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 September 30, 2006
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.
--------------------
(Exact name of registrant as specified in its charter)
New Jersey 13-3152196
--------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4000 Hollywood Blvd., 6th Floor, North Tower, Hollywood, Florida 33021
------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(954) 331-4200
--------------
(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 Non-accelerated filer X
--- --- ---
Indicate by check mark whether the registrant is a shell company (as defined 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 - 28,859,385 shares as of November 7, 2006
Index
Concord Camera Corp. and Subsidiaries
Part I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets as of September 30, 2006 (Unaudited) and July 1, 2006........................3
Condensed consolidated statements of operations (Unaudited) for the quarter ended September 30, 2006
and October 1, 2005............................................................................................4
Condensed consolidated statements of cash flows (Unaudited) for the quarter ended September 30, 2006
and October 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...............................18
Item 3. Quantitative and Qualitative Disclosures About Market Risk..........................................................24
Item 4. Controls and Procedures.............................................................................................24
Part II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................................................................24
Item 1A. Risk Factors........................................................................................................25
Item 6. Exhibits............................................................................................................25
2
PART I. FINANCIAL INFORMATION.
Item 1. FINANCIAL STATEMENTS
CONCORD CAMERA CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, 2006 July 1,
(Unaudited) 2006
--------------------- --------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 6,383 $ 6,795
Restricted cash 9,199 8,264
Short-term investments 26,625 23,550
Accounts receivable, net 10,893 16,648
Inventories 21,428 28,260
Prepaid expenses and other current assets 2,397 3,277
--------------------- --------------------
Total current assets 76,925 86,794
Property, plant and equipment, net 12,959 13,778
Other assets 3,816 4,170
--------------------- --------------------
Total assets $ 93,700 $ 104,742
===================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings under financing facilities $ 2,545 $ --
Accounts payable 13,208 23,366
Accrued expenses 12,716 14,711
Other current liabilities 2,024 1,874
--------------------- --------------------
Total current liabilities 30,493 39,951
Other long-term liabilities 1,854 1,824
--------------------- --------------------
Total liabilities 32,347 41,775
Commitments and contingencies
Stockholders' equity:
Blank check preferred stock, no par value,
1,000 shares authorized, none issued - -
Common stock, no par value, 100,000 shares
authorized; 30,925 shares issued
as of September 30, 2006 and July 1, 2006 143,518 143,518
Additional paid-in capital 5,154 5,128
Deferred share arrangement 413 624
Accumulated deficit (82,326) (80,686)
--------------------- --------------------
66,759 68,584
Less: treasury stock, at cost, 1,735
shares as of September 30, 2006 and July 1, 2006 (4,993) (4,993)
Less: common stock held in trust, 331 and 509
shares as of September 30, 2006 and July 1, 2006 (413) (624)
--------------------- --------------------
Total stockholders' equity 61,353 62,967
--------------------- --------------------
Total liabilities and stockholders' equity $ 93,700 $ 104,742
===================== ====================
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
---------------------------------------
September 30, October 1,
2006 2005
---------------- ---------------
Net sales $ 28,825 $ 44,586
Cost of products sold 24,322 40,457
---------------- ---------------
Gross profit 4,503 4,129
Selling expenses 2,787 3,537
General and administrative
expenses 3,738 6,306
---------------- ---------------
Operating loss (2,022) (5,714)
Interest expense 66 101
Other income,
net (465) (105)
---------------- ---------------
Loss before
income taxes (1,623) (5,710)
Provision for
income taxes 17 50
---------------- ---------------
Net loss $ (1,640) $ (5,760)
================ ===============
Basic and diluted loss per
common share $ (0.06) $ (0.20)
================ ===============
Weighted average
common shares
outstanding - basic and
diluted 29,190 29,190
================ ===============
See accompanying notes to condensed consolidated financial statements.
4
CONCORD CAMERA CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
For the quarter ended
-----------------------------------------------
September 30, 2006 October 1, 2005
-------------------- ---------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,640) $ (5,760)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,048 1,175
Inventory charges 319 313
Gain on disposal of property, plant and equipment (26) --
Share-based compensation 26 130
Changes in operating assets and liabilities:
Accounts receivable, net 5,755 8,594
Inventories 6,513 5,536
Prepaid expenses and other current assets 736 500
Other assets 234 (200)
Accounts payable (10,158) (11,308)
Accrued expenses (1,995) 213
Other current liabilities 150 (496)
Other long-term liabilities 30 99
---------------- -----------------
Net cash provided by (used in) operating activities 992 (1,204)
---------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of available-for-sale investments 22,750 8,650
Purchases of available-for-sale investments (25,825) (9,100)
Proceeds from the sale of property, plant and equipment 175 --
Purchases of property, plant and equipment (114) (254)
Restricted cash (935) --
---------------- -----------------
Net cash used in investing activities (3,949) (704)
---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) under short-term financing facilities, net 2,545 (45)
---------------- -----------------
Net cash provided by (used in) financing activities 2,545 (45)
---------------- -----------------
Net decrease in cash and cash equivalents (412) (1,953)
Cash and cash equivalents at beginning of period 6,795 8,016
---------------- -----------------
Cash and cash equivalents at end of period $ 6,383 $ 6,063
================ =================
See accompanying notes to condensed consolidated financial statements.
5
CONCORD CAMERA CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
(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 September 30, 2006 ("First Quarter Fiscal 2007")
are not necessarily indicative of the results that may be expected for the
fiscal year ending June 30, 2007 ("Fiscal 2007"). For comparative purposes, the
quarter ended October 1, 2005 has been defined as the ("First Quarter Fiscal
2006"). The balance sheet at July 1, 2006 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 filed
with the Securities and Exchange Commission ("SEC") as of September 14, 2006 for
the fiscal year ended July 1, 2006 ("Fiscal 2006").
REVERSE SPLIT OF COMMON STOCK
On October 26, 2006, the Board of Directors of the Company approved, without
action by the shareholders of the Company, a Certificate of Amendment to the
Company's Certificate of Incorporation to implement a one-for-five split of the
Company's Common Stock effective November 21, 2006. On the effective date, of
the reverse split each five shares of issued Common Stock (including treasury
shares and shares held in trust) will be converted automatically into one share
of Common Stock, resulting in the total number of shares outstanding being
reduced from 28,859,385 shares to 5,771,877 shares, and the number of authorized
shares of the Company's Common Stock will be reduced from 100,000,000 shares to
20,000,000 shares.
See Note 13 - Subsequent Events, Reverse Split of Common Stock.
NOTE 2 - SIGNIFICANT CUSTOMERS:
During the First Quarter Fiscal 2007, the Company's sales to Walgreen Co.
