United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 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
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 ___ No _X_
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated 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 March 24, 2008
Index
Concord Camera Corp. and Subsidiaries
Part I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets as of
December 29, 2007 (Unaudited) and June 30, 2007 ................ 3
Condensed consolidated statements of operations
(Unaudited) for the quarter and six months ended
December 29, 2007 and December 30, 2006 ......................... 4
Condensed consolidated statements of cash flows
(Unaudited) for the six months ended December 29,
2007 and December 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 ........................... 19
Item 3. Quantitative and Qualitative Disclosures
About Market Risk ............................................. 28
Item 4T. Controls and Procedures .......................................... 28
Part II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................ 28
Item 1A. Risk Factors ..................................................... 29
Item 4. Submission of Matters to a Vote of Security Holders .............. 30
Item 6. Exhibits ......................................................... 31
2
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Concord Camera Corp. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands)
December 29, 2007 June 30,
(Unaudited) 2007
----------------- --------
Assets
Current Assets:
Cash and cash equivalents $ 4,479 $ 3,853
Restricted cash 6,200 6,200
Short-term investments 2,550 30,475
Accounts receivable, net 7,772 10,702
Inventories 13,534 15,806
Prepaid expenses and other current assets 1,121 1,401
-------- --------
Total current assets 35,656 68,437
Long-term investments 25,200 --
Property, plant and equipment, net 9,207 10,616
Other assets 3,437 3,451
-------- --------
Total assets $ 73,500 $ 82,504
======== ========
Liabilities and Stockholders' Equity
Current Liabilities:
Short-term borrowings under financing facilities $ 7,438 $ 2,756
Accounts payable 9,286 17,042
Accrued royalties 2,614 2,499
Accrued expenses 4,341 5,775
Other current liabilities 1,011 1,346
-------- --------
Total current liabilities 24,690 29,418
Other long-term liabilities 1,198 1,442
-------- --------
Total liabilities 25,888 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
December 29, 2007 and June 30, 2007 respectively 143,860 143,860
Additional paid-in capital 5,195 5,189
Deferred share arrangement -- 413
Accumulated deficit (96,450) (92,412)
-------- --------
52,605 57,050
Less: treasury stock, at cost, 347
shares as of December 29, 2007 and June 30, 2007 (4,993) (4,993)
Less: common stock held in trust, 0 and 66
shares as of December 29, 2007 and June 30, 2007 -- (413)
-------- --------
Total stockholders' equity 47,612 51,644
-------- --------
Total liabilities and stockholders' equity $ 73,500 $ 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 For the six months ended
------------------------------ ------------------------------
December 29, December 30, December 29, December 30,
2007 2006 2007 2006
------------ ------------ ------------ ------------
Net sales $ 18,404 $ 19,338 $ 40,102 $ 48,163
Cost of products sold 17,098 17,837 35,781 42,159
-------- -------- -------- --------
Gross profit 1,306 1,501 4,321 6,004
Selling expenses 1,821 2,344 3,994 5,317
General and administrative expenses 2,817 3,286 5,659 6,839
-------- -------- -------- --------
Operating loss (3,332) (4,129) (5,332) (6,152)
Interest expense 124 98 201 164
Other income, net (456) (698) (772) (1,163)
-------- -------- -------- --------
Loss before income taxes (3,000) (3,529) (4,761) (5,153)
(Benefit) provision for income taxes (787) 18 (785) 35
-------- -------- -------- --------
Net loss $ (2,213) $ (3,547) $ (3,976) $ (5,188)
======== ======== ======== ========
Basic and diluted loss per common share $ (0.37) $ (0.61) $ (0.67) $ (0.89)
======== ======== ======== ========
Weighted average common shares
outstanding -- basic and diluted 5,914 5,846 5,914 5,842
======== ======== ======== ========
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 six months ended
----------------------------------------
December 29, 2007 December 30, 2006
----------------- -----------------
Cash flows from operating activities:
Net loss $ (3,976) $ (5,188)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 1,662 2,186
Inventory charges -- 347
Gain on disposal of property, plant and equipment (63) (58)
Unrecognized tax benefit (62) --
Share-based compensation 6 43
Changes in operating assets and liabilities:
Accounts receivable, net 2,930 7,728
Inventories 2,272 11,442
Prepaid expenses and other current assets 280 753
Other assets (199) 254
Accounts payable (7,756) (15,177)
Accrued expenses (1,434) (1,100)
Accrued royalties 115 (641)
Other current liabilities (335) 129
Other long-term liabilities (244) (433)
-------- --------
Net cash (used in) provided by operating activities (6,804) 285
-------- --------
Cash flows from investing activities:
Restricted cash -- 2,064
Purchases of property, plant and equipment (40) (258)
Proceeds from the sale of property, plant and equipment 63 342
Proceeds from sales of available-for-sale investments 43,625 38,300
Purchases of available-for-sale investments (40,900) (46,900)
-------- --------
Net cash provided by (used in) investing activities 2,748 (6,452)
-------- --------
Cash flows from financing activities:
Net proceeds from issuance of common stock -- 342
Borrowings under short-term financing facilities, net 4,682 3,114
-------- --------
Net cash provided by financing activities 4,682 3,456
-------- --------
Net increase (decrease) in cash and cash equivalents 626 (2,711)
Cash and cash equivalents at beginning of period 3,853 6,795
-------- --------
Cash and cash equivalents at end of period $ 4,479 $ 4,084
======== ========
See accompanying notes to condensed consolidated financial statements.
5
CONCORD CAMERA CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
December 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 December 29, 2007 ("Second
Quarter Fiscal 2008") and the six months ended December 29, 2007 ("Fiscal 2008
YTD") 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 December 30, 2006, has been defined as the ("Second Quarter Fiscal
2007") and the six months ended December 30, 2006 has been defined as ("Fiscal
2007 YTD"). 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 Second Quarter Fiscal 2008, the Company's sales to Walgreen Co.
("Walgreens") increased and sales to Wal-Mart Stores, Inc. ("Wal-Mart")
decreased as compared to the Second Quarter Fiscal 2007. During Fiscal 2008 YTD,
the Company's sales to Walgreens and Wal-Mart decreased as compared to Fiscal
2007 YTD. The Second Quarter Fiscal 2008 increase in sales to Walgreens was
attributable to increased sales of single-use cameras. The Second Quarter Fiscal
2008 decrease in sales to Wal-Mart was attributable to a decrease in sales of
traditional film and single-use cameras and, to a lesser extent, a reduction in
the average selling price per camera. The Fiscal 2008 YTD decrease in sales to
Wal-Mart and Walgreens was primarily attributable to a decrease in sales of
single-use and traditional film 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 Second Quarter Fiscal 2008, the
Second Quarter Fiscal 2007, Fiscal 2008 YTD and Fiscal 2007 YTD.
