United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 30, 2006
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to ___________
Commission file number 0-17038
Concord Camera Corp.
--------------------
(Exact name of registrant as specified in its charter)
New Jersey 13-3152196
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4000 Hollywood Blvd., 6th Floor, North Tower, Hollywood, Florida 33021
----------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(954) 331-4200
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, no par value - 5,847,408 shares as of January 31, 2007
Index
Concord Camera Corp. and Subsidiaries
Part I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets as of
December 30, 2006 (Unaudited) and July 1, 2006................ 3
Condensed consolidated statements of operations
(Unaudited) for the quarter and six months ended
December 30, 2006 and December 31, 2005....................... 4
Condensed consolidated statements of cash flows
(Unaudited) for the six months ended
December 30, 2006 and December 31, 2005....................... 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........ 27
Item 4. Controls and Procedures........................................... 27
Part II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 28
Item 1A. Risk Factors...................................................... 28
Item 4. Submission of Matters to a Vote of Security Holders............... 28
Item 5. Other Information................................................. 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)
December 30, 2006 July 1,
(Unaudited) 2006
----------------- ---------
Assets
Current Assets:
Cash and cash equivalents $ 4,084 $ 6,795
Restricted cash 6,200 8,264
Short-term investments 32,150 23,550
Accounts receivable, net 8,920 16,648
Inventories 16,471 28,260
Prepaid expenses and other current assets 2,245 3,277
--------- ---------
Total current assets 70,070 86,794
Property, plant and equipment, net 12,081 13,778
Other assets 3,680 4,170
--------- ---------
Total assets $ 85,831 $ 104,742
========= =========
Liabilities and Stockholders' Equity
Current Liabilities:
Short-term borrowings under financing facilities $ 3,114 $ --
Accounts payable 8,617 23,366
Accrued expenses 12,542 14,711
Other current liabilities 2,003 1,874
--------- ---------
Total current liabilities 26,276 39,951
Other long-term liabilities 1,391 1,824
--------- ---------
Total liabilities 27,667 41,775
Commitments and contingencies
Stockholders' equity:
Blank check preferred stock, no par value,
1,000 shares authorized, none issued -- --
Common stock, no par value, 20,000 shares
authorized; 6,261 and 6,185 shares issued
as of December 30, 2006 and July 1, 2006, respectively 143,860 143,518
Additional paid-in capital 5,171 5,128
Deferred share arrangement 413 624
Accumulated deficit (85,874) (80,686)
--------- ---------
63,570 68,584
Less: treasury stock, at cost, 347
shares as of December 30, 2006 and July 1, 2006 (4,993) (4,993)
Less: common stock held in trust, 66 and 102
shares as of December 30, 2006 and July 1, 2006 (413) (624)
--------- ---------
Total stockholders' equity 58,164 62,967
--------- ---------
Total liabilities and stockholders' equity $ 85,831 $ 104,742
========= =========
See accompanying notes to condensed consolidated financial statements.
3
Concord Camera Corp. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands, except per share data)
For the quarter ended For the six months ended
---------------------------------- ---------------------------------
December 30, December 31, December 30, December 31,
2006 2005 2006 2005
------------ ------------ ------------ ------------
Net sales $ 19,338 $ 41,109 $ 48,163 $ 85,695
Cost of products sold 17,837 37,088 42,159 77,545
-------- -------- -------- --------
Gross profit 1,501 4,021 6,004 8,150
Selling expenses 2,155 4,016 4,943 7,553
General and administrative
expenses 3,475 5,495 7,213 11,801
-------- -------- -------- --------
Operating loss (4,129) (5,490) (6,152) (11,204)
Interest expense 98 107 164 208
Other (income) expense, net (698) 44 (1,163) (62)
-------- -------- -------- --------
Loss before income taxes (3,529) (5,641) (5,153) (11,350)
Provision for income taxes 18 138 35 189
-------- -------- -------- --------
Net loss $ (3,547) $ (5,779) $ (5,188) $(11,539)
======== ======== ======== ========
Basic and diluted loss per
common share $ (0.61) $ (0.99) $ (0.89) $ (1.98)
======== ======== ======== ========
Weighted average common shares
outstanding - basic and
diluted 5,846 5,838 5,842 5,838
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
4
Concord Camera Corp. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
For the six months ended
---------------------------------------
December 30, 2006 December 31, 2005
----------------- -----------------
Cash flows from operating activities:
Net loss $ (5,188) $(11,539)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 2,186 2,402
Inventory charges 347 444
Restructuring reserve -- (110)
Gain on disposal of property, plant and equipment (58) --
Stock-based compensation 43 249
Changes in operating assets and liabilities:
Accounts receivable, net 7,728 10,296
Inventories 11,442 14,216
Prepaid expenses and other current assets 753 1,962
Other assets 254 1,140
Accounts payable (14,749) (15,725)
Accrued expenses (2,169) 2,237
Other current liabilities 129 (1,830)
Other long-term liabilities (433) (1,627)
-------- --------
Net cash provided by operating activities 285 2,115
-------- --------
Cash flows from investing activities:
Proceeds from sales of available-for-sale investments 38,300 35,200
Purchases of available-for-sale investments (46,900) --
Proceeds from the sale of property, plant and equipment 342 --
Purchases of property, plant and equipment (258) (897)
Restricted cash 2,064 (2,000)
-------- --------
Net cash (used in) provided by investing activities (6,452) 32,303
-------- --------
Cash flows from financing activities:
Borrowings under short-term financing facilities, net 3,114 888
Net Proceeds from issuance of common stock 342 --
-------- --------
Net cash provided by financing activities 3,456 888
-------- --------
Net (decrease) increase in cash and cash equivalents (2,711) 35,306
Cash and cash equivalents at beginning of period 6,795 8,016
-------- --------
Cash and cash equivalents at end of period $ 4,084 $ 43,322
======== ========
See accompanying notes to condensed consolidated financial statements.
5
CONCORD CAMERA CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 30, 2006
(Unaudited)
Note 1 - Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the quarter ended December 30, 2006 ("Second Quarter Fiscal 2007")
and the six months ended December 30, 2006 ("Fiscal 2007 YTD") are not
necessarily indicative of the results that may be expected for the fiscal year
ending June 30, 2007 ("Fiscal 2007"). For comparative purposes, the quarter
ended December 31, 2005 has been defined as the ("Second Quarter Fiscal 2006")
and the six months ended December 31, 2005 have been defined as ("Fiscal 2006
YTD"). The balance sheet at July 1, 2006 has been derived from the audited
financial statements at that date, but does not include all of the information
and footnotes required by accounting principles generally accepted in the United
States for complete financial statements. Concord Camera Corp., a New Jersey
corporation, and its consolidated subsidiaries (collectively referred to as the
"Company") manage their business on the basis of one reportable segment. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K filed
with the Securities and Exchange Commission ("SEC") as of September 14, 2006 for
the fiscal year ended July 1, 2006 ("Fiscal 2006").
Reverse Split of Common Stock
On October 26, 2006, the Board of Directors of the Company approved, without
action by the shareholders of the Company, a Certificate of Amendment to the
Company's Certificate of Incorporation to implement a one-for-five split of the
Company's Common Stock with an effective date of November 21, 2006. On the
effective date of the reverse split, each five shares of issued Common Stock
(including treasury shares and shares held in trust) were converted
automatically into one share of Common Stock, resulting in the total number of
shares outstanding being reduced from 28,859,385 shares to 5,771,877 shares, and
the number of authorized shares of the Company's Common Stock reduced from
100,000,000 shares to 20,000,000 shares. All Common Stock shares and per-share
and related stock option amounts have been restated for the reverse stock split
in the accompanying condensed consolidated financial statements and footnotes.