("Walgreens") and Wal-Mart Stores, Inc. ("Wal-Mart") increased as compared to
the First Quarter Fiscal 2006. The First Quarter Fiscal 2007 increase in sales
to Walgreens was attributable to increased sales of single-use cameras partially
offset by a decrease in sales of 35mm traditional film cameras. The First
Quarter Fiscal 2007 increase in sales to Wal-Mart was attributable to increased
sales of single-use cameras, partially offset by a decrease in sales of 35mm
traditional film and digital cameras. The loss of any of these significant
customers or substantially reduced sales to these significant customers or any
other customer could have a material adverse effect on the Company's results of
operations.
6
The following table illustrates each significant customer's net sales as a
percentage of consolidated net sales during the First Quarter Fiscal 2007 and
the First Quarter Fiscal 2006.
Percent of Net Sales
--------------------
For the quarter ended
-------------------------------------------
September 30, 2006 October 1, 2005
-------------------- ----------------
Walgreens 40.8% 22.4%
Wal-Mart 34.6% 15.8%
-------------------- ----------------
Total 75.4% 38.2%
==================== ================
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 but are not limited to, provisions for sales returns
and allowances, provision for bad debts, inventory valuation charges,
realizability of long-lived and other assets, realizability of deferred income
tax assets, and provisions for intellectual property claims and litigation
related matters.
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 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 that the U.S. Dollar is the functional
currency for all of its subsidiaries. The accounting records for subsidiaries
that are maintained in a local currency are remeasured into the U.S. Dollar.
Accordingly, most non-monetary balance sheet items and related statement of
operations accounts are remeasured from the applicable local currency to the
U.S. Dollar using average historical exchange rates, producing substantially the
same result as if the entity's accounting records had been maintained in the
U.S. Dollar. Adjustments resulting from the remeasurement process are recorded
into earnings. Gains or losses resulting from foreign currency transactions and
remeasurement are included in "Other income, net" in the accompanying condensed
consolidated statements of operations. For the First Quarter Fiscal 2007 and the
First Quarter Fiscal 2006, included in "Other income, net" in the accompanying
condensed consolidated statements of operations are approximately $(0.1) million
and $0.2 million, respectively, of net foreign currency (gains) losses.
HEDGING ACTIVITIES
During the First Quarter Fiscal 2007 and the First Quarter Fiscal 2006, 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 September 30, 2006 and July 1, 2006, the Company had cash deposits pledged
as security in the amount of approximately $9.2 million and $8.3 million,
respectively, for borrowings outstanding under its revolving demand financing
facilities. During the First Quarter Fiscal 2007, the Company provided an
additional $1.0 million cash deposit pledged as security for a new financing
facility that was not available for use until after October 4, 2006. The
restricted cash amount is classified as a current asset in the condensed
consolidated balance sheets since the borrowings it secures are classified as a
current liability. See Note 7 - Short-Term Borrowings and Financing Facilities
and Note 13 -- Subsequent Events, Financing Facility.
INVESTMENTS
At September 30, 2006 and July 1, 2006, the Company's "Short-term investments,"
as classified in the accompanying condensed consolidated balance sheets,
consisted of auction rate debt securities and were considered available-for-sale
securities. During the First Quarter Fiscal 2007 and the First Quarter Fiscal
2006, 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, then it would be recorded as an expense. Realized gains and losses,
interest and dividends are classified as investment income in "Other income,
net" in the accompanying condensed consolidated statements of operations.
Investment income of $0.5 million and $0.3 million related to the short-term
investments is included in "Other income, net" for the First Quarter Fiscal 2007
and the First Quarter Fiscal 2006, respectively.
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
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 September 30, 2006, the sum of the Company's undiscounted forecasted 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.
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 provisions for anticipated returns which the Company estimates based on
historical rates of return, adjusted for current events as appropriate, in
accordance with SFAS 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 SAB No. 104 and 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, are 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 the cost of products sold based upon the underlying
revenue transaction.
SHARE-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.
INCOME TAXES
The Company periodically evaluates the realizability of its deferred income tax
assets. In the First Quarter Fiscal 2007 and the quarter ended July 1, 2006
("Fourth Quarter Fiscal 2006"), 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 September 30, 2006 and July 1, 2006.
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 the First Quarter Fiscal 2007 and the First
Quarter Fiscal 2006, the Company recorded provisions for income taxes of
approximately $17,000 and $50,000, respectively. The First Quarter Fiscal 2007
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 income tax liabilities.
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 First Quarter Fiscal 2007, the Company's comprehensive loss was $(1.6)
million, the same as the net loss for the period because the Company did not
have any items of other comprehensive income or loss. During the First Quarter
Fiscal 2006, the Company's comprehensive loss was $(5.8) million, the same as
the net loss for the period because the Company did not have any items of other
comprehensive income or loss.
9
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 First
Quarter Fiscal 2007 and the First Quarter Fiscal 2006, the Company issued no
shares of Common Stock in either period upon the exercise of stock options. In
the First Quarter Fiscal 2007 and the First Quarter Fiscal 2006, potentially
dilutive securities were comprised of stock options to purchase 2,874 and
417,656 shares of Common Stock, respectively, that were not included in the
calculation of diluted loss per share because their impact was antidilutive. In
the First Quarter Fiscal 2007 and the First Quarter Fiscal 2006 the weighted
average effect of 331,001 and 509,054 shares, respectively, 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 1 -- Basis of Presentation, Reverse Split of Common
Stock and Note 9 - Deferred Share Arrangement.
NOTE 4 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In July 2006, the FASB issued Interpretation No. 48 ("FIN 48"), "Accounting for
Uncertainty in Income Taxes--an Interpretation of FASB Statement No. 109." FIN
48 clarifies the accounting for uncertainty in income taxes recognized in a
company's financial statements by prescribing a recognition threshold and
measurement attribute for financial statement recognition and measurement of a
tax position taken or expected to be taken on a tax return. Additionally, FIN 48
provides guidance on de-recognition of tax benefits previously recognized and
additional disclosures for unrecognized tax benefits, interest and penalties.
FIN 48 is effective for fiscal years beginning after December 15, 2006, and is
required to be adopted by the Company in the first quarter of fiscal year 2008.
The Company is currently evaluating whether the adoption of FIN 48 will have a
material effect on its consolidated financial position, results of operations or
cash flows.
NOTE 5 - SUPPLEMENTAL CASH FLOW INFORMATION:
Non-cash Investing Activities:
(table in thousands)
Deferred Share Arrangement First Quarter
Fiscal 2007
-------------
Deferred share arrangement obligation to participant $ (211)
Common stock received and held in trust 211
-------------
$ -
=============
See Note 9 - Deferred Share Arrangement for a description of the deferred share
arrangement transactions in the First Quarter Fiscal 2007.
NOTE 6 - INVENTORIES:
Inventories consist of the following:
(table in thousands)
September 30, July 1,
2006 2006
------------- ----------
Raw materials, components, and $ 5,332 $ 9,589
work-in-process
Finished goods 16,096 18,671
------------- ----------
Total inventories $ 21,428 $ 28,260
============= ==========
During each of the First Quarter Fiscal 2007 and the First Quarter Fiscal 2006,
the Company recorded inventory related pre-tax charges of approximately $0.3
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 September 30, 2006 and October 1, 2005.