Percent of Net Sales
--------------------
For the quarter ended For the six months ended
----------------------------- -----------------------------
December 29, December 30, December 29, December 30,
2007 2006 2007 2006
------------ ------------ ------------ ------------
Wal-Mart 38.8% 40.5% 37.7% 37.0%
Walgreens 17.3% 7.3% 16.6% 27.3%
------------ ------------ ------------ ------------
Total 56.1% 47.8% 54.3% 64.3%
============ ============ ============ ============
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 Second Quarter Fiscal 2008 and
the Second Quarter Fiscal 2007, included in "Other income, net" in the
accompanying condensed consolidated statements of operations are approximately
$0 and $0.1 million, respectively, of net foreign currency losses. For the
Fiscal 2008 YTD and Fiscal 2007 YTD, included in "Other income, net" in the
accompanying condensed consolidated statements of operations are approximately
$0.1 million and $0, respectively, of net foreign currency losses.
7
Hedging Activities
During the Second Quarter Fiscal 2008 and the Second 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.
Restricted Cash
As of December 29, 2007 and June 30, 2007, the Company had cash deposits pledged
as security in the amount of approximately $6.2 million 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 December 29, 2007, the Company classified certain of its auction rate
securities as non-current in the Company's condensed consolidated balance sheet
because of the current liquidity issues in the auction rate securities market.
As of December 29, 2007, the Company had $27.8 million invested in certain
auction rate securities of which $25.2 million have been classified as
"Long-term investments" and $2.6 million have been classified as "Short-term
investments" on the Company's condensed consolidated balance sheet and are
considered available-for-sale. Subsequent to December 29, 2007, the Company
received net proceeds of $2.6 million resulting from the sale of certain action
rate securities which had been classified as current on the Company's condensed
consolidated balance sheet. At 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.
The Company's portfolio of auction rate securities are AAA rated, long-term debt
obligations secured by student loans, with approximately 100% of such collateral
being guaranteed by the U.S. Government under the Federal Family Education Loan
Program. Liquidity for these securities has been provided by an auction process
that resets the applicable interest rate at pre-determined intervals usually
every 28-35 days. In the past, the auction process allowed investors to obtain
immediate liquidity, if needed, by selling the securities at face value. Current
disruptions in the credit markets have adversely affected the auction market for
these types of securities. The Company has recently experienced failed auctions
for each of its auction rate securities that have gone to auction resulting in
the Company's inability to sell most of these securities. The auction rate
securities continue to pay interest at default interest rates which are
generally higher than the current market rate and there has been no change in
the ratings of these securities to date.
It is possible that the potential lack of liquidity in the Company's auction
rate security investments could adversely affect the Company's liquidity and its
ability to fund its operations. The Company cannot predict whether future
auctions related to its auction rate securities will be successful. The Company
is currently seeking alternatives for reducing its exposure to the auction rate
market, but may not be able to identify any such alternative. Although the
Company currently has sufficient working capital to finance its operations in
the near term, if the Company's working capital is insufficient in the future
and the Company is not able to monetize some or all of its auction rate
securities at that time, it could have a material adverse effect on our ability
to finance our future ongoing operations.
During the Second Quarter Fiscal 2008 and the Second Quarter Fiscal 2007, no
other comprehensive income or loss was recorded because the variable interest
rate feature and the carrying value of the auction rate debt securities
approximated the market value of the securities. Available-for-sale securities
are carried at fair value, with the unrealized gains and losses, net of tax, if
incurred, reported as a component of accumulated other comprehensive loss in the
stockholders' equity section or recorded as an expense if the loss is other than
temporary. The current market for the auction rate securities held by the
Company is uncertain and the Company will continue to monitor and evaluate the
market for these securities to determine if impairment of the carrying value of
the securities has occurred. The Company reviews its investments for impairments
in accordance with Financial Accounting Standard Board ("FASB"), FASB Staff
Position ("FSP"), Statement of Financial Accounting Standards ("SFAS") 115-1 and
124-1, The Meaning of Other-Than-Temporary Investment and Its Application to
Certain Investments, to determine when an investment is considered impaired,
whether that impairment is other than temporary and the measurement of the loss.
As of December 29, 2007, the Company believes the value of its
8
auction rate securities has not been impaired. If any of the issuers of the
auction rate securities are unable to successfully close future auctions and/or
their credit ratings deteriorate and if the market values of our auction rate
securities permanently decline, the Company may be required to record an
impairment charge on these investments. If the Company is required to record an
impairment charge on these investments, it could have a material adverse effect
on the Company's financial condition.
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
long-term and short-term investments and $0.4 million related to the short-term
investments are included in "Other income, net" for the Second Quarter Fiscal
2008 and the Second Quarter Fiscal 2007, respectively. Investment income of $1.0
million related to the long-term and short-term investments and $0.9 million
related to the short-term investments are included in "Other income, net" for
Fiscal 2008 YTD and Fiscal 2007 YTD, 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 SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, the Company continually evaluates whether events and
circumstances have occurred that provide indications of impairment. The Company
records an impairment loss when indications of impairment are present and when
the undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amounts. The Company performs an impairment test by
summarizing the undiscounted cash flows expected to result from the use and
eventual sale of its long-lived assets. If the sum of the undiscounted cash
flows exceeds the carrying values of these assets, then the Company concludes
these carrying values are recoverable. As of December 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.
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
9
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. During the Second Quarter Fiscal 2008 and the Second Quarter
Fiscal 2007, the Company recorded approximately $1,000 and $16,000,
respectively, of share-based compensation expense. During Fiscal 2008 YTD and
Fiscal 2007 YTD, the Company recorded approximately $6,000 and $43,000,
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.
Income Taxes
Effective July 1, 2007, the Company adopted FASB Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement
No. 109," ("FIN 48") which clarifies the accounting and disclosure for uncertain
tax positions. The Company previously had accounted for tax contingencies in
accordance with Statement of Financial Accounting Standards No. 5, "Accounting
for Contingencies."
As a result of the implementation of FIN 48, the Company recorded a $0.1 million
increase in the liability for unrecognized tax benefits, which was accounted for
as an increase in the July 1, 2007 accumulated deficit balance. The Company had
unrecognized tax benefits of $1.0 million and $0.1 million as of July 1, 2007
and December 29, 2007, respectively. The reduction in unrecognized tax benefits
favorably affected the Company's effective tax rate as of December 29, 2007.
During the Second Quarter of Fiscal 2008, the settlement of the German tax audit
reduced the unrecognized tax benefits by $0.9 million including approximately
$0.1 million related to income taxes, inclusive of interest and approximately
$0.8 million related to a reduction for tax positions of prior years.
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 December 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, by the German Taxing Authorities for fiscal
years 2000 through 2005 and by taxing authorities in various state and other
foreign jurisdictions for fiscal years 2003 through 2007, with few exceptions.
During the Second Quarter Fiscal 2008, the Company and the German Tax
Authorities settled the net liabilities resulting from an audit of the Company's
German subsidiary for fiscal years 2000 through 2005 of approximately 131,000
euros related to value added taxes and approximately 88,000 euros related to
income taxes, inclusive of interest. The Company accrued a liability of
approximately 92,000 euros related to value added taxes in the condensed
consolidated balance sheet as of September 29, 2007 and recorded the remaining
39,000 euros in the Second Quarter of Fiscal 2008.
The Company periodically evaluates the realizability of its deferred income tax
assets. In the Second 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 December 29, 2007 and June 30, 2007.
