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 29, 2007
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
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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. (Check
one):
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 - 5,913,610 shares as of November 1, 2007
Index
Concord Camera Corp. and Subsidiaries
Part I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets as of September 29, 2007
(Unaudited) and June 30, 2007................................. 3
Condensed consolidated statements of operations (Unaudited) for
the quarter ended September 29, 2007 and
September 30, 2006............................................ 4
Condensed consolidated statements of cash flows (Unaudited) for
the quarter ended September 29, 2007 and
September 30, 2006............................................ 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 4T. Controls and Procedures......................................... 24
Part II. OTHER INFORMATION
Item 1. Legal Proceedings............................................... 25
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 29, 2007 June 30,
(Unaudited) 2007
------------------ -------------
Assets
Current Assets:
Cash and cash equivalents $ 4,728 $ 3,853
Restricted cash 6,200 6,200
Short-term investments 27,150 30,475
Accounts receivable, net 8,268 10,702
Inventories 18,576 15,806
Prepaid expenses and other current assets 889 1,401
--------- ---------
Total current assets 65,811 68,437
Property, plant and equipment, net 9,926 10,616
Other assets 3,344 3,451
--------- ---------
Total assets $ 79,081 $ 82,504
========= =========
Liabilities and Stockholders' Equity
Current Liabilities:
Short-term borrowings under financing facilities $ 2,328 $ 2,756
Accounts payable 17,476 17,042
Accrued royalties 1,439 2,499
Accrued expenses 5,533 5,775
Other current liabilities 1,010 1,346
--------- ---------
Total current liabilities 27,786 29,418
Other long-term liabilities 1,471 1,442
--------- ---------
Total liabilities 29,257 30,860
Commitments and contingencies
Stockholders' equity:
Blank check preferred stock, no par value,
1,000 shares authorized, none issued -- --
Common stock, no par value, 20,000 shares
authorized, 6,261 shares issued
as of September 29, 2007 and June 30, 2007 respectively 143,860 143,860
Additional paid-in capital 5,194 5,189
Deferred share arrangement -- 413
Accumulated deficit (94,237) (92,412)
--------- ---------
54,817 57,050
Less: treasury stock, at cost, 347
shares as of September 29, 2007 and June 30, 2007 (4,993) (4,993)
Less: common stock held in trust, 0 and 66
shares as of September 29, 2007 and June 30, 2007 -- (413)
--------- ---------
Total stockholders' equity 49,824 51,644
--------- ---------
Total liabilities and stockholders' equity $ 79,081 $ 82,504
========= =========
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 29, September 30,
2007 2006
--------------- ---------------
Net sales $ 21,698 $ 28,825
Cost of products sold 18,683 24,322
-------- --------
Gross profit 3,015 4,503
Selling expenses 2,173 2,787
General and administrative expenses 2,842 3,738
-------- --------
Operating loss (2,000) (2,022)
Interest expense 77 66
Other income, net (315) (465)
-------- --------
Loss before (1,762) (1,623)
income taxes
Provision for income taxes 1 17
-------- --------
Net loss $ (1,763) $ (1,640)
======== ========
Basic and diluted loss per
common share $ (0.30) $ (0.28)
======== ========
Weighted average
common shares
outstanding - basic and diluted 5,914 5,838
======== ========
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 29, 2007 September 30, 2006
------------------ ------------------
Cash flows from operating activities:
Net loss $ (1,763) $ (1,640)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 804 1,048
Inventory charges -- 319
Gain on disposal of property, plant and equipment -- (26)
Unrecognized tax benefit (62) --
Share-based compensation 5 26
Changes in operating assets and liabilities:
Accounts receivable, net 2,434 5,755
Inventories (2,770) 6,513
Prepaid expenses and other current assets 512 736
Other assets -- 234
Accounts payable 434 (7,433)
Accrued expenses (242) (3,227)
Accrued royalties (1,060) (1,493)
Other current liabilities (336) 150
Other long-term liabilities 29 30
--------- ---------
Net cash (used in) provided by operating activities (2,015) 992
--------- ---------
Cash flows from investing activities:
Restricted cash -- (935)
Purchases of property, plant and equipment (7) (114)
Proceeds from the sale of property, plant and equipment -- 175
Proceeds from sales of available-for-sale investments 23,175 22,750
Purchases of available-for-sale investments (19,850) (25,825)
--------- ---------
Net cash provided by (used in) investing activities 3,318 (3,949)
--------- ---------
Cash flows from financing activities:
(Repayments) borrowings under short-term financing
facilities, net (428) 2,545
--------- ---------
Net cash (used in) provided by financing activities (428) 2,545
--------- ---------
Net increase (decrease) in cash and cash equivalents 875 (412)
Cash and cash equivalents at beginning of period 3,853 6,795
--------- ---------
Cash and cash equivalents at end of period $ 4,728 $ 6,383
========= =========
See accompanying notes to condensed consolidated financial statements.
5
CONCORD CAMERA CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 29, 2007
(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 of America 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 29, 2007 ("First
Quarter Fiscal 2008") are not necessarily indicative of the results that may be
expected for the fiscal year ending June 28, 2008 ("Fiscal 2008"). For
comparative purposes, the quarter ended September 30, 2006, has been defined as
the ("First Quarter Fiscal 2007"). The balance sheet at June 30, 2007 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 of America 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") on September 27, 2007 for the fiscal year ended June 30, 2007
("Fiscal 2007").
Reclassifications
Certain amounts in the prior year have been reclassified to conform to the
current year presentation.