For each of the First Quarter Fiscal 2007 and the First Quarter Fiscal 2006, the
inventory related pre-tax charges had the effect of decreasing inventories by
$0.3 million and increasing cost of products sold by $0.3 million.
10
NOTE 7 - SHORT-TERM BORROWINGS AND FINANCING FACILITIES:
On August 1, 2006, CCHK accepted a proposal from The Hongkong and Shanghai
Banking Corporation Limited ("HSBC") to renew the revolving demand financing
facilities under the same terms that Concord Camera HK Limited ("CCHK"), the
Company's Hong Kong subsidiary, previously accepted in January 2006 (the
"January 2006 Agreement"). The renewed financing facilities are subject to
review by HSBC at any time, and, in any event, by June 15, 2007. The January
2006 Agreement provided an aggregate of approximately $8.2 million in borrowing
capacity consisting of an import facility of approximately $7.7 million and a
guarantee facility of 380,000 Euros (equal to approximately $0.5 million).
Pursuant to the January 2006 Agreement, CCHK provided HSBC with cash deposits
pledged as security in an aggregate amount of approximately $8.2 million.
The HSBC facilities are denominated in Hong Kong Dollars and bear interest at
variable rates, as follows: 1.75% over the Hong Kong Interbank Offered Rate on
import loans denominated in Hong Kong Dollars and 1.75% over the Singapore
Interbank Offered Rate for transactions denominated in currency other than the
Hong Kong Dollar. Since 1983, the Hong Kong Dollar has been pegged to the U.S.
Dollar.
As of September 30, 2006 and July 1, 2006, the Company had $2.5 million and $0,
respectively, in short-term borrowings outstanding under the import facility
described above. The weighted average borrowing rates on the short-term
borrowings as of September 30, 2006 and July 1, 2006, were 4.98% and 6.79%,
respectively.
On October 4, 2006, the Company obtained access to an additional demand banking
facility. See Note 13 - Subsequent Events, Financing Facility.
NOTE 8 - SHARE-BASED COMPENSATION EXPENSE:
During the First Quarter Fiscal 2007 and the First Quarter Fiscal 2006, the
Company recorded approximately $26,000 and $130,000, respectively, of
share-based compensation expenses. The Company considers all of its share-based
compensation expense as a component of general and administrative expenses. In
addition, no amount of share-based compensation 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 share-based compensation expense
recorded in the First Quarter Fiscal 2007 and the First Quarter Fiscal 2006 was
calculated using the assumptions included 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 is zero percent as the Company has never paid cash
dividends and has no present intention to pay cash dividends. The Company uses
historical data to estimate option exercise and employee termination information
within 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 five-year U.S. Treasury constant maturity rate for
the appropriate quarter, which approximates the rate in effect at the time of
the stock option grant.
Quarter ended Quarter ended
September 30, 2006 October 1, 2005
------------------ ---------------
Expected volatility 64.2% 73.38%
Expected dividend yield 0% 0%
Expected term (in years) 4.5 5.1
Risk-free interest rate 4.84% 4.01%
11
A summary of stock option activity under the Company's stock option plans as of
September 30, 2006, and changes during the First Quarter Fiscal 2007 are
presented below:
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Total Stock Options Shares Price Term (Years) Value
--------------------------------------- --------- ---------------- ----------------- ----------------
Outstanding at July 1, 2006 1,638,453 $4.21
Granted 10,000 $0.55
Exercised -- --
Forfeited or expired 77,668 5.76
---------
Outstanding at September 30, 2006 1,570,785 $4.11 3.08 $--
========= ================ ================= ================
Exercisable at September 30, 2006 1,423,256 $4.31 2.65 $--
========= ================ ================= ================
The weighted average grant-date fair value of options granted during the First
Quarter Fiscal 2007 and the First Quarter Fiscal 2006 was $1.50 and $4.00,
respectively.
A summary of the status of nonvested shares as of September 30, 2006, and
changes during the First Quarter Fiscal 2007 are presented below:
Weighted Average
Grant Date Fair
Nonvested Stock Options Shares Value
-------------------------------------------- -------- ----------------
Nonvested at July 1, 2006 160,862 $1.58
Granted 10,000 $0.30
Vested (17,333) $2.62
Forfeited (6,000) $1.84
--------
Nonvested at September 30, 2006 147,529 $1.36
========
As of September 30, 2006, there was approximately $133,000 of total unrecognized
compensation cost related to nonvested share-based compensation arrangements
granted under the Company's stock option plans. The unrecognized compensation
cost is expected to be recognized over a weighted-average vesting period of 2.9
years. The total grant date fair value of stock options vested during the First
Quarter Fiscal 2007 and the First Quarter Fiscal 2006 was approximately $45,000
and $198,000, respectively. See Note 1-- Basis of Presentation, Reverse Split of
Common Stock.
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.
On August 9, 2006, the Chairman took delivery of the 178,043 shares held in
trust upon expiration of the two-year deferral period, reducing the deferred
share arrangement balance in stockholders' equity by $211,500. See Note 1 -Basis
of Presentation, Reverse Split of Common Stock and Note 5 - Supplemental Cash
Flow Information.
12
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.
Effective January 1, 2001, the Company entered into a new twenty-year license
agreement with Fuji Photo Film Ltd ("Fuji"). Under the new license agreement,
Fuji granted the Company a worldwide non-exclusive license (excluding Japan
until January 1, 2005) to use certain of Fuji's patents and patent applications
related to single-use cameras. The license extends until the later of the
expiration of the last of the licensed Fuji patents or February 26, 2021. In
consideration of the license, the Company agreed to pay a license fee and
certain royalty payments to Fuji. Accordingly, a significant balance included in
"Other assets" in the accompanying condensed consolidated balance sheets as of
September 30, 2006 and July 1, 2006, represents an asset associated with the
Fuji license. In addition, a significant balance included in "Other liabilities"
in the accompanying condensed consolidated balance sheets as of September 30,
2006 and July 1, 2006 represents the present value of future license fee
payments to Fuji. The Company amortizes this asset based upon quantities of
single-use cameras that are produced using Fuji's patents and patent
applications.
On August 26, 2002, the Company entered into two Polaroid licensing agreements.
