United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 2008
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
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer |_| Accelerated filer |_|
Non-accelerated filer |X| Smaller reporting company |_|
(Do not check if a smaller
reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, no par value - 5,913,610 shares as of November 10, 2008
Index
Concord Camera Corp. and Subsidiaries
Part I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets as of
September 27, 2008 (Unaudited) and June 28, 2008...............3
Condensed consolidated statements of operations
(Unaudited) for the quarter ended
September 27, 2008 and September 29, 2007......................4
Condensed consolidated statements of cash flows
(Unaudited) for the quarter ended
September 27, 2008 and September 29, 2007......................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 6. Exhibits...........................................................29
2
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Concord Camera Corp. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands)
September 27, 2008 June 28,
(Unaudited) 2008
------------------ ---------
Assets
Current Assets:
Cash and cash equivalents $ 20,001 $ 19,041
Restricted cash 6,200 6,200
Short-term investments 300 1,750
Accounts receivable, net 8,782 10,478
Inventories 10,755 10,431
Prepaid expenses and other current assets 593 821
Assets held for sale 3,814 3,814
--------- ---------
Total current assets 50,445 52,535
Long-term investments 16,768 16,768
Property, plant and equipment, net 744 868
Other assets 185 431
--------- ---------
Total assets $ 68,142 $ 70,602
========= =========
Liabilities and Stockholders' Equity
Current Liabilities:
Short-term borrowings under financing facilities $ 14,032 $ 17,621
Accounts payable 11,271 10,583
Accrued royalties 1,540 2,206
Accrued expenses 4,495 4,364
Other current liabilities 489 830
--------- ---------
Total current liabilities 31,827 35,604
Other long-term liabilities 1,127 1,096
--------- ---------
Total liabilities 32,954 36,700
Commitments and contingencies
Stockholders' Equity:
Blank check preferred stock, no par value,
1,000 shares authorized, none issued -- --
Common stock, no par value, 20,000 shares
authorized; 6,261 shares issued
as of September 27, 2008 and June 28, 2008 143,860 143,860
Additional paid-in capital 5,202 5,197
Accumulated other comprehensive loss (5,082) (5,082)
Accumulated deficit (103,799) (105,080)
--------- ---------
40,181 38,895
Less: treasury stock, at cost, 347 shares as
of September 27, 2008 and June 28, 2008 (4,993) (4,993)
--------- ---------
Total stockholders' equity 35,188 33,902
--------- ---------
Total liabilities and stockholders' equity $ 68,142 $ 70,602
========= =========
See accompanying notes to condensed consolidated financial statements.
3
Concord Camera Corp. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands, except per share data)
For the quarter ended
--------------------------------------
September 27, September 29,
2008 2007
------------- -------------
Net sales $ 17,669 $ 21,698
Cost of products sold 14,500 18,683
-------- --------
Gross profit 3,169 3,015
Selling expenses 1,099 2,173
General and administrative expenses 2,004 2,842
-------- --------
Operating income (loss) 66 (2,000)
Interest expense 187 77
Other income, net (1,406) (315)
-------- --------
Income (loss) before provision for income taxes 1,285 (1,762)
Provision for income taxes 4 1
-------- --------
Net income (loss) $ 1,281 $ (1,763)
======== ========
Net income (loss) per common share:
Basic and diluted income
(loss) per common share $ 0.22 $ (0.30)
======== ========
Weighted average
common shares outstanding -- basic and diluted 5,914 5,914
======== ========
See accompanying notes to condensed consolidated financial statements.
4
Concord Camera Corp. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
------------------------------------
For the quarter ended
------------------------------------
September 27, September 29,
2008 2007
------------- -------------
Cash flows from operating activities:
Net income (loss) $ 1,281 $ (1,763)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 231 804
Gain on disposal of property, plant and equipment (164) --
Share-based compensation 5 5
Unrecognized tax benefit -- (62)
Changes in operating assets and liabilities:
Accounts receivable, net 1,696 2,434
Inventories (324) (2,770)
Prepaid expenses and other current assets 180 512
Other assets 246 --
Accounts payable 688 434
Accrued expenses 132 (242)
Accrued royalty (666) (1,060)
Other current liabilities (340) (336)
Other long-term liabilities 30 29
-------- --------
Net cash provided by (used in) operating activities 2,995 (2,015)
-------- --------
Cash flows from investing activities:
Proceeds from sales of available-for-sale
investments 1,450 23,175
Purchases of available-for-sale investments -- (19,850)
Purchases of property, plant and equipment (5) (7)
Proceeds from sale of property, plant and equipment 110 --
-------- --------
Net cash provided by investing activities 1,555 3,318
-------- --------
Cash flows from financing activities:
Repayments under financing facilities, net (3,590) (428)
-------- --------
Net cash used in financing activities (3,590) (428)
-------- --------
Net increase in cash and cash equivalents 960 875
Cash and cash equivalents at beginning of the period 19,041 3,853
-------- --------
Cash and cash equivalents at end of the period $ 20,001 $ 4,728
======== ========
See Note 6- Supplemental Cash Flow Information in the accompanying notes to
condensed consolidated financial statements.
5
CONCORD CAMERA CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 27, 2008
(Unaudited)
Note 1 - Liquidation Proposal and Going Concern
On August 14, 2006, the Board of Directors (the "Board") of Concord Camera
Corp., a New Jersey corporation (collectively with its consolidated
subsidiaries, the "Company" or "Concord"), established a committee ("the Special
Committee") consisting of three independent directors, to investigate, evaluate
and/or analyze strategic alternatives for the Company and make any
recommendations to the Board with respect to such strategic alternatives that
the Special Committee determines to be appropriate. With the assistance of its
financial advisor, the Special Committee considered several alternative
strategies, including: (i) continuing current operations; (ii) making strategic
acquisitions; (iii) a sale or other disposition of all or a significant part of
the Company or its business; (iv) a "going-private" transaction; and (v) a
liquidation of the Company. The Special Committee authorized its financial
advisor and management to conduct discussions and negotiate with potential
strategic and financial investors who expressed an interest in making an
investment in or acquiring the Company. However, to date, efforts by the Special
Committee's financial advisor and management to engage in a transaction with any
of these third parties have not been successful.
On October 29, 2008, based on the Special Committee's review of strategic
alternatives and recommendation, the Board recommended the dissolution of the
Company and the adoption of a plan of liquidation (the "Liquidation Proposal").
The Liquidation Proposal is subject to approval by the Company's shareholders at
the 2008 Annual Meeting of Shareholders (the "Annual Meeting") that is expected
to be held in December 2008. Pending the shareholders' vote on the Liquidation
Proposal, the Company has ceased manufacturing products, purchasing materials
and products and undertaking commitments for sales of its products, except as
necessary to complete the manufacture and sale of materials and products that
the Company has remaining in inventory.
The Company filed its preliminary proxy statement with the Securities and
Exchange Commission ("SEC") on November 7, 2008. Once the SEC review process is
complete, the Company will mail a copy of the definitive proxy statement to its
shareholders.
If the Company's shareholders approve the Liquidation Proposal, the Company will
file a certificate of dissolution with the Department of Treasury of the State
of New Jersey. Thereafter, the Company will not engage in any business
activities except for the purpose of preserving the value of its assets,
prosecuting and defending lawsuits by or against it, winding up its business and
affairs, selling and monetizing its properties and non-cash assets, including
its intellectual property and other intangible assets, paying or otherwise
settling its liabilities, including contingent liabilities, terminating
commercial agreements and relationships and preparing to make distributions to
shareholders, in accordance with the plan of liquidation.
If the Company's shareholders do not approve the Liquidation Proposal, the Board
will explore the alternatives then available for the future of the Company. The
Company believes the value of its business will be materially and adversely
impacted after the announcement of the recommendation by its Board of the
Liquidation Proposal. In particular, pending the shareholders' vote on the
Liquidation Proposal, the Company has ceased manufacturing products, purchasing
materials and products and undertaking commitments for sales of its products,
except as necessary to complete the manufacture and sale of materials and
products that it has remaining in inventory and, as a result, the Company
believes that many, if not all, of its customers, including its major customers,
will transition their business to the Company's competitors. Therefore, if the
Company's shareholders do not approve the Liquidation Proposal, the Company will
not be able to continue to operate its business as it existed prior to the
Board's recommendation of the Liquidation Proposal and may not be able to
operate its business at all.
6
The accompanying consolidated financial statements have been prepared on the
going concern basis of accounting, which contemplates realization of assets and
liabilities in the normal course of business. Accordingly, the accompanying
statements do not include any adjustments necessary to reflect the possible
future effects on the recoverability of assets and settlement of liabilities
that may result from adoption of the plan of orderly liquidation or the
Company's inability to complete such a plan in an orderly manner.
