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 December 31, 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 X No
---- ----
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer X
---- ----
Non-accelerated filer
----
Indicate by check mark whether the registrant is a shell company (as define in
rule 12b-2 of the Exchange Act).
Yes No X
---- ----
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 - 28,680,842 shares as of January 31, 2006
Index
Concord Camera Corp. and Subsidiaries
Part I. FINANCIAL INFORMATION Page No.
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Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets as of December 31, 2005 (Unaudited) and July 2, 2005.......................3
Condensed consolidated statements of operations (Unaudited) for
the quarter and six months ended December 31, 2005 and
January 1, 2005..............................................................................................4
Condensed consolidated statements of cash flows (Unaudited) for
the six months ended December 31, 2005 and January 1, 2005...................................................5
Notes to condensed consolidated financial statements (Unaudited).................................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................................................................21
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................................................31
Item 4. Controls and Procedures...........................................................................................31
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................................................32
Item 1A. Risk Factors......................................................................................................33
Item 5. Other Information.................................................................................................33
Item 6. Exhibits..........................................................................................................34
2
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS
CONCORD CAMERA CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31, 2005 July 2,
(UNAUDITED) 2005
-------------------- ---------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 43,322 $ 8,016
Restricted cash 2,000 -
Short-term investments - 35,200
Accounts receivable, net 21,564 31,860
Inventories 21,723 36,382
Deferred compensation assets 7,652 8,711
Prepaid expenses and other current assets 1,805 2,708
---------------- -----------------
Total current assets 98,066 122,877
Property, plant and equipment, net 15,816 16,672
Other assets 5,418 7,207
---------------- -----------------
Total assets $ 119,300 $ 146,756
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings under financing facilities $ 3,824 $ 2,936
Accounts payable 16,532 32,257
Accrued expenses 16,236 14,108
Deferred compensation liabilities 7,467 8,688
Other current liabilities 2,518 3,127
---------------- -----------------
Total current liabilities 46,577 61,116
Other long-term liabilities 1,710 3,337
---------------- -----------------
Total liabilities 48,287 64,453
Commitments and contingencies
Stockholders' equity:
Blank check preferred stock, no par value,
1,000 shares authorized, none issued - -
Common stock, no par value, 100,000 shares
authorized; 30,925 shares issued
as of December 31, 2005 and July 2, 2005 143,518 143,518
Additional paid-in capital 5,102 4,853
Deferred share arrangement 624 624
Accumulated deficit (72,614) (61,075)
---------------- -----------------
76,630 87,920
Less: treasury stock, at cost, 1,735
shares as of December 31, 2005 and July 2, 2005 (4,993) (4,993)
Less: common stock held in trust, 509
shares as of December 31, 2005 and July 2, 2005 (624) (624)
---------------- -----------------
Total stockholders' equity 71,013 82,303
---------------- -----------------
Total liabilities and stockholders' equity $ 119,300 $ 146,756
================ =================
See accompanying notes to condensed consolidated financial statements.
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
------------------------------------- ---------------------------------------
DECEMBER 31, JANUARY 1, DECEMBER 31, JANUARY 1,
2005 2005 2005 2005
-------------- --------------- -------------- ---- ---- --------------
Net sales $ 41,109 $ 54,333 $ 85,695 $ 97,347
Cost of products sold 37,088 57,879 77,545 100,473
-------------- --------------- -------------- --------------
Gross profit (deficit) 4,021 (3,546) 8,150 (3,126)
Selling expenses 4,016 4,892 7,553 9,090
General and administrative
expenses 5,495 5,540 11,801 11,748
-------------- --------------- -------------- --------------
Operating loss (5,490) (13,978) (11,204) (23,964)
Interest expense 107 308 208 139
Other expense (income),
net 44 (1,357) (62) (1,914)
-------------- --------------- -------------- --------------
Loss before
income taxes (5,641) (12,929) (11,350) (22,189)
Provision for
income taxes 138 80 189 140
-------------- --------------- -------------- --------------
Net loss $ (5,779) $ (13,009) $ (11,539) $ (22,329)
============== =============== ============== ==============
Basic and diluted loss per
common share $ (0.20) (0.44) $ (0.40) $ (0.76)
============== =============== ============== ==============
Weighted average
common shares
outstanding - basic and
diluted 29,190 29,342 29,190 29,271
============== =============== ============== ==============
4
CONCORD CAMERA CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
For the six months ended
-----------------------------------------------
DECEMBER 31, 2005 JANUARY 1, 2005
-------------------- ---------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (11,539) $ (22,329)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,402 3,841
Inventory charges 444 8,766
Restructuring reserve (110) 160
Gain related to available-for-sale investments -- (1,124)
Stock-based compensation 249 --
Changes in operating assets and liabilities:
Restricted cash (2,000) --
Accounts receivable, net 10,296 (12,659)
Inventories 14,216 4,622
Deferred compensation assets 1,059 449
Prepaid expenses and other current assets 903 817
Other assets 1,140 870
Accounts payable (15,725) 15,002
Accrued expenses 2,237 (1,708)
Deferred compensation liabilities (1,221) (26)
Other current liabilities (609) (1,421)
Other long-term liabilities (1,627) (145)
---------------- -----------------
Net cash provided by (used in) operating activities 115 (4,885)
---------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (897) (1,667)
Proceeds from sales of available-for-sale investments -- 13,401
Proceeds from sales (purchases) of short-term investments, net 35,200 (23,477)
---------------- -----------------
Net cash provided by (used in) investing activities 34,303 (11,743)
---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under short-term financing facilities, net 888 8,931
Net proceeds from issuance of common stock -- 72
---------------- -----------------
Net cash provided by financing activities 888 9,003
---------------- -----------------
Net increase (decrease) in cash and cash equivalents 35,306 (7,625)
Cash and cash equivalents at beginning of period 8,016 18,323
---------------- -----------------
Cash and cash equivalents at end of period $ 43,322 $ 10,698
================ =================
See accompanying notes to condensed consolidated financial statements.
5
CONCORD CAMERA CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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 December 31, 2005 ("Second Quarter Fiscal 2006")
and the six months ended December 31, 2005 ("Fiscal 2006 YTD") are not
necessarily indicative of the results that may be expected for the fiscal year
ending July 1, 2006 ("Fiscal 2006"). For comparative purposes, the quarter ended
January 1, 2005 has been defined as the ("Second Quarter Fiscal 2005") and the
six months ended January 1, 2005 have been defined as ("Fiscal 2005 YTD"). The
balance sheet at July 2, 2005 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, as
amended by the Annual Report on Form 10-K/A filed with the Securities and
Exchange Commission ("SEC") as of December 19, 2005 ("Form 10-K/A") for the
fiscal year ended July 2, 2005 ("Fiscal 2005").
Certain amounts in the prior year have been reclassified to conform to the
current year presentation.
NOTE 2 - SIGNIFICANT CUSTOMERS:
During the Second Quarter Fiscal 2006 and Fiscal 2006 YTD, we experienced an
increase in sales to Walgreen Co. ("Walgreens"), Wal-Mart Stores, Inc.
("Wal-Mart") and Plus Warenhandelgesellschaft mbH ("Plus") partially offset by a
reduction in sales to Eastman Kodak Company ("Kodak") as compared to the Second
Quarter Fiscal 2005 and Fiscal 2005 YTD. The Second Quarter Fiscal 2006 and
Fiscal 2006 YTD increase in sales to Wal-Mart was attributable to increased
sales of single-use cameras partially offset by a decrease in sales of digital
cameras. The Second Quarter Fiscal 2006 and Fiscal 2006 YTD increase in sales to
Walgreens was attributable to increased purchases of single-use and 35mm
traditional film cameras. The Second Quarter Fiscal 2006 and Fiscal 2006 YTD
increase in sales to Plus was due to increased purchases of digital cameras.
During the Second Quarter Fiscal 2006 and Fiscal 2006 YTD, sales to Kodak
decreased from the Second Quarter Fiscal 2005 and Fiscal 2005 YTD as a result of
Kodak ceasing single-use camera purchases under our two design and manufacturing
services ("DMS") contracts. The loss of sales to Kodak had a material adverse
effect on results of operations. The loss of any of these significant customers
or substantially reduced sales to any other significant customer could have a
material adverse effect on our results of operations.
The following table illustrates each significant customer's net sales as a
percentage of consolidated net sales during Second Quarter Fiscal 2006, Second
Quarter Fiscal 2005, Fiscal 2006 YTD and Fiscal 2005 YTD.
6
Percent of Net Sales
--------------------
For the quarter ended For the six months ended
---------------------------------------- --------------- -- -- -------------
December 31, January 1, December 31, January 1,
2005 2005 2005 2005
----------------- --------------- --------------- ------------
Wal-Mart 26.4% 16.6% 20.9% 17.3%
Walgreens 19.4% 3.1% 21.0% 3.7%
Plus 10.6% 7.7% 10.0% 5.8%
Kodak 0.0% 8.6% 0.0% 12.8%
----------------- --------------- --------------- ------------
Total 56.4% 36.0% 51.9% 39.6%
================= =============== =============== ============
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 accounting principles
generally accepted 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 provisions for sales returns, sales allowances and
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, 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 expense (income), net" in the accompanying
condensed consolidated statements of operations. For the Second Quarter Fiscal
2006 and the Second Quarter Fiscal 2005, included in "Other expense (income),
net" in the accompanying condensed consolidated statements of operations, are
approximately $0.4 million and $(1.1) million, respectively, of net foreign
currency losses (gains). For Fiscal 2006 YTD and Fiscal 2005 YTD, included in
"Other expense (income), net" in the accompanying condensed consolidated
statements of operations, are approximately $(0.6) million and $(2.1) million,
respectively, of net foreign currency losses (gains).
HEDGING ACTIVITIES
During the Second Quarter Fiscal 2006 and the Second Quarter Fiscal 2005, the
Company had no forward exchange contracts or other derivatives outstanding and
did not participate in any other type of hedging activities.
7
RESTRICTED CASH
As of December 31, 2005, the Company had cash deposits pledged as security in
the amount of $2.0 million for borrowings outstanding under the revolving demand
credit facilities. The restricted cash amount is classified as a current asset
since the borrowings it secures is classified as a current liability.
INVESTMENTS
On December 31, 2005, the Company sold its short-term investments and reinvested
the proceeds in cash and cash equivalents as part of the Company's year-end tax
planning strategy. At July 2, 2005, the Company's "Short-term investments," as
classified in the accompanying condensed consolidated balance sheet, consisted
of auction rate debt securities and were considered available-for-sale
securities. During the Second Quarter Fiscal 2006 and the Second Quarter Fiscal
2005, no other comprehensive income or loss was recorded because the variable
interest rate feature and short maturities of the auction rate debt securities
caused their carrying values to approximate market value. 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
expense (income), 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 Euros. The
gain on the short-term investment is included in "Other expense (income), net"
in the accompanying condensed consolidated statements of operations. Investment
income of $0.4 million and $0.3 million related to the short-term investments is
included in "Other expense (income), net" for the Second Quarter Fiscal 2006 and
the Second Quarter Fiscal 2005, respectively. Investment income of $0.7 million
and $0.5 million related to the short-term investments are included in "Other
expense (income), net" for Fiscal 2006 YTD and Fiscal 2005 YTD, respectively.
Investments held in deferred compensation rabbi trusts directed by participants
are classified as trading, and changes in the fair value of such investments are
recorded in earnings.
INVENTORIES
Inventories, consisting of raw materials, components, work-in-process and
finished goods, are stated at the lower of cost or market value and are
determined on a first-in, first-out basis. Work-in-process and component
inventory costs include materials, labor and manufacturing overhead. The Company
records lower of cost or market value adjustments based upon changes in market
pricing, customer demand, technological developments or other economic factors
and for on-hand excess, obsolete or slow-moving inventory.