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 with an effective date of November 21, 2006. On the
effective date of the reverse split, each five shares of issued Common Stock
(including treasury shares and shares held in trust) were converted
automatically into one share of Common Stock, resulting in the total number of
shares outstanding being reduced from 28,859,385 shares to 5,771,877 shares, and
the number of authorized shares of the Company's Common Stock reduced from
100,000,000 shares to 20,000,000 shares. All Common Stock shares and per-share
and related stock option amounts have been restated for the reverse stock split
in the accompanying condensed consolidated financial statements and footnotes.
Note 2 - Significant Customers:
During the First Quarter Fiscal 2008, the Company's sales to Wal-Mart Stores,
Inc. ("Wal-Mart") and Walgreen Co. ("Walgreens") decreased as compared to the
First Quarter Fiscal 2007. The First Quarter Fiscal 2008 decrease in sales to
Wal-Mart and Walgreens was primarily attributable to a decrease in the unit
sales of single-use cameras and to a lesser extent a decrease in the average
selling price per camera. The loss of either of these significant customers or
substantially reduced sales to these significant customers or any other large
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 2008 and
the First Quarter Fiscal 2007.
Percent of Net Sales
For the quarter ended
----------------------------------
September 29, September 30,
2007 2006
------------- -------------
Wal-Mart 36.8% 34.6%
Walgreens 15.9% 40.8%
-------- --------
Total 52.7% 75.4%
======== ========
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
of America 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 of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. The more
significant of the Company's estimates 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 accounting for litigation and settlements,
among other things.
Foreign Currency Transactions
The Company operates on a worldwide basis and its results may be adversely or
positively affected by fluctuations of various foreign currencies against the
U.S. Dollar, specifically, the Canadian Dollar, European Euro, British Pound
Sterling, PRC Renminbi, Hong Kong Dollar and 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 2008 and the
First Quarter Fiscal 2007, included in "Other income, net" in the accompanying
condensed consolidated statements of operations are approximately $0.1 million
and $(0.1) million, respectively, of net foreign currency losses (gains).
Hedging Activities
During the First Quarter Fiscal 2008 and the First Quarter Fiscal 2007, 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 29, 2007 and June 30, 2007, the Company had cash deposits
pledged as security in the amount of approximately $6.2 million, respectively,
for letters of credits and borrowings under its revolving demand financing
facilities. 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.
Investments
At September 29, 2007 and June 30, 2007, 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 2008 and the First Quarter Fiscal
2007, 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, if incurred, are reported as a component of accumulated other
comprehensive 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 related to the short-term
investments is included in "Other income, net" for each of the First Quarter
Fiscal 2008 and the First Quarter Fiscal 2007, 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 29, 2007, the sum of the Company's undiscounted forecasted cash
flows exceeded the carrying value of its long-lived assets.
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"), which addresses the statement of operations classification of
consideration between a vendor and a retailer, 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, 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
Effective July 1, 2007, the Company adopted Financial Accounting Standards Board
("FASB") Interpretation No. 48, "Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109," ("FIN 48") which clarifies the
accounting and disclosure for uncertain tax positions. The Company previously
had accounted for tax contingencies in accordance with Statement of Financial
Accounting Standards No. 5, "Accounting for Contingencies."
As a result of the implementation of FIN 48, the Company recorded a $62,000
increase in the liability for unrecognized tax benefits, which was accounted for
as an increase in the July 1, 2007 accumulated deficit balance. The amount of
unrecognized tax benefits at July 1, 2007 was $0.8 million, which would affect
the Company's effective tax rate if recognized. The amount of unrecognized tax
benefits did not materially change as of September 29, 2007. During the next
twelve months, it is reasonably possible that the total unrecognized tax
benefits will decrease by approximately $0.5 million due to an audit settlement.
The Company recognizes interest and penalties accrued related to unrecognized
tax benefits as components of its provision for income taxes. The Company
accrued approximately $25,000 for interest and penalties at July 1, 2007.
Subsequent changes to accrued interest and penalties through September 29, 2007
have not been significant.
The Company files U.S. Federal income tax returns as well as income tax returns
in various states and foreign jurisdictions. At the beginning of fiscal 2008,
the Company was subject to examination by the Internal Revenue Service for
fiscal years 2005 through 2006, and by taxing authorities in various state and
foreign jurisdictions for fiscal years 2003 through 2007, with few exceptions.
In addition, the Company was subject to examination by the German Taxing
Authorities for fiscal years 2000 through 2005 - See Note 13 - Subsequent
Events, Settlement of German Tax Audit.
The Company periodically evaluates the realizability of its deferred income tax
assets. In the First Quarter Fiscal 2008 and the quarter ended June 30, 2007
("Fourth Quarter Fiscal 2007"), 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 29, 2007 and June 30, 2007.
9
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 2008 and the First
Quarter Fiscal 2007, the Company recorded a provision for income taxes of
approximately $1,000 and $17,000, respectively. The First Quarter Fiscal 2008
income tax provision relates to United States state income taxes. 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 United States. Unrealized gains and losses
related to the Company's available-for-sale investments are excluded from net
loss. During the First Quarter Fiscal 2008 and the First Quarter Fiscal 2007,
the Company's comprehensive loss was $(1.8) million and $(1.6) million,
respectively, the same as the net loss for the period because the Company did
not have any items of other comprehensive 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 First
Quarter Fiscal 2008 and the First Quarter Fiscal 2007, the Company issued no
shares, respectively, of Common Stock on the exercise of stock options. In the
First Quarter Fiscal 2008 and the First Quarter Fiscal 2007, potentially
dilutive securities were comprised of stock options to purchase 18 and 2,874
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, the weighted average effect of 66,202 shares for which
delivery had been deferred under the Company's Deferred Delivery Plan was
included in the denominator of both basic and diluted loss per share
calculations. The 66,202 deferred shares were delivered on July 2, 2007 and
included in the total shares outstanding during the quarter. See Note 1 - Basis
of Presentation, Reverse Split of Common Stock and Note 9 - Deferred Share
Arrangement.
