quarter Fiscal 2004, respectively.
24
OTHER (INCOME) EXPENSE, NET
Other (income) expense, net was $(1.4) million and $0.3 million for the Second
Quarter Fiscal 2005 and the Second Quarter Fiscal 2004, respectively. The
increase is primarily attributable to foreign exchange gains. See Note 3 -
Summary of Significant Accounting Policies in the Notes to Condensed
Consolidated Financial Statements.
INCOME TAXES
Management periodically evaluates the realizability of the Company's deferred
income tax assets. In the Second Quarter Fiscal 2005 and Fourth Quarter of
Fiscal 2004, based on all the available evidence, management determined that it
was not more likely than not that its deferred income tax assets will be fully
realized. Accordingly, the Company recorded a valuation allowance for the entire
balance of its deferred income tax assets as of January 1, 2005 and July 3,
2004.
The Company estimates its interim effective tax rate before consideration of a
valuation allowance based upon its projected consolidated annual effective
income tax rate. This rate is largely a function of the amounts of pre-tax
income or loss attributed to both domestic and foreign operations, the
application of their respective statutory tax rates and the anticipated
utilization of available net operating loss carryforwards to reduce taxable
income. A significant portion of the Company's pre-tax loss was generated in
Hong Kong, where the statutory tax rate is 8.75%. The Company recorded a
provision (benefit) for income taxes of $0.1 million and $(0.4) million for
Second Quarter Fiscal 2005 and Second Quarter Fiscal 2004, respectively. The
Second Quarter Fiscal 2005 income tax provision relates to income tax
liabilities incurred by certain of the Company's foreign subsidiaries. These
foreign subsidiaries do not have net operating losses to offset such
liabilities.
NET LOSS
As a result of the matters described above, we incurred a net loss of $(13.0)
million, or $(0.44) per diluted common share, for the Second Quarter Fiscal 2005
as compared to a net loss of $(2.9) million, or $(.10) per diluted common share,
for the Second Quarter Fiscal 2004.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JANUARY 1, 2005 COMPARED TO THE SIX MONTHS ENDED DECEMBER 27,
2003
NET SALES
Net sales for the six months ended January 1, 2005 ("Fiscal 2005 YTD") were
$97.3 million, a decrease of $25.1 million, or 20.5 %, as compared to net sales
for the six months ended December 27, 2003 ("Fiscal 2004 YTD"). The decrease in
net sales was mostly due to a reduction in single use cameras sold to RSD and
DMS customers, a reduction in digital camera sales to a significant customer and
lower average selling prices for digital cameras resulting from significant
pricing competition. This reduction in net sales was partially offset by net
sales related to Jenimage.
DMS net sales were $13.1 million for Fiscal 2005 YTD, a decrease of $11.6
million, or 47.1 %, as compared to Fiscal 2004 YTD, and accounted for 13.4 % of
total net sales. The decrease in DMS net sales was primarily attributable to
lower sales to Kodak, for whom the Company manufactured products under two DMS
agreements. Sales to Kodak in Fiscal 2005 YTD accounted for 12.8% of total net
sales, while in Fiscal 2004 YTD, sales to Kodak accounted for 15.7% of total net
sales. As previously reported, Kodak has ceased purchases under the two DMS
contracts during the second quarter of Fiscal 2005. We expect that the cessation
of sales to Kodak will have a material adverse effect on our results of
operations in the third and fourth quarters of Fiscal 2005 unless we are able to
substantially increase sales to other customers. See Note 2 - Significant
Customers in the Notes to Condensed Consolidated Financial Statements.
RSD net sales were $84.2 million for Fiscal 2005 YTD, a decrease of $13.5
million, or 13.8 %, as compared to the same period last year, and accounted for
86.6 % of total net sales.
RSD net sales from our operations in the Americas for Fiscal 2005 YTD were $36.5
million, a decrease of $32.9 million, or 47.4%, as compared to Fiscal 2004 YTD.
The decrease in RSD net sales was due primarily to reduced sales to two
significant customers. This decrease in sales had a material adverse impact on
Fiscal 2005 YTD results of operations. The reduction in sales to one RSD
customer was due to such customer's overstocked inventory levels of single use
cameras. We expect sales of single use cameras to this customer to increase as
its inventory levels decrease. The reduction in sales to the other RSD customer
was attributable to a reduction in sales of digital cameras. See Note 2 -
Significant Customers in the Notes to Condensed Consolidated Financial
Statements. Lower digital camera average selling prices also contributed to the
sales decline.
25
RSD net sales from our operations in Europe for Fiscal 2005 YTD were $43.6
million, an increase of $17.1 million, or 64.5%, as compared to the same period
last year. This increase was attributable to the inclusion of Jenimage.
Net sales from our operations in Asia for Fiscal 2005 YTD were $17.2 million, a
decrease of $9.3 million, or 35.1%, as compared to Fiscal 2004 YTD. The decrease
was attributable primarily to a reduction in sales volume to Kodak partially
offset by sales from our new subsidiary in Japan.
GROSS (DEFICIT) PROFIT
Gross (deficit) for Fiscal 2005 YTD was $(2.9) million, or (3.0)% of net sales,
versus gross profit of $17.2 million, or 14.0% of net sales, in Fiscal 2004 YTD.