IMPAIRMENT OF LONG-LIVED AND OTHER ASSETS
In accordance with Statement of Financial Accounting Standards ("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.
As of December 31, 2005, the sum of the Company's undiscounted cash flows
exceeded the carrying value of its long-lived assets. Assets reviewed include
patents, prepaid amounts related to licensing and royalty agreements, and
property, plant and equipment. No impairment charges were recorded during Fiscal
2006 YTD and Fiscal 2005 YTD.
REVENUE RECOGNITION
The Company recognizes revenue, in accordance with Staff Accounting Bulletin
("SAB") No. 101, Revenue Recognition in Financial Statements, and SAB No. 104,
Revenue Recognition: Corrected Copy, when title and risk of loss are transferred
to the customer, the sales price is fixed or determinable, persuasive evidence
of an arrangement exists, and collectibility is probable. Title and risk of loss
generally transfer when the product is delivered to the customer or upon
shipment, depending upon negotiated contractual arrangements. Sales are recorded
net of anticipated returns which the Company estimates based on historical rates
of return, adjusted for current events as appropriate, in accordance with
Statement of Financial Accounting Standard No. 48, Revenue Recognition When
Right of Return Exists ("SFAS No. 48"). If actual future returns are higher than
estimated, then net sales could be adversely affected. Management has assessed
the appropriateness of the timing of revenue recognition in accordance with SFAS
No. 48. After considering the requirements of SFAS No. 48, the Company concluded
it would defer recognition of revenue from certain customers until such
customers' transactions meet all of the requirements of SFAS No. 48.
8
SALES ALLOWANCES
The Company may enter into arrangements to offer certain pricing discounts and
allowances that do not provide an identifiable separate benefit or service. In
accordance with Emerging Issues Task Force Issue No. 01-09, Consideration Given
by a Vendor to a Customer (Including a Reseller of the Vendor's Products) ("EITF
Issue No. 01-09"), the Company records these pricing discounts and allowances as
a reduction of sales. Advertising and promotional costs, which include
advertising allowances and other discounts, have been expensed as incurred. In
accordance with EITF Issue No. 01-09, which addresses the statement of
operations classification of consideration between a vendor and a retailer, the
Company records certain variable selling expenses, including advertising
allowances, other discounts and other allowances, as a reduction of sales. The
Company may enter into arrangements to provide certain free products. In
accordance with EITF Issue No. 01-09, the Company records the cost of free
products ratably into cost of products sold based upon the underlying revenue
transaction.
STOCK-BASED COMPENSATION
Effective July 3, 2005, the Company began accounting for its employee and
director stock option plans in accordance with the provisions of SFAS No. 123
(revised 2004), "Share-Based Payment" ("SFAS No. 123R"). SFAS No. 123R revised
SFAS No. 123, "Accounting for Stock-Based Compensation," and supersedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB Opinion No.
25"). The revised statement addresses the accounting for share-based payment
transactions with employees and other third parties, eliminates the ability to
account for share-based payments using APB Opinion No. 25 and requires that the
compensation costs relating to such transactions be recognized in the
consolidated statement of operations based upon the grant-date fair value of
those instruments. We have adopted the modified prospective method of transition
as provided by SFAS No. 123R, and as a result, compensation expense related to
share-based payments is recorded only for periods beginning July 3, 2005. Under
the modified prospective method, stock-based compensation expense is generally
recognized over the vesting period for new awards granted after July 2, 2005 and
over the remaining vesting period for unvested awards outstanding at July 2,
2005.
INCOME TAXES
The Company periodically evaluates the realizability of its deferred income tax
assets. In the Second Quarter Fiscal 2006 and the quarter ended July 2, 2005
("Fourth Quarter Fiscal 2005"), based upon all the available evidence, the
Company determined that it was not more likely than not that its deferred income
tax assets will be fully realized. Accordingly, the Company has a valuation
allowance recorded for the entire balance of its deferred income tax assets as
of December 31, 2005 and July 2, 2005.
The Company estimates its interim effective tax rate before consideration of a
deferred income tax valuation allowance based upon its projected consolidated
annual effective income tax rate. This rate is largely a function of the annual
projected 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. During each of the Second Quarter Fiscal 2006 and the
Second Quarter Fiscal 2005, the Company recorded a provision for income taxes of
$0.1 million. During Fiscal 2006 YTD and Fiscal 2005 YTD, the Company recorded a
provision for income taxes of $0.2 million and $0.1 million, respectively. The
Second Quarter Fiscal 2006 and Fiscal 2006 YTD income tax provisions relate 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.
9
COMPREHENSIVE LOSS
Comprehensive loss in accordance with SFAS No. 130, Reporting Comprehensive
Income ("SFAS No. 130"), includes net loss adjusted for certain revenues,
expenses, gains and losses that are excluded from net loss 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. During
the Second Quarter Fiscal 2006 and Fiscal 2006 YTD, the Company's comprehensive
loss was ($5.8) million and ($11.5) million, respectively, the same as the net
loss for both periods, because the Company did not have any items of other
comprehensive income or loss. During the Second Quarter Fiscal 2005 and Fiscal
YTD 2005, the Company's comprehensive loss was ($13.0) million and ($22.3)
million, respectively, the same as the net loss for both periods, because the
Company did not have any items of other comprehensive income or loss.
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 2006 and the Second Quarter Fiscal 2005, the Company issued no
shares and 26,666 shares of Common Stock, respectively, upon the exercise of
stock options. During Fiscal 2006 YTD and Fiscal 2005 YTD, the Company issued no
shares and 353,478 shares of Common Stock, respectively, upon the exercise of
stock options. In the Second Quarter Fiscal 2006 and the Second Quarter Fiscal
2005, potentially dilutive securities were comprised of stock options to
purchase 104,161 and 287,631 shares of Common Stock, respectively, that were not
included in the calculation of diluted loss per share because their impact was
antidilutive. In Fiscal 2006 YTD and Fiscal 2005 YTD, potentially dilutive
securities were comprised of stock options to purchase 118,624 and 297,209
shares of Common Stock, respectively, that were not included in the calculation
of diluted loss per share because their impact was antidilutive. In the Second
Quarter Fiscal 2006, the Second Quarter Fiscal 2005, Fiscal 2006 YTD, and Fiscal
2005 YTD the weighted average effect of 509,054 shares for which delivery has
been deferred under the Company's Deferred Delivery Plan, was included in the
denominator of both basic and diluted loss per share calculations for each
respective period. See Note 9 - Deferred Share Arrangement.
NOTE 4 - SUPPLEMENTAL CASH FLOW INFORMATION:
(in thousands)
Non-cash Investing Activities:
Deferred Share Arrangement Fiscal 2005 YTD
-------------------------- ---------------------
Common stock issued to participant and trust $ 373
Treasury stock received by Company (373)
Deferred share arrangement obligation to participant 211
Common stock received and held in trust (211)
---------------------
$ -
=====================
The Company did not have any non-cash investing activities during Fiscal 2006
YTD. See Note 9-Deferred Share Arrangement for a description of the deferred
share arrangement transactions in Fiscal 2005.
10
NOTE 5 - INVENTORIES:
Inventories consist of the following:
(table in thousands)
DECEMBER 31, JULY 2,
2005 2005
--------------------- ---------------------
Raw materials, components, and work-in-
process $ 7,548 $ 6,507
Finished goods $ 14,175 $ 29,875
--------------------- ---------------------
Total inventories $ 21,723 $ 36,382
===================== =====================
During the Second Quarter Fiscal 2006, the Company recorded inventory related
pre-tax charges of approximately $0.1 million to reduce the carrying value of
certain finished goods and return camera inventories below their cost basis,
resulting from price declines, to their estimated net realizable value at
December 31, 2005. For the Second Quarter Fiscal 2006, the inventory related
pre-tax charges had the effect of decreasing inventories by $0.1 million and
increasing cost of products sold by $0.1 million. For Fiscal 2006 YTD, the
inventory pre-tax charges had the effect of decreasing inventories by $0.4
million and increasing cost of products sold by $0.4 million.
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 costs basis, resulting from price declines, to
their estimated net realizable value at January 1, 2005. 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 related pre-tax charges had the
effect of decreasing inventories by $8.8 million and increasing cost of products
sold by $8.8 million.
NOTE 6 - DEFERRED COMPENSATION:
As previously disclosed in our Current Report on Form 8-K filed with the SEC on
November 29, 2005, during the Second Quarter Fiscal 2006, pursuant to the
Company's amendments to its supplemental executive retirement plans (each, a
"SERP" and collectively, the "SERPs"), certain executives, including the
Company's Chairman (collectively, the "SERP Participants"), were to receive
distributions of their vested account balances from their respective SERPs
during the remainder of calendar year 2005. In addition, the amended SERP
between the Company and its Chairman permits the Chairman to receive a
distribution of certain other vested account balances from his SERP on January
3, 2006. During the Second Quarter Fiscal 2006, the SERP Participants received
distributions of their vested account balances totaling approximately $2.8
million. Since the SERPs were funded in prior years, distributions of the vested
amounts made to the SERP Participants had no effect on the Company's liquidity.
The "Deferred Compensation assets" and "Deferred Compensation liabilities"
amounts included in the accompanying condensed consolidated balance sheet as of
December 31, 2005 include the effect of the SERP distributions made during the
Second Quarter Fiscal 2006. For information regarding the January 3, 2006 SERP
distribution to the Company's Chairman, see Note 13 - Subsequent Events-
Deferred Compensation Distribution.
NOTE 7 - SHORT-TERM BORROWINGS AND FINANCING FACILITIES:
As of December 31, 2005, pursuant to a proposal dated September 20, 2005 and
accepted on October 14, 2005 (the "October 19 Agreement"), Concord Camera HK
Limited ("CCHK"), the Company's Hong Kong subsidiary had various revolving
demand credit facilities with The Hongkong and Shanghai Banking Corporation
Limited ("HSBC") providing an aggregate of approximately $9.6 million in
borrowing capacity. See the Company's Current Report on Form 8-K filed with the
SEC as of October 24, 2005. The revolving credit facilities were comprised of:
(1) an approximate $7.7 million import facility including an approximate $2.6
million packing credit and export sub-limit facility and (2) an approximate $1.9
million foreign exchange facility (collectively, the " Financing Facilities").
The Financing Facilities are denominated in Hong Kong Dollars and bear interest
at variable rates, as follows: 1.75% over the Hong Kong Interbank Offered Rate
on import loans denominated in Hong Kong Dollars and 1.75% over the Singapore
Interbank Offered Rate for transactions denominated in currency other than the
Hong Kong Dollar. Since 1983, the Hong Kong Dollar has been pegged to the U.S.
Dollar. Pursuant to an agreement dated June 10, 2004, CCHK granted a security
interest in substantially all of its assets to HSBC. On or about February 24,
2005, the Company and HSBC agreed, among other things, to subordinate
approximately $20.0 million in inter-company payables from CCHK to the Company
to any amounts owing or which may in the future become owing to HSBC by CCHK.
Pursuant to the October 19 Agreement, the Company and HSBC agreed, among other
things, to provide HSBC with cash deposits pledged as security in the amount of
$2.0 million. As of December 31, 2005, the Company guaranteed all of the amounts
under the Financing Facilities.
11
The Financing Facilities were subject to certain covenants, and the Company was
in compliance with such covenants as of December 31, 2005 and July 2, 2005. At
December 31, 2005 and July 2, 2005, the Company had $3.8 million and $2.9,
respectively, in short-term borrowings outstanding under the import facility.