Note 4 - Recently Issued Accounting Pronouncements:
In May 2007, the Financial Accounting Standard Board ("FASB") issued FASB Staff
Position ("FSP") No. FIN 48-1, Definition of Settlement in FASB Interpretation
No.48 ("FSP No. FIN 48-1"), which provides guidance on how an enterprise should
determine whether a tax position is effectively settled for the purpose of
recognizing previously unrecognized tax benefits. The guidance in FSP No. FIN
48-1 must be applied upon the initial adoption of FIN 48. The adoption of FSP
No. FIN 48-1 did not have a material impact on the Company's condensed
consolidated financial statements.
In February 2007, the FASB issued Statement of Financial Accounting Standard
("SFAS") No. 159, "The Fair Value Option for Financial Assets and Financial
Liabilities - Including an amendment of FASB Statement No. 115," ("SFAS No.
159") which provides companies with an option to report selected financial
assets and liabilities at their fair values. The election is made on an
instrument-by-instrument basis and is irrevocable. If the fair value option is
elected for an instrument, FASB No. 159 specifies that all subsequent changes in
fair value for that instrument must be reported in earnings. FASB No. 159 is
effective as of the beginning of an entity's first fiscal year that begins after
November 15, 2007, which for us will be our fiscal year beginning June 29, 2008.
The Company is currently evaluating the effects of the adoption of SFAS No. 159.
In September 2006, the FASB issued Statement of Accounting Standards No. 157,
Fair Value Measurements ("SFAS No. 157"). SFAS No. 157 defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosure about fair value measurements. SFAS
No. 157 applies under other accounting pronouncements that require or permit
fair value measurements, the FASB having previously concluded in those
10
accounting pronouncements that fair value is the relevant measurement attribute.
Accordingly, SFAS No. 157 does not require any new fair value measurements. SFAS
No. 157 is effective for fiscal years beginning after December 15, 2007. The
Company is currently evaluating the impact, if any, that the adoption of SFAS
No. 157 will have on the Company's consolidated financial position and results
of operations or cash flows.
In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes, an interpretation of FAS 109, Accounting for Income Taxes" (FIN
48), to create a single model to address accounting for uncertainty in income
tax positions. FIN 48 clarifies the accounting for income taxes by prescribing a
minimum probability threshold a tax position must meet to be recognized in the
financial statements. FIN 48 also provides guidance on the measurement,
derecognition and classification of recognized tax benefits, interest and
penalties, accounting for interim periods, and the transition of the accounting
method upon the adoption of FIN 48. FIN 48 is effective for years beginning
after December 15, 2006. Accordingly, the Company adopted FIN 48 effective as of
July 1, 2007. The effect of the adoption is disclosed in Note 3 - Summary of
Significant Accounting Policies, Income Taxes.
Note 5 - Supplemental Cash Flow Information:
Non-cash Investing Activities:
(amounts in thousands)
First Quarter First Quarter
Deferred Share Arrangement Fiscal 2008 Fiscal 2007
-------------------------- ------------- -------------
Deferred share arrangement obligation
to participant $ (413) $ (211)
Common stock received and held in trust 413 211
-------- ---------
$ -- $ --
======== =========
See Note 9 - Deferred Share Arrangement for a description of the deferred share
arrangement transactions in the First Quarter Fiscal 2008.
Note 6 - Inventories:
Inventories consist of the following:
(amounts in thousands)
September 29, June 30,
2007 2007
------------- --------
Raw materials, components, and $ 7,146 $ 5,431
work-in-process
Finished goods 11,430 10,375
-------- --------
Total inventories $ 18,576 $ 15,806
======== ========
During the First Quarter Fiscal 2008 inventory carrying values approximated
their cost basis and no charges were made to reduce the carrying value of the
inventory in stock. During the First Quarter Fiscal 2007, 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. For the First Quarter Fiscal 2007, 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.
Note 7 - Short-Term Borrowings and Financing Facilities:
Concord Camera HK Limited ("CCHK"), the Company's Hong Kong subsidiary, has
certain demand financing facilities with The Hongkong and Shanghai Banking
Corporation, Dah Sing Bank, Limited ("Dah Sing") and the Shanghai Commercial
Bank Ltd ("SCB"). These financing facilities provide CCHK with an aggregate
borrowing capacity of approximately US$8.6 million. As security for the Dah Sing
and SCB financing facilities, among other things, (i) the Company provided a
corporate guarantee to Dah Sing of approximately US$2.3 million and to SCB of
approximately US$1.1 million; (ii) CCHK provided to HSBC and
11
Dah Sing pledged deposits in the amount of approximately $5.2 million and $1.0
million, respectively; and (iii) CCHK executed a mortgage in favor of SCB on the
Hong Kong office property owned by CCHK.
At September 29, 2007 and June 30, 2007, the Company had $2.3 million and $2.8
million, respectively, in short-term borrowings outstanding under the financing
facilities described above. The weighted average borrowing rates on the
short-term borrowings as of September 29, 2007 and June 30, 2007, were 7.45% and
6.85%, respectively.
Note 8 - Share-Based Compensation Expense:
During the First Quarter Fiscal 2008 and the First Quarter Fiscal 2007, the
Company recorded approximately $5,000 and $26,000, respectively, of share-based
compensation expense. 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 2008 and the First Quarter Fiscal 2007 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 29, 2007 September 30, 2006
------------------ ------------------
Expected volatility 60.5% 64.2%
Expected dividend yield 0% 0%
Expected term (in years) 4.2 4.5
Risk-free interest rate 4.5% 4.8%
A summary of stock option activity under the Company's stock option plans as of
September 29, 2007 and changes during the First Quarter Fiscal 2008 are
presented below:
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Total Stock Options Shares Price Term (Years) Value
--------------------------------------- ------------- -------------- --------------- -------------
Outstanding at June 30, 2007 203,951 $23.24
Granted 8,000 $ 4.04
Exercised -- --
Forfeited or expired (13,060) $15.09
--------
Outstanding at September 29, 2007 198,891 $23.00 3.2 $ 460
======== ====== ====== ========
Exercisable at September 29, 2007 171,778 $25.74 2.5 $ 92
======== ====== ====== ========
The weighted average grant-date fair value of options granted during the First
Quarter Fiscal 2008 and the First Quarter Fiscal 2007 was $2.07 and $1.50,
respectively.