During Fiscal 2005 YTD, gross profit (deficit), in dollars and as a percentage
of net sales, was negatively affected by the following factors: (i)
restructuring charges of $4.3 million consisting of $3.6 million reduction in
the carrying value of certain finished goods, components, work-in process, raw
material, and return camera inventory below their cost basis to their estimated
market value and $0.7 million related to employee severance costs attributable
to the Company's decision to significantly reduce its reliance on internally
designed and manufactured digital cameras, (ii) a $5.2 million charge to reduce
the carrying value of certain finished good, components, work-in process, raw
material, and return camera inventory below their cost basis to their estimated
market value resulting from price declines, (iii) reduced sales volume of single
use cameras and lower average selling prices for digital cameras, (iv) lower
production volumes in our manufacturing facilities created under absorption of
manufacturing labor and overhead and other costs, and (v) increased depreciation
of $0.5 million for molds and tooling related to certain digital cameras.
Product engineering, design and development costs for Fiscal 2005 YTD and Fiscal
2004 YTD, in dollars and as a percentage of net sales, were $5.7 million (5.8%)
and $5.0 million (4.1%), respectively. We expect engineering, design and product
development expenses to decrease during the remainder of Fiscal 2005 as we
increase our purchases of digital cameras from third-party manufacturers in
connection with our restructuring plan. For further discussion, see
"Inventories" in the Critical Accounting Policies above, and Note 12 -
Restructuring and Other Related Charges in the Notes to Condensed Consolidated
Financial Statements.
OPERATING EXPENSES
Selling expenses for Fiscal 2005 YTD were $8.9 million, or 9.2% of net sales,
compared to $6.1 million, or 5.0% of net sales, for Fiscal 2004 YTD. The
increase was primarily due to the cost of additional sales and marketing
personnel, royalty expense related to the Polaroid brand licenses and increases
in freight-related shipping costs. Selling expenses in Fiscal 2005 YTD included
costs incurred by Jenimage.
General and administrative ("G&A") expenses for Fiscal 2005 YTD were $12.1
million, or 12.4% of net sales, compared to $11.5 million, or 9.4% of net sales,
for Fiscal 2004 YTD. The increase in G&A expenses was primarily due to recording
expenses of $0.6 million related to previously capitalized costs incurred in
connection with potential acquisitions, partially offset by decreases in
professional fees associated with designing and installing our Enterprise
Resource Planning System and costs associated with implementing measures
necessary to comply with Sarbanes-Oxley. G&A expenses in Fiscal 2005 YTD include
costs incurred by Jenimage. We expect costs associated with Sarbanes-Oxley
compliance measures will increase during the third and fourth quarters of Fiscal
2005.
Variable stock-based compensation expense for Fiscal 2005 YTD was $0 because the
common stock price was lower than the repriced options' exercise price of $5.97
at the beginning and end of the fiscal period. Variable stock-based compensation
expense for Fiscal 2004 YTD was $3.1 million because the Company's stock price
on December 27, 2003 was above the repriced options' exercise price of $5.97.
See Note 3 - Summary of Significant Accounting Policies in the Notes to
Condensed Consolidated Financial Statements.
26
INTEREST EXPENSE
Interest expense was $0.5 million and $0.4 million for Fiscal 2005 YTD and
Fiscal 2004 YTD, respectively.
OTHER (INCOME) EXPENSE, NET
Other (income) expense, net was $(2.3) million and $0.2 million for Fiscal 2005
YTD and Fiscal 2004 YTD, respectively. The increase is primarily attributable to
foreign exchange gains. See Note 3 - Summary of Significant Accounting Policies
in the Notes to Condensed Consolidated Financial Statements.
INCOME TAXES
Management periodically evaluates the realizability of the Company's deferred
income tax assets. In the Second Quarter Fiscal 2005 and Fourth Quarter of
Fiscal 2004, based on all the available evidence, management determined that it
was not more likely than not that its deferred income tax assets will be fully
realized. Accordingly, the Company recorded a valuation allowance for the entire
balance of its deferred income tax assets as of January 1, 2005 and July 3,
2004.
The Company estimates its interim effective tax rate before consideration of a
valuation allowance based upon its projected consolidated annual effective
income tax rate. This rate is largely a function of the amounts of pre-tax
income or loss attributed to both domestic and foreign operations, the
application of their respective statutory tax rates and the anticipated
utilization of available net operating loss carryforwards to reduce taxable
income. A significant portion of the Company's pre-tax loss was generated in
Hong Kong, where the statutory tax rate is 8.75%. The Company recorded a
provision (benefit) for income taxes of $0.1 million and $(0.5) million in
Fiscal 2005 YTD and Fiscal 2004 YTD, respectively. Second Quarter Fiscal 2005
income tax provision relates to income tax liabilities incurred by certain of
the Company's foreign subsidiaries. These foreign subsidiaries do not have net
operating losses to offset such liabilities.
NET LOSS
As a result of the matters described above, we incurred a net loss of $(22.3)
million, or $(0.76) per diluted common share, for Fiscal 2005 YTD as compared to
a net loss of $(3.5) million, or $(0.12) per diluted common share, for Fiscal
2004 YTD.
RESTRUCTURING AND OTHER RELATED CHARGES:
During Second Quarter Fiscal 2005, the Company announced a restructuring plan
and cost-reduction initiatives ("Restructuring Initiative") designed to
significantly reduce the Company's reliance on internally designed and
manufactured digital cameras and increase the design, co-development, and
purchase of digital cameras from contract manufacturers so as to continue to
provide competitive products to the retail market. The Company's reliance on
internally designed and manufactured digital cameras is expected to be
significantly reduced by the end of the fourth quarter of Fiscal 2005. The
Restructuring Initiative is a result of the Company's previously announced
strategic review process to determine how the Company may better compete in the
digital camera market.