The two license agreements provided it with the exclusive (with the exception of
products already released by Polaroid into the distribution chain), worldwide
use of the Polaroid brand trademark in connection with the manufacture,
distribution, promotion and sale of single-use and 35 mm traditional film
cameras, including zoom cameras and certain related accessories. The license
agreements did not include instant or digital cameras. Each license agreement
included an initial term expiring on February 1, 2006, provided the Company the
right to renew the license under the same economic terms for an additional
three-year period and provided for the payment by the Company of $3.0 million of
minimum royalties, or $6.0 million in total, which were fully credited against
percentage royalties. On November 28, 2005, the Company exercised its right to
renew the single-use camera license agreement with Polaroid for an additional
three-year term expiring on February 1, 2009 in accordance with the same
economic terms included in the original agreement. Pursuant to the terms of the
renewed single-use camera license agreement, in February 2006, the Company paid
$2.0 million as a pre-payment of the minimum royalties for the renewal term and
recorded this payment as a prepaid asset. The Company amortizes this asset based
upon a percentage of net sales of Polaroid branded single-use cameras sold
during the renewal term of the single-use camera license agreement. In January
2006, the Company entered into a new license agreement with Polaroid providing
it with the exclusive, worldwide use of the Polaroid brand trademark in
connection with the manufacture, distribution, promotion and sale of traditional
film cameras, including zoom cameras and certain related accessories and
excluding instant cameras. The new traditional film license agreement is for a
term of three years expiring on January 31, 2009 and provides for the payment by
the Company of $50,000 of minimum royalties on or before October 31, 2006, which
will be fully credited against percentage royalties during the first year of the
term. There are no minimum guaranteed royalty payments under the traditional
film license agreement after the first year of the term. As of September 30,
2006, the Company's percentage royalties related to traditional film cameras
exceeded the minimum royalty amount.
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 First Quarter Fiscal 2007 and the First Quarter
Fiscal 2006, was $2.1 million and $2.5 million, respectively.
INTELLECTUAL PROPERTY CLAIMS
From time to time, the Company receives patent infringement claims which it
analyzes and, if appropriate, takes action to avoid infringement, settle the
claim or negotiate a license. Those claims for which legal proceedings have been
initiated against the Company are discussed in Note 11, Litigation and
Settlements. The Company has also received notifications from two entities, one
of which was a significant customer, alleging that certain of the Company's
digital cameras infringe upon those entities' respective patents. The Company
has engaged in discussions with these entities regarding resolution of the
claims.
13
Based on the Company's initial assessment of these claims, infringement of one
or more patents is probable if the patents are valid. Based upon the licensing
discussions to date, the Company preliminarily estimates the potential royalties
due to these two claimants for digital camera sales through September 30, 2006
to be between $0 and approximately $6.6 million in the aggregate. The actual
royalty amounts, if any, for past and future sales are dependent upon the
outcome of the negotiations. The Company has notified certain of its suppliers
of its right to be indemnified by the suppliers if it is required to pay
royalties or damages to either claimant. The Company is unable to reasonably
estimate the amount of the potential loss, if any, within the range of estimates
relating to these claims. Accordingly, the Company has not accrued any amounts
related to these claims as of September 30, 2006.
PURCHASE COMMITMENTS
At September 30, 2006, the Company had $6.3 million in non-cancelable purchase
commitments relating to the procurement of raw materials, components and
finished goods inventory from various suppliers. In the aggregate, such
commitments are not at prices in excess of current market values and typically
do not exceed one year.
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 holders of the Company's Common Stock.
In January 2003, an amended class action complaint (the "Amended Complaint") was
filed adding certain of the Company's current and former directors as
defendants. On August 27, 2004, the court dismissed the claims against the newly
added current and former directors. On September 8, 2005, the court granted the
plaintiffs' motion for class certification and certified as plaintiffs all
persons who purchased the Common Stock between January 18, 2001 and June 22,
2001, inclusive, and who were allegedly damaged thereby (the period January 18,
2001 through June 22, 2001 hereinafter referred to as the "Class Period"). The
allegations remaining in the Amended Complaint 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 claimed that such failures artificially
inflated the price of the Common Stock. The Amended Complaint sought unspecified
damages, interest, attorneys' fees, costs of suit and unspecified other and
further relief from the court. The Company has reached an agreement with the
plaintiffs on the settlement of this lawsuit and, on October 13, 2006, a
Stipulation of Settlement was filed with the court. On October 23, 2006, the
court issued an order preliminarily approving the settlement and scheduling a
settlement hearing for January 26, 2007 to determine, among other things,
whether the terms of the proposed settlement should be approved by the court.
The Company has sought coverage from its insurance carrier for this lawsuit
under its directors and officers liability insurance policy. The agreed upon and
pending settlement amount is within the policy limits and has been approved by
the Company's insurance carrier. Although the Company believes that the
settlement will be consummated and approved by the court, the Company cannot
guarantee this result and if the lawsuit continues and is adversely determined,
the ultimate liability of the Company, which could be material, cannot be
ascertained.
On September 17, 2002, the Company was advised by the staff of the SEC that it
was conducting an informal inquiry related to the matters described above and
requested certain information and materials related thereto. On October 15,
2002, the staff of NASDAQ also requested certain information and materials
related to the matters described above and to matters related to the previously
reported embezzlement of Company funds by a former employee, uncovered in April
2002. The Company provided the requested information to the staff of the SEC and
NASDAQ and has not received any further communication from the staff of the SEC
with respect to the informal inquiry or from NASDAQ with respect to its request
since the Company last responded in February 2003.
14
In September 2004, a class action complaint was filed against the Company and
certain of its officers in the United States District Court for the Southern
District of Florida by individuals purporting to be holders of the Company's
Common Stock. In August 2005, an amended consolidated complaint (the "Amended
Complaint") was filed adding a former officer of the Company as a defendant. The
lead plaintiff under the Amended Complaint seeks to act as a representative of a
class consisting of all persons who purchased the Company's Common Stock during
the period from August 14, 2003 through August 31, 2004, inclusive (the "Class
Period"), and who were allegedly damaged thereby. The allegations in the Amended
Complaint are centered around claims that the Company failed to disclose, in
periodic reports it filed with the SEC and in press releases it made to the
public during the Class Period regarding its operations and financial results,
(i) the full extent of the Company's excess, obsolete and otherwise impaired
inventory; (ii) the departure of the newly added former officer defendant from
the Company until several months after his departure; and (iii) that Eastman
Kodak Company ("Kodak") would cancel its two design and manufacturing services
("DMS") contracts with the Company due to the Company's alleged infringement of
Kodak's patents. The Amended Complaint also alleged that the Company improperly
recognized revenue contrary to generally accepted accounting principles ("GAAP")
due to an alleged inability to reasonably estimate digital camera returns. The
Amended Complaint claimed that such failures artificially inflated the price of
the Common Stock. The Amended Complaint sought unspecified damages, interest,
attorneys' fees, costs of suit and unspecified other and further relief from the
court. The Company is vigorously defending 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 staff of the SEC and has not received any
further communication from the SEC with respect to its request since the Company
last responded in May 2005.
On November 16, 2004, a shareholder derivative suit was filed against certain of
the Company's current and former officers and directors, and the Company as a
nominal defendant, in the United States District Court for the District of New
Jersey by an individual purporting to be a holder of the Company's Common Stock.