12
A summary of the status of nonvested stock options as of September 29, 2007 and
changes during the First Quarter Fiscal 2008 are presented below:
Weighted Average
Grant Date Fair
Nonvested Stock Options Shares Value
---------------------------------------- -------- ----------------
Nonvested at June 30, 2007 25,293 $3.68
Granted 8,000 $2.07
Vested (1,480) $4.29
Forfeited (4,700) $3.20
------ -----
Nonvested at September 29, 2007 27,113 $3.26
====== =====
As of September 29, 2007, there was approximately $75,000 of total unrecognized
compensation expense related to nonvested share-based compensation arrangements
granted under the Company's stock option plans. The unrecognized compensation
expense is expected to be recognized over a weighted-average vesting period of
3.4 years. The total grant date fair value of stock options vested during the
First Quarter Fiscal 2008 and the First Quarter Fiscal 2007 was approximately
$6,000 and $45,000, 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 July 2, 2007, the Chairman took delivery of the 66,202 shares held in trust
upon expiration of the extended deferral period, reducing the deferred share
arrangement balance in stockholders' equity by $412,825. As of September 29,
2007, there were no deferred shares held in trust by the Company. See Note 1 -
Basis of Presentation, Reverse Split of Common Stock and Note 5 - Supplemental
Cash Flow Information.
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 twenty-year license
agreement with Fuji Photo Film Ltd ("Fuji"). Under the license agreement, Fuji
granted the Company a worldwide non-exclusive license (excluding Japan until
January 1, 2005) to use certain of Fuji's patents and patent applications
related to single-use cameras. The license extends until the later of the
expiration of the last of the licensed Fuji patents or February 26, 2021. In
consideration of the license, the Company agreed to pay a license fee and
certain royalty payments to Fuji. Accordingly, a significant portion of the
balance for patents, trademarks and licenses, net in "Other assets" in the
accompanying condensed consolidated balance sheets at September 29, 2007 and
June 30, 2007, was an asset associated with the Fuji license. The Company also
recorded as a liability a corresponding amount that was included in licensing
related obligations in "Other liabilities" in the accompanying consolidated
balance sheets at September 29, 2007 and June 30, 2007 which was equal to the
present value of future license fee payments. The Company amortizes these assets
based upon quantities of units produced.
13
On August 26, 2002, the Company entered into two Polaroid licensing agreements.
The two license agreements provided it with the exclusive (with the exception of
products already released by Polaroid into the distribution chain), worldwide
use of the Polaroid brand trademark in connection with the manufacture,
distribution, promotion and sale of single-use and traditional film based
cameras, including zoom cameras and certain related accessories. The license
agreements did not include instant or digital cameras. Each license agreement
included an initial term expiring on February 1, 2006, provided the Company the
right to renew the license under the same economic terms for an additional
three-year period and provided for the payment by the Company of $3.0 million of
minimum royalties, or $6.0 million in total for both license agreements, which
were fully credited against percentage royalties. On November 28, 2005, the
Company exercised its right to renew the single-use camera license agreement
with Polaroid for an additional three-year term expiring on February 1, 2009 in
accordance with the same economic terms included in the original agreement.
Pursuant to the terms of the single-use camera license agreement, as of July 1,
2007, the Company paid $2.5 million of minimum royalties and recorded the
payment as a prepaid asset. The Company amortizes this asset based upon a
percentage of net sales of Polaroid branded single-use cameras during the
three-year renewal term expiring February 1, 2009. In January 2006, the Company
entered into a new license agreement with Polaroid providing it with the
exclusive, worldwide use of the Polaroid brand trademark in connection with the
manufacture, distribution, promotion and sale of traditional film cameras. The
new license agreement is for a term of three years expiring on January 31, 2009
and provided for the payment by the Company of $50,000 of minimum royalties on
or before October 31, 2006, which was fully credited against percentage
royalties during the first year of the term. There are no minimum guaranteed
royalty payments under the traditional film license agreement after the first
year of the term.
Additionally, the Company has other license and royalty agreements that require
the payment of royalties based on the manufacture and/or sale of certain
products. Its license and royalty agreements expire at various dates through
Fiscal 2023. Total amortization and royalty expense for all licensing and
royalty agreements for the First Quarter Fiscal 2008 and the First Quarter
Fiscal 2007, was $1.5 million and $2.1 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.
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 29, 2007
to be between $0 and approximately $6.7 million in the aggregate. The actual
royalty amounts, if any, for past and future sales are dependent upon the
outcome of the negotiations. The Company has notified certain of its suppliers
of its right to be indemnified by the suppliers if it is required to pay
royalties or damages to either claimant. The Company is unable to reasonably
estimate the amount of the potential loss, if any, within the range of estimates
relating to these claims. Accordingly, the Company has not accrued any amounts
related to these claims as of September 29, 2007.