Note 2 - Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the quarter ended September 27, 2008 ("First
Quarter Fiscal 2009") are not necessarily indicative of the results that may be
expected for the fiscal year ending June 30, 2009 ("Fiscal 2009"). For
comparative purposes, the quarter ended September 29, 2007, has been defined as
the ("First Quarter Fiscal 2008"). The balance sheet at June 28, 2008 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. The
Company and its consolidated subsidiaries 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 SEC on November 7, 2008 for the fiscal year
ended June 28, 2008 ("Fiscal 2008").
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 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. The number of authorized shares of the Company's Common Stock was
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 retroactively adjusted
for the reverse stock split in the accompanying consolidated financial
statements and footnotes.
Note 3 - Significant Customers:
During the First Quarter Fiscal 2009, the Company's sales to Walgreen Co.
("Walgreens") and sales to Wal-Mart Stores, Inc. ("Wal-Mart") decreased as
compared to the First Quarter Fiscal 2008. The First Quarter Fiscal 2009
decrease in sales to Walgreens and Wal-Mart was primarily attributable to a
decrease in sales of single-use cameras and, to a lesser extent, a decrease in
sales of traditional film cameras. The loss of either of these significant
customers or any other large customer or substantially reduced sales to either
of these significant customers or any other large customer could have a material
adverse effect on the Company's results of operations if the Company's
shareholders do not approve the Liquidation Proposal.
7
The following table illustrates each significant customer's net sales as a
percentage of consolidated net sales during the First Quarter Fiscal 2009 and
the First Quarter Fiscal 2008.
Percent of Net Sales
-----------------------------
For the quarter ended
-----------------------------
September 27, September 29,
2008 2007
------------- -------------
Wal-Mart 24.8% 36.8%
Walgreens 17.1% 15.9%
---- ----
Total 41.8% 52.7%
==== ====
Note 4 - Summary of Significant Accounting Policies:
Principles of Consolidation
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the United States of
America and include the accounts of the Company. All significant intercompany
balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States 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 includes sales returns and allowances,
provision for bad debts, inventory valuation charges, realizability of
intangibles, realizability of deferred tax assets, and accounting for litigation
and settlements, among others.
Foreign Currency Transactions
The Company operates on a worldwide basis and its results may be adversely or
positively affected by fluctuations of various foreign currencies against the
U.S. Dollar, specifically, the Canadian Dollar, European Euro, British Pound
Sterling, PRC Renminbi, Hong Kong Dollar and the Japanese Yen. Although certain
net sales to customers and purchases of certain components and services are
transacted in local currencies, each of the Company's foreign subsidiaries
purchases substantially all of its finished goods inventories in U.S. Dollars.
Therefore, the Company has determined the U.S. Dollar is the functional currency
for all of its subsidiaries. The accounting records for subsidiaries that are
maintained in a local currency are remeasured into the U.S. Dollar. Accordingly,
most non-monetary balance sheet items and related income statement 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 consolidated statements of
operations. Net foreign currency losses of approximately $0.1 million are
included in "Other income, net" for each of the First Quarter Fiscal 2009 and
the First Quarter Fiscal 2008, respectively, in the accompanying condensed
consolidated statements of operations.
Hedging Activities
During the First Quarter Fiscal 2009 and the First Quarter Fiscal 2008, the
Company had no forward exchange contracts or other derivatives outstanding and
did not participate in any other type of hedging activities.
8
Restricted Cash
The Company's financing facilities require a minimum cash deposit as security in
the amount of $6.2 million for borrowings outstanding under its revolving demand
financing facilities. The restricted cash amount is classified as a current
asset in the accompanying consolidated balance sheets since the borrowings it
secures are classified as a current liability. See Note 8 - Short-Term
Borrowings and Financing Facilities.
Investments
At September 27, 2008 and June 28, 2008, the Company's "Short-term investments"
and "Long-term investments" as classified in the accompanying consolidated
balance sheets consisted of auction rate debt securities and are considered to
be available-for-sale securities. As of September 27, 2008 and June 28, 2008,
the Company has recorded a $5.1 million unrealized loss related to its auction
rate debt securities. The Company has experienced redemptions of approximately
$0.3 million of its auction rate securities at 100% of par value subsequent to
September 27, 2008 and has consented to tender $2.1 million in par value of its
auction rate securities pursuant to an offer by the issuer to purchase such
securities for approximately $1.9 million. See Note 13, Subsequent Events.
Currently, the Company has the ability and intent to hold its auction rate
securities until a recovery of par value and does not consider its auction rate
securities to be other-than-temporarily impaired at September 27, 2008. Realized
gains and losses, interest and dividends are classified as investment income in
"Other income, net" in the accompanying consolidated statements of operations.
For the First Quarter Fiscal 2009 and First Quarter Fiscal 2008, included in
"Other income, net" in the accompanying condensed consolidated statements of
operations are approximately $0.3 million and $0.5 million, respectively, of
investment income related to the short-term investments.
Inventories
Inventories, consisting of raw materials, components, work-in-process and
finished goods, are stated at the lower of cost or market value and are
determined on a first-in, first-out basis. Work-in-process and component
inventory costs include materials, labor and manufacturing overhead. The Company
records lower of cost or market value adjustments based upon changes in market
pricing, customer demand, technological developments or other economic factors
and for on-hand excess, obsolete or slow-moving inventory. See Note 7,
Inventories.
Assets Held For Sale
At September 27, 2008 and June 28, 2008, the Company's "Assets Held for Sale" in
the accompanying consolidated balance sheets consist of certain land, building,
and improvements held for sale. The certain land, building, and improvements met
the criteria to be considered held for sale under Statement of Financial
Accounting Standards ("SFAS") No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets at September 27, 2008 and June 28, 2008. The Company
currently anticipates that the sale of these assets will occur within the next
twelve months.
Impairment of Long-Lived and Other Assets
In accordance with SFAS No. 144, the Company continually evaluates whether
events and circumstances have occurred that provide indications of impairment.
The Company records an impairment loss when indications of impairment are
present and when the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amounts. The Company performs an
impairment test by summarizing the undiscounted cash flows expected to result
from the use and eventual sale of its long-lived assets. If the sum of the
undiscounted cash flows exceeds the carrying values of these assets, then the
Company concludes these carrying values are recoverable. As of September 27,
2008, the sum of the Company's undiscounted forecasted cash flows exceeded the
carrying value of its long-lived assets.
9
Revenue Recognition
The Company recognizes revenue, in accordance with Staff Accounting Bulletin
("SAB") No. 101, Revenue Recognition in Financial Statements, as amended by SAB
No. 104, Revenue Recognition: Corrected Copy, when title and risk of loss are
transferred to the customer, the sales price is fixed or determinable,
persuasive evidence of an arrangement exists, and collectibility is probable.
Title and risk of loss generally transfer when the product is delivered to the
customer or upon shipment, depending upon negotiated contractual arrangements.
Sales are recorded net of anticipated returns which the Company estimates based
on historical rates of return, adjusted for current events as appropriate, in
accordance with Statement of Financial Accounting Standard No. 48, Revenue
Recognition When Right of Return Exists ("SFAS No. 48"). If actual future
returns are higher than estimated, then net sales could be adversely affected.
Sales Allowances
The Company may enter into arrangements to offer certain pricing discounts and
allowances that do not provide an identifiable separate benefit or service. In
accordance with Emerging Issues Task Force Issue No. 01-09, Consideration Given
by a Vendor to a Customer (Including a Reseller of the Vendor's Products) ("EITF
Issue No. 01-09"), the Company records these pricing discounts and allowances as
a reduction of sales. Advertising and promotional costs, which include
advertising allowances and other discounts, have been expensed as incurred. In
accordance with EITF Issue No. 01-09, which addresses the statement of
operations classification of consideration between a vendor and a retailer, the
Company records certain variable selling expenses, including advertising
allowances, other discounts and other allowances, as a reduction of sales. The
Company may enter into arrangements to provide certain free products. In
accordance with EITF Issue No. 01-09, the Company records the cost of free
products ratably into cost of products sold based upon the underlying revenue
transaction.
Share-Based Compensation Expense
Effective July 3, 2005, the Company adopted the fair value recognition
provisions of SFAS No. 123R, "Share-Based Payment," as interpreted by Financial
Accounting Standards Board ("FASB") Staff Positions No. 123R-1, 123R-2, 123R-3,
123R-4, 123R-5 and 123R-6. Share-based compensation expense of approximately
$5,000 is included in income (loss) before income taxes for each of the First
Quarter Fiscal 2009 and the First Quarter Fiscal 2008, respectively.