Note 2 - Significant Customers:
During the Second Quarter Fiscal 2007 and Fiscal 2007 YTD, the Company's sales
to Walgreen Co. ("Walgreens") and Wal-Mart Stores, Inc. ("Wal-Mart") decreased
as compared to the Second Quarter Fiscal 2006 and Fiscal 2006 YTD. The Second
Quarter Fiscal 2007 and Fiscal 2007 YTD decrease in sales to Walgreens was
attributable to decreased sales of single-use cameras resulting from overstocked
inventory levels and decreased sales of 35mm traditional film cameras. The
Second Quarter Fiscal 2007 decrease in sales to Wal-Mart was attributable to
decreased sales of single-use cameras resulting from overstocked inventory
levels and decreased sales of digital and 35mm traditional film cameras. The
Fiscal 2007 YTD decrease in sales to Wal-Mart was primarily due to decreased
sales of 35mm traditional film and digital cameras partially offset by an
increase in single-use cameras. The Company expects sales of single-use cameras
to Walgreens and Wal-Mart to increase as their respective inventory levels
decrease, subject to seasonality. The loss of any of these significant customers
or substantially reduced sales to these significant customers or any other large
customer could have a material adverse effect on the Company's results of
operations.
6
The following table illustrates each significant customer's net sales as a
percentage of consolidated net sales during the Second Quarter Fiscal 2007,
Second Quarter Fiscal 2006, Fiscal 2007 YTD and Fiscal 2006 YTD.
Percent of Net Sales
--------------------
For the quarter ended For the six months ended
------------------------------- -------------------------------
December 30, December 31, December 30, December 31,
2006 2005 2006 2005
------------ ------------ ------------ ------------
Wal-Mart 40.5% 26.4% 37.0% 20.9%
Walgreens 7.3% 19.4% 27.3% 21.0%
Plus 0.0% 10.6% 0.0% 10.0%
---- ---- ---- ----
Total 47.8% 56.4% 64.3% 51.9%
==== ==== ==== ====
Note 3 - Summary of Significant Accounting Policies:
Principles of Consolidation
The accompanying condensed consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
and include the accounts of the Company and its subsidiaries. All significant
intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The more significant of the
Company's estimates include but are not limited to, provisions for sales returns
and allowances, provision for bad debts, inventory valuation charges,
realizability of long-lived and other assets, realizability of deferred income
tax assets and provisions for intellectual property claims and litigation
related matters.
Foreign Currency Transactions
The Company operates on a worldwide basis and its results may be adversely or
positively affected by fluctuations of various foreign currencies against the
U.S. Dollar, specifically, the Canadian Dollar, Euro, British Pound Sterling,
PRC Renminbi, Hong Kong Dollar and Japanese Yen. Although certain net sales to
customers and purchases of certain components and services are transacted in
local currencies, each of the Company's foreign subsidiaries purchases
substantially all of its finished goods inventories in U.S. Dollars.
Accordingly, the Company has determined that the U.S. Dollar is the functional
currency for all of its subsidiaries. The accounting records for subsidiaries
that are maintained in a local currency are remeasured into the U.S. Dollar.
Accordingly, most non-monetary balance sheet items and related statement of
operations accounts are remeasured from the applicable local currency to the
U.S. Dollar using average historical exchange rates, producing substantially the
same result as if the entity's accounting records had been maintained in the
U.S. Dollar. Adjustments resulting from the remeasurement process are recorded
into earnings. Gains or losses resulting from foreign currency transactions and
remeasurement are included in "Other expense (income), net" in the accompanying
condensed consolidated statements of operations. For the Second Quarter Fiscal
2007 and the Second Quarter Fiscal 2006, included in "Other expense (income),
net" in the accompanying condensed consolidated statements of operations are
approximately $0.1 million and $0.4 million, respectively, of net foreign
currency losses. For Fiscal 2007 YTD and Fiscal 2006 YTD, included in "Other
expense (income), net" in the accompanying condensed consolidated statements of
operations, are $0 and approximately $0.6 million, respectively, of net foreign
currency losses.
7
Hedging Activities
During the Second Quarter Fiscal 2007 and the Second Quarter Fiscal 2006, the
Company had no forward exchange contracts or other derivatives outstanding and
did not participate in any other type of hedging activities.
Restricted Cash
As of December 30, 2006 and July 1, 2006, the Company had cash deposits pledged
as security in the amount of approximately $6.2 million and $8.3 million,
respectively, for letters of credits and borrowings under its revolving demand
financing facilities. The restricted cash amount is classified as a current
asset in the condensed consolidated balance sheets since the borrowings it
secures are classified as a current liability. See Note 7 - Short-Term
Borrowings and Financing Facilities.
Investments
At December 30, 2006 and July 1, 2006, the Company's "Short-term investments,"
as classified in the accompanying condensed consolidated balance sheets,
consisted of auction rate debt securities and were considered available-for-sale
securities. During the Second Quarter Fiscal 2007 and the Second Quarter Fiscal
2006, no other comprehensive income or loss was recorded because the variable
interest rate feature and short maturities of the auction rate debt securities
caused their carrying values to approximate market value. Available-for-sale
securities are carried at fair value, with the unrealized gains and losses, net
of tax, reported as a component of accumulated other comprehensive income (loss)
reported in the stockholders' equity section unless the loss is other than
temporary, then it would be recorded as an expense. Realized gains and losses,
interest and dividends are classified as investment income in "Other expense
(income), net" in the accompanying condensed consolidated statements of
operations. Investment income of $0.4 million related to the short-term
investments is included in "Other expense (income), net" for each of the Second
Quarter Fiscal 2007 and the Second Quarter Fiscal 2006, respectively. Investment
income of $0.9 million and $0.7 million related to the short-term investments
is included in "Other expense (income), net" for Fiscal 2007 YTD and Fiscal
2006 YTD, respectively.
Inventories
Inventories, consisting of raw materials, components, work-in-process and
finished goods, are stated at the lower of cost or market value and are
determined on a first-in, first-out basis. Work-in-process and component
inventory costs include materials, labor and manufacturing overhead. The Company
records lower of cost or market value adjustments based upon changes in market
pricing, customer demand, technological developments or other economic factors
for on-hand, excess, obsolete or slow-moving inventory.
Impairment of Long-Lived and Other Assets
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, the Company
continually evaluates whether events and circumstances have occurred that
provide indications of impairment. The Company records an impairment loss when
indications of impairment are present and when the undiscounted cash flows
estimated to be generated by those assets are less than the assets' carrying
amounts. The Company performs an impairment test by summarizing the undiscounted
cash flows expected to result from the use and eventual sale of its long-lived
assets. If the sum of the undiscounted cash flows exceeds the carrying values of
these assets, then the Company concludes these carrying values are recoverable.
Revenue Recognition
The Company recognizes revenue, in accordance with Staff Accounting Bulletin
("SAB") No. 101, Revenue Recognition in Financial Statements, and SAB No. 104,
Revenue Recognition: Corrected Copy, when title and risk of loss are transferred
to the customer, the sales price is fixed or determinable, persuasive evidence
of an arrangement exists and collectibility is probable. Title and risk of loss
generally transfer when the product is delivered to the customer or upon
shipment, depending upon negotiated contractual arrangements. Sales are recorded
net of provisions for anticipated returns which the Company estimates based on
historical rates of return, adjusted for current events as appropriate, in
accordance with SFAS
8
No. 48, Revenue Recognition When Right of Return Exists ("SFAS No. 48"). If
actual future returns are higher than estimated, then net sales could be
adversely affected. Management has assessed the appropriateness of the timing of
revenue recognition in accordance with SAB No. 104 and SFAS No. 48.
Sales Allowances
The Company may enter into arrangements to offer certain pricing discounts and
allowances that do not provide an identifiable separate benefit or service. In
accordance with Emerging Issues Task Force Issue No. 01-09, Consideration Given
by a Vendor to a Customer (Including a Reseller of the Vendor's Products) ("EITF
Issue No. 01-09"), the Company records these pricing discounts and allowances as
a reduction of sales. Advertising and promotional costs, which include
advertising allowances and other discounts, are expensed as incurred. In
accordance with EITF Issue No. 01-09, which addresses the statement of
operations classification of consideration between a vendor and a retailer, the
Company records certain variable selling expenses, including advertising
allowances, other discounts and other allowances, as a reduction of sales. The
Company may enter into arrangements to provide certain free products. In
accordance with EITF Issue No. 01-09, the Company records the cost of free
products ratably into the cost of products sold based upon the underlying
revenue transaction.