The complaint alleged that the individual defendants breached their duties of
loyalty and good faith by causing the Company to misrepresent its financial
results and prospects, resulting in the class action complaints described in the
immediately preceding paragraph. The complaint sought unspecified damages,
repayment of salaries and other remuneration from the individual defendants,
interest, attorneys' fees, costs of suit and unspecified other and further
relief from the court. In March 2005, the court granted a motion by the
individual defendants and the Company to transfer the action to the United
States District Court for the Southern District of Florida where the related
class action suit is currently pending. In May 2005, the court consolidated this
case with the related class action suit for discovery purposes only. Although
the Company believes this lawsuit is without merit, its outcome cannot be
predicted, and if adversely determined, the ultimate effect on the Company,
which could be material, cannot be ascertained. The Company has sought coverage
from its insurance carrier for this lawsuit and the related class action suit
under its directors and officers liability insurance policy, and the insurance
carrier is defending the actions under a reservation of rights.
Pursuant to the Company's Certificate of Incorporation, as amended, the personal
liability of the Company's directors is limited to the fullest extent permitted
under the New Jersey Business Corporation Act ("NJBCA"), and the Company is
required to indemnify its officers and directors to the fullest extent permitted
under the NJBCA. In accordance with the terms of the Certificate of
Incorporation and the NJBCA, the Board of Directors approved the payment of
expenses for each of the current and former officers and directors named as
defendants (the "individual defendants") in the above described class action and
derivative action litigations (collectively, the "actions") in advance of the
final disposition of such actions. The individual defendants have executed and
delivered to the Company written undertakings to repay the Company all amounts
so advanced if it shall ultimately be determined that the individual defendants
are not entitled to be indemnified by the Company under the NJBCA.
In April 2004, a patent infringement complaint was filed by Compression Labs,
Inc. against 28 defendants, including the Company, in the United States District
Court for the Eastern District of Texas. The complaint asserted that the
defendants have conducted activities which infringe U.S. Patent No. 4,698,672
(the "672 Patent"), entitled, "Coding System for Reducing Redundancy." The
complaint sought unspecified damages, interest, attorneys' fees, costs of suit
and unspecified other and further relief from the court. In February 2005,
pursuant to an order of the Judicial Panel on Multi-District Litigation, this
action was transferred to the United States District Court for the Northern
District of California. The Company has reached an agreement with the plaintiffs
on the settlement of this lawsuit and, on November 6, 2006, the plaintiff
dismissed its claim against the Company with prejudice. The settlement amount is
not material and will not have a material adverse effect on our financial
position or results of operations. The Company accrued the settlement amount as
of July 1, 2006. The Company has notified several third parties of its intent to
seek indemnity from such parties for the costs and damages incurred by the
Company as a result of this action.
15
On October 6, 2004, a patent infringement complaint was filed by Honeywell
International, Inc. and Honeywell Intellectual Properties, Inc., against 27
defendants, including the Company, in the United States District Court for the
District of Delaware. The complaint asserted that the defendants have conducted
activities which infringe U.S. Patent No. 5,280,371, entitled, "Directional
Diffuser for a Liquid Crystal Display." The complaint sought unspecified
damages, interest, attorneys' fees, costs of suit and unspecified other and
further relief from the court. The proceedings in this action against the
Company and other similarly situated defendants were stayed by the court pending
the resolution of the infringement actions against the liquid crystal display
manufacturers. It is too early to assess the probability of a favorable or
unfavorable outcome or the loss or range of loss, if any, and therefore, no
amounts have been accrued relating to this action. The Company has notified
several third parties of its intent to seek indemnity from such parties for any
costs or damages incurred by the Company as a result of this action.
In June 2006, St. Clair Intellectual Properties Consultants, Inc. filed a patent
infringement complaint against 22 defendants, including the Company, in the
United States District Court for the District of Delaware. The complaint
asserted that the defendants conducted activities which infringe U.S. Patent
Nos. 5,138,459, 6,094,219, 6,233,010 and 6,323,899. The complaint sought
injunctive relief, unspecified damages, interest, attorneys' fees, costs of suit
and unspecified other and further relief from the court. The proceedings in this
action against the Company, and the other defendants were stayed by the court
until further order of the court. It is too early to assess the probability of a
favorable or unfavorable outcome or the loss or range of loss, if any, and,
therefore, no amounts have been accrued relating to this action. The Company is
assessing potential claims of indemnification against certain of its suppliers
with respect to this action.
The Company is also involved from time to time in routine legal matters
incidental to its business. Based upon available information, the Company
believes that the resolution of such matters will not have a material adverse
effect on its financial position or results of operations.
NOTE 12 OTHER CHARGES:
COST-REDUCTION INITIATIVES
The Company continues to evaluate its cost structure and implement
cost-reduction initiatives as appropriate. During the First Quarter Fiscal 2007,
cost-reduction initiatives included, among other things, the elimination of
certain employee positions. As a result, during the First Quarter Fiscal 2007,
the Company recorded total charges of $0.4 million related to severance costs
for the elimination of certain employee positions.
Table III -- Other Charges Liability reconciles the beginning and ending
balances of the other charges liability.
(in thousands)
Other Charges Liability
Severance Retention Leases Total
---------- ---------------- ------------- -------------
Balance as of July 1, 2006 $ 1,175 $ 7 $ -- $ 1,182
Charges 429 -- 26 455
Reversal (23) -- -- (23)
Payments (625) -- -- (625)
---------- ---------------- ------------- -------------
Balance as of
September 30, 2006 $ 956 $ 7 $ 26 $ 989
========== ================ ============= =============
16
Table IV -- Other Charges presents the related expenses and their classification
in the consolidated statements of operations.
(in thousands)
Other Charges Severance Retention Leases Total
------------- --------- --------- ------ -------
First Quarter Fiscal 2007
Cost of products sold $ 177 $ -- $ -- $ 177
Selling expense 229 -- 16 245
General and administrative
expense -- -- 10 10
--------- --------- ------ -------
Total $ 406 $ -- $ 26 $ 432
========= ========= ====== =======
First Quarter Fiscal 2006
Cost of products sold $ -- $ 51 $ -- $ 51
Selling expense -- 6 -- 6
General and administrative --
expense -- 50 50
--------- --------- ------ -------
Total $ -- $ 107 $ -- $ 107
========= ========= ====== =======
As a result of the cost-reduction initiatives implemented in Fiscal 2006 and
Fiscal 2007, the Company expects to make cash payments totaling approximately
$1.0 million during Fiscal 2007 related to severance, retention and lease costs.
NOTE 13 - SUBSEQUENT EVENTS:
FINANCING FACILITY
On October 4, 2006, CCHK accepted a proposal from Dah Sing Bank, Limited ("Dah
Sing Bank") dated June 19, 2006 (the "Dah Sing Agreement") for the provision to
CCHK of certain demand banking facilities up to an amount of approximately $2.3
million (collectively, the "Dah Sing Facilities"). Pursuant to the proposal,
CCHK may use the Dah Sing Facilities for opening letters of credit, draft loans,
negotiating export letters of credit with a letter of guarantee and/or outward
bills loans. Of this credit line, approximately $1.9 million will be available
for trust receipts, invoice financing, packing loans and/or advances against
receivables. The Dah Sing Agreement expires on June 30, 2007.