The total income tax benefit of $0 was recognized in the consolidated statement
of operations for the share-based compensation arrangements for each of the
First Quarter Fiscal 2009 and the First Quarter Fiscal 2008, respectively. The
Company considers all of its share-based compensation expense as a component of
general and administrative expenses in the accompanying consolidated statements
of operations. In addition, no amount of share-based compensation was
capitalized as part of capital expenditures or inventory for the First Quarter
Fiscal 2009 and the First Quarter Fiscal 2008.
Income Taxes
The provision for income taxes is based on the consolidated United States
entities' and individual foreign companies' estimated tax rates for the
applicable year. Deferred taxes are determined utilizing the asset and liability
method based on the difference between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. Deferred
income tax provisions and benefits are based on the changes in the net deferred
tax asset or liability from period to period. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized.
Comprehensive Income (Loss)
Comprehensive income in accordance with SFAS No. 130, Reporting Comprehensive
Income, ("SFAS No. 130") includes net income (loss) adjusted for certain
revenues, expenses, gains and losses that are excluded from net income (loss)
under accounting principles generally accepted in the United States of America.
During the First Quarter Fiscal 2009 and the First Quarter Fiscal 2008, the
Company's comprehensive income (loss) was $1.3 million and $(1.8) million,
respectively,
10
the same as the net income (loss) for the period because the Company did not
have any items of other comprehensive income or (loss).
Income (Loss) Per Share
Basic and diluted income (loss) per share are calculated in accordance with SFAS
No. 128, Earnings per Share ("SFAS No. 128"). All applicable income (loss) per
share amounts have been presented in conformity with SFAS No. 128 requirements.
During the First Quarter Fiscal 2009 and the First Quarter Fiscal 2008, the
Company issued no shares of Common Stock on the exercise of stock options. In
the First Quarter Fiscal 2009 and the First Quarter Fiscal 2008, potentially
dilutive securities were comprised of stock options to purchase 0 and 18 shares
of Common Stock, respectively that were not included in the calculation of
diluted income (loss) per share because their impact was antidilutive. In the
First Quarter Fiscal 2008, 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 income (loss) per share
calculations. The 66,202 deferred shares were delivered on July 2, 2007 and
included in the total shares outstanding during the First Quarter Fiscal 2009
and the First Quarter Fiscal 2008, respectively. See Note 2 - Basis of
Presentation, Reverse Split of Common Stock and Note 9 - Deferred Share
Arrangement.
Note 5 - Recently Issued Accounting Pronouncements:
In October 2008, the Financial Accounting Standards Board ("FASB") issued FASB
Staff Position ("FSP") FAS 157-3 that clarifies the application of Statement of
Financial Accounting Standards ("SFAS") No. 157 in a market that is not active.
FSP No. FAS 157-3 is effective October 2008, including prior periods for which
financial statements have not been issued. The adoption of FSP No. FAS 157-3 did
not have a material impact on the Company's consolidated financial statements.
In February 2008, the FASB issued FSP 157-2 that delays the effective date of
SFAS No. 157 for nonfinancial assets and nonfinancial liabilities until fiscal
years beginning after November 15, 2008 and interim periods within those fiscal
years.
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
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 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" (as
defined below). The adoption of FSP No. FIN 48-1 did not have a material impact
on the Company's 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. The adoption of SFAS No. 159
did not have a material impact on the Company's consolidated financial
statements.
11
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 November 15, 2007. The adoption of SFAS No. 157 did not
have a material impact on the Company's consolidated financial statements.
In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes, an interpretation of FAS 109, Accounting for Income Taxes"
("FIN 48"), to create a single model to address accounting for uncertainty in
income tax positions. FIN 48 clarifies the accounting for income taxes by
prescribing a minimum probability threshold a tax position must meet to be
recognized in the financial statements. FIN 48 also provides guidance on the
measurement, derecognition and classification of recognized tax benefits,
interest and penalties, accounting for interim periods and the transition of the
accounting method upon the adoption of FIN 48. FIN 48 is effective for years
beginning after December 15, 2006. Accordingly, we adopted FIN 48 effective as
of July 1, 2007. Note 4 - Summary of Significant Accounting Policies, Income
Taxes.
Note 6 - Supplemental Cash Flow Information:
Non-cash Investing Activities:
(amounts in thousands)
First Quarter First Quarter
Deferred Share Arrangement Fiscal 2009 Fiscal 2008
-------------------------- ------------- -------------
Deferred share arrangement obligation to participant $ -- $ (413)
Common stock received and held in trust -- 413
------ ------
$ -- $ --
====== ======
See Note 9 - Deferred Share Arrangement for a description of the deferred share
arrangement transactions in the First Quarter Fiscal 2008.
Note 7 - Inventories:
Inventories consist of the following:
(amounts in thousands)
September 27, June 28,
2008 2008
------------- --------
Raw materials, components, and
work-in-process $ 3,987 $ 4,866
Finished goods 6,768 5,565
------- -------
Total inventories $10,755 $10,431
======= =======
During the First Quarter Fiscal 2009 inventory carrying values approximated
their cost basis and no charges were made to reduce the carrying value of the
inventory in stock.
Note 8 - Short-Term Borrowings and Financing Facilities:
Hong Kong Financing Facilities
Concord Camera HK Limited ("CCHK"), the Company's Hong Kong subsidiary, has an
approximate US$1.0 million demand financing facility with Dah Sing Bank, Limited
("Dah Sing") and a US$5.2 million demand financing facility with The Hongkong
and Shanghai Banking Corporation ("HSBC"). The HSBC financing facility consists
of an import facility
12
of approximately US$4.7 million and a guarantee facility of 380,000 Euros (equal
to approximately US$0.5 million). As security for the financing facilities,
among other things, CCHK provided to HSBC and Dah Sing pledged deposits in the
amount of approximately US$5.2 million and US$1.0 million, respectively. The
HSBC financing facility is subject to review by HSBC by June 15, 2009 and the
Dah Sing financing facility is subject to review by Dah Sing at any time.
The Dah Sing facilities may be used by CCHK for opening letters of credit, draft
loans, negotiating export letters of credit with a letter of guarantee, outward
bills loans, trust receipts, invoice financing, packing loans and/or advances
against receivables. The Dah Sing facilities bear interest at variable rates, as
follows: 1.5% per annum over the Hong Kong Interbank Offered Rate on facilities
denominated in Hong Kong Dollars; 1.5% per annum over the London Interbank
Offered Rate on facilities denominated in U.S. Dollars; and 1.5% per annum over
Dah Sing's Base Rate on facilities denominated in any other foreign currency.
The HSBC facilities bear interest at variable rates, as follows: 1.75% over the
Hong Kong Interbank Offered Rate on import loans denominated in Hong Kong
Dollars and 1.75% over the Singapore Interbank Offered Rate for transactions
denominated in currency other than the Hong Kong Dollar.
United States Financing Facilities
Concord Keystone Sales Corp. ("Keystone"), the Company's United States
subsidiary, has a $15 million secured revolving line of credit (the "CIT
Facility"), which includes a letter of credit ("L/C") sub-line of $10 million,
with The CIT Group/Commercial Services, Inc. ("CIT"). The CIT Facility is
secured by a first priority lien and security interest in CIT's favor on, among
other things, Keystone's accounts receivable, other payment rights and
inventory.
The borrowing base under the CIT Facility consists 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. The current term of the CIT Facility expires on October 16, 2009,
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. In
addition, Keystone may terminate the CIT Facility at any time upon 30 days'
written notice to CIT. See Note 13, Subsequent Events.
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
CIT Facility 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).
In the event Keystone was to utilize all or a portion of the CIT Facility and
CIT was to demand repayment at a time when the Company did not otherwise have
sufficient borrowing capacity or liquid assets that would enable Keystone to
repay the CIT Facility in full, CIT would be entitled to foreclose on Keystone's
pledged inventory. This could result in Keystone's inventory being sold at a
significant discount to its carrying value and could have a material adverse
effect on the Company's liquidity, ability to fund its operations, results of
operations and financial condition.
Effective April 17, 2008, the Company entered into an Express Creditline Loan
Agreement (the "Loan Agreement") with Citigroup Global Markets, Inc.