The Restructuring Initiative was substantially implemented by the end of Second
Quarter Fiscal 2005 and consisted of the termination of approximately 1,200
employees either through involuntary or voluntary terminations. These employees
were primarily employed in manufacturing, engineering, sales, marketing and
administration functions in the PRC. During the Second Quarter Fiscal 2005, the
Company incurred approximately $0.7 million in expense related to employee
severance costs relating to the Restructuring Initiative and expects to incur an
additional $0.7 million related to employee severance cost for the remainder of
Fiscal 2005. At January 1, 2005, the Company had a restructuring reserve
recorded in the amount of $0.2 million representing the unpaid amount of the
accrued severance costs, and such expenses are included in the financial
statement caption "Accrued expenses" in the accompanying condensed consolidated
financial statements.
27
In connection with the Restructuring Initiative, the Company recorded
restructuring-related inventory charges in the amount of $3.6 million during
Second Quarter Fiscal 2005 primarily related to raw material, component, and
finished goods inventories related to digital cameras the Company will no longer
manufacture. Since the Company has ceased the production of most of its digital
cameras, the Company reduced the carrying value of certain molds and tooling
used in the production of these digital cameras during Second Quarter Fiscal
2005 because the products are either no longer in production or have a shortened
product life and these specific molds and tooling do not have alternative
production uses. The Company recorded an additional $0.5 million in depreciation
expense related to the reduction in useful lives of the molds and tooling. See
Note 5 - Inventories and Note 6 - Property, Plant, and Equipment, Net in the
notes to Condensed Consolidated Financial Statements.
(in thousands)
Restructuring Liability Severance
----------------------- ----------
Charges $702
Payment (542)
----
Accrual at 1/1/05 $160
====
Inventory
Restructuring Charges Severance Impairment Total
--------------------- --------- ---------- -------
Cost of products sold $701 $3,601 $4,302
General and administrative expense 1 - 1
---- ------ ------
Total $702 $3,601 $4,303
==== ====== ======
In connection with the Restructuring Initiative, the Company also incurred other
charges related to retention cost of employees that were not terminated. The
services of these employees benefit parts of the business other than the
manufacture of digital cameras. During Second Quarter Fiscal 2005, the Company
incurred approximately $30,000 in expenses related to employee retention costs
and expects to incur a total expense of approximately $0.5 million in retention
costs through December 31, 2005, provided that such employees are retained
through that date.
Additional Cost-Reduction Initiatives. As a result of the Company's continued
evaluation of its cost structure and the strategic review process, subsequent to
January 1, 2005, the Company made a decision to reduce certain additional costs,
including the elimination of certain employee positions. The Company anticipates
incurring a charge in the amount of approximately $0.6 million in the third
quarter of Fiscal 2005 for employee severance costs in connection with these
additional cost-reduction initiatives. The cost reductions resulting from these
additional cost-reduction initiatives are expected to be realized principally in
Fiscal 2006.
LIQUIDITY AND CAPITAL RESOURCES
We are not aware of factors that are reasonably likely to adversely affect
liquidity trends, other than those factors summarized under the caption "Risk
Factors" in this report and in our most recent Annual Report filed with the SEC
on Form 10-K for Fiscal 2004. We do not have, nor do we engage in, transactions
with any special purpose entities. We are not engaged in hedging activities and
had no forward exchange contracts outstanding at January 1, 2005. In the
ordinary course of business, we enter into operating lease commitments, purchase
commitments and other contractual obligations. These transactions are recognized
in our financial statements in accordance with accounting principles generally
accepted in the United States, and are more fully discussed below.
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 short-term working capital and capital expenditure requirements as
well as our anticipated long-term working capital and capital expenditure
requirements for at least the next twelve months.
Working Capital - At January 1, 2005, we had working capital of $79.7 million
compared to $100.6 million at July 3, 2004, a decrease of $21.2 million.
28
Cash Used In Operating Activities - Cash used in operating activities during
Fiscal 2005 YTD was $4.9 million, which compared favorably to cash used in
operating activities of $31.9 million during Fiscal 2004 YTD. The changes in
cash provided by operating activities for the respective fiscal periods were
primarily attributable to net loss offset primarily by depreciation and other
non-cash items and changes in accounts payable and accounts receivable.
Cash (Used in) Provided By Investing Activities - Capital expenditures for
Fiscal 2005 YTD and Fiscal 2004 YTD were $(1.7) million and $(2.1) million,
respectively, and related primarily to expenditures on plant and equipment for
our manufacturing facilities in the PRC. Purchases of short-term investments
were $(23.5) million offset partially by proceeds from sales of
available-for-sale investments of $13.4 million in Fiscal 2005 YTD. Proceeds
from the sale of available-for-sale investments were $5.0 million and proceeds
from net sales of short-term investments were $23.3 million in Fiscal 2004 YTD.
Cash Provided by Financing Activities - Cash provided by financing activities
during Fiscal 2005 YTD and Fiscal 2004 YTD was approximately $9.0 million and
$1.1 million, respectively. The increase in Fiscal 2005 YTD related to proceeds
received from borrowing under short-term credit facilities of approximately $8.9
million partially offset by a $.1 million reduction in proceeds received from
the issuance of common stock.