The weighted average borrowing rates on the short-term borrowings as of December
31, 2005 and July 2, 2005, were 5.81% and 4.15%, respectively.
On January 24, 2006, CCHK accepted a proposal from HSBC to revise the existing
Financing Facilities which resulted in, among other things, a reduction in
borrowing capacity and increased cash security requirements. See Note
13--Subsequent Events-Revision of Financing Facilities' Terms.
NOTE 8 - STOCK-BASED COMPENSATION EXPENSE:
At December 31, 2005, the Company had stock-based employee compensation plans
which are described in Note 14 to Form 10-K/A. In accordance with SFAS No.123R,
the Company recorded approximately $119,000 and $249,000 of share-based
compensation during the Second Quarter Fiscal 2006 and Fiscal YTD 2006,
respectively. The Company considers all of its stock-based compensation expense
as a component of general and administrative expenses. In addition, no amount of
stock-based compensation expense was capitalized as part of capital expenditures
or inventory for the periods presented.
The Company uses the Black-Scholes-Merton option valuation model to calculate
the fair value of a stock option grant. The stock-based compensation recorded in
the Second Quarter Fiscal 2006 was calculated using the assumptions noted in the
following table. Expected volatilities are based on the historical volatility of
the Company's common stock over the period of time commensurate with the
expected life of the stock options. The dividend yield of zero is based on the
fact that the Company has never paid cash dividends and has no present intention
to pay cash dividends. The Company estimated its future stock option exercise
and employee termination information used in the valuation model. The expected
term of options granted is based upon the observed and expected time to the date
of post-vesting exercise and forfeitures of options by the Company's employees.
The risk-free interest rate is derived from the average U.S. Treasury rate for
the period, which approximates the rate in effect at the time of the stock
option grant.
Quarter ended
December 31, 2005
-------------------------
Expected volatility 70.9%
Expected dividend yield 0%
Expected term (in years) 5
Risk-free interest rate 4.4%
A summary of stock option activity under our stock option plans as of December
31, 2005, and changes during the Second Quarter Fiscal 2006 and Fiscal YTD 2006
are presented below:
12
Weighted
Weighted Average
Average Remaining
Exercise Contractual Aggregate
Total Stock Options Shares Price Term (Years) Intrinsic Value
--------------------------------------- ------------- -------------- ----------------- -----------------
Outstanding at October 1, 2005 2,271,889 $4.37
Granted 5,000 $1.08
Exercised -- --
Canceled (60,000) $2.67
-------------
Outstanding at December 31, 2005 2,216,889 $4.41 3.6 $9,775,759
=============
Exercisable at December 31, 2005 1,982,595 $4.48 3.0 $8,887,005
=============
Weighted
Weighted Average
Average Remaining
Exercise Contractual Aggregate
Total Stock Options Shares Price Term (Years) Intrinsic Value
--------------------------------------- ------------- -------------- ---------------- -----------------
Outstanding at July 2, 2005 2,262,889 $4.40
Granted 52,000 $1.24
Exercised -- --
Canceled (98,000) $2.58
-------------
Outstanding at December 31, 2005 2,216,889 $4.41 3.6 $9,775,759
=============
Exercisable at December 31, 2005 1,982,595 $4.48 3.0 $8,887,005
=============
The weighted average grant-date fair value of options granted during the Second
Quarter Fiscal 2006 and the Second Quarter Fiscal 2005 was $0 and $1.45,
respectively. No options were exercised during the Second Quarter Fiscal 2006
and Fiscal 2006 YTD. The total intrinsic value of options exercised during the
Second Quarter Fiscal 2005 and Fiscal 2005 YTD was $3,000 and $508,000,
respectively. The intrinsic value of a stock option is the amount by which the
current market value of the underlying stock exceeds the exercise price of the
stock option.
A summary of the status of nonvested shares as of December 31, 2005, and
changes during the Second Quarter Fiscal 2006 and Fiscal YTD 2006 are presented
below:
Weighted Average
Grant Date
Nonvested Stock Options Shares Fair Value
------------------------------------------------------ -------------------- --------------------
Nonvested at October 1, 2005 318,632 $2.54
Granted 5,000 $0.0
Vested (65,338) $3.56
Canceled (24,000) $0.80
--------------------
Nonvested at December 31, 2005 234,294 $2.38
====================
13
Weighted Average
Grant Date
Nonvested Stock Options Shares Fair Value
------------------------------------------------------ -------------------- --------------------
Nonvested at July 2, 2005 344,414 $2.99
Granted 52,000 $0.72
Vested (100,120) $4.30
Canceled (62,000) $1.25
--------------------
Nonvested at December 31, 2005 234,294 $2.38
====================
As of December 31, 2005, there was approximately $425,000 of total unrecognized
compensation cost related to nonvested share-based compensation arrangements
granted under our stock option plans. That cost is expected to be recognized
over a weighted-average vesting period of 2.1 years. The total fair value of
stock options vested during the Second Quarter Fiscal 2006 and the Second
Quarter Fiscal 2005 was approximately $233,000 and $228,000, respectively. The
total fair value of stock options vested during Fiscal YTD 2006 and Fiscal YTD
2005 was approximately $431,000 and $728,000, respectively.
For the periods prior to July 2, 2005, the Company accounted for its employee
and director stock option plans in accordance with the provisions of APB Opinion
No. 25. As permitted by SFAS No. 123, the Company measured employee compensation
cost of its stock option plans using the intrinsic value method of accounting.
Prior to the Company's adoption of SFAS No. 123R, SFAS No. 123 required that the
Company provide pro forma information regarding net earning and net earnings per
common share as if compensation cost for the Company's stock-based awards had
been determined in accordance with the fair value method now prescribed. The
Company had previously adopted the disclosure portion of SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure," requiring
quarterly SFAS No. 123 pro forma disclosure. The pro forma change for
compensation cost related to stock-based awards granted was recognized over the
vesting period. For stock options, the vesting period represents the period of
time between the date of grant and the date each option becomes exercisable.
The following table illustrates the effect on net loss and net loss per share if
the Company had applied the fair value recognition provisions of SFAS No. 123,
as amended by SFAS No. 148, to stock-based employee compensation for periods
prior to the adoption of SFAS No. 123R.
For the six
Quarter Ended months ended
January 1, 2005 January 1, 2005
------------------- ---------------------
Net loss as reported $ (13,009) $ (22,329)
Add: variable stock-based compensation expense, net of related tax
effects, included in the determination of net loss as reported -- --
Deduct: total employee stock-based compensation expense determined under fair
value based method for all awards, net of tax effects (171) (368)
------------------- ---------------------
Pro forma net loss $ (13,180) $ (22,697)
=================== =====================
Net loss per common share:
Basic and diluted - as reported $ (0.44) $ (0.76)
=================== =====================
Basic and diluted - pro forma $ (0.45) $ (0.78)
=================== =====================
As a result of adopting Statement No. 123R on July 2, 2005, the Company's loss
before income taxes and net loss for the Second Quarter Fiscal 2006 and Fiscal
YTD 2006 were approximately $119,000 and $249,000 lower, respectively, than if
it had continued to account for stock-based compensation under APB Opinion No.
25. If the Company had not adopted SFAS No. 123R during the First Quarter Fiscal
2006, basic and diluted loss per common share for the Second Quarter Fiscal 2006
and Fiscal YTD 2006 would have remained the same as the basic and diluted loss
per common share reported for the Second Quarter Fiscal 2006 and Fiscal YTD
2006.
14
NOTE 9 - DEFERRED SHARE ARRANGEMENT:
The Company's Deferred Delivery Plan allows designated executive officers to
elect, subject to the approval of the Compensation and Stock Option Committee of
the Company's Board of Directors, 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 of $373,375 (the
"Payment Shares") of his option to purchase 314,312 shares of Common Stock
("2005 Delivery Plan Transaction"). Upon completion of the 2005 Delivery Plan
Transaction, the 136,269 Payment Shares were classified as "Treasury stock" and
recorded at a cost of $373,375. The Company issued 314,312 new shares of Common
Stock and classified them as "Common Stock" at a cost of $373,375, of which
136,269 shares were issued to the Chairman in exchange for the Payment Shares.
The remaining 178,043 shares, the delivery of which was deferred by the
Chairman, were issued to a rabbi trust. The 178,043 shares held in the rabbi
trust were recorded at a cost of $211,500 and classified as "Common stock held
in trust." The corresponding liability to the Chairman was recorded at $211,500
and classified as "Deferred share arrangement" in the stockholders' equity
section of the condensed consolidated balance sheets.
NOTE 10 - COMMITMENTS AND CONTINGENCIES:
LICENSE AND ROYALTY AGREEMENTS
On May 10, 2004, the Company entered into a twenty year, worldwide trademark
license agreement with Jenoptik AG for the exclusive use of the JENOPTIK brand
name and trademark on non-professional consumer imaging products including, but
not limited to, digital, single-use and traditional cameras, and other imaging
products and related accessories. The license agreement provides for a royalty
of one-half of one percent (0.5%) of net sales of non-professional consumer
imaging products bearing the JENOPTIK brand name for the first ten (10) years of
the license and a royalty of six-tenths of one percent (0.6%) for the second ten
(10) years of the license. There are no minimum guaranteed royalty payments.
On August 26, 2002, the Company entered into two Polaroid licensing agreements.
The two license 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 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 expiring on February 1, 2006 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 are fully credited against
percentage royalties. Pursuant to the terms of the license agreements, as of
August 2004, the Company paid a total of $6.0 million, which represented $3.0
million for each license agreement, as payment of the minimum royalties and has
recorded these payments as prepaid assets. These assets are amortized based upon
a percentage of net sales. On November 28, 2005, the Company exercised its right
to renew the single-use camera license agreement with Polaroid for an additional
three-year term expiring on February 1, 2009 in accordance with the same
economic terms included in the original agreement. In January, 2006, the Company
entered into a new traditional film camera license agreement with Polaroid on
terms different from the original agreement. See Note 13-Subsequent
Events--Polaroid Traditional Film Camera Agreement.
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 non-exclusive license (excluding Japan until
January 1, 2005) to use certain of Fuji's patents and patent applications
related to single-use cameras. The license extends until the later of the
expiration of the last of the licensed Fuji patents or February 26, 2021. In
consideration of the license, the Company agreed to pay a license fee and
certain royalty payments to Fuji. Accordingly, a significant portion of the
balance for patents, trademarks and licenses, net in "Other assets" in the
accompanying condensed consolidated balance sheets at December 31, 2005 and July
2, 2005, 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 liabilities" in the accompanying condensed
consolidated balance sheets at December 31, 2005 and July 2, 2005 which was
equal to the present value of future license fee payments. These assets are
amortized based upon quantities of units produced.
15
Additionally, the Company has other license and royalty agreements that require
the payment of royalties based on the manufacture, reproduction, and/or sale of
certain products. Total amortization and royalty expense for all licensing and
royalty agreements for the Second Quarter Fiscal 2006 and the Second Quarter
Fiscal 2005, was $1.9 million and $1.6 million, respectively. Total amortization
and royalty expense for all licensing and royalty agreements for Fiscal 2006 YTD
and Fiscal 2005 YTD, was $4.4 million and $3.0 million, respectively.
INTELLECTUAL PROPERTY CLAIMS
From time to time, patent infringement claims are asserted against the Company.
The Company analyzes the claims and, if appropriate, takes action to avoid
infringement, settle the claim or negotiate a license. The status of those
claims for which legal proceedings have been initiated against the Company is
discussed in Note 11--Litigation and Settlements. The Company has also received
notifications from three entities, one of which was a significant customer of
the Company, alleging that certain of the Company's digital cameras infringe
upon those entities' respective patents. The Company has engaged in discussions
with these three entities regarding resolution of the claims.