Share-Based Compensation
Effective July 3, 2005, the Company began accounting for its employee and
director stock option plans in accordance with the provisions of SFAS No. 123
(revised 2004), "Share-Based Payment" ("SFAS No. 123R"). SFAS No. 123R revised
SFAS No. 123, "Accounting for Stock-Based Compensation," and supersedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB Opinion No.
25"). The revised statement addresses the accounting for share-based payment
transactions with employees and other third parties, eliminates the ability to
account for share-based payments using APB Opinion No. 25 and requires that the
compensation costs relating to such transactions be recognized in the
consolidated statement of operations based upon the grant-date fair value of
those instruments.
Income Taxes
The Company periodically evaluates the realizability of its deferred income tax
assets. In the Second Quarter Fiscal 2007 and the quarter ended July 1, 2006
("Fourth Quarter Fiscal 2006"), based upon all the available evidence, the
Company determined that it was not more likely than not that its deferred income
tax assets will be fully realized. Accordingly, the Company has a valuation
allowance recorded for the entire balance of its deferred income tax assets as
of December 30, 2006 and July 1, 2006.
The Company estimates its interim effective tax rate before consideration of a
deferred income tax valuation allowance based upon its projected consolidated
annual effective income tax rate. This rate is largely a function of the annual
projected amounts of pre-tax income or loss attributed to both domestic and
foreign operations, the application of their respective statutory tax rates and
the anticipated utilization of available net operating loss carryforwards to
reduce taxable income. During the Second Quarter Fiscal 2007 and the Second
Quarter Fiscal 2006, the Company recorded provisions for income taxes of
approximately $18,000 and $138,000, respectively. During Fiscal 2007 YTD and
Fiscal 2006 YTD, the Company recorded a provision for income taxes of $35,000
and $189,000, respectively. The Second Quarter Fiscal 2007 and Fiscal 2007 YTD
income tax provision relates to income tax liabilities incurred by certain of
the Company's foreign subsidiaries. These foreign subsidiaries do not have net
operating losses to offset such income tax liabilities.
Comprehensive Loss
Comprehensive loss in accordance with SFAS No. 130, Reporting Comprehensive
Income ("SFAS No. 130"), includes net loss adjusted for certain revenues,
expenses, gains and losses that are excluded from net loss under accounting
principles generally accepted in the U.S. Unrealized gains and losses related to
the Company's available-for-sale investments are excluded from net loss. During
the Second Quarter Fiscal 2007 and Fiscal 2007 YTD, the Company's comprehensive
loss was $(3.5) million and $(5.2) million, respectively, the same as the net
loss for both periods because the Company did not have any items of other
comprehensive income or loss. During the Second Quarter Fiscal 2006 and Fiscal
2006 YTD, the
9
Company's comprehensive loss was $(5.8) million and $(11.5) million,
respectively, the same as the net loss for both periods because the Company did
not have any items of other comprehensive income or loss.
Loss per Share
Basic and diluted loss per share are calculated in accordance with SFAS No. 128,
Earnings per Share ("SFAS No. 128"). All applicable loss per share amounts have
been presented in conformity with SFAS No. 128 requirements. During the Second
Quarter Fiscal 2007 and the Second Quarter Fiscal 2006, the Company issued
75,532 and no shares, respectively, of Common Stock on the exercise of stock
options. During Fiscal 2007 YTD and Fiscal 2006 YTD, the Company issued 75,532
and no shares, respectively, of Common Stock on the exercise of stock options.
In the Second Quarter Fiscal 2007 and the Second Quarter Fiscal 2006,
potentially dilutive securities were comprised of stock options to purchase
3,851 and 20,832 shares of Common Stock, respectively, that were not included in
the calculation of diluted loss per share because their impact was antidilutive.
In Fiscal 2007 YTD and Fiscal 2006 YTD, potentially dilutive securities were
comprised of stock options to purchase 899 and 23,725 shares of Common Stock,
respectively, that were not included in the calculation of diluted loss per
share because their impact was antidilutive. In the Second Quarter Fiscal 2007
and Fiscal 2007 YTD and the Second Quarter Fiscal 2006 and Fiscal 2006 YTD, the
weighted average effect of 66,200 and 101,811 shares, respectively, for which
delivery has been deferred under the Company's Deferred Delivery Plan, was
included in the denominator of both basic and diluted loss per share
calculations for each respective period. See Note 1 -- Basis of Presentation,
Reverse Split of Common Stock and Note 9 - Deferred Share Arrangement.
Note 4 - Recently Issued Accounting Pronouncements:
In July 2006, the FASB issued Interpretation No. 48 ("FIN 48"), "Accounting for
Uncertainty in Income Taxes--an Interpretation of FASB Statement No. 109." FIN
48 clarifies the accounting for uncertainty in income taxes recognized in a
company's financial statements by prescribing a recognition threshold and
measurement attribute for financial statement recognition and measurement of a
tax position taken or expected to be taken on a tax return. Additionally, FIN 48
provides guidance on de-recognition of tax benefits previously recognized and
additional disclosures for unrecognized tax benefits, interest and penalties.
FIN 48 is effective for fiscal years beginning after December 15, 2006, and is
required to be adopted by the Company in the first quarter of fiscal year 2008.
The Company is currently evaluating whether the adoption of FIN 48 will have a
material effect on its consolidated financial position, results of operations or
cash flows.
Note 5 - Supplemental Cash Flow Information:
Non-cash Investing Activities:
(table in thousands)
Deferred Share Arrangement Fiscal 2007 YTD
-------------------------- ---------------
Deferred share arrangement obligation to participant $ (211)
Common stock received and held in trust 211
------
$ --
======
See Note 9 - Deferred Share Arrangement for a description of the deferred share
arrangement transactions in Fiscal 2007.
10
Note 6 - Inventories:
Inventories consist of the following:
(table in thousands)
December 30, July 1,
2006 2006
------------ -------
Raw materials, components, and
work-in-process $ 6,202 $ 9,589
Finished goods 10,269 18,671
------- -------
Total inventories $16,471 $28,260
======= =======
During the Second Quarter Fiscal 2007 and the Second Quarter Fiscal 2006, the
Company recorded inventory related pre-tax charges of $0 and approximately $0.1
million, respectively, to reduce the carrying value of certain finished goods
and return camera inventories below their cost basis, resulting from price
declines, to their estimated net realizable value at December 30, 2006 and
December 31, 2005. For the Second Quarter Fiscal 2007 and the Second Quarter
Fiscal 2006, the inventory related pre-tax charges had the effect of decreasing
inventories by $0 and $0.1 million, respectively, and increasing cost of
products sold by $0 and $0.1 million, respectively. For Fiscal 2007 YTD and
Fiscal 2006 YTD, the inventory pre-tax charges had the effect of decreasing
inventories by $0.3 million and $0.4 million, respectively, and increasing cost
of products sold by $0.3 million and $0.4 million, respectively.
Note 7 - Short-Term Borrowings and Financing Facilities:
During the Second Quarter Fiscal 2007, Concord Camera HK Limited ("CCHK"), the
Company's Hong Kong subsidiary, (i) reduced the demand financing facilities
provided by The Honkkong and Shanghai Banking Corporation ("HSBC") by
approximately US$3.0 million, from an aggregate amount of approximately US$8.2
million to approximately US$5.2 million, and the corresponding cash on deposit
as security for the facilities by approximately US$3.0 million; and (ii)
accepted additional demand financing facilities from each of Dah Sing Bank,
Limited ("Dah Sing") and Shanghai Commercial Bank Ltd ("SCB") in an aggregate
amount of approximately US$3.4 million. As security for the Dah Sing and SCB
financing facilities, among other things, the Company provided a corporate
guarantee to Dah Sing in the amount of approximately US$2.3 million and to SCB
in the amount of approximately US$1.1 million. The financing facilities are
discussed in detail below.