10
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 Second Quarter Fiscal 2008 and the Second
Quarter Fiscal 2007, the Company recorded a (benefit) provision for income taxes
of approximately $(787,000) and $18,000, respectively. During Fiscal 2008 YTD
and Fiscal 2007 YTD, the Company recorded a (benefit) provision for income taxes
of approximately $(785,000) and $35,000, respectively. The Second Quarter Fiscal
2008 and Fiscal 2008 YTD income tax benefits include a $(774,000) income tax
benefit related to our settlement with the German Tax Authorities of the net
liabilities resulting from an audit of our German subsidiary for fiscal years
2000 through 2005 and a net reduction in United States state income tax
liabilities. The Second Quarter Fiscal 2007 and Fiscal 2007 YTD income tax
provisions relate to income tax liabilities incurred by certain of the Company's
foreign subsidiaries. These foreign subsidiaries do not have net operating
losses to offset such 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 of America. Unrealized gains
and losses related to the Company's available-for-sale investments are excluded
from net loss. During the Second Quarter Fiscal 2008 and Fiscal 2008 YTD, the
Company's comprehensive loss was $(2.2) million and $(4.0) million,
respectively. During the Second Quarter Fiscal 2007 and Fiscal 2007 YTD, the
Company's comprehensive loss was $(3.5) million and $(5.2) million,
respectively. In each period, the comprehensive loss was 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 Second
Quarter Fiscal 2008 and the Second Quarter Fiscal 2007, the Company issued no
shares and 75,832 shares, respectively, of Common Stock on the exercise of stock
options. During Fiscal 2008 YTD and Fiscal 2007 YTD, the Company issued no
shares and 75,832 shares, respectively, of Common Stock on the exercise of stock
options. In the Second Quarter Fiscal 2008 and the Second Quarter Fiscal 2007,
potentially dilutive securities were comprised of stock options to purchase 0
and 3,851 shares of Common Stock, respectively that were not included in the
calculation of diluted loss per share because their impact was antidilutive. In
Fiscal 2008 YTD and Fiscal 2007 YTD, potentially dilutive securities were
comprised of stock options to purchase 0 and 899 shares of Common Stock,
respectively that were not included in the calculation of diluted loss per share
because their impact was antidilutive. In the Second Quarter Fiscal 2007 and
Fiscal 2007 YTD, 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 Second Quarter Fiscal 2008 and Fiscal 2008 YTD. See Note
1 - Basis of Presentation, Reverse Split of Common Stock and Note 8 - Deferred
Share Arrangement.
Note 4 - Recently Issued Accounting Pronouncements:
---------------------------------------------------
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements, an Amendment of ARB No. 51" ("SFAS No. 160").
SFAS No. 160 clarifies the accounting for noncontrolling interests and
establishes accounting and reporting standards for the noncontrolling interest
in a subsidiary, including classification as a component of equity. SFAS No. 160
is effective for fiscal years beginning after December 15, 2008. The Company
does not currently have any minority interests.
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations"
("SFAS No. 141(R)"), which replaces SFAS No. 141. SFAS No. 141(R) requires
assets and liabilities acquired in a business combination, contingent
11
consideration and certain acquired contingencies to be measured at their fair
values as of the date of acquisition. SFAS No. 141(R) also requires that
acquisition-related costs and restructuring costs be recognized separately from
the business combination. SFAS No. 141(R) is effective for fiscal years
beginning after December 15, 2008 and will be effective for business
combinations entered into after January 1, 2009.
In May 2007, the FASB issued 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 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 SFAS No. 157, Fair Value Measurements ("SFAS
No. 157"). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value under generally accepted accounting principles and expands
disclosure about fair value measurements. SFAS No. 157 applies under other
accounting pronouncements that require or permit fair value measurements, the
FASB having previously concluded in those accounting pronouncements that fair
value is the relevant measurement attribute. Accordingly, SFAS No. 157 does not
require any new fair value measurements. SFAS No. 157 is effective for fiscal
years beginning after 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)
Deferred Share Arrangement
Fiscal Fiscal
2008 YTD 2007 YTD
-------- --------
Deferred share arrangement obligation to participant $(413) $(211)
Common stock received and held in trust 413 211
----- -----
$ -- $ --
===== =====
See Note 8 - Deferred Share Arrangement for a description of the deferred share
arrangement transactions in Fiscal 2008 YTD.
12
Note 6 - Inventories:
---------------------
Inventories consist of the following:
(amounts in thousands)
December 29, June 30,
2007 2007
------------ --------
Raw materials, components, and $ 7,740 $ 5,431
work-in-process
Finished goods 5,794 10,375
------- -------
Total inventories $13,534 $15,806
======= =======
During the Second Quarter Fiscal 2008 and the Second Quarter Fiscal 2007
inventory carrying values approximated their cost basis and no charges were made
to reduce the carrying value of the inventory in stock. For Fiscal 2008 YTD and
Fiscal 2007 YTD, the inventory pre-tax charges had the effect of decreasing
inventories by $0 and approximately $0.3 million, respectively, increasing cost
of products sold by $0 and $0.3 million, respectively.
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 ("HSBC"), 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$7.3 million. As security for
the financing facilities, among other things, (i) the Company provided a
corporate guarantee to SCB of approximately US$1.1 million; (ii) CCHK provided
to HSBC and 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. The HSBC financing
facility is subject to review by HSBC by June 15, 2008 and the Dah Sing
financing facility expires on June 30, 2008. The SCB financing facility has no
stated expiration date.
On November 21, 2007, CCHK accepted a proposal from Dah Sing to renew the
existing financing facility through June 30, 2008 and to reduce such financing
facility by approximately US$1.3 million from approximately US$2.3 million to
US$ 1.0 million.
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) 60% of the sum of the eligible
inventory and the eligible in-transit inventory or (b) 90% of the eligible
accounts receivable, minus (iii) the amount of the availability reserves. All
loans, advances and extensions of credit will be made at CIT's discretion.
Interest on the CIT Facility is payable monthly in arrears at the prime rate
announced by JP Morgan Chase Bank plus 0.25% per annum, or in Keystone's
discretion, at the one-month London Interbank Offered Rate (LIBOR) plus 2.25%
per annum. 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/Cs shall
cease and CIT may declare all obligations immediately due and payable (including
principal and accrued but unpaid interest on all then outstanding obligations).
See Note 12 - Subsequent Events.
13
At December 29, 2007 and June 30, 2007, the Company had $7.4 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 December 29, 2007 and June 30, 2007, were 7.35% and
6.85%, respectively.
Note 8 - 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 December 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 9 - 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 December 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 December 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.
On August 26, 2002, the Company entered into two Polaroid licensing agreements.
The two license agreements provided it with the exclusive (with the exception of
products already released by Polaroid into the distribution chain), worldwide
use of the Polaroid brand trademark in connection with the manufacture,
distribution, promotion and sale of single-use and traditional film based
cameras, including zoom cameras and certain related accessories. The license
agreements did not include instant or digital cameras. Each license agreement
included an initial term expiring on February 1, 2006, provided the Company the
right to renew the license under the same economic terms for an additional
three-year period and provided for the payment by the Company of $3.0 million of
minimum royalties, or $6.0 million in total for both license agreements, which
were fully credited against percentage royalties. On November 28, 2005, the
Company exercised its right to renew the single-use camera license agreement
with Polaroid for an additional three-year term expiring on February 1, 2009 in
accordance with the same economic terms included in the original agreement.