("Citigroup") for a $9 million secured revolving credit line (the "Citigroup
Facility"). Advances under the Citigroup Facility may be used by the Company to
finance business operations and general working capital and other corporate
business purposes, including, but not limited to, implementation of strategic
alternatives, distributions to shareholders and/or any other uses of cash as
determined by the Company and cannot be used to purchase, carry or trade in
securities, or reduce or retire indebtedness incurred to purchase, carry or
trade in securities. In addition to the $9 million credit line for advances, the
Citigroup Facility provided for the accrual of up to $1 million of interest,
resulting in an aggregate credit limit of $10 million (the "Loan Limit") under
the Citigroup Facility. Effective October 20, 2008, the Loan Limit was increased
to $10,925,000. The Citigroup Facility is secured by a first priority lien and
security interest in the Company's remaining auction rate securities (the
"Collateral").
13
Under the terms of the Loan Agreement, interest on amounts outstanding under the
Citigroup Facility was payable monthly at the Open Federal Funds rate plus 1.50%
per annum from April 17, 2008 through October 21, 2008. In order to maintain its
eligibility for this interest rate, the Company was to continue to attempt to
sell the Collateral at future auctions. Effective October 21, 2008, the interest
rate was increased to the Open Federal Funds rate plus 3.25% per annum.
Citigroup may, in its sole discretion and without cause, demand full or partial
payment of any outstanding balance under the Citigroup Facility or reduce the
Loan Limit at any time. The Loan Agreement may be terminated by either party
upon thirty calendar days' prior written notice to the other party.
At September 27, 2008 and June 28, 2008, the Company had $1.0 million and $3.2
million, respectively, in short-term borrowings outstanding under the Hong Kong
financing facilities described above. The weighted average borrowing rates on
the short-term borrowings as of September 27, 2008 and June 28, 2008, were 5.8%
and 6.3%, respectively.
At September 27, 2008 and June 28, 2008, the Company had $13.0 million and $14.4
million, respectively, in short-term borrowings outstanding under the United
States Financing Facilities. The weighted average borrowing rates on the
short-term borrowings as of September 27, 2008 and June 28, 2008 were 4.9% and
4.7%, respectively.
At September 27, 2008 and June 28, 2008, the Company had $1.2 million and $1.5
million, respectively, in letters of credit outstanding, which were issued
primarily to certain suppliers to guarantee payment for our purchase orders with
such suppliers. The letters of credit are issued under the Company's import
facilities that have been granted to CCHK.
Note 9 - Deferred Share Arrangement:
The Company's Deferred Delivery Plan allows designated executive officers to
elect, subject to the approval of the Compensation and Stock Option Committee of
the Company's Board of Directors, to defer the gains on certain stock option
exercises by deferring delivery of the "profit" shares to be received upon
exercise.
On July 2, 2007, the Chairman took delivery of the 66,202 shares held in trust
upon expiration of the extended deferral period, reducing the deferred share
arrangement balance in stockholders' equity by $412,825. As of September 27,
2008, there were no deferred shares held in trust by the Company. See Note 2 -
Basis of Presentation, Reverse Split of Common Stock and Note 6 - Supplemental
Cash Flow Information.
Note 10 - Commitments and Contingencies:
License and Royalty Agreements
On May 10, 2004, the Company entered into a twenty year, worldwide trademark
license agreement with Jenoptik AG for the exclusive use of the Jenoptik brand
name and trademark on non-professional consumer imaging products including, but
not limited to, digital, single-use and traditional cameras, and other imaging
products and related accessories. The license agreement provides for a royalty
of one-half of one percent (0.5%) of net sales of non-professional consumer
imaging products bearing the JENOPTIK brand name for the first ten (10) years of
the license and a royalty of six-tenths of one percent (0.6%) for the second ten
(10) years of the license. There are no minimum guaranteed royalty payments. In
August 2008, the Company entered into an agreement with Jenoptik AG to terminate
the Jenoptik trademark license agreement effective January 1, 2010 in exchange
for Jenoptik AG's waiver of certain royalty payments and reimbursement to the
Company of approximately $1.1 million of the upfront license fee paid by the
Company upon entering into the license agreement in 2004. The reimbursement of
$1.1 million was recorded in "Other income, net" in the accompanying
consolidated statement of operations for the First Quarter Fiscal 2009. As of
September 27, 2008, the carrying value of the license was $0.1 million.
Effective January 1, 2001, the Company entered into a new twenty-year license
agreement with FujiFilm Corporation ("Fuji"). Under the new license agreement,
Fuji granted the Company a worldwide non-exclusive license (excluding Japan
14
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. During Fiscal 2008, the Company recorded an
impairment charge of $3.0 million to lower the carrying value of the Fuji
license. The Company previously amortized this asset based upon quantities of
units produced. As of September 27, 2008, the carrying value of the Fuji license
was $0. The Company also recorded as a liability a corresponding amount that was
included in licensing related obligations in "Other liabilities" in the
accompanying consolidated balance sheets at September 27, 2008 and June 28,
2008, which was equal to the present value of future license fee payments. . The
Company's ability to manufacture and sell single-use cameras depends in part on
the continuation of its right to use the Fuji patents. As a result, the Company
believes that the loss of the Fuji license prior to the expiration of the
patents would have a material adverse effect on the Company's financial position
and results of operations if the Company's shareholders do not approve the
Liquidation Proposal and the Company seeks to continue its single-use camera
business.
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 $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. The Company has engaged in discussions with Polaroid regarding
the renewal of the single-use camera license agreement, but has suspended those
discussions pending the Company's shareholders' vote on the Liquidation
Proposal. If the shareholders do not approve the Liquidation Proposal, it is
uncertain whether the Company will be able to renew the single-use camera
license agreement. The Company believes that the loss of the Polaroid single-use
camera license would have a material adverse effect on its financial position
and results of operations if the Company's shareholders do not approve the
Liquidation Proposal and the Company seeks to continue its single-use camera
business.
Additionally, the Company has other license and royalty agreements that require
the payment of royalties based on the manufacture and/or sale of certain
products. Its license and royalty agreements expire at various dates through
Fiscal 2023. Total amortization and royalty expense for all licensing and
royalty agreements for the First Quarter Fiscal 2009 and the First Quarter
Fiscal 2008, was $1.3 million and $1.5 million, respectively.
Intellectual Property Claims
From time to time, the Company receives patent infringement claims which it
analyzes and, if appropriate, takes action to avoid infringement, settle the
claim or negotiate a license. Those claims for which legal proceedings have been
initiated against the Company are discussed in Note 11, Litigation and
Settlements. The Company has also received notifications from two entities, one
of which was a significant customer, alleging that certain of the Company's
digital cameras infringe upon those entities' respective patents. The Company
has engaged in discussions with these entities regarding resolution of the
claims.
15
Based on the Company's initial assessment of these claims, infringement of one
or more patents is probable if the patents are valid. Based upon the licensing
discussions to date, the Company preliminarily estimates the potential royalties
due to these two claimants for digital camera sales through September 27, 2008
to be between $0 and approximately $6.7 million in the aggregate. The actual
royalty amounts, if any, for past and future sales are dependent upon the
outcome of the negotiations. The Company has notified certain of its suppliers
of its right to be indemnified by the suppliers if it is required to pay
royalties or damages to either claimant. The Company is unable to reasonably
estimate the amount of the potential loss, if any, within the range of estimates
relating to these claims. Accordingly, the Company has not accrued any amounts
related to these claims as of September 27, 2008.
Purchase Commitments
At September 27, 2008, the Company had $2.1 million in non-cancelable purchase
commitments relating to the procurement of raw materials, components and
finished goods inventory from various suppliers. In the aggregate, such
commitments are not at prices in excess of current market values and typically
do not exceed one year.
Note 11 - Litigation and Settlements:
On October 6, 2004, a patent infringement complaint was filed by Honeywell
International, Inc. and Honeywell Intellectual Properties, Inc., against 27
defendants, including the Company, in the United States District Court for the
District of Delaware. The complaint asserted that the defendants have conducted
activities which infringe U.S. Patent No. 5,280,371, entitled, "Directional
Diffuser for a Liquid Crystal Display." The complaint sought unspecified
damages, interest, attorneys' fees, costs of suit and unspecified other and
further relief from the court. The proceedings in this action against the
Company and other similarly situated defendants were stayed by the court pending
the resolution of the infringement actions against the liquid crystal display
manufacturers. It is too early to assess the probability of a favorable or
unfavorable outcome or the loss or range of loss, if any, and therefore, no
amounts have been accrued relating to this action. The Company has notified
several third parties of its intent to seek indemnity from such parties for any
costs or damages incurred by the Company as a result of this action.