On December 5, 2006, CCHK accepted a proposal from SCB dated June 12, 2006 (the
"SCB Agreement") for the provision to CCHK of certain demand banking facilities
up to an amount of approximately HKD9,000,000 (approximately, US$1.125 million)
(collectively, the "SCB Facilities"). Pursuant to the SCB Agreement, subject to
certain terms and conditions set forth in the agreement, CCHK may use (i) up to
HKD6,000,000 (approximately US$750,000) of the SCB Facilities for opening
letters of credit, import loans for settlement of draw-downs under Letters of
Credit, releasing goods under trust receipts, payables financing loans against
vendor's invoices and packing loans; and (ii) up to HKD3,000,000 (approximately
US$375,000) for negotiating export documents under Letters of Credit in CCHK's
favor. The SCB Agreement has no stated expiration date.
The SCB Facilities bear interest at variable rates, as follows: 0.5% per annum
over the Hong Kong prime rate on facilities denominated in Hong Kong Dollars;
and 0.5% per annum over the U.S. prime rate on facilities denominated in U.S.
Dollars.
As security for the SCB Facilities, in addition to the Company's corporate
guarantee in the amount of HKD9,000,000 (approximately US$1.125 million), CCHK
executed a mortgage in favor of SCB on the Hong Kong office property owned by
CCHK.
On December 4, 2006, CCHK accepted a proposal from HSBC to reduce its borrowing
capacity by approximately $3.0 million under the import facilities provided by
HSBC to CCHK. This reduction decreased CCHK's aggregate borrowing capacity,
including a guaranty facility of approximately $0.5 million, to approximately
$5.2 million. Upon CCHK's acceptance of the proposal, HSBC released to CCHK
approximately $3.0 million of the $8.2 million cash on deposit held
11
by HSBC as security for the HSBC revolving demand financing facilities and
outstanding letters of credit, thereby reducing such cash on deposit to
approximately $5.2 million. CCHK requested the reduction in borrowing capacity
and the corresponding reduction of the cash on deposit held by HSBC after
establishing facilities with Dah Sing and SCB.
On October 4, 2006, CCHK accepted a proposal from Dah Sing dated June 19, 2006
(the "Dah Sing Agreement") for the provision to CCHK of certain demand banking
facilities up to an amount of approximately $2.3 million (collectively, the "Dah
Sing Facilities"). Pursuant to the proposal, CCHK may use the Dah Sing
Facilities for opening letters of credit, draft loans, negotiating export
letters of credit with a letter of guarantee and/or outward bills loans. Of this
credit line, approximately $1.9 million will be available for trust receipts,
invoice financing, packing loans and/or advances against receivables. The Dah
Sing Agreement expires on June 30, 2007.
The Dah Sing Facilities bear interest at variable rates, as follows: 1.5% per
annum over 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 the Singapore
Interbank Offered Rate on facilities denominated in any other foreign currency.
As security for the Dah Sing Facilities, in addition to the Company's corporate
guarantee in the amount of approximately $2.3 million, CCHK provided to Dah Sing
a pledged deposit in the amount of not less than $1.0 million and CCHK had
undertaken (A) to maintain a net worth of not less than HKD80.0 million
(approximately US$10.0 million), (B) to provide audited financial statements
showing a net profit by June 30, 2007, the end of the Company's 2007 fiscal
year, and (C) to direct import/export business to Dah Sing of not less than
HKD60.0 million (approximately US$7.5 million) per year.
As of December 30, 2006 and July 1, 2006, the Company had $3.1 million and $0,
respectively, in short-term borrowings outstanding under the financing
facilities described above. The weighted average borrowing rates on the
short-term borrowings as of December 30, 2006 and July 1, 2006, were 6.19% and
6.79%, respectively.
Note 8 - Share-Based Compensation Expense:
During the Second Quarter Fiscal 2007 and the Second Quarter Fiscal 2006, the
Company recorded approximately $17,000 and $119,000, respectively, of
share-based compensation expenses. During Fiscal 2007 YTD and Fiscal 2006 YTD
the Company recorded approximately $43,000 and $249,000, respectively, of
share-based compensation. The Company considers all of its share-based
compensation expense as a component of general and administrative expenses. In
addition, no amount of share-based compensation expense was capitalized as part
of capital expenditures or inventory for the periods presented.
The Company uses the Black-Scholes-Merton option valuation model to calculate
the fair value of a stock option grant. The share-based compensation expense
recorded in the Second Quarter Fiscal 2007 and the Second Quarter Fiscal 2006
was calculated using the assumptions included in the following table. Expected
volatilities are based on the historical volatility of the Company's Common
Stock over the period of time commensurate with the expected life of the stock
options. The dividend yield is zero percent as the Company has never paid cash
dividends and has no present intention to pay cash dividends. The Company uses
historical data to estimate option exercise and employee termination information
within the valuation model. The expected term of options granted is based upon
the observed and expected time to the date of post-vesting exercise and
forfeitures of options by the Company's employees. The risk-free interest rate
is derived from the average five-year U.S. Treasury constant maturity rate for
the appropriate quarter, which approximates the rate in effect at the time of
the stock option grant.
12
Quarter ended Quarter ended
December 30, 2006 December 31, 2005
----------------- -----------------
Expected volatility 64.7% 70.9%
Expected dividend yield 0% 0%
Expected term (in years) 5 5
Risk-free interest rate 4.6% 4.4%
A summary of stock option activity under the Company's stock option plans as of
December 30, 2006, and changes during the Second Quarter Fiscal 2007 and Fiscal
YTD 2007 are presented below:
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Total Stock Options Shares Price Term (Years) Value
--------------------------------- ------- -------- ------------ ---------
Outstanding at September 30, 2006 314,156 $20.56
Granted -- --
Exercised 75,532 $ 4.53
Forfeited or expired (14,480) $28.57
-------
Outstanding at December 30, 2006 224,144 $25.44 3.5 $5,000
======= ====== === ======
Exercisable at December 30, 2006 198,789 $27.65 3.0 $ --
======= ====== === ======
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Total Stock Options Shares Price Term (Years) Value
--------------------------------- ------- -------- ------------ ---------
Outstanding at July 1, 2006 327,690 $21.06
Granted 2,000 $ 2.75
Exercised 75,532 $ 4.53
Forfeited or expired (30,014) $28.68
-------
Outstanding at December 30, 2006 224,144 $25.44 3.5 $5,000
======= ====== === ======
Exercisable at December 30, 2006 198,789 $27.65 3.0 $ --
======= ====== === ======
The weighted average grant-date fair value of options granted during the Second
Quarter Fiscal 2007 and the Second Quarter Fiscal 2006 was $0 each. The total
intrinsic value of options exercised during the Second Quarter Fiscal 2007 and
Fiscal 2007 YTD was $2,000. No options were exercised in the Second Quarter
Fiscal 2006 and Fiscal 2006 YTD. The intrinsic value of a stock option is the
amount by which the current market value of the underlying stock option exceeds
the exercise price of the stock option.
13
A summary of the status of nonvested shares as of December 30, 2006, and changes
during the Second Quarter Fiscal 2007 and Fiscal 2007 YTD are presented below:
Weighted
Average Grant
Nonvested Stock Options Shares Date Fair Value
------------------------------- ------ ---------------
Nonvested at September 30, 2006 29,502 $ 6.81
Granted -- --
Vested (1,867) $29.91
Forfeited (2,280) $ 7.32
------ ------
Nonvested at December 30, 2006 25,355 $ 5.06
====== ======
Weighted
Average Grant
Nonvested Stock Options Shares Date Fair Value
------------------------------- ------ ---------------
Nonvested at July 1, 2006 32,169 $ 7.90
Granted 2,000 $ 1.52
Vested (5,334) $18.99
Forfeited (3,480) $ 7.96
------ ------
Nonvested at December 30, 2006 25,355 $ 5.06
====== ======
As of December 30, 2006, there was approximately $100,000 of total unrecognized
compensation cost related to nonvested share-based compensation arrangements
granted under the Company's stock option plans. The unrecognized compensation
cost is expected to be recognized over a weighted-average vesting period of 2.9
years. The total grant date fair value of stock options vested during the Second
Quarter Fiscal 2007 and the Second Quarter Fiscal 2006 was approximately $56,000
and $233,000, respectively. The total grant date fair value of stock options
vested during Fiscal 2007 YTD and Fiscal 2006 YTD was approximately $101,000 and
$431,000, respectively. See Note 1-- Basis of Presentation, Reverse Split of
Common Stock.