The Dah Sing Facilities bear interest at variable rates, as follows: 1.5% per
annum over HIBOR on facilities denominated in Hong Kong Dollars; 1.5% per annum
over the London Interbank Offered Rate on facilities denominated in U.S.
Dollars; and 1.5% per annum over SIBOR on facilities denominated in any other
foreign currency.
As security for the Dah Sing Facilities, among other things, (i) the Company
provided a corporate guarantee to Dah Sing Bank in the amount of approximately
$2.3 million; (ii) CCHK provided to Dah Sing Bank a pledged deposit in the
amount of not less than $1.0 million; and (iii) CCHK had undertaken (A) to
maintain a net worth of not less than HKD80.0 million (approximately US$10.0
million), (B) to provide audited financial statements showing a net profit by
June 30, 2007, the end of the Company's 2007 fiscal year, and (C) to direct
import/export business to Dah Sing Bank of not less than HKD60.0 million
(approximately US$7.5 million) per year.
REVERSE SPLIT OF COMMON STOCK
On October 26, 2006, the Board of Directors of the Company approved, without
action by the shareholders of the Company, a Certificate of Amendment to the
Company's Certificate of Incorporation to implement a one-for-five split of the
Company's Common Stock effective November 21, 2006. On the effective date, of
the reverse split each five shares of issued Common Stock (including treasury
shares and shares held in trust) will be converted automatically into one share
of Common Stock, resulting in the total number of shares outstanding being
reduced from 28,859,385 shares to 5,771,871 shares, and the number of authorized
shares of the Company's Common Stock will be reduced from 100,000,000 shares to
20,000,000 shares. Continental Stock Transfer & Trust Company will act as the
exchange agent for purposes of implementing the exchange of share certificates
of shareholders of record as of November 20, 2006. Since the effective date of
the reverse split of common stock is after the financial statement issuance
date, pro forma per share data is presented below on a post-split basis.
(Pro Forma)
For the quarter ended
-------------------------------------------
September 30, 2006 October 1, 2005
-------------------- ----------------
Basic and diluted loss
per common share $(0.28) $(0.99)
==================== ================
17
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 our
Annual Report on Form 10-K for Fiscal 2006 filed with the SEC as of September
14, 2006 ("Form 10-K") including the condensed consolidated financial statements
and the notes to such financial statements included elsewhere in this Form 10-Q.
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 Part II Item 1A, "Risk
Factors" below and in our Form 10-K. 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 market and sell popularly priced, easy-to-use image capture products
including single-use and 35mm traditional film cameras. We design, develop,
manufacture and assemble most of our single-use cameras and certain of our 35mm
traditional film cameras at our manufacturing facilities in the Peoples Republic
of China, ("PRC") and outsource the manufacture of certain of our single-use and
35mm traditional film cameras. In fiscal 2006, we significantly de-emphasized
the sale of digital cameras and do not expect digital camera sales to be
material in fiscal 2007. We sell our private label and brand-name products to
our customers worldwide either directly or through third-party distributors.
EXECUTIVE SUMMARY
QUARTER-OVER-QUARTER RESULTS OF OPERATIONS
Our operating loss in the first quarter fiscal 2007 was $(2.0) million as
compared to an operating loss of $(5.7) million for the first quarter fiscal
2006.
The decrease in our quarter-over-quarter operating loss is primarily related to
decreases in selling, general and administrative expenses. Quarter-over-quarter
selling expenses decreased by $0.7 million, primarily due to lower freight and
royalty costs in the amounts of $0.4 million and $0.1 million, respectively, as
a result of a decrease in quarter-over-quarter net sales. In addition,
selling-related employee compensation costs decreased by $0.2 million, net of
the current quarter's severance charges, resulting from the elimination of
certain positions in connection with our fiscal 2006 cost reduction initiatives.
Quarter-over-quarter general and administrative ("G&A") expenses decreased by
$2.6 million, primarily due to a reduction in professional fees of $1.9 million
related to our effort to comply with Section 404 of the Sarbanes-Oxley Act of
2002 ("SOX"). In addition, to a lesser extent, G&A-related employee compensation
costs decreased by $0.7 million as a result of the elimination of certain
positions in connection with our fiscal 2006 cost-reduction initiatives.
18
First Quarter Fiscal 2007 Results of Operations
We recorded an operating loss of $(2.0) million during the quarter, but we
significantly reduced our operating loss by $3.7 million, or 64.6%, in the first
quarter fiscal 2007 as compared to the first quarter fiscal 2006.
Factors contributing to the first quarter fiscal 2007 operating loss were:
1. Manufacturing Material, Labor and Overhead Cost Variances
2. Cost and Expenses Related to Digital Cameras
3. Other Charges
4. Inventory Charges
1. Manufacturing Material, Labor and Overhead Cost Variances
During the first quarter fiscal 2007, we experienced unfavorable manufacturing
material, labor and overhead cost variances of $0.8 million attributable to a
change in the product mix of single-use cameras manufactured during the period.
2. Cost and Expenses Related to Digital Cameras
During the first quarter fiscal 2007, we continued to significantly reduce our
digital camera inventory. Although we significantly reduced our operating
expenses related to sales of digital cameras, principally in Europe and Japan,
the nominal gross profit on the sales of digital cameras was insufficient to
cover such operating expenses and resulted in an operating loss of $0.4 million.
3. Other Charges
During the first quarter fiscal 2007, we recorded total charges of $0.4 million
for severance costs related to the elimination of certain employee positions in
connection with our fiscal 2007 cost-reduction initiatives.
4. Inventory Charges
During the first quarter fiscal 2007, we recorded inventory charges of $0.3
million to reduce the carrying value of certain finished goods inventory,
primarily digital camera inventory, below its cost basis to its net realizable
value resulting from price declines.
During the first quarter fiscal 2007, we have increased our gross margin, in
dollars and as a percentage of sales, and lowered our operating costs as a
result of our increased emphasis on the sale of single-use and, to a lesser
extent, 35mm traditional film cameras. Our first quarter fiscal 2007 sales and
gross profit margins were not sufficient to cover our manufacturing material,
labor and overhead cost variances, European and Japanese operating expenses
related to digital camera sales, severance costs, inventory charges and
worldwide overhead costs. We continue to take action and review our strategies,
including and relating to: (i) acquisition of new single-use and 35mm
traditional film camera customers, (ii) potential new business initiatives,
(iii) continued de-emphasis of digital camera sales, (iv) significant reduction
of operating costs required to support a presence in the digital camera market,
and (v) implementation of additional cost reductions related to worldwide
overhead costs. There can be no assurances that implementing any such strategies
will successfully reverse our losses, increase our revenues, decrease our costs
or improve our results of operations.
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 1,
2006, there have been no significant changes to the assumptions and estimates
related to those critical accounting policies. See critical accounting policies
disclosed in our Form 10-K.