Operating Leases- We enter into operating leases in the ordinary course of
business (e.g., warehouse facilities, office space and equipment) where the
economic profile is favorable. The effects of outstanding leases are not
material to us in terms of either annual cash flow or total future minimum
payments.
Purchase Commitments - As part of the ordinary course of our business, we enter
into and have purchase commitments for materials, supplies, services, and
property, plant and equipment. At January 1, 2005, the Company had $15.7 million
in non-cancelable purchase commitments relating to the purchase of raw
materials, components and finished goods inventory from various suppliers. Such
commitments are not at prices in excess of current market values.
Other Contractual Obligations - We do not have any material financial guarantees
or other contractual commitments that are reasonably likely to have an adverse
affect on liquidity. See Hong Kong Financing Facilities below for additional
information about our financial guarantees. See also Note 9-Commitments and
Contingencies in the Notes to Condensed Consolidated Financial Statements.
Hong Kong Financing Facilities - The Company's Hong Kong subsidiary has various
revolving demand credit facilities providing an aggregate of approximately $38.3
million in borrowing capacity. The revolving credit facilities are comprised of:
1) an approximate $24.0 million Import Facility with an approximate $2.6 million
Packing Credit and Export sub-limit Facility, and 2) an approximate $1.9 million
Foreign Exchange Facility and 3) an approximate $13.6 million Revolving Facility
(the "Revolving Facility") (collectively, the "Hong Kong Financing Facilities").
The approximate $13.6 million Revolving Facility is denominated in European
Central Bank Euros, whereas the other facilities are denominated in Hong Kong
dollars. Since 1983 the Hong Kong Dollar has been pegged to the United States
Dollar. The Company guarantees all of the amounts under the Hong Kong Financing
Facilities. Pursuant to an agreement dated June 10, 2004, the Company's Hong
Kong subsidiary granted a security interest in substantially all of its assets
to HSBC. All of the Hong Kong Financing Facilities are subject to certain
covenants, and the Company was in compliance with all such covenants as of
January 1, 2005 and July 3, 2004. The Hong Kong Financing Facilities bear
interest at variable rates. At January 1, 2005, the Company had $13.6 million
and $4.5 million in short-term borrowings outstanding under the Revolving
Facility and Import Facility, respectively. At July 3, 2004, the Company had
$6.2 million and $3.0 million in short-term borrowings outstanding under the
Revolving Facility and Import Facility, respectively. The weighted average
borrowing rates on the short-term borrowings as of January 1, 2005 and July 3,
2004, were 3.74 % and 3.44%, respectively. Effective January 31, 2005, the
Company's Hong Kong Subsidiary terminated the Revolving Facility and repaid
approximately $13 million (decreased from January 1, 2005 quarter-end due to
foreign currency rate fluctuations) constituting all obligations owed
thereunder. Neither the Company nor the Company's Hong Kong subsidiary incurred
any termination fees or penalties in connection with the repayment and
termination of the Revolving Facility. On or around February 24, 2005, the
Company and HSBC agreed, among other things, to reduce the Company's borrowing
capacity under the Import Facility from approximately $24 million to
approximately $14 million, and to subordinate approximately $20 million in
inter-company payables from the Company's Hong Kong subsidiary to the Company to
any amounts owing or which may in the future become owing to HSBC by the
Company's Hong Kong subsidiary.
License Agreements - See Note 9-Commitments and Contingencies in the Notes to
Condensed Consolidated Financial Statements.
29
Intellectual Property Claims - See Note 9 -- Commitments and Contingencies and
Note 10 -- Litigation and Settlements in the Notes to Condensed Consolidated
Financial Statements.
FORWARD-LOOKING INFORMATION: CERTAIN CAUTIONARY STATEMENTS
The statements contained in this report that are not historical facts are
"forward-looking statements" (as such term is defined in the Private Securities
Litigation Reform Act of 1995), which can be identified by the use of
forward-looking terminology such as: "estimates," "projects," "anticipates,"
"expects," "intends," "believes," "plans," or the negative thereof or other
variations thereon or comparable terminology, or by discussions of strategy that
involve risks and uncertainties. Our actual results could differ materially from
those anticipated in such forward-looking statements as a result of certain
factors. For a discussion of some of the factors that could cause actual results
to differ, see the discussion under "Risk Factors" below and in our most recent
Annual Report on Form 10-K for Fiscal 2004 filed with the SEC and subsequently
filed reports. We wish to caution the reader that these forward-looking
statements, including statements regarding expected cost savings, our ability to
meet customer demands and fulfill customer service obligations, anticipated or
expected results, the implementation of our restructuring plan and additional
cost-reduction initiatives, anticipated financial benefits of significantly
reducing our reliance on internally designed and manufactured digital cameras
and increasing the design, co-development, and purchase of digital cameras from
contract manufacturers, the development of our business, anticipated revenues or
capital expenditures, projected profits or losses and other statements contained
in this report regarding matters that are not historical facts, are only
estimates or predictions. No assurance can be given that future results will be
achieved. Actual events or results may differ materially as a result of risks
facing us or actual results differing from the assumptions underlying such
statements. In particular, our expected results could be adversely affected by
production difficulties or economic conditions negatively affecting the market
for our products or by our inability to successfully develop and maintain
relationships with contract manufacturers. Obtaining the results expected from
the introduction of new products may require timely completion of development,
successful ramp-up of full-scale production on a timely basis and customer and
consumer acceptance of those products. In addition, current or future DMS
relationships or agreements may require an ability to meet high quality and
performance standards, to successfully implement production at greatly increased
volumes and to sustain production at greatly increased volumes, as to all of
which there can be no assurance. There also can be no assurance that products
under development will be successfully developed or that once developed such
products will be commercially successful. Any forward-looking statements
contained in this report represent our estimates only as of the date of this
report, or as of such earlier dates as are indicated herein, and should not be
relied upon as representing our estimates as of any subsequent date. While we
may elect to update forward-looking statements at some point in the future, we
specifically disclaim any obligation to do so, even if our estimates change.