Note 9 - Deferred Share Arrangement:
The Company's Deferred Delivery Plan allows designated executive officers to
elect, subject to the approval of the Compensation and Stock Option Committee of
the Company's Board of Directors, to defer the gains on certain stock option
exercises by deferring delivery of the "profit" shares to be received upon
exercise.
On August 9, 2006, the Chairman took delivery of the 35,609 shares held in trust
upon expiration of the two-year deferral period, reducing the deferred share
arrangement balance in stockholders' equity by $211,500. See Note 1 -Basis of
Presentation, Reverse Split of Common Stock and Note 5 - Supplemental Cash Flow
Information.
Note 10 - Commitments and Contingencies:
License and Royalty Agreements
On May 10, 2004, the Company entered into a twenty year, worldwide trademark
license agreement with Jenoptik AG for the exclusive use of the JENOPTIK brand
name and trademark on non-professional consumer imaging products including, but
not limited to, digital, single-use and traditional cameras, and other imaging
products and related accessories. The license agreement provides for a royalty
of one-half of one percent (0.5%) of net sales of non-professional consumer
imaging products bearing the JENOPTIK brand name for the first ten (10) years of
the license and a royalty of six-tenths of one percent (0.6%) for the second ten
(10) years of the license. There are no minimum guaranteed royalty payments.
Effective January 1, 2001, the Company entered into a new twenty-year license
agreement with Fuji Photo Film Ltd ("Fuji"). Under the new license agreement,
Fuji granted the Company a worldwide non-exclusive license (excluding Japan
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. Accordingly, a significant balance included in
"Other assets" in the accompanying condensed consolidated balance sheets as of
December 30, 2006 and July 1, 2006, represents an asset associated with the Fuji
license. In addition, a significant balance included in "Other liabilities" in
the accompanying condensed consolidated balance sheets as of December 30, 2006
and July 1, 2006 represents the present value of future license fee payments to
Fuji. The Company amortizes this asset based upon quantities of single-use
cameras that are produced using Fuji's patents and patent applications.
On August 26, 2002, the Company entered into two Polaroid licensing agreements.
The two license agreements provided it with the exclusive (with the exception of
products already released by Polaroid into the distribution chain), worldwide
use of the Polaroid brand trademark in connection with the manufacture,
distribution, promotion and sale of single-use and 35mm traditional film
cameras, including zoom cameras and certain related accessories. The license
agreements did not include instant or digital cameras. Each license agreement
included an initial term expiring on February 1, 2006, provided the Company the
right to renew the license under the same economic terms for an additional
three-year period and provided for the payment by the Company of $3.0 million of
minimum royalties, or $6.0 million in total, which were fully credited against
percentage royalties. On November 28, 2005, the Company exercised its right to
renew the single-use camera license agreement with Polaroid for an additional
three-year term expiring on February 1, 2009 in accordance with the same
economic terms included in the original agreement. Pursuant to the terms of the
renewed single-use camera license agreement, in February 2006, the Company paid
$2.0 million as a pre-payment of the minimum royalties for the renewal term and
recorded this payment as a prepaid asset. The Company amortizes this asset based
upon a percentage of net sales of Polaroid branded single-use cameras sold
during the renewal term of the single-use camera license agreement. In January
2006, the Company entered into a new license agreement with Polaroid providing
it with the exclusive, worldwide use of the Polaroid brand trademark in
connection with the manufacture, distribution, promotion and sale of 35mm
traditional film cameras, including zoom cameras and certain related accessories
and excluding instant cameras. The new 35mm traditional film camera license
agreement is for a term of three years expiring on January 31, 2009 and provides
for the payment by the Company of $50,000 of minimum royalties on or before
October 31, 2006. The Company satisfied its minimum guaranteed royalty payment
of $50,000 related to 35mm traditional film cameras prior to October 31, 2006.
There are no minimum guaranteed royalty payments under the traditional film
license agreement after the first year of the term.
Additionally, the Company has other license and royalty agreements that require
the payment of royalties based on the manufacture, reproduction and/or sale of
certain products. Total amortization and royalty expense for all licensing and
royalty agreements for the Second Quarter Fiscal 2007 and the Second Quarter
Fiscal 2006, was $1.4 million and $1.9 million, respectively. Total amortization
and royalty expense for all licensing and royalty agreements for Fiscal 2007 YTD
and Fiscal 2006 YTD, was $3.6 million and $4.4 million, respectively.
Intellectual Property Claims
From time to time, the Company receives patent infringement claims which it
analyzes and, if appropriate, takes action to avoid infringement, settle the
claim or negotiate a license. Those claims for which legal proceedings have been
initiated against the Company are discussed in Note 11, Litigation and
Settlements. The Company has also received notifications from two entities, one
of which was a significant customer, alleging that certain of the Company's
digital cameras infringe upon those entities' respective patents. The Company
has engaged in discussions with these entities regarding resolution of the
claims.
Based on the Company's initial assessment of these claims, infringement of one
or more patents is probable if the patents are valid. Based upon the licensing
discussions to date, the Company preliminarily estimates the potential royalties
due to these two claimants for digital camera sales through December 30, 2006 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
15
potential loss, if any, within the range of estimates relating to these claims.
Accordingly, the Company has not accrued any amounts related to these claims as
of December 30, 2006.
Purchase Commitments
At December 30, 2006, the Company had $4.9 million in non-cancelable purchase
commitments relating to the procurement of raw materials, components and
finished goods inventory from various suppliers. In the aggregate, such
commitments are not at prices in excess of current market values and typically
do not exceed one year.
Note 11 - Litigation and Settlements:
In July 2002, a class action complaint was filed against the Company and certain
of its officers in the United States District Court for the Southern District of
Florida by individuals purporting to be holders of the Company's Common Stock.
In January 2003, an amended class action complaint (the "Amended Complaint") was
filed adding certain of the Company's current and former directors as
defendants. On August 27, 2004, the court dismissed the claims against the newly
added current and former directors. On September 8, 2005, the court granted the
plaintiffs' motion for class certification and certified as plaintiffs all
persons who purchased the Common Stock between January 18, 2001 and June 22,
2001, inclusive, and who were allegedly damaged thereby (the period January 18,
2001 through June 22, 2001 hereinafter referred to as the "Class Period"). The
allegations remaining in the Amended Complaint are centered around claims that
the Company failed to disclose, in periodic reports it filed with the SEC and in
press releases it made to the public during the Class Period regarding its
operations and financial results, that a large portion of its accounts
receivable was represented by a delinquent and uncollectible balance due from
then customer, KB Gear Interactive, Inc. ("KB Gear"), and that a material
portion of its inventory consisted of customized components that had no
alternative usage. The Amended Complaint claimed that such failures artificially
inflated the price of the Common Stock. The Amended Complaint sought unspecified
damages, interest, attorneys' fees, costs of suit and unspecified other and
further relief from the court. The Company has reached an agreement with the
plaintiffs on the settlement of this lawsuit and, on October 13, 2006, a
Stipulation of Settlement was filed with the court. On January 26, 2007, the
court issued a Final Judgment and Order of Dismissal approving the settlement
set forth in the Stipulation of Settlement and dismissing the case with
prejudice. See Note 13 -- Subsequent Events.
On September 17, 2002, the Company was advised by the staff of the SEC that it
was conducting an informal inquiry related to the matters described above and
requested certain information and materials related thereto. On October 15,
2002, the staff of NASDAQ also requested certain information and materials
related to the matters described above and to matters related to the previously
reported embezzlement of Company funds by a former employee, uncovered in April
2002. The Company provided the requested information to the staff of the SEC and
NASDAQ and has not received any further communication from the staff of the SEC
with respect to the informal inquiry or from NASDAQ with respect to its request
since the Company last responded in February 2003.