Based on our initial assessment of two of the claims, infringement of one or
more patents is probable if the patents are valid. Based upon the licensing
discussions to date, we preliminarily estimate the potential royalties due to
these two claimants for digital camera sales through December 31, 2005 to be
between $0 and approximately $6.3 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 or damages to either claimant. The Company is unable to reasonably
estimate the amount of the potential loss, if any, within the range of estimates
relating to these claims. Accordingly, no amounts have been accrued related to
these claims as of December 31, 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, and therefore, no amounts have been accrued
relating to this claim as of December 31, 2005. The Company is assessing
potential claims of indemnification against certain of its suppliers with
respect to this claim.
PURCHASE COMMITMENTS
At December 31, 2005, the Company had $8.3 million in purchase commitments
relating to the procurement of raw materials, components, and finished goods
inventory from various suppliers.
NOTE 11 - 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 dismissed all claims against the defendants related to the Secondary
Offering. On September 8, 2005, the court granted the plaintiffs' motion for
class certification and certified as plaintiffs all persons who purchased the
Common Stock between January 18, 2001 and June 22, 2001, inclusive, and who were
allegedly damaged thereby (the period January 18, 2001 through June 22, 2001
hereinafter referred to as the "Class Period"). The allegations remaining in the
Amended Complaint are centered around claims that the Company failed to
disclose, in periodic reports it filed with the SEC and in press releases it
made to the public during the Class Period regarding its operations and
financial results, that a large portion of its accounts receivable was
represented by a delinquent and uncollectible balance due from then customer, KB
Gear Interactive, Inc. ("KB Gear"), and that a material portion of its inventory
consisted of customized components that had no alternative usage. The Amended
Complaint claims that such failures artificially inflated the price of the
Common Stock. The Amended Complaint seeks unspecified damages, interest,
attorneys' fees, costs of suit and unspecified other and further relief from the
court. Pursuant to a scheduling order of the court, trial in this matter is
scheduled to commence on November 13, 2006. The Company 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 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 its informal inquiry or from Nasdaq
with respect to its request since the Company last responded in February 2003.
16
In September 2004, a class action complaint was filed against the Company and
certain of its officers in the United States District Court for the Southern
District of Florida by individuals purporting to be shareholders of the Company.
In August 2005, an amended consolidated complaint (the "Amended Complaint") was
filed adding a former officer of the Company as a defendant. The lead plaintiff
in the Amended Complaint seeks to act as a representative of a class consisting
of all persons who purchased the Company's Common Stock during the period from
August 14, 2003 through August 31, 2004, inclusive (the "Class Period"), who
were allegedly damaged thereby. The allegations in the Amended Complaint are
centered around claims that the Company failed to disclose, in periodic reports
it filed with the SEC and in press releases it made to the public during the
Class Period regarding its operations and financial results, (i) the full extent
of the Company's excess, obsolete and otherwise impaired inventory; (ii) the
departure of a former officer from the Company until several months after his
departure; and (iii) that Kodak would cancel its DMS contracts with the Company
due to the Company's alleged infringement of Kodak's patents. The Amended
Complaint also alleges that the Company improperly recognized revenue contrary
to accounting principles generally accepted in the United States due to an
inability to reasonably estimate digital camera returns. The Amended Complaint
claims that such failures artificially inflated the price of the Common Stock.
The Amended Complaint seeks unspecified damages, interest, attorneys' fees,
costs of suit and unspecified other and further relief from the court. The
Company intends to vigorously defend the lawsuit. Although the Company believes
the lawsuit is without merit, the outcome cannot be predicted, and if adversely
determined, the ultimate liability of the Company, which could be material,
cannot be ascertained. In a letter dated November 19, 2004, the Company was
advised by the staff of the SEC that it is conducting an investigation related
to the matters described above. The Company has provided the requested
information to the SEC and has not received any further communication from the
SEC with respect to its request since the Company last responded in May 2005.
On November 16, 2004, a shareholder derivative suit was initiated against
certain of the Company's current and former officers and directors, and the
Company as a nominal defendant, in the United States District Court for the
District of New Jersey by an individual purporting to be a shareholder of the
Company. The complaint alleges that the individual defendants breached their
duties of loyalty and good faith by causing the Company to misrepresent its
financial results and prospects, resulting in the class action complaints
described in the immediately preceding paragraph. The complaint seeks
unspecified damages, repayment of salaries and other remuneration from the
individual defendants, interest, attorneys' fees, costs of suit and unspecified
other and further relief from the court. In March 2005, the New Jersey federal
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. In May 2005,
the court consolidated this case with the related class action suit for
discovery purposes only. Although the Company believes this lawsuit is without
merit, its outcome cannot be predicted, and if adversely determined, the
ultimate effect on the Company, which could be material, cannot be ascertained.
The Company has sought coverage from its insurance carriers for the actions
described above under the Company's directors and officers insurance policies
and the insurance carriers are defending the actions under a reservation of
rights.
Pursuant to the Company's Certificate of Incorporation, as amended, the personal
liability of the Company's directors is limited to the fullest extent permitted
under the New Jersey Business Corporation Act ("NJBCA"), and the Company is
required to indemnify its officers and directors to the fullest extent permitted
under the NJBCA. In accordance with the terms of the Certificate of
Incorporation and the NJBCA, the Board of Directors approved the payment of
expenses for each of the current and former officers and directors named as
defendants (the "individual defendants") in the above described class action and
derivative action litigations (collectively, the "actions") in advance of the
final disposition of such actions. The individual defendants have executed and
delivered to the Company written undertakings to repay the Company all amounts
so advanced if it is ultimately be determined that the individual defendants are
not entitled to be indemnified by the Company under the NJBCA.
17
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 "672 Patent"). 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, and therefore, no
amounts have been accrued relating to this action. The Company has notified
several third parties of its intent to seek indemnity from such parties for any
costs or damages incurred by the Company as a result of this action. On January
31, 2006, the United States Patent and Trademark Office granted a request for
reexamination of the 672 Patent.
On October 6, 2004, a patent infringement complaint was filed by Honeywell
International, Inc. and Honeywell Intellectual Properties, Inc., against 27
defendants, including the Company, in the United States District Court for the
District of Delaware. The complaint asserts that the defendants have conducted
activities which infringe U.S. Patent No. 5,280,371, entitled Directional
Diffuser for a Liquid Crystal Display. The complaint seeks unspecified damages,
interest, attorneys' fees, costs of suit and unspecified other and further
relief from the court. The proceedings in this action against the Company and
other similarly situated defendants have been stayed by the court pending the
resolution of the infringement actions against the liquid crystal display
manufacturers. It is too early to assess the probability of a favorable or
unfavorable outcome or the loss or range of loss, if any, and therefore, no
amounts have been accrued relating to this action. The Company has notified
several third parties of its intent to seek indemnity from such parties for any
costs or damages incurred by the Company as a result of this action.
In November 2005, a patent infringement complaint was filed by Flashpoint
Technology, Inc. against the Company in the United States District Court for the
District of Delaware. The Company has not yet been served with the complaint.
The complaint asserts that the defendants have conducted activities which
infringe U.S. Patent Nos. 6,177,956, 6,249,316, 6,847,388, 6,278,447 and
6,233,190. The complaint seeks injunctive relief, unspecified damages, interest,
attorneys' fees, costs of suit and unspecified other and further relief from the
court. It is too early to assess the probability of a favorable or unfavorable
outcome or the loss or range of loss, if any, and therefore, no amounts have
been accrued relating to this action. The Company is assessing potential claims
of indemnification against certain of its suppliers with respect to this action.
The Company is involved from time to time in routine legal matters incidental to
its business. Based upon available information, the Company believes that the
resolution of such matters will not have a material adverse effect on its
financial position or results of operations.
18
NOTE 12 - RESTRUCTURING AND OTHER CHARGES:
RESTRUCTURING INITIATIVES
During Fiscal 2005, the Company announced Restructuring Initiatives designed to
eliminate its reliance on internally designed and manufactured digital cameras
and increase the design, co-development and purchase of digital cameras from
outsourced manufacturers to provide competitive products to the retail market.
The Restructuring Initiatives were a result of the Company's previously
announced strategic review process to determine how it may better compete in the
digital camera market. The Company's reliance on internally designed and
manufactured digital cameras ended at the end of Fourth Quarter Fiscal 2005.
Table I -- Restructuring Charges, below, reconciles the beginning and ending
balances of the restructuring reserve.
(in thousands)
Accrual
Severance
-----------------
Charges $ 702
Payments (542)
-----------------
Balance as of January 1, 2005 $ 160
Charges 515
Payments (565)
-----------------
Balance as of July 2, 2005 $ 110
Charges --
Payments (110)
-----------------
Balance as of December 31, 2005 $ --
=================
(in thousands)
Quarter and Six Months Ended January 1, 2005
--------------------------------------------------------------
Restructuring Charges Inventory
Severance Impairment Total
----------------- ------------------ -------------------
Cost of products sold $ 701 $ 3,601 $ 4,302
General and administrative expense 1 -- 1
----------------- ------------------ -------------------
Total $ 702 $ 3,601 $ 4,303
================= ================== ===================
During the Second Quarter Fiscal 2005, the Company recorded an additional $0.5
million in depreciation expense, which is included in cost of products sold,
related to the reduction in useful lives of the molds and tooling formerly used
in the manufacturing of digital cameras.
In connection with the Restructuring Initiatives, the Company also incurred
other charges related to retention costs of employees that were not terminated.
The services of these employees benefit parts of the business other than the
manufacture of digital cameras. Accordingly, these retention costs are
classified as other charges in Table II below. During the Second Quarter Fiscal
2006 and Fiscal 2006 YTD, we incurred approximately $0.1 and $0.2 million,
respectively, in expenses related to employee retention.
19
COST-REDUCTION INITIATIVES
2006 COST-REDUCTION INITIATIVES
During Fiscal 2006, as a result of our continued evaluation of our cost
structure and strategic review process, we began the initial implementation of
additional cost reduction initiatives ("2006 Cost-Reduction Initiatives"),
including, among other things, the separation of three executives and the
elimination of certain employee positions. As a result, in the Second Quarter
Fiscal 2006, we recorded a total charge of $1.1 million related to severance
costs.
2005 COST-REDUCTION INITIATIVES
During Fiscal 2005, as a result of our continued evaluation of our cost
structure and the strategic review process, we implemented cost-reduction
initiatives ("2005 Cost-Reduction Initiatives") including, among other things,
eliminating certain employee positions and consolidating certain operations in
the United Kingdom, France and Germany into our operations in Jena, Germany. In
addition, we entered into retention agreements with certain employees affected
by our decision to consolidate these European operations.
Table II--Other Charges, below, reconciles the beginning and ending balances of
the accrual (prepaid) amounts related to other charges and presents the
statement of operations classification of the other charges.