Purchase Commitments
At September 29, 2007, the Company had $5.6 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 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
14
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. On March 23,
2007, the court granted the plaintiff's motion for class certification and
certified as plaintiffs all persons who purchased the Common Stock between
August 14, 2003 and August 31, 2004, inclusive, and who were allegedly damaged
thereby (the period August 14, 2003 through August 31, 2004 hereinafter referred
to as the "Class Period"). 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
from the Company of the aforementioned former officer defendant until several
months after his departure; and (iii) that Eastman Kodak Company ("Kodak") had
notified the Company that it would stop purchasing cameras from the Company
under its two design and manufacturing services ("DMS") contracts with the
Company due to the Company's alleged infringement of Kodak's patents. The
Amended Complaint also alleged that the Company improperly recognized revenue
contrary to generally accepted accounting principles due to an alleged inability
to reasonably estimate digital camera returns. The Amended Complaint claimed
that such failures artificially inflated the price of the Common Stock. The
Amended Complaint sought unspecified damages, interest, attorneys' fees, costs
of suit and unspecified other and further relief from the court. The Company has
reached an agreement in principle with the plaintiffs on the settlement of this
lawsuit. The settlement is subject to the negotiation and execution of a
mutually agreeable settlement agreement and approval by the class shareholders
and the court. The Company has sought coverage from its insurance carrier for
this lawsuit under its directors' and officers' liability insurance policy and
the insurance carrier is defending the action under a reservation of rights. The
agreed upon pending settlement amount is within the policy limits and the
insurance carrier has agreed to pay such amount. Although the Company believes
the settlement will be consummated and approved by the court, the Company cannot
guarantee this result and if the lawsuit continues and is adversely determined,
the Company's ultimate liability, 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 under its directors' and officers'
liability insurance policy, and the insurance carrier is defending the action
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.
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 2008,
no additional costs were incurred related to the Company's current
cost-reduction initiatives.
During the First Fiscal Quarter 2008, the Company recorded a $60,000 reduction
in a liability related to severance costs accrued for the elimination of certain
employee positions.
Table I - Other Charges Liability reconciles the beginning and ending balances
of the other charges liability.
(in thousands)
Other Charges Liability
-----------------------
Severance Retention Total
--------- --------- -----
Balance as of June 30, 2007 $ 236 $ 9 $ 245
Charges -- -- --
Reversal (60) -- (60)
Payments (44) (9) (53)
----- ----- -----
Balance as of
September 29, 2007 $ 132 $ -- $ 132
===== ===== =====
16
Table II - 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 2008
-------------------------
Cost of products sold $ -- $ -- $ -- $ --
Selling expense (60) -- -- (60)
General and administrative
expense -- --
-------- ------ ------ --------
Total $ (60) $ -- $ -- $ (60)
======== ====== ====== ========
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
======== ====== ====== ========
As of September 29, 2007, the Company expects to make cash payments totaling
approximately $0.1 million during the remainder of Fiscal 2008 related to
severance costs as disclosed in Table I - Other Charges Liability.
Note 13 - Subsequent Events
Financing Facilities
On October 16, 2007, Concord Keystone Sales Corp. ("Keystone"), the Company's
United States wholly owned subsidiary, entered into a Financing Agreement (the
"Agreement") with The CIT Group/Commercial Services, Inc. ("CIT") for a $15
million secured revolving line of credit (the "CIT Facility"), which includes a
letter of credit ("L/C") sub-line of $10 million. The CIT Facility is secured by
a first priority lien in CIT's favor on, among other things, Keystone's accounts
receivable, other payment rights and inventory.
The Agreement has a one-year initial term with annual renewals thereafter,
unless terminated by either party upon 30 days' written notice before the
expiration of the initial term or any renewal term. Keystone may terminate the
Agreement at any time upon 30 days' written notice to CIT. Under the terms of
the Agreement, the borrowing base will consist of (i) 90% of the eligible
accounts receivable plus (ii) the lesser of (a) a specified percentage of the
sum of the eligible inventory and the eligible in-transit inventory or (b) 90%
of the eligible accounts receivable, minus (iii) the amount of the availability
reserves. All loans, advances and extensions of credit will be made at CIT's
discretion.
Interest on the CIT Facility is payable monthly in arrears at the prime rate
announced by JP Morgan Chase Bank plus 0.25% per annum, or in Keystone's
discretion, at the one-month London Interbank Offered Rate (LIBOR) plus 2.25%
per annum. Keystone will also be required to pay customary loan facility, credit
line, annual renewal and L/C fees.
Upon the occurrence of certain events of default, including the Company ceasing
to own and control 100% of Keystone's voting shares, CIT's obligation under the
Agreement to make revolving loans and assist Keystone with opening L/C's shall
cease and CIT may declare all obligations immediately due and payable (including
principal and accrued but unpaid interest on all then outstanding obligations).
The demand financing facilities provided by Dah Sing, which were to have expired
on June 30, 2007, have been extended on a month-to-month basis, most recently to
November 30, 2007 by a letter dated October 29, 2007, pending completion of Dah
Sing's review of the facilities.
17
Settlement of German Tax Audit
During the second quarter of fiscal 2008, the Company and the German Tax
Authorities settled an audit of the Company's German subsidiary for fiscal years
2000 through 2005 resulting in a net liability of approximately 92,000 euros
relating to value added taxes and a net liability related to income taxes of
approximately 115,000 euros, inclusive of interest. The Company accrued a net
liability of approximately 92,000 euros related to value added taxes in its
condensed consolidated balance sheet as of September 29, 2007. The effect on the
Company's unrecognized tax benefits, including a net liability of approximately
115,000 euro related to income taxes, resulting from the settlement of the
income tax related items will be recorded in the second quarter of fiscal 2008.
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
condensed consolidated financial statements and the notes to such financial
statements included elsewhere in this Quarterly Report on Form 10-Q and our
Annual Report on Form 10-K for Fiscal 2007 filed with the SEC as of September
27, 2007 ("Form 10-K").
Overview
We market and sell popularly priced, easy-to-use 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 People's 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.