In September 2004, a class action complaint was filed against the Company and
certain of its officers in the United States District Court for the Southern
District of Florida by individuals purporting to be holders of the Company's
Common Stock. In August 2005, an amended consolidated complaint (the "Amended
Complaint") was filed adding a former officer of the Company as a defendant. The
lead plaintiff under the Amended Complaint seeks to act as a representative of a
class consisting of all persons who purchased the Company's Common Stock during
the period from August 14, 2003 through August 31, 2004, inclusive (the "Class
Period"), and who were allegedly damaged thereby. The allegations in the Amended
Complaint are centered around claims that the Company failed to disclose, in
periodic reports it filed with the SEC and in press releases it made to the
public during the Class Period regarding its operations and financial results,
(i) the full extent of the Company's excess, obsolete and otherwise impaired
inventory; (ii) the departure of the newly added former officer defendant from
the Company until several months after his departure; and (iii) that Eastman
Kodak Company ("Kodak") would cancel its two design and manufacturing services
("DMS") contracts with the Company due to the Company's alleged infringement of
Kodak's patents. The Amended Complaint also alleged that the Company improperly
recognized revenue contrary to generally accepted accounting principles ("GAAP")
due to an alleged inability to reasonably estimate digital camera returns. The
Amended Complaint claimed that such failures artificially inflated the price of
the Common Stock. The Amended Complaint sought unspecified damages, interest,
attorneys' fees, costs of suit
16
and unspecified other and further relief from the court. The Company is
vigorously defending the lawsuit. Although the Company believes the lawsuit is
without merit, the outcome cannot be predicted, and if adversely determined, the
ultimate liability of the Company, which could be material, cannot be
ascertained. In a letter dated November 19, 2004, the Company was advised by the
staff of the SEC that it is conducting an investigation related to the matters
described above. The Company has provided the requested information to the staff
of the SEC and has not received any further communication from the SEC with
respect to its request since the Company last responded in May 2005.
On November 16, 2004, a shareholder derivative suit was filed against certain of
the Company's current and former officers and directors, and the Company as a
nominal defendant, in the United States District Court for the District of New
Jersey by an individual purporting to be a holder of the Company's Common Stock.
The complaint alleged that the individual defendants breached their duties of
loyalty and good faith by causing the Company to misrepresent its financial
results and prospects, resulting in the class action complaints described in the
immediately preceding paragraph. The complaint sought unspecified damages,
repayment of salaries and other remuneration from the individual defendants,
interest, attorneys' fees, costs of suit and unspecified other and further
relief from the court. In March 2005, the court granted a motion by the
individual defendants and the Company to transfer the action to the United
States District Court for the Southern District of Florida where the related
class action suit is currently pending. In May 2005, the court consolidated this
case with the related class action suit for discovery purposes only. Although
the Company believes this lawsuit is without merit, its outcome cannot be
predicted, and if adversely determined, the ultimate effect on the Company,
which could be material, cannot be ascertained. The Company has sought coverage
from its insurance carrier for this lawsuit and the related class action suit
under its directors and officers liability insurance policy, and the insurance
carrier is defending the actions under a reservation of rights.
Pursuant to the Company's Certificate of Incorporation, as amended, the personal
liability of the Company's directors is limited to the fullest extent permitted
under the New Jersey Business Corporation Act ("NJBCA"), and the Company is
required to indemnify its officers and directors to the fullest extent permitted
under the NJBCA. In accordance with the terms of the Certificate of
Incorporation and the NJBCA, the Board of Directors approved the payment of
expenses for each of the current and former officers and directors named as
defendants (the "individual defendants") in the above described class action and
derivative action litigations (collectively, the "actions") in advance of the
final disposition of such actions. The individual defendants have executed and
delivered to the Company written undertakings to repay the Company all amounts
so advanced if it shall ultimately be determined that the individual defendants
are not entitled to be indemnified by the Company under the NJBCA.
In April 2004, a patent infringement complaint was filed by Compression Labs,
Inc. against 28 defendants, including the Company, in the United States District
Court for the Eastern District of Texas. The complaint asserted that the
defendants have conducted activities which infringe U.S. Patent No. 4,698,672
(the "672 Patent"), entitled, "Coding System for Reducing Redundancy." The
complaint sought unspecified damages, interest, attorneys' fees, costs of suit
and unspecified other and further relief from the court. In February 2005,
pursuant to an order of the Judicial Panel on Multi-District Litigation, this
action was transferred to the United States District Court for the Northern
District of California. The Company has reached an agreement with the plaintiffs
on the settlement of this lawsuit and, on November 6, 2006, the plaintiff
dismissed its claim against the Company with prejudice. The settlement amount is
not material and will not have a material adverse effect on our financial
position or results of operations. The Company accrued the settlement amount as
of July 1, 2006. The Company has notified several third parties of its intent to
seek indemnity from such parties for the costs and damages incurred by the
Company as a result of this action.
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.
17
The Company has notified several third parties of its intent to seek indemnity
from such parties for any costs or damages incurred by the Company as a result
of this action.
In June 2006, St. Clair Intellectual Properties Consultants, Inc. filed a patent
infringement complaint against 22 defendants, including the Company, in the
United States District Court for the District of Delaware. The complaint
asserted that the defendants conducted activities which infringe U.S. Patent
Nos. 5,138,459, 6,094,219, 6,233,010 and 6,323,899. The complaint sought
injunctive relief, unspecified damages, interest, attorneys' fees, costs of suit
and unspecified other and further relief from the court. The proceedings in this
action against the Company and the other defendants were stayed by the court
until further order of the court. It is too early to assess the probability of a
favorable or unfavorable outcome or the loss or range of loss, if any, and,
therefore, no amounts have been accrued relating to this action. The Company is
assessing potential claims of indemnification against certain of its suppliers
with respect to this action.
The Company is also involved from time to time in routine legal matters
incidental to its business. Based upon available information, the Company
believes that the resolution of such matters will not have a material adverse
effect on its financial position or results of operations.
Note -- 12 Other Charges:
Cost-Reduction Initiatives
The Company continues to evaluate its cost structure and implement
cost-reduction initiatives as appropriate. During Fiscal 2007 YTD,
cost-reduction initiatives included, among other things, the elimination of
certain employee positions. As a result, during the Second Fiscal Quarter 2007
and Fiscal 2007 YTD, the Company recorded total charges of $0.3 million and $0.7
million, respectively, related to severance costs for the elimination of certain
employee positions.
Table III -- Other Charges Liability reconciles the beginning and ending
balances of the other charges liability.
(in thousands)
Other Charges Liability
Severance Retention Leases Total
--------- --------- ------- -------
Balance as of July 1, 2006 $ 1,175 $ 7 $ -- $ 1,182
Charges 706 -- 26 732
Reversal (44) (7) (1) (52)
Payments (1,226) -- (25) (1,251)
------- ------- ------- -------
Balance as of December 30, 2006 $ 611 $ -- $ -- $ 611
======= ======= ======= =======
18
Table IV -- Other Charges presents the related expenses and their classification
in the consolidated statements of operations.
(in thousands)
Other Charges Severance Retention Leases Total
--------- --------- ------- -------
Second Quarter Fiscal 2007
Cost of products sold $ 132 $ -- $ -- $ 132
Selling expense 50 (7) -- 43
General and administrative
expense 74 -- (1) 73
------- ------- ------- -------
Total $ 256 $ (7) $ (1) $ 248
======= ======= ======= =======
Fiscal 2007 YTD
Cost of products sold $ 309 $ -- $ -- $ 309
Selling expense 279 (7) 16 288
General and administrative
expense 74 -- 9 83
------- ------- ------- -------
Total $ 662 $ (7) $ 25 $ 680
======= ======= ======= =======
Second Quarter Fiscal 2006
Cost of products sold $ -- $ 45 $ -- $ 45
Selling expense -- 8 -- 8
General and administrative --
expense 1,138 17 -- 1,155
------- ------- ------- -------
Total $ 1,138 $ 70 $ -- $ 1,208
======= ======= ======= =======
Fiscal 2006 YTD
Cost of products sold $ -- $ 96 -- $ 96
Selling expense -- 14 -- 14
General and administrative --
expense 1,138 67 -- 1,205
------- ------- ------- -------
Total $ 1,138 $ 177 -- $ 1,315
======= ======= ======= =======
As a result of the cost-reduction initiatives implemented in Fiscal 2006 and
Fiscal 2007, the Company expects to make cash payments totaling approximately
$0.6 million during the remainder of Fiscal 2007 related to severance costs.