Pursuant to the terms of the single-use camera license agreement, as of February
1, 2008, the Company paid $3.0 million of minimum royalties and recorded the
payment as a prepaid asset. The Company amortizes this asset based upon a
percentage of net sales of Polaroid branded single-use cameras during the
three-year renewal term expiring February 1, 2009. In January 2006, the Company
entered into a new license agreement with Polaroid providing it with the
exclusive, worldwide use of the Polaroid brand trademark in connection with the
manufacture, distribution, promotion and sale of traditional film cameras. The
new license agreement is for a term of three years expiring on January 31, 2009
and provided for the payment by the Company of
14
$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 Second Quarter Fiscal 2008 and the Second Quarter
Fiscal 2007, was $1.2 million and $1.4 million, respectively. Total amortization
and royalty expense for all licensing and royalty agreements for Fiscal 2008 YTD
and Fiscal 2007 YTD, was $2.8 million and $3.6 million, respectively.
Intellectual Property Claims
----------------------------
From time to time, the Company receives patent infringement claims which it
analyzes and, if appropriate, takes action to avoid infringement, settle the
claim or negotiate a license. Those claims for which legal proceedings have been
initiated against the Company are discussed in Note 10 - Litigation and
Settlements. The Company has also received notifications from 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 December 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 December 29, 2007.
Purchase Commitments
--------------------
At December 29, 2007, the Company had $3.4 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 10 - Litigation and Settlements:
-------------------------------------
In September 2004, a class action complaint was filed against the Company and
certain of its officers in the United States District Court for the Southern
District of Florida by individuals purporting to be holders of the Company's
Common Stock. In August 2005, an amended consolidated complaint (the "Amended
Complaint") was filed adding a former officer of the Company as a defendant. The
lead plaintiff under the Amended Complaint 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
15
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 with the plaintiffs on the settlement of this lawsuit and, on
November 15, 2007, a Stipulation and Agreement of Settlement was filed with the
court. The settlement is subject to 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 complaint described in the
immediately preceding paragraph. The complaint sought unspecified damages,
repayment of salaries and other remuneration from the individual defendants,
interest, attorneys' fees, costs of suit and unspecified other and further
relief from the court. In March 2005, the court granted a motion by the
individual defendants and the Company to transfer the action to the United
States District Court for the Southern District of Florida where the related
class action suit is currently pending. In May 2005, the court consolidated this
case with the related class action suit for discovery purposes only. The Company
has reached an agreement in principle with the plaintiffs on the settlement of
this lawsuit and, on March 7, 2008, a Stipulation and Agreement Settlement was
filed with the court. The settlement is subject to the approval by 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 ultimate
effect on the Company, which could be material, cannot be ascertained.
Pursuant to the Company's Certificate of Incorporation, as amended, the personal
liability of the Company's directors is limited to the fullest extent permitted
under the New Jersey Business Corporation Act ("NJBCA"), and the Company is
required to indemnify its officers and directors to the fullest extent permitted
under the NJBCA. In accordance with the terms of the Certificate of
Incorporation and the NJBCA, the Board of Directors approved the payment of
expenses for each of the current and former officers and directors named as
defendants (the "individual defendants") in the above described class action and
derivative action litigations (collectively, the "actions") in advance of the
final disposition of such actions. The individual defendants have executed and
delivered to the Company written undertakings to repay the Company all amounts
so advanced if it shall ultimately be determined that the individual defendants
are not entitled to be indemnified by the Company under the NJBCA.
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.
16
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 11 -- Other Charges:
-------------------------
Cost-Reduction Initiatives
The Company continues to evaluate its cost structure and implement
cost-reduction initiatives as appropriate. During the Second Quarter Fiscal
2008, the Company recorded total charges of $0.2 million related to severance
costs for the elimination of certain employee positions.
During the quarter ended September 29, 2007 ("First Quarter Fiscal 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 212 -- 212
Reversal (60) -- (60)
Payments (388) (9) (397)
----- ----- -----
Balance as of
December 29, 2007 $ -- $ -- $ --
===== ===== =====
17
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
------------- --------- --------- ------ -----
Second Quarter Fiscal 2008
Cost of products sold $ 212 $ -- $ -- $ 212
Selling expense -- -- -- --
General and administrative expense -- -- -- --
--------- ------------- ------------- ---------
Total $ 212 $ -- $ -- $ 212
========= ============= ============= =========
Fiscal 2008 YTD
Cost of products sold $ 212 $ -- $ -- $ 212
Selling expense (60) -- -- (60)
General and administrative expense -- -- -- --
--------- ------------- ------------- ---------
Total $ 152 $ -- $ -- $ 152
========= ============= ============= =========
Second Quarter Fiscal 2007
Cost of products sold $ 132 $ -- $ -- $ 132
Selling expense 50 (7) -- 43
General and administrative 74 -- (1) 73
--------- ------------- ------------- ---------
Total $ 256 $ (7) $ (1) $ 248
========= ============= ============= =========
Fiscal 2007 YTD
Cost of products sold $ 309 $ -- $ -- $ 309
Selling expense 279 (7) 16 288
General and administrative expense 74 -- 9 83
--------- ------------- ------------- ---------
Total $ 662 $ (7) $ 25 $ 680
========= ============= ============= =========
As of December 29, 2007, the Company had no amounts accrued as "Other Charges
Liabilities" in connection with the Company's cost-reduction initiatives.
18
Note 12 - Subsequent Events:
----------------------------
In a press release dated February 12, 2008, the Company announced that it was
delaying the filing of its Quarterly Report on Form 10-Q for the second quarter
of fiscal 2008 with the Securities and Exchange Commission. In that press
release, the Company explained that a committee (the "Special Committee") of the
Board of Directors (the "Board") of the Company established to explore strategic
alternatives for the Company was nearing the conclusion of its work and expected
to make its recommendations to the Board within approximately the next sixty
days. Because certain of the strategic alternatives being considered by the
Special Committee could have impacted the Company's financial statements, the
Company explained that it was delaying the filing of its Form 10-Q for the
second quarter of fiscal 2008 until the Special Committee made its
recommendations to the Board and the Board determined whether or not to
implement such recommendations. The Special Committee continues to consider the
strategic alternatives available to the Company, but it is likely that
additional time, beyond the originally anticipated approximately sixty day
period, will be necessary for the Special Committee to complete its evaluation
of the strategic alternatives available to the Company and to make an
appropriate recommendation to the Board and for the Board to consider such
recommendations. Certain of the strategic alternatives being explored, if
implemented, may result in the net realizable value of certain of the Company's
assets being less than the current carrying value of such assets.
On March 4, 2008, Concord Keystone Sales Corp. ("Keystone"), the Company's U.S.
subsidiary, received a letter from The CIT Group/Commercial Services, Inc.
("CIT") with notice that an event of default exists under the Financing
Agreement between Keystone and CIT as a result of Keystone's failure to provide
CIT with the Company's financial information for the Company's second quarter
ending December 29, 2007 as required by the Financing Agreement (see the
Company's Current Report on Form 8-K, dated February 12, 2008, announcing that
it was delaying the filing of its Quarterly Report on Form 10-Q for the period
ended December 29, 2007 with the Securities and Exchange Commission). As a
result of this event of default, CIT has notified Keystone that it will increase
the availability reserve, thereby decreasing the borrowing base, by $500,000.