Digital camera sales in fiscal 2007 were not material and we do not expect to
have digital camera sales in fiscal 2008. 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 for each of the first quarter of fiscal 2008 and the first
quarter of fiscal 2007 was $(2.0) million.
We experienced a $1.5 million decrease in our quarter-over-quarter gross profit.
The decrease in the quarter-over-quarter gross profit was primarily due to a
decrease in quarter-over-quarter net sales and a decrease in
quarter-over-quarter gross margin percentages totaling approximately $2.5
million, partially offset by favorable quarter-over-quarter manufacturing
material, labor and overhead cost variances of approximately $1.0 million.
Our selling, general and administrative expenses decreased by $1.5 million,
quarter-over-quarter but were offset by the $1.5 million decrease in gross
profit. Our quarter-over-quarter selling expenses decreased by $0.6 million due
to a reduction in selling-related employee compensation costs of $0.4 million
and a reduction in certain other costs of $0.2 million. Selling-related employee
compensation costs decreased as a result of the elimination of certain positions
in connection with our cost-reduction initiatives. Our quarter-over-quarter
general and administrative ("G&A") expenses decreased by $0.9 million primarily
due to a reduction in G&A-related employee compensation costs of $0.4 million as
a result of the elimination of certain positions in connection with our
cost-reduction initiatives, a reduction in professional fees of $0.3 million
primarily as a result of a reduction in audit fees and a reduction in certain
other costs totaling $0.2 million.
18
First Quarter Fiscal 2008 Results of Operations
We recorded an operating loss of $2.0 million during the quarter.
Factors contributing to the first quarter fiscal 2008 operating loss were:
1. Insufficient Net Sales and Related Gross Profit to Fully Absorb
Non-Manufacturing Overhead Costs
2. Unanticipated Air Freight Costs.
1. Insufficient Net Sales and Related Gross Profit to Fully Absorb
Non-Manufacturing Overhead Costs
During the first quarter fiscal 2008, our net sales and related gross profit
were not sufficient to fully absorb our non-manufacturing overhead costs. The
insufficient net sales and related gross profit contributed approximately $1.8
million to the operating loss.
2. Unanticipated Air Freight Costs
During the first quarter of fiscal 2008, we continued to experience a temporary
shortage of film used in our cameras that began in the fourth quarter of fiscal
2007, which delayed the production schedule of our single-use and 35mm
traditional film cameras. As a result of this film shortage and its impact on
our production schedule, certain of our products were shipped by air from Asia
to the United States in order to meet our delivery schedules to our customers.
Due to this unanticipated usage of air freight, we incurred an additional $0.2
million in freight 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, and (iii) implementation of additional
cost reductions related to worldwide overhead costs. There can be no assurances
that we will be able to implement any such strategies or 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 June 30,
2007, there have been no significant changes to the assumptions and estimates
related to those critical accounting policies. See the critical accounting
policies disclosed in our Form 10-K.
Recently Issued Accounting Pronouncements
In May 2007, the Financial Accounting Standard Board ("FASB") issued FASB Staff
Position ("FSP") No. FIN 48-1, Definition of Settlement in FASB Interpretation
No.48 ("FSP No. FIN 48-1"), which provides guidance on how an enterprise should
determine whether a tax position is effectively settled for the purpose of
recognizing previously unrecognized tax benefits. The guidance in FSP No. FIN
48-1 must be applied upon the initial adoption of FIN No. 48. The adoption of
FSP No. FIN 48-1 did not have a material impact on our condensed consolidated
financial statements.
In February 2007, the Financial Accounting Standard Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 159, "The Fair Value
Option for Financial Assets and Financial Liabilities - Including an amendment
of FASB Statement No. 115," ("SFAS No. 159") which provides companies with an
option to report selected financial assets and liabilities at their fair values.
The election is made on an instrument-by-instrument basis and is irrevocable. If
the fair value option is elected for an instrument, FASB No. 159 specifies that
all subsequent changes in fair value for that instrument must be reported in
earnings. FASB No. 159 is effective as of the beginning of an entity's first
fiscal year that begins after November 15,
19
2007, which for us will be our fiscal year beginning June 29, 2008. The Company
is currently evaluating the effects of the adoption of SFAS No. 159.
In September 2006, the FASB issued Statement of Accounting Standards No. 157,
Fair Value Measurements ("SFAS No. 157"). SFAS No. 157 defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosure about fair value measurements. SFAS
No. 157 applies under other accounting pronouncements that require or permit
fair value measurements, the FASB having previously concluded in those
accounting pronouncements that fair value is the relevant measurement attribute.
Accordingly, SFAS No. 157 does not require any new fair value measurements. SFAS
No. 157 is effective for fiscal years beginning after December 15, 2007. The
Company is currently evaluating the impact, if any, that the adoption of SFAS
No. 157 will have on the Company's consolidated financial position and results
of operations or cash flows.
In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes, an interpretation of FAS 109, Accounting for Income Taxes" (FIN
48), to create a single model to address accounting for uncertainty in income
tax positions. FIN 48 clarifies the accounting for income taxes by prescribing a
minimum probability threshold a tax position must meet to be recognized in the
financial statements. FIN 48 also provides guidance on the measurement,
derecognition and classification of recognized tax benefits, interest and
penalties, accounting for interim periods, and the transition of the accounting
method upon the adoption of FIN 48. FIN 48 is effective for years beginning
after December 15, 2006. Accordingly, we adopted FIN 48 effective as of July 1,
2007. The effect of the adoption is disclosed in Note 3 - Summary of Significant
Accounting Policies, Income Taxes, in the Notes to Condensed Consolidated
Financial Statements.