In June 2006, St. Clair Intellectual Properties Consultants, Inc. filed a patent
infringement complaint against 22 defendants, including the Company, in the
United States District Court for the District of Delaware. The complaint
asserted that the defendants conducted activities which infringe U.S. Patent
Nos. 5,138,459, 6,094,219, 6,233,010 and 6,323,899. The complaint sought
injunctive relief, unspecified damages, interest, attorneys' fees, costs of suit
and unspecified other and further relief from the court. The proceedings in this
action against the Company and the other defendants were stayed by the court
until further order of the court. On October 16, 2008, the court granted the
plaintiff's motion to lift the stay. 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. The Company's
announcement of the Liquidation Proposal by the Board and/or the implementation
of the plan of liquidation if it is approved by the Company's shareholders may
give rise to legal claims, which may have a material adverse effect on the
Company's financial position and results of operations.
16
Note 12 -- Other Charges:
Cost-Reduction Initiatives and Related Charges
The Company continues to evaluate its cost structure and implement
cost-reduction initiatives as appropriate. During the First Quarter Fiscal 2009,
we incurred approximately $0.1 million in severance costs related to the
Company's current cost-reduction initiatives.
During the First Fiscal Quarter 2008, the Company recorded a $60,000 reduction
in a liability related to severance costs accrued for the elimination of certain
employee positions.
Table I -- Other Charges Liability reconciles the beginning and ending balances
of the other charges liability.
(in thousands)
Other Charges Liability
Severance
---------
Balance as of June 28, 2008 $ 543
Charges 84
Reversals --
Payments (330)
-----
Balance as of September 27, 2008 $ 297
=====
Table II -- Other Charges presents the related expenses and their classification
in the consolidated statements of operations.
(in thousands)
Other Charges Severance
---------
First Quarter Fiscal 2009
Cost of products sold $ 84
Selling expenses --
General and administrative expense --
----
Total $ 84
====
First Quarter Fiscal 2008
Cost of products sold $ --
Selling expense (60)
General and administrative expense --
----
Total $(60)
====
As a result of the cost-reduction initiatives implemented in Fiscal 2008, we
expect to make cash payments totaling $0.3 million during Fiscal 2009 related to
severance.
17
Note 13 - Subsequent Events:
On November 10, 2008, the Company received a notice from the NASDAQ Stock Market
("NASDAQ") indicating that the Company's filing delinquency resulting from the
Company's delay in filing its Annual Report on Form 10-K for Fiscal 2008 had
been cured and therefore, the Company's securities would remain listed on the
NASDAQ Global Market. The Company was previously notified by NASDAQ that the
Company's securities were subject to delisting due to the Company's failure to
file its Annual Report on Form 10-K for Fiscal 2008. On November 7, 2008, the
Company filed its Annual Report on Form 10-K for Fiscal 2008 with the SEC and
NASDAQ, thereby regaining compliance with all requirements for continued listing
on the NASDAQ Global Market.
On November 3, 2008, Keystone received a notice from CIT that an event of
default existed under the CIT Facility as a result of the Company's press
release on October 30, 2008 that it has elected to wind down operations and
liquidate assets. Currently, CIT has not exercised its rights to accelerate
Keystone's obligation to repay the CIT Facility, but has temporarily
discontinued making loans under the CIT Facility until it receives additional
financial information regarding the Liquidation Proposal. As of September 27,
2008, the Company has approximately $3.8 million of debt outstanding under the
CIT Facility.
On November 1, 2008, in connection with the recommendation by our Board of our
dissolution and the adoption of the plan of liquidation, we provided the
required twelve months notice of termination of our processing agreement with
the PRC governmental entities, which allows us to operate in the PRC.
On October 29, 2008, our Board recommended the Liquidation Proposal. The
Liquidation Proposal is subject to approval by the Company's shareholders at the
2008 Annual Meeting, which is expected to be held in December 2008. Pending the
Company's shareholders' vote on the Liquidation Proposal, in order to protect
shareholder value, the Company has ceased manufacturing products, purchasing
materials and products and undertaking commitments for sales of its products,
except as necessary to complete the manufacture and sale of materials and
products that the Company has remaining in inventory.
If the Company's shareholders approve the Liquidation Proposal, the Company will
file a certificate of dissolution with the Department of Treasury of the State
of New Jersey. Thereafter, the Company will not engage in any business
activities except for the purpose of preserving the value of its assets,
prosecuting and defending lawsuits by or against the Company, adjusting and
winding up its business and affairs, selling and liquidating its properties and
non-cash assets, including its intellectual property and other intangible
assets, paying or otherwise settling its liabilities, including contingent
liabilities, terminating commercial agreements and relationships and preparing
to make distributions to its shareholders, in accordance with the plan of
liquidation.
If the Company's shareholders do not approve the Liquidation Proposal, the
Company's Board will explore the alternatives then available for the future of
the Company. The Company believes the value of its business will be materially
and adversely impacted after the announcement of the recommendation by the Board
of the Liquidation Proposal. In particular, pending the Company's shareholders'
vote on the Liquidation Proposal, the Company has ceased manufacturing products,
purchasing materials and products and undertaking commitments for sales of its
products, except as necessary to complete the manufacture and sale of materials
and products that the Company has remaining in inventory and, as a result, the
Company believes that many, if not all, of its customers, including its major
customers, will transition their business to its competitors. Therefore, if the
Company's shareholders do not approve the Liquidation Proposal, the Company will
not be able to continue to operate its business as it existed prior to the
Board's recommendation of the Liquidation Proposal and may not be able to
operate its business at all. See Note 1, Liquidation Proposal and Going Concern.
On October 20, 2008, the Company's Loan Limit under the Citigroup Facility was
increased to $10,925,000 and the Company increased its outstanding borrowings
under the Citigroup Facility equal to the Loan Limit.
On October 17, 2008, the Company consented to tender $2.1 million in par value
of its auction rate securities in connection with a tender offer by Leon Higher
Education Authority, Inc. ("Leon") that has Brazos Higher Education Service
Corporation, Inc. ("Brazos") acting as its master servicer. The tender offer
requires certain levels of participation by the auction rate securities holders.
If these levels of participation by auction rate securities holders are attained
and certain
18
additional conditions (described below) are met, the Company should receive cash
proceeds equal to 92% of par value of the securities tendered or approximately
$1,932,000. On November 3, 2008, Brazos announced that the minimum tender
conditions have not been met for the thirteen previously announced offers to
purchase or exchange student loan backed securities, almost all of which are
auction rate securities. As a result, Leon has not selected offers in respect of
which to pursue a collateral resecuritization. The previously announced
expiration date for the offer remains unchanged at this time and therefore will
expire on December 4, 2008 unless further extended. If the offer is selected at
a future time to proceed to the resecuritization phase, Leon will announce an
updated date related to this offer, including a new expiration date.
Consummation of the tender offer is subject to additional conditions, including
Leon's ability to raise the necessary funds by resecuritizing the assets
underlying the auction rate securities to be purchased in the tender offer.
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 2008 filed with the SEC on November 7,
2008 ("Form 10-K").
Overview
We market and sell easy-to-use 35mm single-use and traditional film cameras. We
design, develop, manufacture and assemble most of our 35mm single-use cameras
and certain of our traditional film cameras at our manufacturing facilities in
the Peoples Republic of China ("PRC") and outsource the manufacture of certain
of our 35mm single-use and traditional film cameras. In fiscal 2006, we
significantly de-emphasized the sale of digital cameras and, in fiscal 2007, we
exited the digital camera market. Digital camera sales in fiscal 2007 were not
material and we did not sell digital cameras in fiscal 2008. We sell our private
label and brand-name products to our customers worldwide either directly or
through third-party distributors.
Throughout fiscal 2008, we assessed our ability to continue manufacturing,
marketing and/or selling single-use cameras. We determined that it would not be
advisable to continue our business as a small public company based on a number
of factors, including the continuing single-use and traditional film camera
market decline, both in unit volumes and selling prices, the increased cost of
certain components and labor, the significant competition in this industry, the
lack of market acceptance of our new non-camera products, the likelihood that we
would continue to incur significant net losses for an extended period of time,
and, that even if successful, the realization of significant returns on our
investments in the film camera business or new products was uncertain and could
take years to achieve.
Accordingly, based on the Special Committee's review of strategic alternatives
and recommendation, on October 29, 2008, our Board recommended our dissolution
and the adoption of a plan of liquidation. The dissolution and plan of
liquidation are subject to approval by our shareholders at the 2008 Annual
Meeting of Shareholders which is expected to be held in December 2008. Our
preliminary proxy statement was filed on November 7, 2008 with the SEC for its
review and is available for free on the SEC web site. Once the SEC review
process is complete, we will mail a copy of the definitive proxy statement to
our shareholders, together with instructions on voting procedures.