Note 13 -- Subsequent Events:
On January 26, 2007, the United States District Court for the Southern District
of Florida issued a Final Judgment and Order of Dismissal approving the
settlement set forth in the Stipulation of Settlement and dismissing with
prejudice the lawsuit based on a class action complaint that was filed against
the Company in July 2002. The Company has sought coverage from its insurance
carrier for this lawsuit under its directors and officers liability insurance
policy. The settlement amount is within the policy limits and has been approved
by the Company's insurance carrier.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis should be read in conjunction with our
Annual Report on Form 10-K for Fiscal 2006 filed with the SEC as of September
14, 2006 ("Form 10-K"), including the condensed consolidated financial
statements and the notes to such financial statements included elsewhere in this
Form 10-Q. Except for historical information
19
contained herein, the matters discussed below are forward-looking statements
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Such statements involve risks and uncertainties, including,
but not limited to, economic, governmental, political, competitive and
technological factors affecting the Company's operations, markets, products,
prices and other factors discussed elsewhere in this report and other reports
filed with the SEC. See Part I Item 1A, "Risk Factors" in our Form 10-K. These
factors may cause results to differ materially from the statements made in this
report or otherwise made by or on behalf of the Company.
Overview
We market and sell popularly priced, easy-to-use single-use and 35mm traditional
film cameras. We design, develop, manufacture and assemble most of our
single-use cameras and certain of our 35mm traditional film cameras at our
manufacturing facilities in the Peoples Republic of China ("PRC") and outsource
the manufacture of certain of our single-use and 35mm traditional film cameras.
In fiscal 2006, we significantly de-emphasized the sale of digital cameras and
do not expect digital camera sales to be material in fiscal 2007. We sell our
private label and brand-name products to our customers worldwide either directly
or through third-party distributors.
Executive Summary
Quarter-Over-Quarter Results of Operations
Our operating loss for the second quarter of fiscal 2007 was $(4.1) million as
compared to an operating loss of $(5.5) million for the second quarter of fiscal
2006.
The decrease in our quarter-over-quarter operating loss is primarily related to
decreases in selling, general and administrative expenses. Quarter-over-quarter
selling expenses decreased by $1.9 million due to (i) lower freight and royalty
costs in the amounts of $0.7 million and $0.4 million, respectively, as a result
of a decrease in quarter-over-quarter net sales; (ii) lower selling-related
employee compensation costs in the amount of $0.8 million, net of the current
quarter's severance charges, resulting from the elimination of certain positions
in connection with our cost-reduction initiatives. Quarter-over-quarter general
and administrative ("G&A") expenses decreased by $2.0 million due to a decrease
in G&A-related employee compensation costs of $2.0 million as a result of the
elimination of certain positions in connection with our cost-reduction
initiatives.
Although we experienced decreases in our quarter-over-quarter selling, general
and administrative expenses of $3.9 million, our gross profit for the second
quarter of fiscal 2007 decreased as compared to the gross profit for our second
quarter of fiscal 2006 by $2.5 million. The decrease in the quarter-over-quarter
gross profit was primarily due to insufficient net sales and related gross
profit and unfavorable manufacturing material, labor and overhead cost variances
of $0.5 million resulting from a reduction in net sales of $21.8 million.
Second Quarter Fiscal 2007 Results of Operations
Although we reduced our operating loss by $1.4 million, or 25.5%, for the second
quarter of fiscal 2007 as compared to the second quarter of fiscal 2006, we
recorded an operating loss of $4.1 million during the quarter.
Factors contributing to the second quarter fiscal 2007 operating loss were:
1. Manufacturing Material, Labor and Overhead Cost Variances
2. Insufficient Net Sales and Related Gross Profit to Fully Absorb
Non-Manufacturing Overhead Costs
3. Professional Fees
4. Severance Charges
20
1. Manufacturing Material, Labor and Overhead Cost Variances
During the second quarter of fiscal 2007, we experienced unfavorable
manufacturing material, labor and overhead cost variances of $1.9 million
attributable to a change in the anticipated product mix of single-use cameras
manufactured during the period.
2. Insufficient Net Sales and Related Gross Profit to Fully Absorb
Non-Manufacturing Overhead Costs
During the second quarter of fiscal 2007, we experienced a significant decrease
in net sales and related gross profit resulting in insufficient gross profit to
fully absorb our non-manufacturing overhead costs. This net sales and related
gross profit reduction contributed approximately $1.5 million to the operating
loss.
3. Professional Fees
During the second quarter of fiscal 2007, we recorded charges of $0.3 million
related to internal control costs incurred in connection with the remediation of
certain previously disclosed material weaknesses and legal costs of $0.1 million
related to the defense of class action lawsuits.
4. Other Charges
During the second quarter of fiscal 2007, we recorded total charges of $0.3
million for severance costs related to the elimination of certain employee
positions in connection with our cost-reduction initiatives.
We continue to take action and review our strategies, including and relating to:
(i) acquisition of new single-use and 35mm traditional film camera customers,
(ii) potential new business initiatives, and (iii) implementation of additional
cost reductions related to worldwide overhead costs. There can be no assurances
that implementing any such strategies will successfully reverse our losses,
increase our revenues, decrease our costs or improve our results of operations.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in conformity with accounting principles generally accepted in the United
States. The preparation of these financial statements requires management to
make estimates and assumptions that affect the amounts reported in the condensed
consolidated financial statements and the accompanying notes. Since July 1,
2006, there have been no significant changes to the assumptions and estimates
related to those critical accounting policies. See critical accounting policies
disclosed in our Form 10-K.
Recently Issued Accounting Pronouncements
In July 2006, the FASB issued Interpretation No. 48 ("FIN 48"), "Accounting for
Uncertainty in Income Taxes--an Interpretation of FASB Statement No. 109." FIN
48 clarifies the accounting for uncertainty in income taxes recognized in a
company's financial statements by prescribing a recognition threshold and
measurement attribute for financial statement recognition and measurement of a
tax position taken or expected to be taken on a tax return. Additionally, FIN 48
provides guidance on de-recognition of tax benefits previously recognized and
additional disclosures for unrecognized tax benefits, interest and penalties.
FIN 48 is effective for fiscal years beginning after December 15, 2006 and,
therefore, we are required to adopt it in the first quarter of our 2008 fiscal
year. We are currently evaluating whether the adoption of FIN 48 will have a
material effect on our consolidated financial position, results of operations or
cash flows.
21
Results of Operations
Quarter Ended December 30, 2006 Compared to the Quarter Ended December 31, 2005
Net Sales
Net sales of our products for the second quarter of fiscal 2007 were $19.3
million, a decrease of $21.8 million, or 53.0%, as compared to net sales for the
second quarter of fiscal 2006. The decrease in net sales was due primarily to a
reduction in sales of digital cameras attributable to our decision to
de-emphasize sales of digital cameras and to a lesser extent, a reduction in
sales of single-use and 35mm traditional film cameras.
Net sales from our operations in the Americas for the second quarter of fiscal
2007 were $13.9 million, a decrease of $10.3 million, or 42.6%, as compared to
the second quarter of fiscal 2006. The decrease in net sales in the Americas was
due primarily to a decrease in sales of single-use and 35mm traditional film
cameras and to a lesser extent, digital cameras.
Net sales from our operations in Europe for the second quarter of fiscal 2007
were $4.2 million, a decrease of $12.6 million, or 75.0%, as compared to the
second quarter of fiscal 2006. The decrease in net sales in Europe was due
primarily to a reduction in sales of digital cameras attributable to our
decision to de-emphasize digital camera sales.
Net sales from our operations in Asia for the second quarter of fiscal 2007 and
the second quarter of fiscal 2006 were $1.3 million and $0.1 million,
respectively. The increase in net sales in Asia was due primarily to increased
sales of single-use cameras in Japan in the second quarter of fiscal 2007.
Gross Profit
Gross profit for the second quarter of fiscal 2007 was $1.5 million, or 7.8% of
net sales, versus gross profit of $4.0 million, or 9.7% of net sales, in the
second quarter of fiscal 2006. During the second quarter of fiscal 2007 as
compared to the second quarter of fiscal 2006, gross profit, in dollars and as a
percentage of net sales, was negatively affected by unfavorable manufacturing
material, labor and overhead cost variances and a reduction in net sales of
single-use and 35mm traditional film cameras.