Results of Operations
Quarter Ended September 29, 2007 Compared to the Quarter Ended September 30,
2006
Net Sales
Net sales of our products for the first quarter of fiscal 2008 were $21.7
million, a decrease of $7.1 million, or 24.7%, as compared to net sales for the
first quarter of fiscal 2007. The decrease in net sales was due primarily to a
reduction in unit sales of single-use, digital and 35mm traditional film cameras
to significant customers and to a lesser extent a decrease in the average
selling price per camera.
Net sales from our operations in the Americas for the first quarter of fiscal
2008 were $16.2 million, a decrease of $7.7 million, or 32.2%, as compared to
the first quarter of fiscal 2007. The decrease in net sales in the Americas was
due primarily to a reduction in unit sales of single-use and 35mm traditional
film cameras to significant customers and to a lesser extent a decrease in the
average selling price per camera.
Net sales from our operations in Europe for the first quarter of fiscal 2008
were $4.1 million, a decrease of $0.7 million, or 14.6%, as compared to the
first quarter of fiscal 2007. 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, partially offset by an increase
in sales of single-use cameras.
Net sales from our operations in Asia for the first quarter of fiscal 2008 were
$1.4 million, an increase of $1.3 million, or 1300%, as compared to the first
quarter of fiscal 2007. The increase in net sales in Asia was due to increased
sales of single-use cameras in Japan.
20
Gross Profit
Gross profit for the first quarter of fiscal 2008 was $3.0 million, or 13.8% of
net sales, versus gross profit of $4.5 million, or 15.6% of net sales, in the
first quarter of fiscal 2007. The decrease in the quarter-over-quarter gross
profit was primarily due to a decrease in quarter-over-quarter net sales and a
decrease in quarter-over-quarter gross margin percentages totaling approximately
$2.5 million, partially offset by favorable manufacturing material, labor and
overhead cost variances of approximately $1.0 million.
Product engineering, design and development costs for the first quarter of
fiscal 2008 and the first quarter of fiscal 2007, in dollars and as a percentage
of net sales, were $0.5 million, or 2.3%, and $0.8 million, or 2.8%,
respectively.
Operating Expenses
Selling expenses for the first quarter of fiscal 2008 were $2.2 million, or
10.1% of net sales, compared to $2.8 million, or 9.7% of net sales, for the
first quarter of fiscal 2007. Our quarter-over-quarter selling expenses
decreased by $0.6 million primarily due to a reduction in selling-related
employee compensation costs of $0.4 million and a reduction in certain other
costs of $0.2 million. Selling-related employee compensation costs decreased as
a result of the elimination of certain positions in connection with our
cost-reduction initiatives.
G&A expenses for the first quarter of fiscal 2008 were $2.8 million, or 12.9% of
net sales, compared to $3.7 million, or 12.9% of net sales, for the first
quarter of fiscal 2007. Our quarter-over-quarter G&A expenses decreased by $0.9
million primarily due to a reduction in G&A-related employee compensation costs
of $0.4 million as a result of the elimination of certain positions in
connection with our cost-reduction initiatives, a reduction in professional fees
of $0.3 million primarily as a result of a reduction in audit fees and a
reduction in certain other costs totaling $0.2 million.
Share-Based Compensation
During the first quarter of fiscal 2008 and the first quarter of fiscal 2007, we
recorded approximately $5,000 and $26,000, respectively, of share-based
compensation expenses. We consider all of our share-based compensation expense
as a component of G&A 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 -
Share-Based Compensation in the Notes to Condensed Consolidated Financial
Statements.
Interest Expense
Interest expense was approximately $0.1 million for each of the first quarter of
fiscal 2008 and the first quarter of fiscal 2007.
Other Income, Net
Other income, net was $0.3 million and $0.5 million for the first quarter of
fiscal 2008 and the first quarter of fiscal 2007, respectively. The decrease in
other income, net was primarily due to foreign currency losses of $0.1 million
in the first quarter of fiscal 2008 as compared to a foreign exchange gain of
$(0.1) million recorded in the first quarter of fiscal 2007.
Income Taxes
In the first quarter of fiscal 2008 and the fourth quarter of fiscal 2007, 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 29, 2007 and June 30, 2007. During
the first quarter of fiscal 2008 and the first quarter of fiscal 2007, we
recorded a provision for income taxes of $1,000 and $17,000, respectively. The
first quarter of fiscal 2008 income tax provision relates to United States state
income taxes. The first quarter of fiscal 2007 income tax provision relates to
income tax liabilities incurred by certain of our foreign subsidiaries. These
foreign subsidiaries do not have net operating losses to
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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 $(1.8) million, or $(0.30) per basic and diluted
common share, for the first quarter of fiscal 2008, as compared to a net loss of
$(1.6) million, or $(0.28) per basic and diluted common share, for the first
quarter of fiscal 2007.
Cost-Reduction Initiatives
We continue to evaluate our cost structure and implement cost-reduction
initiatives as appropriate. During the first quarter of fiscal 2008, no
additional costs were incurred related to our ongoing cost-reduction
initiatives. During the first quarter of fiscal 2007, we recorded total charges
of $0.4 million primarily 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 our Form 10-K. We are not engaged in hedging activities and had no
forward exchange contracts outstanding at September 29, 2007. 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.
Although we currently anticipate that we have, or have access to, an amount of
working capital that will be sufficient to fund our operations for the next
twelve months, our cash requirements during this period may exceed the amount of
working capital available to us. Our ability to fund our operating requirements
and maintain an adequate level of working capital will depend primarily on our
ability to generate growth in sales of our single-use and 35mm traditional film
cameras and new products, on our ability to continue to access our financing
facilities and on our ability to control operating expenses. Our failure to
generate substantial growth in the sales of our single-use and 35mm traditional
film cameras and new products, control operating expenses and other events -
including the progress of our new product initiatives, our ability to
manufacture or have manufactured products at an economically feasible cost and
in sufficient quantities and changes in economic or competitive conditions or
our planned business - could cause us to require additional capital. In the
event that we must raise additional capital to fund our working capital needs,
we may seek to raise such capital through borrowings and/or the issuance of debt
securities or equity securities. To the extent we raise additional capital by
issuing equity securities or obtaining borrowings convertible into equity,
existing shareholders may experience ownership dilution and future investors may
be granted rights superior to those of existing shareholders. Moreover,
additional capital may not be available to us on acceptable terms, or at all.