If our shareholders approve our dissolution and the plan of liquidation, we will
file a certificate of dissolution with the Department of Treasury of the State
of New Jersey. Thereafter, we will not engage in any business activities except
for the purpose of preserving the value of our assets, prosecuting and defending
lawsuits by or against us, winding up our business and affairs, selling and
monetizing our properties and non-cash assets, including our intellectual
property and other intangible assets, paying or otherwise settling our
liabilities, including contingent liabilities, terminating commercial agreements
and relationships and preparing to make distributions to our shareholders, in
accordance with the plan of liquidation.
If our shareholders do not approve our dissolution and the plan of liquidation,
our Board will explore the alternatives then available for the future of our
Company. We believe the value of our business will be materially adversely
impacted after
19
the announcement of the recommendation by our Board of our dissolution and the
adoption of a plan of liquidation. In particular, pending our shareholders' vote
on our dissolution and plan of liquidation, we have ceased manufacturing
products, purchasing materials and products and undertaking commitments for
sales of our products, except as necessary to complete the manufacture and sale
of materials and products that we have remaining in inventory and, as a result,
we believe that many, if not all, of our customers, including our major
customers, will transition their business to our competitors. These factors
raise substantial doubt about our ability to continue as a going concern.
Consequently, our independent registered public accounting firm has included an
explanatory paragraph addressing these factors in their report on our
consolidated financial statements included in our Form 10-K for fiscal 2008.
Therefore, if our shareholders do not approve our dissolution and plan of
liquidation, we will not be able to continue to operate our business as it
existed prior to our Board's recommendation of our dissolution and the adoption
of a plan of liquidation and may not be able to operate our business at all.
NASDAQ Delisting Notification
On October 1, 2008, we received a notice from the NASDAQ Stock Market ("NASDAQ")
indicating that our securities were subject to delisting due to our failure to
file our Form 10-K. On November 7, 2008, we filed our Form 10-K with the SEC and
NASDAQ, thereby regaining compliance with all requirements for continued listing
on the NASDAQ Global Market. On November 10, 2008, we received a notice from
NASDAQ indicating that our filing delinquency resulting from our delay in filing
our Form 10-K had been cured and, therefore, our securities would remain listed
on the NASDAQ Global Market.
Executive Summary
Quarter-Over-Quarter Results of Operations
Our operating income for the first quarter of fiscal 2009 was $0.1 million as
compared to an operating loss of $(2.0) million for the first quarter of fiscal
2008.
We experienced a $0.2 million increase in our quarter-over-quarter gross profit.
The increase in the quarter-over-quarter gross profit was primarily due to an
improvement in the quarter-over-quarter manufacturing material, labor and
overhead costs variances of approximately $0.6 million partially offset by a
reduction in gross profit of approximately of $0.3 million related to a
quarter-over-quarter reduction in net sales and an increase in severance costs
of approximately $0.1 million.
Our quarter-over-quarter selling expenses decreased by approximately $1.1
million primarily due to a reduction in selling-related employee compensation
costs of $0.5 million, freight costs of $0.3 million, and royalty costs of $0.1
million and a reduction in certain other costs of $0.2 million. Selling-related
employee compensation costs decreased as a result of the elimination of certain
positions in connection with our cost-reduction initiatives. Our
quarter-over-quarter general and administrative ("G&A") expenses decreased by
$0.8 million primarily due to a reduction in G&A-related employee compensation
costs of $0.3 million, professional fees of $0.1 million (professional fees
include $0.2 million incurred in support of our cost reduction initiatives and
our evaluation of strategic alternatives related to the Special Committee's
activities), value added taxes of $0.1 million, depreciation expense of $0.1
million and a reduction of certain other costs of $0.2 million. G&A-related
employee compensation costs decreased as a result of the elimination of certain
positions in connection with our cost-reduction initiatives.
20
First Quarter Fiscal 2009 Results of Operations
We recorded an operating income of $0.1 million for the first quarter of fiscal
2009.
Factors contributing to the first quarter fiscal 2009 operating income were:
1. Favorable Manufacturing Material, Labor and Overhead Cost Variances and
2. Non-Manufacturing Overhead Costs Partially Offset by Net Sales and
Related Gross Profit
1. Favorable Manufacturing Material, Labor and Overhead Cost Variances
During the first quarter of fiscal 2009, we experienced favorable manufacturing
material, labor and overhead cost variances attributable to a greater than
anticipated volume of production during the period that contributed an increase
in operating income of approximately $0.8 million.
2. Non-Manufacturing Overhead Costs Partially Offset by Net Sales and Related
Gross Profit
During the first quarter of fiscal 2009, our non-manufacturing selling and G&A
costs of approximately $3.1 million were partially offset by net sales and
related gross profit of approximately $2.4 million resulting in a net reduction
of operating income of approximately $0.7 million.
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 28, 2008, 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 October 2008, the Financial Accounting Standards Board ("FASB") issued FASB
Staff Position "(FSP") FAS 157-3 that clarifies the application of Statement of
Financial Accounting Standards ("SFAS") No. 157 in a market that is not active.
FSP No. FAS 157-3 is effective October 2008, including prior periods for which
financial statements have not been issued. The adoption of FSP No. FAS 157-3 did
not have a material impact on the Company's consolidated financial statements.
In February 2008, the FASB issued FSP 157-2 that delays the effective date of
SFAS No. 157 for nonfinancial assets and nonfinancial liabilities until fiscal
years beginning after November 15, 2008 and interim periods within those fiscal
years.
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. We do 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.
21
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" (as defined below). 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. The adoption of SFAS No. 159
did not have a material impact on our consolidated financial statements.
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 adoption of SFAS No. 157 did not
have a material impact on our consolidated financial statements.
In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes, an interpretation of FAS 109, Accounting for Income Taxes"
("FIN 48"), to create a single model to address accounting for uncertainty in
income tax positions. FIN 48 clarifies the accounting for income taxes by
prescribing a minimum probability threshold a tax position must meet to be
recognized in the financial statements. FIN 48 also provides guidance on the
measurement, derecognition and classification of recognized tax benefits,
interest and penalties, accounting for interim periods and the transition of the
accounting method upon the adoption of FIN 48. FIN 48 is effective for years
beginning after December 15, 2006. Accordingly, we adopted FIN 48 effective as
of July 1, 2007. The effect of the adoption of FIN 48 is disclosed in Note 4 -
Summary of Significant Accounting Policies, Income Taxes, in the Notes to the
Condensed Consolidated Financial Statements.
Results of Operations
Quarter Ended September 27, 2008 Compared to the Quarter Ended September 29,
2007
Net Sales
Net sales of our products for the first quarter of fiscal 2009 were $17.7
million, a decrease of $4.0 million, or 18.4%, as compared to net sales for the
first quarter of fiscal 2008. The decrease in net sales was due to a reduction
in sales of single-use and traditional film cameras.
Net sales from our operations in the Americas for the first quarter of fiscal
2009 were $12.8 million, a decrease of $3.4 million, or 21.0%, as compared to
the first quarter of fiscal 2008. The decrease in net sales in the Americas was
due primarily to a reduction in sales of single-use and, to a lesser extent,
traditional film cameras to our significant customers.
Net sales from our operations in Europe for the first quarter of fiscal 2009
were $3.5 million, a decrease of $0.6 million, or 14.6%, as compared to the
first quarter of fiscal 2008. The decrease in net sales in Europe was due
primarily to a decrease in sales of single-use cameras.
22
Net sales from our operations in Asia for the first quarter of fiscal 2009 were
$1.4 million, the same as compared to the first quarter of fiscal 2008.
Gross Profit
Gross profit for the first quarter of fiscal 2009 was $3.2 million, or 17.9% of
net sales, versus gross profit of $3.0 million, or 13.9% of net sales, in the
first quarter of fiscal 2008. The increase in the quarter-over-quarter gross
profit was primarily due to an improvement in the quarter-over-quarter
unfavorable manufacturing material, labor and overhead costs variances of
approximately $0.6 million partially offset by a reduction in gross profit of
approximately $0.3 million related to a decrease in quarter-over quarter net
sales and an increase in severance costs of approximately $0.1 million.
Product engineering, design and development costs for the first quarter of
fiscal 2009 and the first quarter of fiscal 2008, in dollars and as a percentage
of net sales, were $0.4 million, or 2.0%, and $0.5 million, or 2.3%,
respectively.