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, including the
"Risk Factors" described in our most recent Annual Report on Form 10-K for
Fiscal 2004 filed with the SEC and any subsequently filed reports.
A DELISTING OF OUR COMMON STOCK COULD HAVE A SUBSTANTIAL EFFECT ON THE PRICE AND
LIQUIDITY OF OUR COMMON STOCK AND ADVERSELY AFFECT OUR ABILITY TO ACCESS CAPITAL
MARKETS.
Due to our delay in filing our quarterly report on Form 10-Q for First Quarter
Fiscal 2005 ("First Quarter Form 10-Q"), the Company was notified by Nasdaq that
the Company's securities are subject to delisting from The Nasdaq Stock Market.
We have since notified Nasdaq that this Form 10-Q for Second Quarter Fiscal 2005
("Second Quarter Form 10-Q") would not be timely filed either. Nasdaq notified
the Company on February 10, 2005 that it granted the Company's request for an
exception and for continued listing on the Nasdaq National Market, subject to
(a) the Company disclosing preliminary unaudited financial results for First
Quarter Fiscal 2005 on or before February 15, 2005; (b) the Company filing its
First Quarter Form 10-Q on or before February 18, 2005; and (c) the Company
filing its Second Quarter Form 10-Q on or before March 31, 2005. The Company has
complied with each of these requirements. In addition, Nasdaq specified that the
Company must be able to demonstrate compliance with all requirements for
continued listing on the Nasdaq National Market. Nasdaq reserved the right to
reconsider the terms of this exception based on any event, condition, or
circumstance that exists or develops that would make continued listing of the
Company's securities on the Nasdaq National Market inadvisable or unwarranted.
Furthermore, the Nasdaq Listing and Hearing Review Council (the "Review
Council") may, on its own motion, review the decision within 45 calendar days,
and may affirm, modify, reverse, dismiss or remand the decision. We cannot
assure you that we will be able to satisfy the conditions specified by Nasdaq
for continued listing, that the Review Council will not delist our common stock
or that Nasdaq will not initiate delisting proceedings in the future if we are
unable to file future periodic reports on time or comply with other listing
requirements. See Note 13 - Subsequent Events in the Notes to Condensed
Consolidated Financial Statements. A delisting of our common stock from Nasdaq
could materially reduce the liquidity of our common stock which may result in a
material reduction in the price of our common stock. In addition, any such
delisting 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 delisted by Nasdaq, we may face a lengthy process to relist
our securities if we are able to relist them at all.
30
WE MAY NOT BE SUCCESSFUL IN IMPLEMENTING OUR RESTRUCTURING PLAN AND ADDITIONAL
COST-REDUCTION INITIATIVES.
In December 2004, we committed to implementing a restructuring plan and other
cost-reduction initiatives that, among other things, involve significantly
reducing our reliance on internally designed and manufactured digital cameras
and increasing the design, co-development and purchase of digital cameras from
contract manufacturers. We have already incurred significant restructuring
charges and expenses as a result of these initiatives and expect to incur
additional charges. In addition, as a result of the Company's continued
evaluation of its cost structure and the strategic review process, subsequent to
January 1, 2005, the Company made a decision to reduce certain additional costs,
including the elimination of certain employee positions. The Company anticipates
incurring a charge in the amount of approximately $.6 million in the third
quarter of Fiscal 2005 for employee severance costs in connection with these
additional cost-reduction initiatives. The expected benefits from the
restructuring plan and additional cost-reduction initiatives are subject to many
estimates and assumptions, including, but not limited to, assumptions regarding:
(1) the amount and timing of cost reductions we can achieve; (2) our ability to
develop and maintain relationships with contract manufacturers for the design,
co-development, and purchase of digital camera products; (3) our ability to meet
customer demands and fulfill customer service obligations; and (4) the costs and
timing of activities undertaken in connection with these initiatives. In
addition, these estimates and assumptions are subject to significant economic,
competitive and other uncertainties that are beyond our control. If these
assumptions are not realized, or if other unforeseen events occur, our
restructuring plan and other cost-reduction initiatives may not be successful,
our results of operations could be adversely affected, and our ability to
compete could be negatively affected. See Note 12 - Restructuring and Other
Related Charges and Note 13 - Subsequent Events in the Notes to Condensed
Consolidated Financial Statements.
IF WE CONTINUE TO INCUR SUBSTANTIAL LOSSES, WE MAY NOT HAVE SUFFICIENT LIQUIDITY
TO MEET OUR WORKING CAPITAL NEEDS.
Although the Company believes that it has sufficient working capital to fund its
operations for at least the next twelve months, the Company's ability to fund
its operating requirements and maintain an adequate level of working capital and
liquidity may be impaired if it continues to incur losses and fails to generate
substantial growth in sales of its products and control operating expenses. In
the event that the Company requires funding to meet its cash flow needs, it may
seek to provide such funding through, among other things, loans or the issuance
of debt or equity securities. To the extent the Company raises additional
capital by issuing equity securities or provides for funding by obtaining
borrowings convertible into equity, ownership dilution to existing shareholders
will result. Moreover, additional funding or capital may not be available to the
Company on acceptable terms, or at all.