Working Capital - At September 29, 2007, we had working capital of $38.0
million, compared to $39.0 million at June 30, 2007, a decrease of $1.0 million.
Cash (Used in) Provided by Operating Activities - Cash (used in) operating
activities during the first quarter of fiscal 2008 was $(2.0) million, which
compared unfavorably to cash provided by operating activities of $1.0 million
during the first quarter of fiscal 2007. The changes in cash (used in) provided
by operating activities for the respective quarters were primarily attributable
to changes in accounts payable and inventory as a result of growth for seasonal
demand partially offset by accounts receivable as a result of improved
collections and accrued expenses as a result of lower overall costs.
22
Cash Provided by (Used in) Investing Activities - Cash provided by investing
activities was $3.3 million for the first quarter of fiscal 2008 as compared to
cash (used in) investing activities of $(4.0) million for the first quarter of
fiscal 2007. The increase in cash provided by investing activities was primarily
due to the net decrease in purchases of available-for-sale investments and a
decrease in restricted cash.
Cash (Used in) Provided by Financing Activities - Cash (used in) financing
activities during the first quarter of fiscal 2008 was $(0.4) million as
compared to cash provided by financing activities of $2.5 million for the first
quarter of fiscal 2007. This activity relates to a net reduction of our
short-term borrowings made under our financing facilities. See Note 7 -
Short-Term Borrowings and Financing Facilities in the Notes to Condensed
Consolidated Financial Statements.
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 - See Note 10 - Commitments and Contingencies in the Notes
to Condensed Consolidated Financial Statements.
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 Note 7 - Short-Term Borrowings and Financing Facilities
in the Notes to Condensed Consolidated Financial Statements 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.
Hong Kong Financing Facilities - As of September 29, 2007, we had $1.4 million
in letters of credit outstanding, which were issued primarily to certain
suppliers to guarantee payment of our purchase orders with such suppliers. The
letters of credit are issued under the import facilities that have been granted
to CCHK. See Note 7 - Short-Term Borrowings and Financing Facilities in the
Notes to Condensed Consolidated Financial Statements.
Revolving Credit Facility -On October 16, 2007, we obtained access to a
revolving credit facility for a $15 million secured revolving line of credit
which includes a letter of credit sub-line of $10 million. The revolving credit
facility is secured by a first priority lien on, among other things, the
accounts receivable and inventory of Concord Keystone Sales Corp., our wholly
owned U.S. subsidiary. See Note 13 - Subsequent Event, Financing Facilities, in
the Notes to the 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" in our Part I,
Item 1A of Form 10-K. 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
cost-reduction initiatives and new business initiatives, anticipated financial
benefits of exiting the digital camera market and increasing our focus on the
sale of single-use and 35mm traditional film cameras, the
23
development of our business, anticipated revenues or capital expenditures, our
ability to improve gross margin percentages on the sale of our products,
projected profits or losses, our expectations regarding the amount of expected
cash payments related to severance costs, our assessment of and estimates of
royalty payments in connection with intellectual property claims, the vesting
period over which unrecognized compensation expense will be realized, the
sufficiency of our working capital and cash to fund our operations in the next
twelve months, our belief regarding the lack of merit in pending litigations,
our belief regarding the lack of a material impact that the resolution of
routine legal matters will have in our business, coverage from our insurance
carrier in connection with pending litigations and our expectation that there is
no material tax exposure to the Company on account of our operations in the
People's Republic of China, 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, regulatory conditions negatively affecting our product costs, production
difficulties or economic conditions negatively affecting our suppliers,
customers or the market for our products, by our inability to develop and
maintain relationships with suppliers, customers or licensors, by our inability
to negotiate favorable terms with our suppliers, customers or licensors, by a
decline in the unit sales of our single-use and 35mm traditional film cameras or
by a decrease in the average selling price of our film camera products.
Obtaining the results expected from the introduction of any new products or
product lines may require successful and timely completion of development,
successful and timely ramp-up of full-scale production 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 and 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. Quantitative and Qualitative Disclosures about Market Risk.
There have been no material changes in the disclosures set forth in Part II,
Item 7A in our Form 10-K during this reporting period.
Item 4T. 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 principal
executive officer and principal financial officer, to allow timely decisions
regarding required disclosure.
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
principal executive officer and principal financial officer concluded that as of
September 29, 2007, our disclosure controls and procedures were effective in
providing reasonable assurance of achieving their objectives in internal control
over financial reporting as described above.
(b) Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting has occurred during
the quarter ended September 29, 2007 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
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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 June 30, 2007.
Item 6. EXHIBITS
No. Description Method of Filing
--- ----------- ----------------
3.1 Certificate of Incorporation, as amended Incorporated by reference to the Company's annual report
through May 9, 2000 on Form 10-K for the year ended July 1, 2000.
3.2 Restated By-Laws, as amended through July Incorporated by reference to the Company's annual report
12, 2004 on Form 10-K 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
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
10.1 Letter from Dah Sing Bank Limited to Concord Filed herewith
Camera HK Limited, dated October 29, 2007,
extending financing facilities until
November 30, 2007 under existing conditions
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
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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, 2007 By: /s/ Blaine A. Robinson
-------------------------------------
(Signature)
Blaine A. Robinson,
Vice President - Finance,
Treasurer and Assistant Secretary
(Principal Financial and
Accounting Officer and Duly
Authorized Officer)
26