Operating Expenses
Selling expenses for the first quarter of fiscal 2009 were $1.1 million, or
6.24% of net sales, compared to $2.2 million, or 10.0% of net sales, for the
first quarter of fiscal 2008. Our quarter-over-quarter selling expenses
decreased by approximately $1.1 million primarily due to a reduction in
selling-related employee compensation costs of $0.5 million, freight costs of
$0.3 million, and royalty costs of $0.1 million and a reduction in certain other
costs of $0.2 million. Selling-related employee compensation costs decreased as
a result of the elimination of certain positions in connection with our
cost-reduction initiatives
G&A expenses for the first quarter of fiscal 2009 were $2.0 million, or 11.3% of
net sales, compared to $2.8 million, or 13.1% of net sales, for the first
quarter of fiscal 2008. Our quarter-over-quarter G&A expenses decreased by $0.8
million primarily due to a reduction in G&A-related employee compensation costs
of $0.3 million, professional fees of $0.1 million (professional fees include
$0.2 million incurred in support of our cost reduction initiatives and our
evaluation of strategic alternatives related to the Special Committee's
activities), value added taxes of $0.1 million, and depreciation expense of $0.1
million and a reduction of certain other costs of $0.2 million. G&A-related
employee compensation costs decreased as a result of the elimination of certain
positions in connection with our cost-reduction initiatives.
Share-Based Compensation
Share-based compensation expense of approximately $5,000 is included in income
(loss) before income taxes for each of the first quarter of fiscal 2009 and the
first quarter of fiscal 2008, respectively. The total income tax benefit of $0
was recognized in the consolidated statement of operations for the share-based
compensation arrangements for each of the first quarter of fiscal 2009 and the
first quarter of fiscal 2008, respectively. We consider all of our share-based
compensation expense as a component of general and administrative expenses in
the accompanying consolidated statements of operations. In addition, no amount
of share-based compensation was capitalized as part of capital expenditures or
inventory for the first quarter fiscal 2009 and the first quarter of fiscal
2008.
Interest Expense
Interest expense was approximately $0.2 million and $0.1 million for the first
quarter of fiscal 2009 and the first quarter of fiscal 2008, respectively.
23
Other Income, Net
Other income, net was $1.4 million and $0.3 million for the first quarter of
fiscal 2009 and the first quarter of fiscal 2008, respectively. The increase is
primarily attributable to a reimbursement to us of approximately $1.1 million
related to a portion of the upfront license fee paid by us to Jenoptik AG upon
entering into the license agreement in 2004 and foreign exchange losses of
approximately $0.1 million and a decrease in interest income of $0.1 million due
to decreases in invested balances. For further discussion, see Note 4 - Summary
of Significant Accounting Policies and Note 10 - Commitments and Contingencies,
License and Royalty Agreements, in the Notes to the Condensed Consolidated
Financial Statements.
Income Taxes
In the first quarter of fiscal 2009 and the fourth quarter of fiscal 2007, based
upon all of the available evidence, management determined that it was not more
likely than not that its deferred income tax assets will be fully realized.
Accordingly, we recorded a valuation allowance for the entire balance of our
deferred income tax assets as of September 27, 2008 and June 28, 2008. During
the first quarter of fiscal 2009 and the first quarter of fiscal 2008, we
recorded a provision for income taxes of $4,000 and $1,000, respectively. For
further discussion, see Note 4 - Summary of Significant Accounting Policies -
Income Taxes in the Notes to the Condensed Consolidated Financial Statements.
Net Income (Loss)
Net income for the first quarter of fiscal 2009 was approximately $1.3 million
or $0.22 per basic and diluted common share, as compared to a net loss of $(1.8)
million, or $(0.30) per basic and diluted common share, for the first quarter of
fiscal 2008.
Cost-Reduction Initiatives
We continue to evaluate our cost structure and implement cost-reduction
initiatives as appropriate. During the first quarter of fiscal 2009, we incurred
approximately $0.1 million in severance costs related to our ongoing
cost-reduction initiatives. During the first quarter of fiscal 2008, we recorded
a $60,000 reduction in a liability related to severance costs accrued for the
elimination of certain employee positions. For further discussion, see Note 12 -
Other Charges in the Notes to the Condensed Consolidated Financial Statements.
Liquidity and Capital Resources
We are not engaged in hedging activities and had no forward exchange contracts
outstanding at September 27, 2008. In the ordinary course of business, we enter
into operating lease commitments, purchase commitments and other contractual
obligations. These transactions are recognized in our financial statements in
accordance with generally accepted accounting principles in the United States of
America and are more fully discussed below.
We believe that our cash and cash equivalents, short-term investments,
anticipated cash flow from working capital and amounts available under our
credit facilities provide sufficient liquidity and capital resources for our
anticipated working capital and capital expenditure requirements for at least
the next twelve months.
Uncertainties in the Credit Markets - As of September 27, 2008, the carrying
value of our auction rate securities was $17.1 million of which $16.8 million
were classified as "Long-term investments" on our 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 consists of 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
24
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. As
previously reported, during fiscal 2008 we experienced failed auctions for
certain of our auction rate securities that have gone to auction, resulting in
our inability to sell those securities. These auction rate securities 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. However, in certain instances the interest rate for some of our auction
rate securities may reset to a zero percent interest rate due to a feature of
the relevant formula for determining the interest rate. To date, only a small
percentage of the auction rate securities have reset to a zero percent interest
rate for a period of time. These securities then may reset to a higher interest
rate in the future. In the event that a greater percentage of our auction rate
securities reset to a zero percent interest rate and do not subsequently reset
to a higher interest rate, it could have a material adverse effect on our
financial condition and results of operations.
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. As of September 27, 2008, we
determined that the estimated value of our auction rate securities was less than
their par value and have recorded our auction rate securities at a carrying
value of $17.1 million. We have experienced redemptions of approximately $0.3
million of our auction rate securities at 100% of par value subsequent to
September 27, 2008 and have consented to tender $2.1 million in par value of our
auction rate securities pursuant to an offer by the issuer to purchase such
securities for approximately $1.9 million. See Note 13, Subsequent Events, in
the Notes to the Condensed Consolidated Financial Statements for further
discussion. Currently, we have the ability and intent to hold our auction rate
securities until a recovery of par value and do not consider our auction rate
securities to be other-than-temporarily impaired as of September 27, 2008.
However we cannot predict whether the purchase of the tendered auction rate
securities will be completed, whether future auctions related to our auction
rate securities will be successful or whether we will otherwise be able to sell
such securities. We continue to seek 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 primary source of liquidity has been provided by our short-term investments,
funds provided by the collection of accounts receivable and borrowing
availability under our financing facilities. Our borrowing capacity under the
import facility provided by HSBC was reduced during calendar year 2005 from
$24.0 million in January 2005 to $14.0 million in September 2005. In January
2006, the HSBC financing facilities were further reduced to an aggregate of
approximately $8.2 million and we were required to provide cash deposits pledged
as security in the amount of approximately $8.2 million against the facility.
During fiscal 2007, we further reduced the HSBC financing facilities by $3.0
million to $5.2 million and obtained $3.0 million of alternative financing from
two other Hong Kong-based financial institutions. During fiscal 2008, we
eliminated one of the alternative financing facilities, leaving us with an
aggregate of approximately $6.2 million with our Hong Kong-based lenders.
On October 16, 2007, Concord Keystone Sales Corp. ("Keystone"), our United
States wholly-owned subsidiary, entered into a demand financing facility 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
sub-line of $10 million. The CIT Facility is secured by a first priority lien
on, among other things, Keystone's accounts receivable and inventory.
On March 4, 2008, Keystone received notice from CIT that an event of default
existed under the CIT Facility as a result of Keystone's failure to provide CIT
with our financial information for the second quarter of fiscal 2008. As
previously reported, we delayed the filing of our Quarterly Report on Form 10-Q
for the second quarter of fiscal 2008. We subsequently filed our Quarterly
Report on Form 10-Q for the second quarter of fiscal 2008 on March 31, 2008. As
a result of this event of default, CIT notified Keystone that it would increase
the availability reserve under the CIT Facility, thereby decreasing the
borrowing base, by $500,000.
On November 3, 2008, CIT notified Keystone that an event of default existed
under the CIT Facility as a result of our press release on October 30, 2008 that
we have elected to wind down operations and liquidate assets. Currently, CIT has
not
25
exercised its rights to accelerate our obligation to repay the CIT Facility, but
has temporarily discontinued making loans under the CIT facility until it
receives additional financial information regarding our dissolution and the plan
of liquidation.
If CIT was to demand repayment at a time when we did not otherwise have
sufficient borrowing capacity or liquid assets that would enable Keystone to
repay the CIT Facility in full, CIT would be entitled to foreclose on Keystone's
pledged inventory. This could result in Keystone's inventory being sold at a
significant discount to its carrying value and could have a material adverse
effect on our liquidity and ability to fund our operations.