(in thousands)
Accrual (prepaid)
----------------- Severance Retention Total
----------------- --------------------- ---------------------
Balance as of January 1, 2005 $ -- $ (43) $ (43)
Charges 260 379 639
Payments (70) (207) (277)
----------------- --------------------- ---------------------
Balance as July 2, 2005 $ 190 $ 129 $ 319
Charges -- 107 107
Payments (26) (37) (63)
----------------- --------------------- ---------------------
Balance as October 1, 2005 $ 164 $ 199 $ 363
Charges 1,138 70 1,208
Payments (16) (133) (149)
----------------- --------------------- ---------------------
Balance as of December 31, 2005 $ 1,286 $ 136 $ 1,422
================= ===================== =====================
(in thousands)
December 31, 2005
------------------ -- -----------------
Other Charges Quarter Six Months
------------- Ended Ended
------------------ -----------------
Cost of products sold $ 45 $ 96
Selling expense 8 14
General and administrative expense 1,155 1,205
------------------ -----------------
Total $ 1,208 $ 1,315
================== =================
20
NOTE 13 - SUBSEQUENT EVENTS:
REVISION OF FINANCING FACILITIES' TERMS
On January 24, 2006, CCHK accepted a proposal from HSBC, dated January 4, 2006
(the "January 2006 Agreement"), to revise the existing Financing Facilities
between CCHK and HSBC. For further information regarding the terms of the
Financing Facilities that preceded the January 2006 Agreement, see Note 7 -
Short Term Borrowings and Financing Facilities.
Under the January 2006 Agreement, the $1.9 million foreign exchange facility was
eliminated and CCHK agreed to provide HSBC with cash deposits pledged as
security in the amount of $6.2 million in addition to the existing cash deposit
pledged as security in the amount of $2.0 million. The total cash deposits
pledged as security in the amount of $8.2 million will secure the import
facility of $7.7 million and a guarantee facility of Euros 380,000 (equal to
approximately $500,000) and will be classified as restricted cash in the
consolidated balance sheet. Upon receipt of CCHK's acceptance of the proposal
and CCHK's providing the additional security of $6.2 million, HSBC agreed to
cancel (i) the Company's corporate guarantees up to the aggregate amount of
$13.7 million and the guarantee facility of Euros 380,000; (ii) HSBC's security
interest in substantially all of CCHK's assets; (iii) the Letters of Undertaking
from CCHK to HSBC dated 1998, 1999 and 2000, pursuant to which CCHK was subject
to, among other things, certain covenants; and (iv) the Capitalization and
Subordination Agreement and the Subordination Agreement each dated March 31,
2005, the provisions of which were described in the Current Report on Form 8-K
filed with the SEC in October 2005.
POLAROID TRADITIONAL FILM CAMERA AGREEMENT
On January 30, 2006, the Company and Polaroid entered into a new license
agreement providing for the exclusive, worldwide use by the Company of the
Polaroid brand trademark in connection with the manufacture, distribution,
promotion and sale of traditional film cameras. The license agreement is for a
term of three years expiring on January 31, 2009 and provides for a minimum
royalty payment by the Company, on or before October 31, 2006, of $50,000, which
will be fully credited against all percentage royalties during the first year of
the term. There are no minimum guaranteed royalty payments after the first year
of the term.
DEFERRED COMPENSATION DISTRIBUTION
During January 2006, the Chairman received a SERP distribution of his vested
account balance totaling approximately $7.1 million. See Note 6-Deferred
Compensation.
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 for Fiscal 2005, as amended by the Annual Report on
Form 10-K/A filed with the SEC as of December 19, 2005 ("Form 10-K/A") for
Fiscal 2005, including the consolidated financial statements, and the related
notes thereto. 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 the Company's operations, markets, products, prices and other factors
discussed elsewhere in this report and other reports filed with the SEC. See
"Risk Factors" below and in the Form-10K/A. These factors may cause results to
differ materially from the statements made in this report or otherwise made by
or on behalf of the Company.
OVERVIEW
We design, develop, manufacture, outsource, market and sell popularly priced,
easy-to-use image capture products. Our products include single-use, digital and
35mm traditional film cameras. We manufacture and assemble certain of our
products in the Peoples Republic of China ("PRC") for sale to retail sales and
distribution ("RSD") customers. We sell our private label and brand name
products to our RSD customers worldwide (either directly or through third-party
distributors). During Fiscal 2006 and Fiscal 2005, we experienced a substantial
reduction in design and manufacturing services ("DMS") sales of single-use
cameras primarily as a result of the decision of Eastman Kodak Company ("Kodak")
to cease purchases under its two DMS contracts with us. Although we continue to
seek and evaluate DMS business opportunities, we had no sales to DMS customers
during the Second Quarter Fiscal 2006 and expect DMS sales to be nominal during
the remainder of Fiscal 2006. We ceased manufacturing digital cameras at the end
of the fourth quarter of Fiscal 2005, and have significantly increased our
reliance on the outsourced manufacture of digital cameras during Fiscal 2006:
21
QUARTER-OVER-QUARTER RESULTS OF OPERATIONS
Our operating loss in the Second Quarter Fiscal 2006 was $(5.5) million as
compared to an operating loss of $(14.0) million for the same period Fiscal
2005.
Factors contributing to the quarter-over-quarter reduction of our operating loss
were:
1. Lower digital camera and component inventory charges; and
2. Lower product design and manufacturing labor and overhead costs.
Lower Digital Camera and Component Inventory Charges
We continue to experience significant competition and price declines in the
digital camera market. The inventory charges recorded for the Second Quarter
Fiscal 2006, however, were $0.1 million as compared to $6.7 million recorded in
the Second Quarter Fiscal 2005. The reduction in inventory charges was primarily
due to a significant reduction in our digital raw material components,
work-in-process and finished goods inventory levels resulting from our increased
reliance on the outsourced manufacture of digital cameras and improved inventory
management processes. This reduction in inventory charges contributed a $6.6
million increase in year-over-year gross profit.
Lower Product Design and Manufacturing Labor and Overhead Costs
As a result of the Restructuring Initiatives implemented in Fiscal 2005 designed
to eliminate our reliance on internally designed and manufactured digital
cameras and increase the design, co-development and purchase of digital cameras
from outsourced manufacturers, we significantly curtailed our product design
costs and lowered our manufacturing labor and overhead costs. As compared to the
Second Quarter Fiscal 2005, these manufacturing-related cost reductions,
together with increased efficiencies and production volumes, resulted in a
decrease in product design costs and reduced under-absorption of manufacturing
labor and overhead in the amounts of $2.1 million and $1.0 million,
respectively.
22
SECOND QUARTER FISCAL 2006 RESULTS OF OPERATIONS
We significantly reduced our operating loss 2005 by $8.5 million, or 60.7%, in
the Second Quarter Fiscal 2006 as compared to Second Quarter Fiscal 2005 but
still recorded an operating loss of $(5.5) million during the quarter.
Factors contributing to the Second Quarter Fiscal 2006 operating loss were:
1. Lower than expected digital camera gross margins;
2. Under-absorption of manufacturing labor and overhead costs; and
3. Increased severance costs.
Lower than Expected Digital Camera Gross Profits
Although we have implemented an outsource model for the procurement of digital
cameras and significantly reduced sales of digital cameras in the Americas, we
continue to experience significant competitive and pricing pressures that have
resulted in nominal digital camera gross margins in other regions. Gross profits
on the sales of digital cameras remains significantly less than expected,
especially in Europe. In addition, we did not realize a gross profit on the
sales of certain digital cameras whose carrying values were lowered in Fiscal
2005 and Fiscal 2006 YTD. Since we lowered the carrying value of certain digital
inventory in prior periods, sales of such digital inventory in future periods
will result, on average, in approximately zero margin.
Under-Absorption of Manufacturing Labor and Overhead Costs
In the Second Quarter Fiscal 2006 and Fiscal 2006 YTD, although we made
significant year-over-year improvements in reducing under-absorption of
manufacturing labor and overhead costs in the amounts of $1.0 million and $3.1
million, respectively, single-use camera production remains at a level
insufficient to cover our manufacturing labor and overhead costs. Management
continues to assess alternatives to increase single-use camera production volume
and to reduce the manufacturing labor and overhead costs.
Increased Severance Costs
Our initial 2006 Cost-Reduction Initiatives, including, among other things, the
separation of three executives and the elimination of certain other employee
positions, had the effect of increasing general and administrative expenses by
$1.1 million in the Second Quarter Fiscal 2006 as compared to the Second Quarter
Fiscal 2005.
Although we have made significant improvements to increase gross margin and
lower our cost structure, we still have not achieved our gross margin, cost
structure and operating income goals. We continue to face challenges in
achieving our gross margin targets in the digital camera market while operating
under a new business model under which we outsource the manufacture of digital
cameras. In the Americas, our increased focus on the sale of single-use and 35mm
traditional film cameras and a de-emphasis on the sale of digital cameras has
resulted in increases in our gross margins, whereas the emphasis on the sale of
digital cameras in Europe has resulted in nominal gross margins. In light of
these trends, we continue to review our strategies, including the implementation
of additional cost reductions and potential new business initiatives, and
continue to assess our digital camera strategy and cost structure, including the
viability of our continued participation in the digital camera market. There can
be no assurances that implementing any such initiatives will successfully
reverse our losses, increase our revenues, decrease our costs or improve our
results of operations.
ACCELERATED FILER STATUS
On December 21, 2005, the SEC published final rules that, among other things,
revised the definition of "accelerated filer" to make it simpler for accelerated
filers whose public float falls below the $50 million threshold to exit
accelerated filer status. Under the new rules, an accelerated filer that has
voting and non-voting equity held by non-affiliates of less then $50 million is
permitted to exit accelerated filer status at the end of the year in which its
equity falls below $50 million at the end of its second fiscal quarter end and
to file its annual report for that year and subsequent periodic reports on a
non-accelerated basis. Accelerated filer status affects an issuer's deadlines
for filing its periodic reports with the SEC and complying with the requirements
of Section 404 ("Section 404") of the Sarbanes-Oxley Act of 2002. A
non-accelerated filer must begin to comply with the internal control over
financial reporting requirements including the attestation report of a
registered public accounting firm for its first fiscal year on or after July 15,
2007.
23
Since the Company's closing Common Stock price on December 30, 2005 was $1.19
and, of the approximately 28.7 million shares outstanding, at least 25% were
held by affiliates of the Company, the Company's public float approximated $21.5
million as of such date. As a result, the Company will exit accelerated filer
status as of the end of Fiscal 2006 and the Company will be treated as a
non-accelerated filer with respect to the filing deadline for its 2006 Annual
Report on Form 10-K ("Form 10-K") and for the three quarterly reports that it
will file with the SEC during the 2007 fiscal year. As a non-accelerated filer,
the Company will be required to file its Form 10-K within 90 days (increased
from the current 75 days) after the fiscal year end and its quarterly reports
within 45 days (increased from the current 40 days) after the fiscal quarter
end.
For the Company, these rules constitute a reprieve from Section 404 compliance
and the accompanying internal and external compliance costs, including, without
limitation, the costs incurred in connection with an annual internal control
audit and attestation by the Company's independent registered public accounting
firm. However, since the Company will not exit accelerated filer status until
the end of Fiscal 2006, the Company must report any changes in its internal
control over financial reporting in its Quarterly Reports on Form 10-Q for the
Second Quarter Fiscal 2006 and for the third quarter of Fiscal 2006 ending on
April 1, 2006.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in conformity with accounting principles generally accepted in the United
States. The preparation of these financial statements requires management to
make estimates and assumptions that affect the amounts reported in the condensed
consolidated financial statements and the accompanying notes. Since July 2,
2005, there have been no significant changes to the assumptions and estimates
related to those critical accounting policies. See critical accounting policies
as disclosed in our Form 10-K/A.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
For a discussion of recently issued accounting pronouncements, see our Form
10-K/A.
RESULTS OF OPERATIONS
QUARTER ENDED DECEMBER 31, 2005 COMPARED TO THE QUARTER ENDED JANUARY 1, 2005
NET SALES
Net sales for the Second Quarter Fiscal 2006 were $41.1 million, a decrease of
$13.2 million, or 24.3%, as compared to net sales for the Second Quarter Fiscal
2005. The decrease in net sales was due to an overall decrease in DMS single-use
camera sales and RSD digital camera sales, partially offset by an increase in
RSD single-use camera sales.