CIT has not exercised its right to accelerate Keystone's obligation to repay the
credit facility and CIT continues to make loans to Keystone under the revolving
credit facility.
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 on September 27,
2007 ("Form 10-K").
Overview
--------
We market and sell popularly priced, easy-to-use single-use and traditional film
cameras. We design, develop, manufacture and assemble most of our single-use
cameras and certain of our 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 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 a material
amount of 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.
Recent Events
-------------
In a press release dated February 12, 2008, the Company announced that it was
delaying the filing of its Quarterly Report on Form 10-Q for the second quarter
of fiscal 2008 with the Securities and Exchange Commission. In that press
release, the Company explained that a committee (the "Special Committee") of the
Board of Directors (the "Board") of the Company established to explore strategic
alternatives for the Company was nearing the conclusion of its work and expected
to make its recommendations to the Board within approximately the next sixty
days. Because certain of the strategic alternatives being considered by the
Special Committee could have impacted the Company's financial statements, the
Company explained that it was delaying the filing of its Form 10-Q for the
second quarter of fiscal 2008 until the Special Committee made its
recommendations to the Board and the Board determined whether or not to
implement such recommendations. The Special Committee continues to consider the
strategic alternatives available to the Company, but it is likely that
19
additional time, beyond the originally anticipated approximately sixty day
period, will be necessary for the Special Committee to complete its evaluation
of the strategic alternatives available to the Company and to make an
appropriate recommendation to the Board and for the Board to consider such
recommendations. Certain of the strategic alternatives being explored, if
implemented, may result in the net realizable value of certain of the Company's
assets being less than the current carrying value of such assets.
Executive Summary
-----------------
Quarter-Over-Quarter Results of Operations
Our operating loss for the second quarter of fiscal 2008 was $(3.3) million as
compared to an operating loss of $(4.1) million for the second quarter of fiscal
2007.
We experienced a $0.2 million decrease in our quarter-over-quarter gross profit.
The decrease in the quarter-over-quarter gross profit was primarily due to a
reduction in quarter-over-quarter net sales and gross margin percentages of
approximately $0.8 million, partially offset by a decrease in the
quarter-over-quarter unfavorable manufacturing material, labor and overhead
costs variances of approximately $0.6 million.
Our selling, general and administrative expenses decreased by $1.0 million,
quarter-over-quarter. Our quarter-over-quarter selling expenses decreased by
$0.5 million due to a reduction in selling-related employee compensation costs
of $0.2 million, freight costs and royalty costs, each of approximately $0.1
million, and a reduction in certain other costs of $0.1 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
$0.5 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 and a reduction in professional
fees of $0.1 million, primarily as a result of a reduction in Sarbanes-Oxley
compliance related fees.
Second Quarter Fiscal 2008 Results of Operations
Although we reduced our operating loss by $0.8 million, or 19.5%, for the second
quarter of fiscal 2008 as compared to the second quarter of fiscal 2007, we
recorded an operating loss of $3.3 million during the quarter.
Factors contributing to the second quarter fiscal 2008 operating loss were:
1. Insufficient Net Sales and Related Gross Profit to Fully Absorb
Non-Manufacturing Overhead Costs
2. Unfavorable Manufacturing Material, Labor and Overhead Cost Variances
1. Insufficient Net Sales and Related Gross Profit to Fully Absorb
Non-Manufacturing Overhead Costs
During the second quarter of 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 $2.0
million to the operating loss.
2. Unfavorable Manufacturing Material, Labor and Overhead Cost Variances
During the second quarter of fiscal 2008, we experienced unfavorable
manufacturing material, labor and overhead cost variances of $1.3 million
primarily attributable to a lower than anticipated volume of production during
the period and, to a lesser extent, increases in costs of film.
We continue to take action and review our strategies, including and relating to:
(i) acquisition of new single-use and 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
20
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
of America. The preparation of these consolidated 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 December 2007, the Financial Accounting Standard Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 160, "Noncontrolling
Interests in Consolidated Financial Statements, an Amendment of ARB No. 51"
("SFAS No. 160"). SFAS No. 160 clarifies the accounting for noncontrolling
interests and establishes accounting and reporting standards for the
noncontrolling interest in a subsidiary, including classification as a component
of equity. SFAS No. 160 is effective for fiscal years beginning after December
15, 2008. The Company does not currently have any minority interests.
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations" (SFAS
No. 141(R)"), which replaces SFAS No. 141. SFAS No. 141(R) requires assets and
liabilities acquired in a business combination, contingent consideration, and
certain acquired contingencies to be measured at their fair values as of the
date of acquisition. SFAS No. 141(R) also requires that acquisition-related
costs and restructuring costs be recognized separately from the business
combination. SFAS No. 141(R) is effective for fiscal years beginning after
December 15, 2008 and will be effective for business combinations entered into
after January 1, 2009.
In May 2007, the FASB issued 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 FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115," ("SFAS No. 159") which provides companies with an option to
report selected financial assets and liabilities at their fair values. The
election is made on an instrument-by-instrument basis and is irrevocable. If the
fair value option is elected for an instrument, FASB No. 159 specifies that all
subsequent changes in fair value for that instrument must be reported in
earnings. FASB No. 159 is effective as of the beginning of an entity's first
fiscal year that begins after November 15, 2007, which for us 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 under generally accepted
accounting principles and expands disclosure about fair value measurements. SFAS
No. 157 applies under other accounting pronouncements that require or permit
fair value measurements, the FASB having previously concluded in those
accounting pronouncements that fair value is the relevant measurement attribute.
Accordingly, SFAS No. 157 does not require any new fair value measurements. SFAS
No. 157 is effective for fiscal years beginning after 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
21
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 the Condensed
Consolidated Financial Statements.
Results of Operations
---------------------
Quarter Ended December 29, 2007 Compared to the Quarter Ended December 30, 2006
Net Sales
Net sales of our products for the second quarter of fiscal 2008 were $18.4
million, a decrease of $0.9 million, or 4.7%, as compared to net sales for the
second quarter of fiscal 2007. The decrease in net sales was due primarily to a
reduction in sales of traditional film cameras and, to a lesser extent, a
decrease in the average selling price per single-use cameras.
Net sales from our operations in the Americas for the second quarter of fiscal
2008 were $13.4 million, a decrease of $0.5 million, or 3.6%, as compared to the
second quarter of fiscal 2007. The decrease in net sales in the Americas was due
primarily to a reduction in sales of traditional film cameras to a significant
customer and, to a lesser extent, a decrease in the average selling price per
single-use cameras.
Net sales from our operations in Europe for the second quarter of fiscal 2008
were $3.2 million, a decrease of $1.0 million, or 23.8%, as compared to the
second quarter of fiscal 2007. The decrease in net sales in Europe was due
primarily to a reduction in sales of single-use cameras and, to a lesser extent,
a reduction in sales of digital cameras attributable to our decision to exit the
digital camera market.
Net sales from our operations in Asia for the second quarter of fiscal 2008 were
$1.8 million, an increase of $0.5 million, or 38.5%, as compared to the second
quarter of fiscal 2007. The increase in net sales in Asia was due to increased
sales of single-use cameras in Japan.