Effective April 17, 2008, we entered into an Express Creditline Loan Agreement
with Citigroup Global Markets, Inc. ("Citigroup") for a $9 million secured
revolving credit line (the "Citigroup Facility"). In addition to the $9 million
credit line for advances, the Citigroup Facility provided for the accrual of up
to $1 million of interest, resulting in a Loan Limit of $10 million (the "Loan
Limit") under the Citigroup Facility. Effective October 20, 2008, the aggregate
credit limit under the Citigroup Facility was increased to $10,925,000. The
Citigroup Facility is secured by a first priority lien and security interest in
our remaining auction rate securities (the "Collateral"). Citigroup may, in its
sole discretion and without cause, demand full or partial payment of any
outstanding balance under the Citigroup Facility or reduce the Loan Limit at any
time.
Although the establishment of Citigroup Facility may mitigate the risk that we
may not have sufficient liquidity to fund our operations in the near term, in
the event that we were to utilize all or a portion of the Citigroup Facility and
Citigroup was to demand repayment at a time when we did not otherwise have
sufficient borrowing capacity or liquid assets that would enable us to repay the
Citigroup Facility in full, Citigroup would be entitled to foreclose on our
pledged auction rate securities. This could result in our auction rate
securities being sold at a significant discount to their face amount and a
significant reduction in the net realizable value of such securities and could
have a material adverse effect on our liquidity and ability to fund our
operations.
If our shareholders do not approve our dissolution and plan of liquidation and
we seek to continue operations, our ability to fund our operating requirements
and maintain an adequate level of working capital will depend primarily on our
ability to generate sales of our single-use and traditional film cameras and/or
new products, on our ability to continue to access our existing financing
facilities and on our ability to further reduce operating expenses. Our failure
to generate profitable sales of our single-use and traditional film cameras
and/or new products, our failure to further reduce operating expenses, and other
events including 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. It is uncertain whether our financing facilities will remain
available or, if they do remain available, what the terms of such facilities
will be, after our announcement of the recommendation by our Board of our
dissolution and the adoption of a plan of liquidation. 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.
Cash and Cash Equivalents - Cash and cash equivalents increased by $1.0 million
from $19.0 million at June 28, 2008 to $20.0 million at September 27, 2008. The
increase was primarily the result of net cash provide by operating activities of
$3.0 million, net proceeds related to sales of short-term investments of $1.5
million and net proceeds received from the sale of property, plant and equipment
of $0.1 million partially offset by $3.6 million in net cash used in repayments
under financing facilities.
Short-Term Investments - Short-term investments, including available-for-sale
investments, decreased by $1.5 million from $1.8 million at June 28, 2008 to
$0.3 million at September 27, 2008, as a result of redemptions of our auction
rate securities at 100% of par value subsequent to June 28, 2008. Current
capital market conditions have significantly reduced our ability to liquidate
our auction rate securities. For further discussion see Note - 4, Summary of
Significant Accounting Policies, Investments in the Notes to Condensed
Consolidated Financial Statements.
26
Cash Provided By (Used in) Operating Activities - Cash provided by operating
activities in the first quarter of fiscal 2009 was $3.0 million which compares
favorably to cash used in operating activities of $(2.0) million for the first
quarter of fiscal 2008. The changes in cash used in operating activities for the
respective fiscal quarters were primarily attributable to changes in net income
(loss), as adjusted for non-cash items of income and expense, accounts
receivable as a result of improved collections, lower levels of inventories as a
result of a focused effort to control inventory balances, and decreases in
accrued royalties as a result of lower overall net sales.
Cash Provided by Investing Activities - Cash provided by investing activities
was $1.6 million for the first quarter of fiscal 2009 as compared to cash
provided by investing activities of $3.3 million for the first quarter of fiscal
2008. The decrease in cash provided by investing activities was primarily due to
the net decrease in net proceeds received from the sale of available-for-sale
investments.
Cash Used In Financing Activities - Cash used in financing activities during
first quarter of fiscal 2009 was $3.6 million as compared to cash used in
financing activities of $0.4 million the first quarter of fiscal 2008. This
activity results from a net increase of repayments of our short-term borrowings
made under our financing facilities used for working capital purposes. See Note
8 - Short-Term Borrowings and Financing Facilities in the Notes to the Condensed
Consolidated Financial Statements.
Operating Leases - We enter into operating leases in the ordinary course of
business (e.g., warehouse facilities, office space and equipment). The effects
of outstanding leases are not material to us in terms of either annual cash flow
or in total future minimum payments.
Purchase Commitments - See Note 10 - Commitments and Contingencies in the Notes
to 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 8 - 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 10 - Commitments and Contingencies in the
Notes to Condensed Consolidated Financial Statements.
License Agreements - See Note 10 - Commitments and Contingencies in the Notes to
the Condensed Consolidated Financial Statements.
Intellectual Property Claims - See Note 10 - Commitments and Contingencies and
Note 11 - Litigation and Settlements in the Notes to the Condensed Consolidated
Financial Statements.
Hong Kong Financing Facilities - As of September 27, 2008, we had $1.2 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 8 - 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 our Annual
Report on Form 10-K for the fiscal year ended June 28, 2008 and subsequently
filed reports. We wish to caution the reader that these forward-looking
statements, including, without limitation, statements
27
regarding the dissolution and liquidation of our company, the amount and timing
of any liquidating distributions, expected cost reductions, anticipated or
expected results of the implementation of our cost-reduction initiatives,
anticipated revenues or capital expenditures, the expected market size for 35 mm
single-use and traditional film cameras, our assessment of and estimates of
royalty payments in connection with intellectual property claims, the
sufficiency of our working capital and cash to fund our operations in the next
twelve months, our belief regarding the impact of pending litigation, and other
statements contained in this report regarding matters that are not historical
facts, are only estimates or predictions. No assurance can be given that future
results will be achieved or that future liquidating distributions will be made.
Actual events or results may differ materially as a result of risks facing us or
actual results differing from the assumptions underlying such statements. In
particular, our expected results could be adversely affected by, among other
things, production difficulties or economic conditions negatively affecting 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 our inability to liquidate our assets or settle our liabilities on
favorable terms or, subject to shareholder approval, by our decision to dissolve
and liquidate our Company. 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 Annual
Report on Form 10-K for the fiscal year ended June 28, 2008.
Item 4T. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rules 13a-15(e)
and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), designed to ensure that information required to be disclosed in our
filings under the Exchange Act is (1) recorded, processed, summarized and
reported within the time periods specified in SEC rules and forms, and (2)
accumulated and communicated to our management, including the principal
executive officer and principal financial officer, to allow timely decisions
regarding required disclosure.
Our management has reviewed and evaluated the effectiveness of the design and
operation of our disclosure controls and procedures as of the end of the period
covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our
principal executive officer and principal financial officer concluded that as of
September 27, 2008, 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 September 27, 2008 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 11 - Litigation and Settlements
in the Notes to the Condensed Consolidated Financial Statements.
28
Item 1A. RISK FACTORS
There have been no material changes in the risk factors set forth in Part 1,
Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the fiscal year
ended June 28, 2008.
Item 6. EXHIBITS
No. Description Method of Filing
--- ----------- ----------------
3.1 Certificate of Incorporation, as amended through Incorporated by reference to the Company's annual report on
May 9, 2000 Form 10-K for the year ended July 1, 2000.
3.2 Restated By-Laws, as amended through July 12, 2004 Incorporated by reference to the Company's annual report on
Form 10-K for the year ended July 3, 2004.
3.3 Certificate of Amendment (No. 7) of Certificate of Incorporated by reference to the Company's current report on
Incorporation, dated November 2, 2006 Form 8-K filed November 7, 2006.
3.4 Certificate of Correction of Certificate of Incorporated by reference to the Company's current report on
Amendment (No. 7) to Certificate of Incorporation, Form 8-K filed November 7, 2006.
dated November 3, 2006
31.1 Certification of Chief Executive Officer pursuant Filed herewith.
to Rule 13a-14(a)/15d-14(a)
31.2 Certification of Principal Financial Officer Filed herewith.
pursuant to Rule 13a-14(a)/15d-14(a)
32.1 Certification of Chief Executive Officer pursuant Filed herewith.
to 18 U.S.C. ss.1350
32.2 Certification of Principal Financial Officer Filed herewith.
pursuant to 18 U.S.C. ss.1350
29
S I G N A T U R E
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONCORD CAMERA CORP.
----------------------------------------
(Registrant)
DATE: November 14, 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)
30
Exhibit Index
No. Description
--- -----------
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
31