RSD net sales were $41.1 million for the Second Quarter Fiscal 2006, a decrease
of $8.4 million, or 17.0%, as compared to the Second Quarter Fiscal 2005, and
accounted for 100% of total net sales.
RSD net sales from our operations in the Americas for the Second Quarter Fiscal
2006 were $24.2 million, an increase of $4.3 million, or 21.6%, as compared to
the Second Quarter Fiscal 2005. The increase in RSD net sales was due primarily
to increased single-use camera sales to Walgreens and Wal-Mart, partially offset
by a decrease in digital camera sales to Wal-Mart and other customers. See Note
2 - Significant Customers in the Notes to the Condensed Consolidated Financial
Statements.
RSD net sales from our operations in Europe for the Second Quarter Fiscal 2006
were $16.8 million, a decrease of $9.3 million, or 35.6%, as compared to the
Second Quarter Fiscal 2005. The decrease was due primarily to an overall
reduction in digital camera sales, partially offset by an increase in digital
camera sales to Plus. See Note 2 - Significant Customers in the Notes to the
Condensed Consolidated Financial Statements.
24
RSD net sales from our operations in Asia for the Second Quarter Fiscal 2006
were $0.1 million, a decrease of $8.2 million, or 98.8%, as compared to the
Second Quarter Fiscal 2005. The decrease was attributable primarily to a
reduction in digital camera sales by our subsidiary in Japan.
DMS net sales were $0 for the Second Quarter Fiscal 2006, a decrease of $4.9
million, or 100%, as compared to the Second Quarter Fiscal 2005. The decrease in
DMS net sales was primarily attributable to the cessation of sales to Kodak, for
whom we had manufactured products under two DMS agreements. One of the Kodak
contracts expired in the third quarter of Fiscal 2005. Sales to Kodak in the
Second Quarter Fiscal 2006 accounted for 0% of total net sales as compared to
8.8% of total net sales in the Second Quarter Fiscal 2005. See Note 2 -
Significant Customers in the Notes to the Condensed Consolidated Financial
Statements.
GROSS PROFIT (DEFICIT)
Gross profit for the Second Quarter Fiscal 2006 was $4.0 million, or 9.7% of net
sales, versus gross (deficit) of $(3.5) million, or (6.4%) of net sales, in the
Second Quarter Fiscal 2005. During the Second Quarter Fiscal 2006 as compared to
Second Quarter Fiscal 2005, gross profit, in dollars and as a percentage of net
sales, was positively affected by the following factors: (i) a reduction of $6.6
million in charges to reduce the carrying value of certain finished goods and
return camera inventory below their cost basis to their estimated net realizable
market value resulting from price declines, and (ii) lower product design costs
and reduced under-absorption of manufacturing labor and overhead of $2.1 million
and $1.0 million, respectively, and negatively affected by (iii) lower gross
profits on the sales of digital cameras. We did not realize gross profit on the
sales of certain digital cameras whose carrying values were lowered in Fiscal
2005 and Fiscal 2006 YTD. Since we lowered the carrying value of certain digital
inventory in prior periods, sales of such digital inventory in future periods
will result, on average, in approximately zero margin.
Product engineering, design and development costs for the Second Quarter Fiscal
2006 and the Second Quarter Fiscal 2005, in dollars and as a percentage of net
sales, were $1.0 million, or 2.4%, and $3.1 million, or 5.7%, respectively.
OPERATING EXPENSES
Selling expenses for the Second Quarter Fiscal 2006 were $4.0 million, or 9.7%
of net sales, compared to $4.9 million, or 9.0% of net sales, for the Second
Quarter Fiscal 2005. The decrease was primarily due to a reduction of sales and
marketing personnel.
General and administrative ("G&A") expenses for the Second Quarter Fiscal 2006
were $5.5 million, or 13.4% of net sales, compared to $5.5 million, or 10.1% of
net sales, for the Second Quarter Fiscal 2005. The increase in G&A expenses was
primarily due to severance costs in the amount of $1.1 million associated with
the separation of three executives and certain other employees.
STOCK-BASED COMPENSATION
During the Second Quarter Fiscal 2006, the Company recorded approximately
$119,000 in compensation costs related to stock options outstanding under its
stock option plans. The Company considers all of our stock-based compensation
expense or income as a component of general and administrative costs. In
addition, no amount of share-based compensation cost was capitalized as part of
capital expenditures or inventory for the periods presented For further
discussion, see Note 8 - Stock-Based Compensation in the Notes to Condensed
Consolidated Financial Statements.
25
INTEREST EXPENSE
Interest expense was $0.1 million and $0.3 million for the Second Quarter Fiscal
2006 and the Second Quarter Fiscal 2005, respectively, due to decreased
borrowings.
OTHER EXPENSE (INCOME), NET
Other expense (income), net was $44,000 and ($1.4) million for the Second
Quarter Fiscal 2006 and the Second Quarter Fiscal 2005, respectively. The
decrease is primarily attributable to foreign exchange losses incurred in the
Second Quarter Fiscal 2006 as compared to foreign exchange losses recorded in
Second Quarter Fiscal 2005. See Note 3 - Summary of Significant Accounting
Policies in the Notes to the Condensed Consolidated Financial Statements.
INCOME TAXES
In the Second Quarter Fiscal 2006 and the Fourth Quarter of Fiscal 2005, based
upon all of 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 December 31, 2005 and July 2, 2005.
During each of the Second Quarter Fiscal 2006 and the Second Quarter Fiscal
2005, the Company recorded a provision for income taxes of $0.1 million. The
Second Quarter Fiscal 2006 and the Second Quarter Fiscal 2005 income tax
provisions relate 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. For further discussion, see Note 3 - Summary
of Significant Accounting Policies-Income Taxes in the Notes to Condensed
Consolidated Financial Statements.
NET LOSS
We incurred a net loss of $(5.8) million, or $(0.20) per basic and diluted
common share, for the Second Quarter Fiscal 2006 as compared to a net loss of
$(13.0) million, or $(0.44) per basic and diluted common share, for the Second
Quarter Fiscal 2005.
RESULTS OF OPERATIONS
FISCAL 2006 YTD COMPARED TO FISCAL 2005 YTD
NET SALES
Net sales for Fiscal 2006 YTD were $85.7 million, a decrease of $11.6 million,
or 11.9%, as compared to net sales for Fiscal 2005 YTD. The decrease in net
sales was due to a significant decrease in DMS single-use camera sales and in
RSD digital and 35mm traditional film camera sales, partially offset by an
overall increase in RSD single-use camera sales.
RSD net sales were $85.7 million for Fiscal 2006 YTD, an increase of $1.5
million, or 1.8%, as compared to Fiscal 2005 YTD, and accounted for 100% of
total net sales.
RSD net sales from our operations in the Americas for Fiscal 2006 YTD were $48.5
million, an increase of $12.0 million, or 32.9%, as compared to Fiscal 2005 YTD.
The increase in RSD net sales was due primarily to increased single-use camera
sales to Walgreens and Wal-Mart. See Note 2 - Significant Customers in the Notes
to the Condensed Consolidated Financial Statements.
RSD net sales from our operations in Europe for Fiscal 2006 YTD were $36.8
million, a decrease of $6.8 million, or 15.6%, as compared to Fiscal 2005 YTD.
The decrease was mostly due to an overall reduction in digital camera sales
partially offset by an increase in digital camera sales to Plus. See Note 2 -
Significant Customers in the Notes to the Condensed Consolidated Financial
Statements.
26
RSD net sales from our operations in Asia for Fiscal 2006 YTD were $0.4 million,
a decrease of $3.7 million, or 90.2%, as compared to Fiscal 2005 YTD. The
decrease was attributable primarily to a reduction in digital camera sales by
our subsidiary in Japan.
DMS net sales were $0 million for Fiscal 2006 YTD, a decrease of $13.1 million,
or 100%, as compared to Fiscal 2005 YTD. The decrease in DMS net sales was
attributable to the cessation of sales to Kodak, for whom the Company previously
manufactured products under two DMS agreements. Sales to Kodak in Fiscal 2006
YTD accounted for 0.0% of total net sales, while in Fiscal 2005 YTD, sales to
Kodak accounted for 12.8% of total net sales. See Note 2 - Significant Customers
in the Notes to the Condensed Consolidated Financial Statements.
GROSS PROFIT (DEFICIT)
Gross profit for Fiscal 2006 YTD was $8.2 million, or 9.6% of net sales, versus
gross (deficit) of $(3.1) million, or 3.2% of net sales, in Fiscal 2005 YTD.
During Fiscal 2006 YTD, gross profit, in dollars and as a percentage of net
sales, was positively affected by the following factors: (i) a reduction of $8.4
million in charges to reduce the carrying value of certain finished goods and
return camera inventory below their cost basis to their estimated net realizable
market value resulting from price declines, and (ii) lower product design costs
and reduced under-absorption of manufacturing labor and overhead of $3.5 million
and $3.1 million, respectively, and negatively affected by (iii) lower gross
profits on the sales of digital cameras. We did not realize gross profit on the
sales of certain digital cameras whose carrying values were lowered in Fiscal
2005 and Fiscal 2006 YTD. Since we lowered the carrying value of certain digital
inventory in prior periods, sales of such digital inventory in future periods
will result, on average, in approximately zero margin.
Product engineering, design and development costs for Fiscal 2006 YTD and Fiscal
2005 YTD, in dollars and as a percentage of net sales, were $2.1 million, or
2.5%, and $5.7 million, or 5.8%, respectively.
OPERATING EXPENSES
Selling expenses for Fiscal 2006 YTD were $7.6 million, or 8.9% of net sales,
compared to $9.1 million, or 9.4% of net sales, for Fiscal 2005 YTD. The
decrease of $1.5 million was primarily due to the reduction of sales and
marketing personnel.
G&A expenses for Fiscal 2006 YTD were $11.8 million, or 13.8% of net sales,
compared to $11.7 million, or 12.0% of net sales, for Fiscal 2005 YTD. The
increase in G&A expenses was primarily due to an increase in professional fees
of $1.5 million associated with implementing measures to comply with the
provisions of the Sarbanes-Oxley Act of 2002 ("SOX") and $1.1 million in
severance costs incurred with the separation of three executives and certain
other employees, partially offset by decreases in professional fees associated
with implementing our Enterprise Resource Planning System. As a result of new
rules that the SEC adopted in December 2005, we expect costs associated with SOX
compliance measures will decrease during the third and fourth quarters of Fiscal
2006 as compared to the same periods in Fiscal 2005. For more information
regarding the new SEC rules and their effect on the Company, see "Accelerated
Filer Status" above.
INTEREST EXPENSE
Interest expense was $0.2 million and $0.5 million for Fiscal 2006 YTD and
Fiscal 2005 YTD, respectively, due to decreased borrowings.
OTHER EXPENSE (INCOME), NET
Other expense (income), net was $(62,000) and $(1.9) million for Fiscal 2006 YTD
and Fiscal 2005 YTD, respectively. The decrease is primarily attributable to
foreign exchange losses incurred during Fiscal 2006 YTD as compared to foreign
exchange gains recorded in Fiscal 2005 YTD. See Note 3 - Summary of Significant
Accounting Policies in the Notes to the Condensed Consolidated Financial
Statements.
27
INCOME TAXES
The Company recorded a provision for income taxes of $0.2 million and $0.1
million in Fiscal 2006 YTD and Fiscal 2005 YTD, respectively. The Fiscal 2006
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. For further discussion, see
Note 3 - Summary of Significant Accounting Policies - Income Taxes in the Notes
to Condensed Consolidated Financial Statements.