19
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July 2006, the FASB issued Interpretation No. 48 ("FIN 48"), "Accounting for
Uncertainty in Income Taxes--an Interpretation of FASB Statement No. 109." FIN
48 clarifies the accounting for uncertainty in income taxes recognized in a
company's financial statements by prescribing a recognition threshold and
measurement attribute for financial statement recognition and measurement of a
tax position taken or expected to be taken on a tax return. Additionally, FIN 48
provides guidance on de-recognition of tax benefits previously recognized and
additional disclosures for unrecognized tax benefits, interest and penalties.
FIN 48 is effective for fiscal years beginning after December 15, 2006 and,
therefore, we are required to adopt it in the first quarter of our 2008 fiscal
year. We are currently evaluating whether the adoption of FIN 48 will have a
material effect on our consolidated financial position, results of operations or
cash flows.
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 2006 COMPARED TO THE QUARTER ENDED OCTOBER 1, 2005
NET SALES
Net sales of our products for the first quarter fiscal 2007 were $28.8 million,
a decrease of $15.8 million, or 35.4%, as compared to net sales for the first
quarter fiscal 2006. The decrease in net sales was due primarily to a reduction
in sales of digital cameras.
Net sales from our operations in the Americas for the first quarter fiscal 2007
were $23.9 million, a decrease of $0.4 million, or 1.7%, as compared to the
first quarter fiscal 2006. The decrease in net sales in the Americas was due
primarily to a decrease in sales of 35mm traditional film cameras.
Net sales from our operations in Europe for the first quarter fiscal 2007 were
$4.8 million, a decrease of $15.4 million, or 76.6%, as compared to the first
quarter fiscal 2006. The decrease in net sales in Europe was due primarily to a
reduction in sales of digital cameras attributable to our decision to
de-emphasize digital camera sales.
Net sales from our operations in Asia for the first quarter fiscal 2007 and the
first quarter fiscal 2006 were $0.1 million and $0.2 million, respectively.
GROSS PROFIT
Gross profit for the first quarter fiscal 2007 was $4.5 million, or 15.6% of net
sales, versus gross profit of $4.1 million, or 9.2% of net sales, in the first
quarter fiscal 2006. During the first quarter fiscal 2007 as compared to first
quarter fiscal 2006, gross profit, in dollars and as a percentage of net sales,
was positively affected by the following factors: (i) a reduction in negative
gross margin percentages on a lower volume of digital camera sales, (ii) a
reduction of warranty costs related to digital camera replacements resulting
from our continued de-emphasis of digital camera sales, and (iii) an increase in
single-use camera sales volume; and was negatively affected by (iv) a decrease
in 35mm traditional film camera sales volume, and (v) an increase in severance
costs.
Product engineering, design and development costs for the first quarter fiscal
2007 and the first quarter fiscal 2006, in dollars and as a percentage of net
sales, were $0.8 million, or 2.8%, and $1.1 million, or 2.4%, respectively.
OPERATING EXPENSES
Selling expenses for the first quarter fiscal 2007 were $2.8 million, or 9.7% of
net sales, compared to $3.5 million, or 7.8% of net sales, for the first quarter
fiscal 2006. The decrease was primarily due to a reduction of freight and
royalty costs in the amounts of $0.4 million and $0.1 million, respectively, as
a result of a decrease in quarter-over-quarter net sales. In addition,
selling-related employee compensation costs decreased by $0.2 million, net of
the current quarter's severance charges of $0.2 million, resulting from the
elimination of certain positions in connection with our fiscal 2006
cost-reduction initiatives.
20
G&A expenses for the first quarter fiscal 2007 were $3.7 million, or 12.9% of
net sales, compared to $6.3 million, or 14.1% of net sales, for the first
quarter fiscal 2006. The decrease was primarily due to a reduction in
professional fees of $1.9 million associated with the Company's efforts to
comply with SOX. In addition, to a lesser extent, G&A-related employee
compensation costs decreased by $0.7 million as a result of the elimination of
certain positions in connection with our fiscal 2006 cost-reduction initiatives.
STOCK-BASED COMPENSATION
During the first quarter fiscal 2007 and the first quarter fiscal 2006, we
recorded approximately $26,000 and $130,000, respectively, of share-based
compensation expenses. We consider all of our share-based compensation expense
as a component of general and administrative expenses. In addition, no amount of
share-based compensation expense was capitalized as part of capital expenditures
or inventory for the periods presented. For further discussion, see Note 8 -
Stock-Based Compensation in the Notes to Condensed Consolidated Financial
Statements.
INTEREST EXPENSE
Interest expense was approximately $66,000 and $100,000 for the first quarter
fiscal 2007 and the first quarter fiscal 2006, respectively. The
quarter-over-quarter reduction was due primarily to a decrease in the average
amount of indebtedness outstanding during the respective quarters and, to a
lesser extent, a decrease is average borrowing rates.
OTHER INCOME, NET
Other income, net was $0.5 million and $0.1 million for the first quarter fiscal
2007 and the first quarter fiscal 2006, respectively. The quarter-over-quarter
increase was primarily due to an increase in foreign exchange gains and, to a
lesser extent, an increase in investment income resulting from an increase in
the average amount of funds invested during the respective quarters. For further
discussion, see Note 3 - Summary of Significant Accounting Policies in the Notes
to the Condensed Consolidated Financial Statements.
INCOME TAXES
In the first quarter fiscal 2007 and the fourth quarter of Fiscal 2006, 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, we recorded a valuation allowance for the entire balance of our
deferred income tax assets as of September 30, 2006 and July 1, 2006. During the
first quarter fiscal 2007 and the first quarter fiscal 2006, we recorded
provisions for income taxes of $17,000 and $50,000, respectively. The first
quarter fiscal 2007 and the first quarter fiscal 2006 income tax provisions
related to income tax liabilities incurred by certain of our foreign
subsidiaries. These foreign subsidiaries do not have net operating losses to
offset such income tax 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 $(1.6) million, or $(0.06) per basic and diluted
common share, for the first quarter fiscal 2007, as compared to a net loss of
$(5.8) million, or $(0.20) per basic and diluted common share, for the first
quarter fiscal 2006.
21
COST-REDUCTION INITIATIVES
We continue to evaluate our cost structure and implement cost-reduction
initiatives as appropriate. During the first quarter fiscal 2007 and the first
quarter fiscal 2006, cost-reduction initiatives included, among other things,
the elimination of certain employee positions. As a result during the first
quarter fiscal 2007 and first quarter fiscal 2006, we recorded total charges of
$0.4 million and $0.1 million, respectively, for severance costs related to the
elimination of certain employee positions. For further discussion see Note 12 -
Other Charges in the Notes to the Condensed Consolidated Financial Statements.
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. We are not engaged in hedging
activities and had no forward exchange contracts outstanding at September 30,
2006. In the ordinary course of business, we enter into operating lease
commitments, purchase commitments and other contractual obligations. These
transactions are recognized in our financial statements in accordance with
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 operations, 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 September 30, 2006, we had working capital of $46.4
million, compared to $46.8 at July 1, 2006, a decrease of $0.4 million.