WE ARE DEPENDENT ON TWO THIRD-PARTY SERVICE PROVIDERS AND DISTRIBUTION
FACILITIES FOR ALL OF OUR OPERATIONS IN THE UNITED STATES, LATIN AMERICA, AND
EUROPE.
The warehousing and distribution services for the Company's (a) United States
and Latin American operations are handled from a single distribution facility by
a third-party service provider in San Pedro, California; and (b) European
operations are handled from a single distribution facility by a third party
service provider in Moerdijk, The Netherlands. The Company's products are
prepared for shipment and shipped to our customers by such third-party service
providers at either of the two distribution facilities noted above. Any failure
by either third-party service provider to maintain a regular flow of products
for us to our customers or any significant interruption in the business of
either service provider or the operation of the two distribution facilities due
to natural disasters, accidents, system failures, work stoppages or other causes
would have a material adverse effect on the Company's business, financial
condition and results of operations.
31
WE HAVE BEEN ADVISED OF TWO MATERIAL WEAKNESSES AS WELL AS SEVERAL REPORTABLE
CONDITIONS IN OUR FINANCIAL CONTROLS RELATING TO THE ACCURACY AND TIMELINESS OF
OUR FINANCIAL REPORTING.
In connection with its Fiscal 2004 audit of our financial statements, Ernst &
Young LLP, the Company's independent registered public accounting firm ("E&Y"),
communicated to the Company and the Audit Committee of the Board of Directors
(the "Audit Committee") several reportable conditions involving the Company's
internal financial controls. Reportable conditions involve matters relating to
significant deficiencies in the design or operation of internal controls that
could adversely affect our ability to record, process, summarize, and report
financial data consistent with the assertions of management in the consolidated
financial statements. The reportable conditions noted by E&Y related to the
Company's inventory valuation, revenue recognition and reserves and allowances
processes. E&Y also noted a reportable condition which it considered to be a
material weakness in the Company's internal controls under standards established
by the American Institute of Certified Public Accountants ("AICPA"). Under AICPA
standards, a material weakness is defined as a reportable condition in which the
design or operation of one or more of the internal control components does not
reduce to a relatively low level the risk that misstatements caused by error or
fraud in amounts that would be material in relation to the financial statements
being audited may occur and not be detected within a timely period by employees
in the normal course of performing their assigned functions. The material
weakness noted by E&Y was that the Company's financial statement close process
does not ensure that all material errors in accounts that involve significant
estimation will be identified on a timely basis by employees in the normal
course of their duties. Specifically, there were significant delays in
accumulating data, performing analysis, and evaluating results.
In connection with its review of the Company's results for First Quarter Fiscal
2005, E&Y advised the Company and the Audit Committee that the Company continued
to experience difficulties with the financial statement closing process, noting
that the closing process had deteriorated significantly during First Quarter
Fiscal 2005 and that the Company had insufficient resources within the finance
department to address all assigned responsibilities, including financial
reporting, budgeting and operational analysis. In addition, E&Y advised the
Company that ineffective planning and execution of the conversion from the
Company's Legacy systems to a fully integrated Enterprise Resource Planning
("ERP") System in First Quarter Fiscal 2005 caused a significant delay in the
Company's ability to file its First Quarter Form 10-Q and constituted a material
weakness in the Company's internal controls under standards established by the
Public Company Accounting Oversight Board ("PCAOB"), which define a material
weakness as a significant deficiency or combination of significant deficiencies
that result in more than a remote likelihood that a material misstatement in the
annual or interim financial statements will not be prevented or detected. During
the Second Quarter Fiscal 2005, the Company believes that it was able to
stabilize and prevent further deterioration of its internal controls. Moreover,
the Company did not detect or identify any new material weaknesses or reportable
conditions. Although the Company believes that it made progress in operating the
ERP System during Second Quarter Fiscal 2005 and subsequent thereto, the Company
continues to experience inefficiencies and delays with the ERP system and the
financial statement closing process. Accordingly, the reportable conditions and
material weaknesses in the Company's internal controls continue to exist.
WE FACE THE RISK OF NON-COMPLIANCE WITH SECTION 404 OF THE SARBANES-OXLEY ACT OF
2002.
Beginning this fiscal year, Section 404 of the Sarbanes-Oxley Act of 2002 will
require the Company to include an internal control report of management in its
Annual Report on Form 10-K. The internal control report must contain (i) a
statement of management's responsibility for establishing and maintaining
adequate internal control over financial reporting, (ii) a statement identifying
the framework used by management to conduct the required evaluation of the
effectiveness of our internal control over financial reporting, (iii)
management's assessment of the effectiveness of our internal control over
financial reporting as of the end of our most recent fiscal year, including a
statement as to whether or not internal control over financial reporting is
effective, and (iv) a statement that the Company's independent registered public
accounting firm has issued an attestation report on management's assessment of
internal control over financial reporting.