Gross Profit
Gross profit for the second quarter of fiscal 2008 was $1.3 million, or 7.1% of
net sales, versus gross profit of $1.5 million, or 7.8% of net sales, in the
second quarter of fiscal 2007. The decrease in the quarter-over-quarter gross
profit was primarily due to a reduction in quarter-over-quarter net sales and
gross margin percentages of approximately $0.8 million, partially offset by a
decrease in the quarter-over-quarter unfavorable manufacturing material, labor
and overhead costs variances of approximately $0.6 million.
Product engineering, design and development costs for the second quarter of
fiscal 2008 and the second quarter of fiscal 2007, in dollars and as a
percentage of net sales, were $0.5 million, or 2.8%, and $0.6 million, or 3.1%,
respectively.
Operating Expenses
Selling expenses for the second quarter of fiscal 2008 were $1.8 million, or
9.8% of net sales, compared to $2.3 million, or 11.9% of net sales, for the
second quarter of fiscal 2007. Our quarter-over-quarter selling expenses
decreased by $0.5 million primarily due to a reduction in selling-related
employee compensation costs of $0.2 million, a reduction in freight costs and
royalty costs, each of approximately $0.1 million, and a reduction in certain
other costs of $0.1 million. Selling-related employee compensation costs
decreased as a result of the elimination of certain positions in connection with
our cost-reduction initiatives.
22
G&A expenses for the second quarter of fiscal 2008 were $2.8 million, or 15.2%
of net sales, compared to $3.3 million, or 17.1% of net sales, for the second
quarter of fiscal 2007. Our quarter-over-quarter G&A expenses decreased by $0.5
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 and a reduction in professional
fees of $0.1 million primarily as a result of the reduction in costs related to
Sarbanes-Oxley compliance.
Share-Based Compensation
During the second quarter of fiscal 2008 and the second quarter of fiscal 2007,
we recorded approximately $1,000 and $16,000, 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.
Interest Expense
Interest expense was approximately $0.1 million for each of the second quarter
of fiscal 2008 and the second quarter of fiscal 2007.
Other Income, Net
Other income, net was $0.5 million and $0.7 million for the second quarter of
fiscal 2008 and the second quarter of fiscal 2007, respectively. The decrease in
other income, net was primarily due to the tax refund recovery in Europe of $0.3
million recorded in the second quarter of fiscal 2007, offset by a reduction in
foreign exchange losses of $0.1 million. For further discussion, see Note 3 -
Summary of Significant Accounting Policies in the Notes to the Condensed
Consolidated Financial Statements.
Income Taxes
In the second 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 December 29, 2007 and June 30, 2007. During the
second quarter of fiscal 2008 and the second quarter of fiscal 2007, we recorded
a (benefit) provision for income taxes of $(787,000) and $18,000, respectively.
The second quarter of fiscal 2008 benefit for income taxes includes a $(774,000)
income tax benefit related to our settlement with the German Tax Authorities of
the net liabilities resulting from an audit of our German subsidiary for fiscal
years 2000 through 2005and a net reduction in United States state income tax
liabilities of $13,000. The second 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
offset such income tax liabilities. For further discussion, see Note 3 - Summary
of Significant Accounting Policies - Income Taxes in the Notes to the Condensed
Consolidated Financial Statements.
Net Loss
We incurred a net loss of $(2.2) million, or $(0.37) per basic and diluted
common share, for the second quarter of fiscal 2008, as compared to a net loss
of $(3.5) million, or $(0.61) per basic and diluted common share, for the second
quarter of fiscal 2007.
Results of Operations
Fiscal 2008 YTD Compared to Fiscal 2007 YTD
Net Sales
Net sales of our products for the six months ended December 29, 2007 ("fiscal
2008 YTD"), were $40.1 million, a decrease of $8.1 million, or 16.8%, as
compared to net sales of $48.2 million for the six months ended December 30,
2006, ("fiscal 2007 YTD"). The decrease in net sales was due primarily to a
reduction in sales of single-use and traditional film
23
cameras to significant customers and, to a lesser extent, a decrease in the
average selling price per single-use and traditional film cameras and no digital
camera sales attributable to our decision to exit the digital camera market.
Net sales from our operations in the Americas for fiscal 2008 YTD were $29.6
million, a decrease of $8.2 million, or 21.7%, as compared to fiscal 2007 YTD.
The decrease in net sales was due primarily to a reduction in sales of
single-use and traditional film cameras to significant customers and, to a
lesser extent, a decrease in the average selling price per single-use and
traditional cameras.
Net sales from our operations in Europe for fiscal 2008 YTD were $7.3 million, a
decrease of $1.7 million, or 18.9%, as compared to fiscal 2007 YTD. The decrease
in net sales in Europe was due primarily to no digital camera sales and, to a
lesser extent, a reduction in sales of single-use cameras.
Net sales from our operations in Asia for fiscal 2008 YTD were $3.2 million, an
increase of $1.8 million, or 128.6% as compared to fiscal 2008 YTD. The increase
in net sales in Asia was due primarily to an increase in sales of single-use
cameras in Japan.
Gross Profit
Gross profit for fiscal 2008 YTD was $4.3 million, or 10.7% of net sales, versus
gross profit of $6.0 million, or 12.5% of net sales, in fiscal 2007 YTD. During
fiscal 2008 YTD as compared to fiscal 2007 YTD, gross profit decreased primarily
due to a decrease in year-to-date net sales and a decrease in year-to-date gross
margin percentages totaling approximately $3.5 million, partially offset by the
decrease in unfavorable manufacturing material, labor and overhead cost
variances of approximately $1.8 million.
Product engineering, design and development costs for fiscal 2008 YTD and fiscal
2007 YTD, in dollars and as a percentage of net sales, were $1.0 million, or
2.5%, and $1.4 million, or 2.9%, respectively.
Operating Expenses
Selling expenses for fiscal 2008 YTD were $4.0 million, or 10.0% of net sales,
compared to $5.3 million, or 11.0% of net sales, for fiscal 2007 YTD. The $1.3
million decrease in selling expenses was primarily due to a reduction in
employee compensation costs of $0.8 million, a reduction in marketing and
advertising expenses of $0.2 million and a reduction in royalty fees of $0.1
million and 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 fiscal 2008 YTD were $5.7 million, or 14.2% of net sales,
compared to $6.8 million, or 14.1% of net sales, for fiscal 2007 YTD. The $1.1
million decrease in G&A expenses was primarily due to a reduction in G&A-related
employee compensation costs of $0.6 million as a result of the elimination of
certain positions in connection with our cost-reduction initiatives and a
reduction in professional fees of $0.5 million primarily as a result of a
reduction in Sarbanes-Oxley compliance costs.
Share-Based Compensation
During fiscal 2008 YTD and fiscal 2007 YTD, we recorded approximately $6,000 and
$43,000, 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.
24
Interest Expense
Interest expense was approximately $0.2 million for each of fiscal 2008 YTD and
fiscal 2007 YTD.