Cash Provided By (Used in)Operating Activities - Cash provided by operating
activities during the first quarter fiscal 2007 was $1.0 million, which compared
favorably to cash used in operating activities of $(1.2) million during the
first quarter fiscal 2006. The increase in cash provided by operating activities
is primarily attributable to a significant reduction in net loss offset by a net
decrease in working capital items.
Cash Used in Investing Activities - Cash used in investing activities was $4.0
million for first quarter fiscal 2007 as compared to $0.7 million for first
quarter fiscal 2006. The increase in cash used in investing activities was
primarily due to an increase in net purchases of short-term investments of $3.1
million and an increase of $1.0 million in restricted cash related to a new
financing facility. See Hong Kong Financing Facilities below.
Cash Provided by (Used in) Financing Activities - Cash provided by (used in)
financing activities during the first quarter fiscal 2007 and first quarter
fiscal 2006 was approximately $2.5 million and $(45,000), respectively. This
activity relates to net short-term borrowings made under our financing
facilities. See Hong Kong Financing Facilities below.
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 - At September 30, 2006, we had $6.3 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
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.
22
Intellectual Property Claims -- See Note 10 - Commitments and Contingencies and
Note 11 - Litigation and Settlements in the Notes to Condensed Consolidated
Financial Statements.
Hong Kong Financing Facilities -- See Note 7 -- Short-Term Borrowings and
Financing Facilities and Note 13 -- Subsequent Events, Financing Facility in the
Notes to Condensed Consolidated Financial Statements.
FORWARD-LOOKING INFORMATION: CERTAIN CAUTIONARY STATEMENTS
The statements contained in this report that are not historical facts are
"forward-looking statements" (as such term is defined in the Private Securities
Litigation Reform Act of 1995), which can be identified by the use of
forward-looking terminology such as: "estimates," "projects," "anticipates,"
"expects," "intends," "believes," "plans," "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 and subsequently filed reports. We wish to caution the reader that
these forward-looking statements, including, without limitation, statements
regarding expected cost reductions, anticipated or expected results of the
implementation of our restructuring initiatives, cost-reduction initiatives, and
possible new business initiatives, anticipated financial benefits of
de-emphasizing the sale of digital cameras, eliminating our reliance on
internally designed and manufactured digital cameras and increasing the design,
co-development and purchase of digital cameras from outsourced manufacturers and
increasing our emphasis on the sale of single-use and 35mm traditional film
cameras, the viability of marketing and selling cameras and competing in the
camera market, the cost structure requirements needed to maintain a presence in
the camera market and to market and sell cameras, the development of our
business, anticipated revenues or capital expenditures, our ability to maintain
or improve gross margin percentages on the sale of our products, projected
profits or losses and other statements contained in this report regarding
matters that are not historical facts, are only estimates or predictions. No
assurance can be given that future results will be achieved. Actual events or
results may differ materially as a result of risks facing us or actual results
differing from the assumptions underlying such statements. In particular, our
expected results could be adversely affected by, among other things, production
difficulties or economic conditions negatively affecting the market for our
products, by our inability to develop and maintain relationships on favorable
terms with component and material suppliers and contract manufacturers or by our
inability to negotiate favorable terms with our licensors. Obtaining the results
expected from the introduction of any new products or product lines may require
timely completion of development, successful ramp-up of full-scale production on
a timely basis and customer and consumer acceptance of those products. In
addition, future relationships or agreements may require an ability to meet high
quality and performance standards, to successfully implement production at
greatly increased volumes and to sustain production at greatly increased
volumes, as to all of which there can be no assurance. There also can be no
assurance that products and new business initiatives under consideration or
development will be successfully developed or that once developed such products
and initiatives will be commercially successful. Any forward-looking statements
contained in this report represent our estimates only as of the date of this
report, or as of such earlier dates as are indicated herein, and should not be
relied upon as representing our estimates as of any subsequent date. While we
may elect to update forward-looking statements at some point in the future, we
specifically disclaim any obligation to do so, even if our estimates change.
ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no material changes in the disclosures set forth in Part II,
Item 7A of our Form 10-K 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 (1) recorded, processed, summarized and
reported within the time periods specified in SEC rules and forms, and (2)
accumulated and communicated to our management, including the chief executive
officer and principal financial officer, to allow timely decisions regarding
required disclosure.
23
Our management has reviewed and evaluated the effectiveness of the design and
operation of our disclosure controls and procedures as of the end of the period
covered by this quarterly report on Form 10-Q. Based on that evaluation, our
chief executive officer and principal financial officer concluded that our
disclosure controls and procedures were not effective as a result of the
continued existence of three material weaknesses in internal control over
financial reporting described in our Form 10-K, as of September 30, 2006.
Because of these three material weaknesses, we performed additional manual
controls, procedures and analyses and other pre- and post-closing procedures
designed to ensure that our unaudited condensed consolidated financial
statements are presented fairly in all material respects in accordance with
accounting principles generally accepted in the United States. We relied on
increased monitoring and review to compensate for the material weaknesses in our
internal control over financial reporting. Accordingly, management believes that
the unaudited 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.
(b) Changes in Internal Control over Financial Reporting
Although, management is continuing to take corrective actions to remediate the
remaining three material weaknesses disclosed in our Form 10-K, these material
weaknesses were not remediated as of September 30, 2006. As a result, there were
no changes in our internal control over financial reporting in connection with
the evaluations referred to above that occurred during the first quarter fiscal
2007 that have materially affected, or are likely to materially affect, our
internal control over financial reporting.
Our management is dedicated to improving our internal controls over financial
reporting and intends to continue monitoring and upgrading our internal controls
as necessary and appropriate for our business.
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.
ITEM 1A. RISK FACTORS
There have been no material changes in the risk factors set forth in Part 1,
Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the fiscal year
ended July 1, 2006.
ITEM 6. EXHIBITS
No. Description Method of Filing
--- ----------- ----------------
3.1 Certificate of Incorporation, as amended through Incorporated by reference to the Company's annual report on Form 10-K
May 9, 2000 for the year ended July 1, 2000.
3.2 Restated By-Laws, as amended through July 12, Incorporated by reference to the Company's annual report on Form 10-K
2004 for the year ended July 3, 2004.
3.3 Certificate of Amendment (No. 7) of Incorporated by reference to the Company's current report
Certificate of Incorporation, dated on Form 8-K filed November 7, 2006.
November 2, 2006
24
3.4 Certificate of Correction of Certificate of Incorporated by reference to the Company's current report
Amendment (No. 7) to Certificate of on Form 8-K filed November 7, 2006.
Incorporation, dated November 3, 2006
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
25
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: November 13, 2006 By: /s/ Blaine A. Robinson
---------------------------------------------
(Signature)
Blaine A. Robinson, Vice President --
Finance, Treasurer and Assistant Secretary
(Principal Financial and Accounting Officer)
26