NET LOSS
We incurred a net loss of $(11.5) million, or $(0.40) per diluted common share,
for Fiscal 2006 YTD as compared to a net loss of $(22.3) million, or $(0.76) per
diluted common share, for Fiscal 2005 YTD.
RESTRUCTURING AND COST-REDUCTION INITIATIVES
Restructuring Initiatives
During Fiscal 2005, the Company announced Restructuring Initiatives designed to
eliminate its reliance on internally designed and manufactured digital cameras
and increase the design, co-development and purchase of digital cameras from
outsourced manufacturers to provide competitive products to the retail market.
The Restructuring Initiatives were a result of the Company's previously
announced strategic review process to determine how it may better compete in the
digital camera market. The Company's reliance on internally designed and
manufactured digital cameras ended at the end of Fourth Quarter Fiscal 2005. In
connection with the Restructuring Initiatives, 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. Accordingly, these retention costs were
classified as other charges. During the Second Quarter Fiscal 2006 and Fiscal
2006 YTD, we incurred approximately $0.1 and $0.2 million, respectively, in
expenses related to employee retention.
2006 Cost-Reduction Initiatives
During Fiscal 2006, as a result of our continued evaluation of our cost
structure and strategic review process, we began the initial implementation of
additional cost reduction initiatives ("2006 Cost-Reduction Initiatives"),
including, among other things, the separation of three executives and the
elimination of certain employee positions. As a result, in the Second Quarter
Fiscal 2006, the Company recorded a total charge of $1.1 million related to
severance costs.
2005 Cost-Reduction Initiatives
During Fiscal 2005, as a result of our continued evaluation of our cost
structure and the strategic review process, we implemented cost-reduction
initiatives ("2005 Cost-Reduction Initiatives") including, among other things,
eliminating certain employee positions and consolidating certain operations in
the United Kingdom, France and Germany into our operations in Jena, Germany. In
addition, we entered into retention agreements with certain employees affected
by our decision to consolidate certain European operations.
For further discussion of our Restructuring and Cost-Reduction Initiatives, see
Note 12 - Restructuring and Other Charges in the Notes to Condensed
Consolidated Financial Statements.
28
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 Form 10-K/A. We are not engaged in hedging
activities and had no forward exchange contracts outstanding at December 31,
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
financing facilities provide sufficient liquidity and capital resources for our
anticipated working capital and capital expenditure requirements for at least
the next twelve months.
Working Capital - At December 31, 2005, we had working capital of $51.6 million
compared to $61.8 million at July 2, 2005, a decrease of $10.2 million.
Cash Provided by (Used In) Operating Activities - Cash provided by operating
activities during Fiscal 2006 YTD was $0.1 million, which compared favorably to
cash (used in) operating activities of $(4.9) million during Fiscal 2005 YTD.
The changes in cash provided by (used in) operating activities for the
respective fiscal periods were primarily attributable to the reduction in
accounts receivable and inventory, partially offset by the reduction of accounts
payable.
Cash Provided by (Used in) Investing Activities - Proceeds from the sale of
short-term investments and capital expenditures were $34.3 million and $(11.7)
million, for Fiscal 2006 YTD and Fiscal 2005 YTD, respectively. The increase
related primarily to the proceeds received from the sale of short-term
investments in Fiscal 2005.
Cash Provided by Financing Activities - Cash provided by financing activities
during Fiscal 2006 YTD and Fiscal 2005 YTD was approximately $0.9 million and
$9.0 million, respectively. The decrease relates to the reduced net short term
borrowings made under our Hong Kong Financing Facilities.
Operating Leases - We enter into operating leases in the ordinary course of
business (e.g., warehouse facilities, office space and equipment). The effects
of outstanding leases are not material to us in terms of either annual cash flow
or in total future minimum payments.
Purchase Commitments - In the ordinary course of our business, we enter into
purchase commitments for components, raw materials, supplies, services, finished
camera products, and property, plant and equipment. At December 31, 2005, the
Company had $8.3 million in non-cancelable purchase commitments relating to the
purchase of raw materials, components and finished goods inventory from various
suppliers. In the aggregate, such commitments are not at prices in excess of
current market values (except for those instances in which the cost basis has
been lowered to net realizable value) and typically do not exceed one year.
Other Contractual Obligations - We do not have any material financial guarantees
or other contractual commitments that are reasonably likely to have an adverse
effect on liquidity. See Hong Kong Financing Facilities below for additional
information about the corporate guarantees we provided in connection with our
financing facilities. See also Note 10-Commitments and Contingencies in the
Notes to Condensed Consolidated Financial Statements.
License Agreements - See Note 10-Commitments and Contingencies in the Notes to
Condensed Consolidated Financial Statements.
Intellectual Property Claims - See Note 10-Commitments and Contingencies and
Note 11 - Litigation and Settlements in the Notes to Condensed Consolidated
Financial Statements.
29
Hong Kong Financing Facilities
As of December 31, 2005, pursuant to a proposal dated September 20, 2005 and
accepted on October 14, 2005 (the "October 19 Agreement"), Concord Camera HK
Limited, ("CCHK"), the Company's Hong Kong subsidiary had various revolving
demand credit facilities with The Hongkong and Shanghai Banking Corporation
Limited ("HSBC") providing an aggregate of approximately $9.6 million in
borrowing capacity. See the Company's Current Report on Form 8-K filed with the
SEC as of October 24, 2005. The revolving credit facilities were comprised of:
(1) an approximate $7.7 million import facility including an approximate $2.6
million packing credit and export sub-limit facility and (2) an approximate $1.9
million foreign exchange facility (collectively, the "Financing Facilities").
The Financing Facilities are denominated in Hong Kong Dollars and bear interest
at variable rates, as follows: 1.75% over the Hong Kong Interbank Offered Rate
on import loans denominated in Hong Kong Dollars and 1.75% over the Singapore
Interbank Offered Rate for transactions denominated in currency other than the
Hong Kong Dollar. Since 1983, the Hong Kong Dollar has been pegged to the U.S.
Dollar. Pursuant to an agreement dated June 10, 2004, CCHK granted a security
interest in substantially all of its assets to HSBC. On or about February 24,
2005, the Company and HSBC agreed, among other things, to subordinate
approximately $20 million in inter-company payables from CCHK to the Company to
any amounts owing or which may in the future become owing to HSBC by CCHK.
Pursuant to the October 19 Agreement, the Company and HSBC agreed, among other
things, to provide HSBC with cash deposits pledged as security in the amount of
$2.0 million. As of December 31, 2005, the Company guaranteed all of the amounts
under the Financing Facilities.
The Financing Facilities were subject to certain covenants, and the Company was
in compliance with such covenants as of December 31, 2005 and July 2, 2005. At
December 31, 2005 and July 2, 2005, the Company had $3.8 million and $2.9,
respectively, in short-term borrowings outstanding under the import facility.
The weighted average borrowing rates on the short-term borrowings as of
December 31, 2005 and July 2, 2005, were 5.81% and 4.15%, respectively.
On January 24, 2006, CCHK accepted a proposal from HSBC to revise the existing
Financing Facilities which resulted in, among other things, a reduction in
borrowing capacity and increased cash security requirements. See Note
13-Subsequent Events-Revision of Financing Facilities' Terms in the Notes to
Condensed Consolidated Financial Statements.
Revision of Financing Facilities' Terms
On January 24, 2006, CCHK accepted a proposal from HSBC, dated January 4, 2006
(the "January 2006 Agreement"), to revise the existing Financing Facilities
between CCHK and HSBC. For further information regarding the terms of the
Financing Facilities that preceded the January 2006 Agreement, see Note 7 -
Short Term Borrowings and Financing Facilities.
Under the January 2006 Agreement, the $1.9 million foreign exchange facility was
eliminated and CCHK agreed to provide HSBC with cash deposits pledged as
security in the amount of $6.2 million in addition to the existing cash deposit
pledged as security in the amount of $2.0 million. The total cash deposits
pledged as security in the amount of $8.2 million will secure the import
facility of $7.7 million and a guarantee facility of Euros 380,000 (equal to
approximately $500,000) and will be classified as restricted cash in the
consolidated balance sheet. Upon receipt of CCHK's acceptance of the proposal
and CCHK's providing the additional security of $6.2 million, HSBC agreed to
cancel (i) the Company's corporate guarantees up to the aggregate amount of
$13.7 million and the guarantee facility of Euros 380,000; (ii) HSBC's security
interest in substantially all of CCHK's assets; (iii) the Letters of Undertaking
from CCHK to HSBC dated 1998, 1999 and 2000, pursuant to which CCHK was subject
to, among other things, certain covenants; and (iv) the Capitalization and
Subordination Agreement and the Subordination Agreement each dated March 31,
2005, the provisions of which, were described in the Current Report on Form 8-K
filed with the SEC in October 2005. See Note 13 - Subsequent Events-Revision of
Financing Facilities Terms in the Notes to Condensed Consolidated Financial
Statements.
Deferred Compensation
During the Second Quarter Fiscal 2006, pursuant to the Company's amendments to
its supplemental executive retirement plans (each, a "SERP" and collectively,
the "SERPs") as previously disclosed in our Current Report on Form 8-K dated
November 28, 2005, certain executives, including the Company's Chairman, were to
receive distributions of their vested account balances from their respective
SERPs during the remainder of calendar year 2005. In addition, the SERP between
the Company and its Chairman permits the Chairman to receive a distribution of
certain other vested account balances from his respective SERPs in January 2006.
During the Second Quarter Fiscal 2006, these certain executives received SERP
distributions of their vested account balances totaling approximately $2.8
million. Since the SERPs were funded in prior years, distributions of the vested
amounts made to these certain executives did not have any effect on our
liquidity. The "Deferred Compensation assets" and "Deferred Compensation
liabilities" amounts included in the condensed consolidated balance sheet as of
December 31, 2005 include the effect of the SERP distributions made during the
Second Quarter Fiscal 2006. During January 2006, the Chairman received a SERP
distribution totaling approximately $7.1 million. See Note 6 - Deferred
Compensation and Note 13 - Subsequent Events - Deferred Compensation
Distribution in the Notes to Condensed Consolidated Financial Statements.
30
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," "forecasts" or the negative thereof
or other variations thereon or comparable terminology, or by discussions of
strategy that involve risks and uncertainties. Our actual results could differ
materially from those anticipated in such forward-looking statements as a result
of certain factors. For a discussion of some of the factors that could cause
actual results to differ, see the discussion under "Risk Factors" below and in
our Form 10-K/A and subsequently filed reports. We wish to caution the reader
that these forward-looking statements, including, without limitation, statements
regarding expected cost reductions, anticipated or expected results of the
implementation of our Restructuring Initiatives, 2005 and 2006 Cost-Reduction
Initiatives, additional cost-reduction initiatives and possible new business
initiatives, anticipated financial benefits of eliminating our reliance on
internally designed and manufactured digital cameras and increasing the design,
co-development and purchase of digital cameras from contract manufacturers, the
viability of marketing and selling digital cameras and competing in the digital
camera market, the cost structure requirements needed to maintain a presence in
the digital camera market and to market and sell digital cameras, the
development of our business, anticipated revenues or capital expenditures, our
ability to improve gross profit margin on the sale of our products, projected
profits or losses and other statements contained in this report regarding
matters that are not historical facts, are only estimates or predictions. No
assurance can be given that future results will be achieved. Actual events or
results may differ materially as a result of risks facing us or actual results
differing from the assumptions underlying such statements. In particular, our
expected results could be adversely affected by, among other things, production
difficulties or economic conditions negatively affecting the market for our
products, by our inability to develop and maintain relationships with contract
manufacturers or by our inability to negotiate favorable terms with our
licensors or with the PRC in connection with the processing agreement that
expires in October 2006. Obtaining the results expected from the introduction of
any new products or product lines may require timely completion of development,
successful ramp-up of full-scale production on a timely basis and customer and
consumer acceptance of those products. In addition, future 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 and new business
initiatives under consideration or development will be successfully developed or
that once developed such products and initiatives will be commercially
successful. Any forward-looking statements contained in this report represent
our estimates only as of the date of this report, or as of such earlier dates as
are indicated herein, and should not be relied upon as representing our
estimates as of any subsequent date. While we may elect to update
forward-looking statements at some point in the future, we specifically disclaim
any obligation to do so, even if our estimates change.
ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no material changes in the disclosures set forth in Item 7A of
our Form 10-K/A during this reporting period.
ITEM 4. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures. We maintain disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), designed to
ensure that information required to be disclosed in our filings under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms. Our management has reviewed and
evaluated our disclosure controls and procedures as of the end of the period
covered by this report. Based on that evaluation, our principal executive and
financial officers concluded that our disclosure controls and procedures were
ineffective in providing reasonable assurance of achieving their objectives
because of the material weaknesses in internal control over financial reporting
described in our Form 10-K/A.
31
In light of the ineffective disclosure controls and procedures, we performed
additional manual controls, procedures and analyses and other pre- and
post-closing procedures designed to ensure that our consolidated financial
statements are presented fairly in all material respects in accordance with
accounting principles generally accepted in the United States. We relied on
increased monitoring and review to compensate for the ineffective disclosure
controls and procedures. Accordingly, management believes that the condensed
consolidated financial statements included in this report fairly present in all
material respects our financial position, results of operations and cash flows
for the periods presented.
The certifications of our Chief Executive Officer and Principal Financial
Officer attached as Exhibits 31.1 and 31.2 to this report include, in paragraph
4 of the certifications, information concerning our disclosure controls and
procedures and internal control over financial reporting. These officers believe
the certifications to be accurate because, as we indicated, we had procedures in
place during the first and second quarters of Fiscal 2006 to prevent and detect
errors in our systems. Accordingly, the certifications should be read in
conjunction with the information contained in this Item 4 for a more complete
understanding of the matters covered by the certifications.
(b) Changes in Internal Control over Financial Reporting. As disclosed in our
Form 10-K/A, management and our independent registered public accounting firm
have identified ten material weaknesses in our internal control over financial
reporting. See also Part II, Item 1A, Risk Factors, below.
Management has begun to take corrective actions to address the material
weaknesses we have identified and is in the process of developing a plan to
remediate them. The corrective actions include, among other things:
o Director of Internal Audit. During the Second Quarter Fiscal 2006, we
employed a Director of Internal Audit to oversee our internal audit
function and assist in formulating a plan to remediate the material
weaknesses in our internal control over financial reporting.
o Additional Personnel. During the Fourth Quarter Fiscal 2005, we retained
a financial consultant to advise us on the organization and composition
of the finance and accounting department. During the first and second
quarters of Fiscal 2006, the consultant successfully completed certain
assignments, which included the identification of additional required
personnel. As of February 8, 2006, the Company had one accounting
position to fill at its U.S. location. Prior to February 8, 2006, the
Company filled three out of four added positions, including the Director
of Internal Audit.
o IT Controls. We have taken and are continuing to take certain remedial
actions to address identified deficiencies in our general IT controls,
including changes to the configurations of the system and implementation
of security and data protection policies, procedures and controls.
Under new SEC rules defining "accelerated filer," the Company will not be
required to report on its internal control over financial reporting beginning
with the Annual Report on Form 10-K for Fiscal 2006 until its first fiscal year
ending on or after July 15, 2007 unless the Company requalifies as an
accelerated filer during fiscal year 2007. See Item 1, Management's Discussion
and Analysis of Financial Condition and Results of Operations, "Accelerated
Filer Status" above.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
See Part I, Item 1, Financial Statements, Note 11 - Litigation and Settlements
in the Notes to Condensed Consolidated Financial Statements.
32
ITEM 1A. RISK FACTORS
You should carefully consider the following risks regarding our company. These
and other risks could materially and adversely affect our business, results of
operations or financial condition. You should also refer to the other
information contained or incorporated by reference in this report, including the
"Risk Factors" described in our Form 10-K/A.
THERE ARE MATERIAL WEAKNESSES IN OUR INTERNAL CONTROL OVER FINANCIAL REPORTING.
OUR INTERNAL CONTROL MAY BE INSUFFICIENT TO DETECT IN A TIMELY MANNER
MISSTATEMENTS THAT COULD OCCUR IN OUR FINANCIAL STATEMENTS IN AMOUNTS THAT MAY
BE MATERIAL.
As previously disclosed in our Form 10-K/A, we have identified ten material
weaknesses in our internal control over financial reporting. See the Form 10-K/A
and Part I, Item 4, Controls and Procedures, above, for a discussion of our
remediation efforts.
We may continue to experience significant deficiencies and material weaknesses
in our internal control over financial reporting in the future, which, if not
remediated, may render us unable to detect in a timely manner misstatements that
could occur in our financial statements in amounts that may be material. We
cannot assure you that we will remediate all our material weaknesses by the end
of Fiscal 2006.
WE MAY EXPERIENCE LIQUIDITY ISSUES IF OUR RELIANCE ON FINANCING FACILITIES
INCREASES.
Our primary source of liquidity has been provided by our short-term investments,
reductions in working capital and borrowing availability under the Financing
Facilities. Our borrowing capacity under the import facility was reduced during
calendar year 2005 from $24.0 million in January 2005 to $14.0 million in
September 2005 and under a proposal from HSBC dated January 4, 2006, which we
accepted on January 24, 2006, now consists of an import facility of $7.7 million
and a guarantee facility of Euros 380,000 (equal to approximately $500,000),
against which we are required to provide cash deposits pledged as security in
the amount of $8.2 million. See Part I, Item 2, Management's Discussion and
Analysis of Financial Condition and Results of Operations, "Recent Events,"
above. Due to our recent losses, we may need to increase our reliance on
financing facilities, whether through HSBC or other financial institutions; as a
result, liquidity issues may arise for us due to potential funding limits and
debt service requirements imposed by lenders. Additionally, we may not be able
to secure such financing on reasonable terms or at all. A significant increase
in our indebtedness could increase our financing costs, interfere with our
ability to operate our business effectively and have a material adverse effect
on our results of operations.
WE MAY NOT CONTINUE TO MEET NASDAQ LISTING STANDARDS.
Under NASDAQ continued listing standard one (Rule 4450(a)), companies listed on
the NASDAQ National Market are required to have, among other criteria, total
shareholders' equity of at least $10 million, and a minimum bid price of at
least $1.00 per share. A company may be de-listed from the NASDAQ National
Market if its common stock trades below $1.00 per share for 30 consecutive
business days and after receiving a deficiency notice from NASDAQ, does not
maintain a minimum bid price of at least $1.00 for 10 consecutive trading days
within a period of 180 days from the date of such notice. We cannot give
investors in our common stock any assurance that we will be able to maintain
compliance with the $1.00 per share minimum bid price standard for continued
listing on NASDAQ and that the liquidity that NASDAQ provides will be available
to investors in the future.
ITEM 5. OTHER INFORMATION
(b) There have been no material changes in the procedures by which our security
holders may recommend nominees to our Board of Directors during this reporting
period.
33
ITEM 6. EXHIBITS
No. Description Method of Filing
--- ----------- ----------------
3.1 Certificate of Incorporation, as amended Incorporated by reference to the Company's annual
through May 9, 2000 report on Form 10-K for the year ended July 1, 2000.
3.2 Restated By-Laws, as amended through Incorporated by reference to the Company's quarterly
July 12, 2004 report on Form 10-K for the year ended July 3, 2004.
10.1 Supplemental Executive Retirement Plan and Filed herewith.
Agreement ("SERP") for Gerald J. Angeli
dated as of July 31, 2001
10.2 Amendment No. 1 to the SERP for Gerald J. Filed herewith.
Angeli dated as of March 22, 2004
10.3 Amendment to the SERP for Harlan I. Press Filed herewith.
dated as of July 31, 2001
10.4 Amendment to the SERP for Urs W. Stampfli Filed herewith.
dated as of July 31, 2001
10.5 Letter Agreement between HSBC and CCHK, Incorporated by reference to the Company's Current Report
dated September 20, 2005, relating to the on Form 8-K filed with the SEC on October 24, 2005.
provision of certain banking facilities and
the guarantee of same by the Company
10.6 Amendment No. 2 to Amended and Restated Incorporated by reference to the Company's Current Report
SERP for Ira B. Lampert dated as of on Form 8-K filed with the SEC on November 29, 2005.
November 28, 2005
10.7 Amendment No. 3 to Amended and Restated Incorporated by reference to the Company's Current Report
SERP for Ira B. Lampert dated as of on Form 8-K filed with the SEC on November 29, 2005.
November 28, 2005
10.8 Amendment No. 1 to Amended and Restated Incorporated by reference to the Company's Current Report
SERP for Keith L. Lampert dated as of on Form 8-K filed with the SEC on November 29, 2005.
November 28, 2005
10.9 Amendment No. 2 to Amended and Restated Incorporated by reference to the Company's Current Report
SERP for Keith L. Lampert dated as of on Form 8-K filed with the SEC on November 29, 2005.
November 28, 2005
10.10 Amendment No. 2 to SERP for Gerald J. Incorporated by reference to the Company's Current Report
Angeli dated as of November 28, 2005 on Form 8-K filed with the SEC on November 29, 2005.
10.11 Amendment No. 3 to SERP for Gerald J. Incorporated by reference to the Company's Current Report
Angeli dated as of November 28, 2005 on Form 8-K filed with the SEC on November 29, 2005.
34
10.12 Amendment No. 3 to SERP for Harlan I. Press Incorporated by reference to the Company's Current Report
dated as of November 28, 2005 on Form 8-K filed with the SEC on November 29, 2005.
10.13 Amendment No. 1 to SERP for Alan Schutzman Incorporated by reference to the Company's Current Report
dated as of November 28, 2005 on Form 8-K filed with the SEC on November 29, 2005.
10.14 Amendment No. 4 to SERP for Urs W. Stampfli Incorporated by reference to the Company's Current Report
dated as of November 28, 2005 on Form 8-K filed with the SEC on November 29, 2005.
10.15 Amendment No. 5 to SERP for Urs W. Stampfli Incorporated by reference to the Company's Current Report
dated as of November 28, 2005 on Form 8-K filed with the SEC on November 29, 2005.
10.16 Separation agreement between the Company Filed herewith.
and Keith L. Lampert dated as of December
24, 2005
10.17 Separation agreement between the Company Filed herewith.
and Alan Schutzman dated as of December 24,
2005
10.18 Separation Agreement between the Company Filed herewith.
and Harlan I. Press dated as of December
24, 2005
10.19 Letter agreement between HSBC and CCHK, Incorporated by reference to the Company's Current Report
dated January 4, 2006, relating to the on Form 8-K filed with the SEC on January 26, 2006.
provision of certain Financing Facilities
to CCHK and the conditions thereof
31.1 Certification of Chief Executive Officer Filed herewith.
pursuant to Rule 13a-14(a)/15d-14(a)
31.2 Certification of Principal Financial Filed herewith.
Officer 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 Principal Financial Filed herewith.
Officer 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: February 8, 2006 By: /s/ Harlan I. Press
-----------------------------------
(Signature)
Harlan I. Press
Vice President, Treasurer and
Assistant Secretary
(Principal Financial Officer)
36