Management acknowledges its responsibility for internal controls over financial
reporting and seeks to continually improve those controls. Beginning in Fiscal
2004, the Company initiated a process to document and evaluate its internal
controls over financial reporting, but suspended such process until the Company
implemented its new, world-wide fully integrated ERP System, which
implementation commenced in August 2004. The Company expects to resume the
process of documenting, evaluating and monitoring its internal control over
financial reporting in the beginning of the fourth quarter of Fiscal 2005. The
Company believes that it faces a significant risk of not completing its internal
control assessment on a timely basis. E&Y has also advised the Board of
Directors and the Audit Committee that it believes the Company may not complete
the assessment on a timely basis, and that even if the Company's assessment is
completed, E&Y may not have sufficient resources and/or time to complete its
assessment. The existence of the above factors and circumstances create a risk
that the Company or E&Y will not be able to conclude at July 2, 2005 that the
Company's internal controls over financial reporting are effective and may
result in a delay in the timely filing of the Company's Annual Report on Form
10-K for Fiscal 2005.
32
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a result of our global operating and financial activities, we are exposed to
changes in interest rates and foreign currency exchange rates that may adversely
affect our results of operations and financial position. In seeking to minimize
the risks and/or costs associated with such activities, we manage exposure to
changes in interest rates and foreign currency exchange rates through our
regular operating and financing activities.
We do not presently use derivative instruments to adjust our interest rate risk
profile. We do not utilize financial instruments for trading or speculative
purposes, nor do we utilize leveraged financial instruments.
Although the U.S. Dollar is the functional currency for each of our
subsidiaries, certain net sales to customers and purchases of certain components
and services are transacted in local currency, thereby creating an exposure to
fluctuations in foreign currency exchange rates. The impact of foreign exchange
transactions is reflected in our statements of operations. As of January 1,
2005, we were not engaged in any hedging activities and we had no forward
exchange contracts outstanding. We continue to analyze the benefits and costs
associated with hedging against foreign currency fluctuations.
ITEM 4. CONTROLS AND PROCEDURES
Certification. The certifications of the principal executive officer and the
principal financial officer (or persons performing similar functions) required
by Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as amended
(the "Certifications") are filed as exhibits to this report. This section of the
report contains the information concerning the evaluation of the Company's
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) ("Disclosure Controls") and changes to internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
("Internal Controls") referred to in the Certifications and this information
should be read in conjunction with the Certifications for a more complete
understanding of the topics presented.
Limitations on the Effectiveness of Controls. Our management, including the
principal executive officer and principal financial officer, does not expect
that our Disclosure Controls or Internal Controls will prevent all error and all
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Because of the limitations in any and all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. Further,
the design of any control system is based in part upon certain assumptions about
the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions. Because of these inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected even
when effective Disclosure Controls and Internal Controls are in place.
Internal Controls. In performing its audit of our Consolidated Financial
Statements for Fiscal 2004, and as reported in our Form 10-K for Fiscal 2004,
E&Y notified the Company and the Audit Committee of several reportable
conditions in Internal Controls under standards established by the American
Institute of Certified Public Accountants. Reportable conditions involve matters
relating to significant deficiencies in the design or operation of Internal
Controls that could adversely affect our ability to record, process, summarize,
and report financial data consistent with the assertions of management in the
consolidated financial statements. E&Y noted reportable conditions relating to
the Company's inventory valuation, revenue recognition and reserves and
allowances processes. E&Y also noted one reportable condition which it
considered to be a material weakness in the Company's Internal Controls. A
material weakness is defined as a reportable condition in which the design or
operation of one or more of the Internal Control components does not reduce to a
relatively low level the risk that misstatements caused by error or fraud in
amounts that would be material in relation to the financial statements being
audited may occur and not be detected within a timely period by employees in the
normal course of performing their assigned functions. Specifically, E&Y
indicated that because there are significant delays in accumulating data,
performing analysis, and evaluating results, the Company's financial statement
closing process does not ensure that on a timely basis employees in the normal
course of their duties will identify all material errors to accounts that
involve significant estimates. In connection with E&Y's review of the Company's
results for First Quarter Fiscal 2005, E&Y advised the Company and the Audit
Committee that the Company continued to experience difficulties with the
financial statement closing process, noting that the closing process had
deteriorated significantly during First Quarter Fiscal 2005 and that the Company
had insufficient resources within the finance department to address all assigned
responsibilities, including financial reporting, budgeting and operational
analysis. In addition, E&Y advised the Company that ineffective planning and
execution of the conversion from the Company's Legacy systems to a world-wide,
fully integrated Enterprise Resource Planning ("ERP") System in First Quarter
Fiscal 2005 caused a significant delay in the Company's ability to file its
Quarterly Report on Form 10-Q for First Quarter Fiscal 2005 ("First Quarter Form
10-Q"), and constituted a material weakness in the Company's Internal Controls
under standards established by the Public Company Accounting Oversight Board
("PCAOB"). PCAOB standards define a material weakness as a significant
deficiency or combination of significant deficiencies that result in more than a
remote likelihood that a material misstatement in the annual or interim
financial statements will not be prevented or detected.
33
The Company has assigned a high priority to the remediation of the material
weaknesses and reportable conditions and believes that several of these issues
will be substantially improved upon effective and efficient operation of the ERP
System. As previously disclosed, the implementation of the new ERP System
resulted in inefficiencies and delays in providing information necessary to
complete the Company's First Quarter Form 10-Q on a timely basis. As a result,
the financial statement closing process deteriorated significantly during First
Quarter Fiscal 2005. The delay in filing the First Quarter Form 10-Q also
impacted the Company's ability to timely file its Second Quarter Form 10-Q.