Other Income, Net
Other income, net was $0.8 million and $1.2 million for fiscal 2008 YTD and
fiscal 2007 YTD, respectively. The year-to-date over year-to-date decrease in
other income, net was primarily due to the tax refund recovery in Europe of $0.3
million recorded in fiscal 2007 and, to a lesser extent, an increase in foreign
exchange losses. For further discussion, see Note 3 - Summary of Significant
Accounting Policies in the Notes to the Condensed Consolidated Financial
Statements.
Income Taxes
In fiscal 2008 YTD 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 December 29, 2007 and June 30, 2007. During fiscal 2008 YTD and
fiscal 2007 YTD, we recorded a (benefit) provision for income taxes of
$(785,000) and $35,000, respectively. The fiscal 2008 YTD benefit for income
taxes includes a $(774,000) income tax benefit related to our settlement with
the German Tax Authorities of the net liabilities resulting from an audit of our
German subsidiary for fiscal years 2000 through 2005 and a net reduction in
United States state income tax liabilities of $11,000. The fiscal 2007 YTD
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 offset such income tax liabilities. For further discussion, see Note 3
- Summary of Significant Accounting Policies - Income Taxes in the Notes to the
Condensed Consolidated Financial Statements.
Net Loss
We incurred a net loss of $(4.0) million, or $(0.67) per basic and diluted
common share, for fiscal 2008 YTD, as compared to a net loss of $(5.2) million,
or $(0.89) per basic and diluted common share, for fiscal 2007 YTD.
Cost-Reduction Initiatives
We continue to evaluate our cost structure and implement cost-reduction
initiatives as appropriate. During the second quarter of fiscal 2008, we
recorded total charges of $0.2 million related to our ongoing cost-reduction
initiatives, primarily for severance costs related to the elimination of certain
employee costs. No costs were recorded in the first quarter of fiscal 2008.
During fiscal 2007 YTD and the second quarter of fiscal 2007, we recorded total
charges of $0.7 million and $0.2 million, respectively, primarily for severance
costs related to the elimination of certain employee positions. For further
discussion, see Note 11 - Other Charges in the Notes to the Condensed
Consolidated Financial Statements.
Liquidity and Capital Resources
Uncertainties in the Credit Markets - As of December 29, 2007, we had $25.5
million invested in certain auction rate securities which have been classified
as "Long-term investments" on our condensed consolidated balance sheet because
of the market uncertainties and the liquidity issues in the market for auction
rate securities.
Our portfolio of auction rate securities are AAA rated, long-term debt
obligations secured by student loans, with approximately 100% of such collateral
being guaranteed by the U.S. Government under the Federal Family Education Loan
Program. Liquidity for these securities has been provided by an auction process
that resets the applicable interest rate at pre-determined intervals usually
every 28-35 days. In the past, the auction process allowed investors to obtain
immediate liquidity if needed by selling the securities at face value. The
current disruptions in the credit markets have adversely affected the auction
market for these types of securities. We have recently experienced failed
auctions for each of our auction rate securities that have gone to auction,
resulting in our inability to sell these securities. The auction rate securities
25
continue to pay interest at default rates which are generally higher than the
current market rate and there has been no change in the ratings of these
securities to date.
Based on our expected operating cash flows and other sources of cash, cash
equivalents and short-term investments, it is possible that the potential lack
of liquidity in our auction rate security investments could adversely affect our
liquidity and our ability to fund our operations. We cannot predict whether
future auctions related to our auction rate securities will be successful. We
are currently seeking alternative short-term financing sources for reducing our
exposure to the auction rate market, but may not be able to identify any such
alternative. Although we currently have sufficient working capital to finance
our operations in the near term, if our working capital is insufficient in the
future and we are not able to monetize some or all of our auction rate
securities or other assets at that time, it could have a material adverse effect
on the our ability to finance our future ongoing operations.
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 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 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 December 29, 2007, we had working capital of $11.0 million,
compared to $39.0 million at June 30, 2007, a decrease of $ 28.0 million.
Working capital and cash and cash equivalents and marketable securities
decreased primarily due to the reclassification of certain of our auction rate
securities from short-term investments to long-term investments. Current capital
market conditions have significantly reduced our ability to liquidate our
auction rate securities. For further discussion see Note - 3, Summary of
Significant Accounting Policies, Investments in the Notes to Condensed
Consolidated Financial Statements.
Cash (Used in) Provided by Operating Activities - Cash (used in) operating
activities during fiscal 2008 YTD was $(6.8) million, which compared unfavorably
to cash provided by operating activities of $0.3 million during fiscal 2007 YTD.
During fiscal 2008 YTD, a reduction of accounts receivable and inventories
provided cash of $2.9 million and $2.3 million, respectively. During fiscal 2007
YTD, reductions of accounts receivables and inventories provided cash of $7.7
million and $11.4 million, respectively. The reduction in accounts receivables
is the result of improved collections and the reduction in inventory is related
to seasonal demand for our products in the second quarter of our fiscal year.
During fiscal 2008 YTD, the reduction of accounts payable and accrued expenses
used cash of $7.8 million and $1.4 million, respectively. This compares with
cash used by a reduction in accounts payable and accrued expenses of $15.2
million and $1.1 million, respectively in fiscal 2007 YTD. The reduction in
accounts payable and accrued expenses is a result of reduced inventory levels
and lower overall costs.
Cash Provided by (Used in) Investing Activities - Cash provided by investing
activities was $2.7 million for fiscal 2008 YTD as compared to cash (used in)
investing activities of $(6.5) million for fiscal 2007 YTD. The increase in cash
provided by investing activities was primarily due to the net increase in the
proceeds of available-for-sale investments.
Cash Provided by Financing Activities - Cash provided by financing activities
during fiscal 2008 YTD was $4.7 million as compared to cash provided by
financing activities of $3.5 million for fiscal 2007 YTD. This activity results
from a net increase of our short-term borrowings made under our financing
facilities used for working capital purposes. See Note 7 - Short-Term Borrowings
and Financing Facilities in the Notes to the Condensed Consolidated Financial
Statements.
26
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 9 - Commitments and Contingencies in the Notes
to the 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 the Condensed Consolidated Financial Statements for additional
information about the corporate guarantees we provided in connection with our
financing facilities. See also Note 9 - Commitments and Contingencies in the
Notes to Condensed Consolidated Financial Statements.
License Agreements - See Note 9 - Commitments and Contingencies in the Notes to
the Condensed Consolidated Financial Statements.
Intellectual Property Claims - See Note 9 - Commitments and Contingencies and
Note 10 - Litigation and Settlements in the Notes to the Condensed Consolidated
Financial Statements.
Hong Kong Financing Facilities - As of December 29, 2007, we had $0.9 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 the
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 7 - Short-Term Borrowings and 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 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 traditional film cameras, the consequences of the loss of
any significant customer, potential new business initiatives, the acquisition of
new customers, the 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 expectations regarding the liquidity of our
auction rate securities, 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, 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 the consequences of the loss of our
authorizations in the People's Republic of China and other statements contained
in this report regarding matters that are not historical facts, are only
27
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 of 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 further decline in the unit sales of our single-use and
traditional film cameras, by a further decrease in the average selling price of
our film camera products, or by the continued failed auctions and the market
uncertainty for auction rate securities. 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, as to all of
which there can be no assurance. In addition, future relationships or agreements
may require an ability to meet high quality and performance standards and to
implement and sustain production successfully 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.