During the Second Quarter Fiscal 2005, the Company believes that it was able to
stabilize and prevent further deterioration of its internal controls. Moreover,
the Company did not detect or identify any new material weaknesses or reportable
conditions. During the Second Quarter Fiscal 2005 and subsequent thereto, the
Company believes it made progress in operating the ERP System. Nevertheless, the
Company continues to experience inefficiencies and delays with the ERP system
and the financial statement closing process. Accordingly, the reportable
conditions and material weaknesses discussed above continue to exist. We cannot
assure you that ongoing issues relating to the operation of our ERP System or
that other control issues will not affect our ability to file other future
periodic reports on a timely basis.
Evaluation of Disclosure Controls. Based on our management's evaluation (with
the participation of our principal executive officer and principal financial
officer), as of the end of the period covered by this report and as a result of
the matters described above and below, our principal executive officer and
principal financial officer have concluded that, our Disclosure Controls were
not effective in providing reasonable assurance of achieving their objectives to
ensure that information required to be disclosed by us in reports that we file
or submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms.
Changes in Internal Controls. The Company implemented its new world-wide, fully
integrated ERP System during First Quarter Fiscal 2005, in part to address the
conditions described above and to improve the overall effectiveness of the
Company's Internal Controls and Disclosure Controls. Although as discussed
above, the Company believes that effective and efficient operation of the ERP
System will reduce the reportable conditions and material weaknesses noted by
E&Y and improve the overall effectiveness of the Company's Internal Controls and
Disclosure Controls, the Company experienced significant operational issues in
connection with the implementation of the ERP System that caused significant
delays in accumulating data, performing analysis and evaluating results
necessary to support the timely preparation of the Company's First Quarter Form
10-Q. As a result, the financial statement closing process deteriorated
significantly during First Quarter Fiscal 2005, which also impacted the
Company's ability to timely file its Second Quarter Form 10-Q.During Second
Quarter Fiscal 2005, the Company believes that it was able to stabilize and
prevent further deterioration of its internal controls. Moreover, the Company
did not detect or identify any new material weaknesses or reportable conditions.
During the Second Quarter Fiscal 2005 and subsequent thereto, the Company
believes it made progress in operating the ERP System. Nevertheless, the Company
continues to experience inefficiencies and delays with the ERP system and the
financial statement closing process. Accordingly, the reportable conditions and
material weaknesses discussed above continue to exist. As we become more
proficient in operating the ERP System, we believe our Internal Controls and
Disclosure Controls will improve.
Compliance with Section 404 of the Sarbanes-Oxley Act of 2002. Beginning this
fiscal year, Section 404 of the Sarbanes-Oxley Act of 2002 will require the
Company to include an internal control report of management in its Annual Report
on Form 10-K. Beginning in Fiscal 2004, the Company initiated a process to
document and evaluate its internal controls over financial reporting, but
suspended such process until the Company implemented its new, world-wide fully
integrated ERP System, which implementation commenced in August 2004. The
Company expects to resume the process of documenting, evaluating and monitoring
its internal control over financial reporting in the beginning of the fourth
quarter of Fiscal 2005. The Company believes that it faces a significant risk of
not completing its internal control assessment on a timely basis. E&Y has also
advised the Board of Directors and the Audit Committee that it believes the
Company may not complete the assessment on a timely basis, and that even if the
Company's assessment is completed, E&Y may not have sufficient resources and/or
time to complete its assessment. The existence of the above factors and
circumstances create a risk that the Company or E&Y will not be able to conclude
at July 2, 2005 that the Company's internal controls over financial reporting
are effective and may result in a delay in the timely filing of the Company's
Annual Report on Form 10-K for Fiscal 2005.
34
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 10 - Litigation and Settlements in the Notes to Condensed Consolidated
Financial Statements.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On December 30, 2004, a former employee of the Company exercised an option for
26,666 shares of the Company's common stock pursuant to the Concord Camera Corp.
Incentive Plan (1993) at a price of $2.00 per share, following which he sold the
underlying shares of Common Stock in the open market for $2.1334 per share. The
Company had not timely filed its First Quarter Form 10-Q as of December 30,
2004, and inadvertently allowed the former employee to exercise the option. As a
result of the untimely filing of the First Quarter Form 10-Q, the shares issued
to the employee upon exercise of the option may not have been issued pursuant to
an effective Form S-8 registration statement or pursuant to a valid exemption
from registration.
ITEM 6. EXHIBITS
No. Description Method of Filing
--- ----------- ----------------
3.1 Certificate of Incorporation, as amended through Incorporated by reference to the Company's annual report
May 9, 2000 on Form 10-K for the year ended July 1, 2000.
3.2 Restated By-Laws, as amended through July 12, 2004 Incorporated by reference to the Company's quarterly
report on Form 10-K for the year ended July 3, 2004
31.1 Certification of Chief Executive Officer Filed herewith.
pursuant to Rule 13a-14(a)/15d-14(a)
31.2 Certification of Chief Financial Officer Filed herewith.
pursuant to Rule 13a-14(a)/15d-14(a)
32.1 Certification of Chief Executive Officer Filed herewith.
pursuant to 18 U.S.C. ss.1350
32.2 Certification of Chief Financial Officer Filed herewith.
pursuant to 18 U.S.C. ss.1350
35
S I G N A T U R E
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONCORD CAMERA CORP.
-------------------------------------
(Registrant)
DATE: March 31, 2005 By: /s/ Robert A. Bosi
----------------------------------
(Signature)
Robert A. Bosi
Interim Senior Vice President and
Chief Financial Officer
DULY AUTHORIZED AND PRINCIPAL
FINANCIAL OFFICER
36