During the reporting period, except as disclosed in our discussion relating to
auction rate securities in Part 1, Item 2 under Uncertainties in the Credit
Markets and elsewhere in this Quarterly Report on Form 10-Q, there have been no
material changes in the disclosures set forth in Part II, Item 7A in our Form
10-K for the fiscal year ended June 30, 2007.
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
December 29, 2007, our disclosure controls and procedures were effective in
providing reasonable assurance of achieving their objectives 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 December 29, 2007 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
PART II. OTHER INFORMATION
---------------------------
Item 1. LEGAL PROCEEDINGS
See Part I, Item 1, Financial Statements, Note 10 - Litigation and Settlements
in the Notes to the Condensed Consolidated Financial Statements.
28
Item 1A. RISK FACTORS
Except as set forth below, 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.
Continued failure of auctions of our auction rate securities can continue to
effect our liquidity.
As of December 29, 2007, we had $27.8 million invested in certain auction rate
securities, of which $25.5 million were classified as "Long-term investments" on
our condensed consolidated balance sheet. Our portfolio of auction rate
securities are AAA rated, long-term debt obligations secured by student loans,
with approximately 100% of such collateral being guaranteed by the U.S.
Government under the Federal Family Education Loan Program. Liquidity for these
securities has been provided by an auction process that resets the applicable
interest rate at pre-determined intervals usually every 28-35 days. In the past,
the auction process allowed investors to obtain immediate liquidity, if needed,
by selling the securities at face value. Current disruptions in the credit
markets have adversely affected the auction market for these types of
securities. We have recently experienced failed auctions for each of our auction
rate securities that have gone to auction resulting in our inability to sell
most of these securities. The auction rate securities continue to pay interest
at default interest rates which are generally higher than the current market
rate and there has been no change in the ratings of these securities to date.
Based on our expected operating cash flows and other sources of cash, cash
equivalents and short-term investments, it is possible that the potential lack
of liquidity in our auction rate security investments could adversely affect our
liquidity and our ability to fund our operations. We cannot predict whether
future auctions related to our auction rate securities will be successful. We
are currently seeking alternatives for reducing our exposure to the auction rate
market, but may not be able to identify any such alternative. Although we
currently have sufficient working capital to finance our operations in the near
term, if our working capital is insufficient in the future and we are not able
to monetize some or all of our auction rate securities or other assets at that
time, it could have a material adverse effect on our ability to finance our
future ongoing operations.
Continued failure of auctions of our auction rate securities may impair the
value of our auction rate securities.
If any of the issuers of the auction rate securities are unable to successfully
close future auctions and/or their credit ratings deteriorate and if the market
values of our auction rate securities permanently decline, we may be required to
record an impairment charge on these investments. If we are required to record
an impairment charge on these investments, it could have a material adverse
effect on our financial condition and results of operations.
We are exposed to political, economic and other risks that arise from operating
a multinational business.
We have significant operations outside the United States. We currently have
operations in the Americas, Europe and Asia. Further, we obtain raw materials,
components and finished camera products from foreign suppliers, particularly in
Asia, and import into the PRC those materials, components and products obtained
from suppliers outside of the PRC which may require certain approvals by the
PRC, including but not limited to certificates, permits and licenses.
Accordingly, our business is subject to the political, economic, regulatory and
other risks that are inherent in operating in foreign countries. These risks
include, but are not limited to:
o the difficulty of ensuring that foreign suppliers and workers are
complying with applicable laws, rules and regulations regarding
manufacturing, safety and environmental standards;
o the difficulty of enforcing agreements, collecting receivables and
protecting assets through foreign legal systems;
o trade protection measures and import or export licensing requirements;
o the imposition of tariffs, exchange controls or other restrictions;
o difficulty in staffing and managing widespread operations and the
application of foreign labor regulations;
o inability to obtain approvals or authorizations necessary to import
materials, components and/or products into our manufacturing facility
or increased costs relating thereto;
29
o required compliance with a variety of foreign laws and regulations;
o changes in the general political and economic conditions in the
countries where we operate, particularly in emerging markets; and
o increased costs and risks of doing business in a number of foreign
jurisdictions.
We are currently reliant on certain authorizations by the PRC to import
materials used in the manufacture of our products into our manufacturing
facility. Our current authorization, which expires during the quarter ending
September 27, 2008, includes limitations on our ability to import certain
materials into the PRC and we are uncertain whether further authorizations will
be issued once we have reached those limitations or what the terms of any such
further authorization will be. The inability to obtain a further authorization
on reasonable terms, although not expected to impact our ability to manufacture
our products, may have a material adverse effect on our results of operations.
Our business depends in part on our ability to successfully anticipate and
effectively manage these and other risks. We cannot assure you that such risks
will not have a material adverse effect on our business, financial condition and
results of operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our 2007 annual meeting of shareholders on December 13, 2007, to
re-elect four directors to serve until the next annual meeting of shareholders
and until their successors are duly elected and qualified, to approve the
Concord Camera Corp. Fiscal 2008 Incentive Plan and to ratify the appointment of
BDO Seidman, LLP as our independent registered public accounting firm for fiscal
2008.
The names of the nominees whose terms expired at our 2007 annual meeting of
shareholders and who were re-elected to serve as directors until the next annual
meeting of shareholders are as follows:
Nominee For Withheld Vote
------- --- -------------
Ira B. Lampert 3,607,579 1,536,507
Ronald S. Cooper 4,348,063 796,022
Morris H. Gindi 4,346,682 797,403
William J. O'Neill, Jr. 4,320,571 823,514
The shareholders approved the Concord Camera Corp. Fiscal 2008 Incentive Plan by
the following vote: 2,783,793 votes "for"; 679,720 votes "against"; and 8,806
abstentions.
The shareholders ratified the appointment of BDO Seidman, LLP as our independent
registered public accounting firm for fiscal 2008 by the following vote:
5,009,745 votes "for"; 120,470 votes "against"; and 13,869 abstentions.
30
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 Renewal letter from Dah Sing Bank Limited Filed herewith.
to Concord Camera HK Limited, dated
November 21, 2007, renewing the financing
facility until June 30, 2008 under revised
conditions
10.2 Financing Agreement between Concord Keystone Filed herewith.
Sales Corp. and The CIT Group/Commercial
Services, Inc. dated October 16, 2007
10.3 Amendment No. 6 to Terms of Employment of Urs W. Incorporated by reference to the Company's current report
Stampfli with the Company, effective as of on Form 8-K filed December 27, 2007.
January 1, 2008
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
31
S I G N A T U R E
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONCORD CAMERA CORP.
-------------------------------
(Registrant)
DATE: March 31, 2008 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)
32
Exhibit Index
No. Description
--- -----------
10.1 Renewal letter from Dah Sing Bank Limited to Concord Camera HK
Limited, dated November 21, 2007, renewing the financing facility
until June 30, 2008 under revised conditions
10.2 Financing Agreement between Concord Keystone Sales Corp. and The CIT
Group/Commercial Services, Inc. dated October 16, 2007
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a)/15d-14(a)
31.2 Certification of Principal Financial Officer pursuant to Rule
13a-14(a)/15d-14(a)
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
ss.1350
32.2 Certification of Principal Financial Officer pursuant to 18 U.S.C.
ss.1350
33