Product engineering, design and development costs for the second quarter of
fiscal 2007 and the second quarter of fiscal 2006, in dollars and as a
percentage of net sales, were $0.6 million, or 3.1%, and $1.0 million, or 2.4%,
respectively.
Operating Expenses
Selling expenses for the second quarter of fiscal 2007 were $2.1 million, or
10.9% of net sales, compared to $4.0 million, or 9.7% of net sales, for the
second quarter of fiscal 2006. The decrease in selling expenses was due to a
reduction of freight and royalty costs in the amounts of $0.7 million and $0.4
million, respectively, as a result of a decrease in quarter-over-quarter net
sales. In addition, selling-related employee compensation costs decreased by
$0.8 million, net of the second quarter's severance charges of $0.1 million,
resulting from the elimination of certain positions in connection with our
cost-reduction initiatives.
G&A expenses for the second quarter of fiscal 2007 were $3.5 million, or 18.1%
of net sales, compared to $5.5 million, or 13.4% of net sales, for the second
quarter of fiscal 2006. The decrease in G&A expenses was due to a reduction in
G&A-related employee compensation costs of $2.0 million as a result of the
elimination of certain positions in connection with our cost-reduction
initiatives.
Stock-Based Compensation
During the second quarter of fiscal 2007 and the second quarter of fiscal 2006,
we recorded approximately $16,000 and $119,000, respectively, of share-based
compensation expenses. We consider all of our share-based compensation expense
as a component of general and administrative expenses. In addition, no amount of
share-based compensation expense was
22
capitalized as part of capital expenditures or inventory for the periods
presented. For further discussion, see Note 8 - Stock-Based Compensation in the
Notes to Condensed Consolidated Financial Statements.
Interest Expense
Interest expense was approximately $0.1 million for each of the second quarter
of fiscal 2007 and the second quarter of fiscal 2006.
Other (Income) Expense, Net
Other (income) expense, net was $(0.7) million and $44,000 for the second
quarter of fiscal 2007 and the second quarter of fiscal 2006, respectively. The
quarter-over-quarter increase in income was primarily due to an increase in
investment income resulting from an increase in the average amount of funds
invested during the respective quarters and to a lesser extent a tax refund
recovery in Europe of $0.3 million. For further discussion, see Note 3 - Summary
of Significant Accounting Policies in the Notes to the Condensed Consolidated
Financial Statements.
Income Taxes
In the second quarter of fiscal 2007 and the fourth quarter of fiscal 2006,
based upon all of the available evidence, management determined that it was not
more likely than not that its deferred income tax assets will be fully realized.
Accordingly, we recorded a valuation allowance for the entire balance of our
deferred income tax assets as of December 30, 2006 and July 1, 2006. During the
second quarter of fiscal 2007 and the second quarter of fiscal 2006, we recorded
provisions for income taxes of $18,000 and $138,000, respectively. The second
quarter of fiscal 2007 and the second quarter of fiscal 2006 income tax
provisions related to income tax liabilities incurred by certain of our foreign
subsidiaries. These foreign subsidiaries do not have net operating losses to
offset such income tax liabilities. For further discussion, see Note 3 --
Summary of Significant Accounting Policies -- Income Taxes in the Notes to
Condensed Consolidated Financial Statements.
Net Loss
We incurred a net loss of $(3.5) million, or $(0.61) per basic and diluted
common share, for the second quarter of fiscal 2007, as compared to a net loss
of $(5.8) million, or $(0.99) per basic and diluted common share, for the second
quarter of fiscal 2006.
Results of Operations
Fiscal 2007 YTD Compared to Fiscal 2006 YTD
Net Sales
Net sales of our products for the six months ended December 30, 2006, ("fiscal
2007 YTD"), were $48.2 million, a decrease of $37.5 million, or 43.8%, as
compared to net sales for the six months ended December 31, 2005, ("fiscal 2006
YTD"). The decrease in net sales was due primarily to a reduction in sales of
digital cameras attributable to our decision to de-emphasize digital camera
sales and to a lesser extent, a reduction in sales of 35mm traditional film
cameras and single-use cameras.
Net sales from our operations in the Americas for fiscal 2007 YTD were $37.8
million, a decrease of $10.7 million, or 22.1%, as compared to fiscal 2006 YTD.
The decrease in net sales in the Americas was due primarily to a reduction in
sales of 35mm traditional film and digital cameras and to lesser extent,
single-use cameras.
Net sales from our operations in Europe for fiscal 2007 YTD were $9.0 million, a
decrease of $27.8 million, or 75.5%, as compared to fiscal 2006 YTD. The
decrease in net sales in Europe was due primarily to a reduction in sales of
digital cameras attributable to our decision to de-emphasize digital camera
sales.
23
Net sales from our operations in Asia for fiscal 2007 YTD and fiscal 2006 YTD
were $1.4 million and $0.4 million, respectively. The increase in net sales in
Asia was due primarily to an increase in sales of single-use cameras in Japan.
Gross Profit
Gross profit for fiscal 2007 YTD was $6.0 million, or 12.5% of net sales, versus
gross profit of $8.2 million, or 9.6% of net sales, in fiscal 2006 YTD. During
fiscal 2007 YTD as compared to fiscal 2006 YTD, gross profit, in dollars and as
a percentage of net sales, was positively affected by a reduction in negative
gross profit related to digital camera sales and negatively affected by
unfavorable manufacturing material, labor and overhead cost variances and a
decrease in net sales of single-use and 35mm traditional film cameras.
Product engineering, design and development costs for fiscal 2007 YTD and fiscal
2006 YTD, in dollars and as a percentage of net sales, were $1.4 million, or
2.9%, and $2.1 million, or 2.5%, respectively.
Operating Expenses
Selling expenses for fiscal 2007 YTD were $4.9 million, or 10.2% of net sales,
compared to $7.6 million, or 8.9% of net sales, for fiscal 2006 YTD. The
decrease was primarily due to a reduction in freight and royalty costs in the
amounts of $1.1 million and $0.5 million, respectively, as a result of a
decrease in year-to-date over year-to-date net sales. In addition,
selling-related employee compensation costs decreased by $1.0 million, net of
the current year-to-date severance charges of $0.3 million, resulting from the
elimination of certain positions in connection with our cost-reduction
initiatives.
G&A expenses for fiscal 2007 YTD were $7.2 million, or 14.9% of net sales,
compared to $11.8 million, or 13.8% of net sales, for fiscal 2006 YTD. The
decrease was primarily due to a reduction in employee compensation costs of $2.9
million, net of the current year-to-date severance charges of $0.1 million,
resulting from the elimination of certain positions in connection with our
cost-reduction initiatives. In addition, professional fees incurred in
connection with internal control remediation efforts decreased by $1.6 million.
Stock-Based Compensation
During fiscal 2007 YTD and fiscal 2006 YTD, we recorded approximately $43,000
and $249,000, respectively, of share-based compensation expenses. We consider
all of our share-based compensation expense as a component of general and
administrative expenses. In addition, no amount of share-based compensation
expense was capitalized as part of capital expenditures or inventory for the
periods presented. For further discussion, see Note 8 - Stock-Based Compensation
in the Notes to Condensed Consolidated Financial Statements.
Interest Expense
Interest expense was approximately $0.2 million for each of fiscal 2007 YTD and
fiscal 2006 YTD.
Other Income, Net
Other income, net was $1.2 million and $0.1 for fiscal 2007 YTD and fiscal 2006
YTD, respectively. The year-to-date over year-to-date increase in other income
was primarily due to a reduction in foreign exchange losses, an increase in
investment income resulting from an increase in the average amount of funds
invested during the respective quarters and to a lesser extent a tax refund
recovery in Europe. For further discussion, see Note 3 - Summary of Significant
Accounting Policies in the Notes to the Condensed Consolidated Financial
Statements.
Income Taxes
In fiscal 2007 YTD and the fourth quarter of fiscal 2006, based upon all of the
available evidence, management determined that it was not more likely than not
that its deferred income tax assets will be fully realized. Accordingly, we
recorded a
24
valuation allowance for the entire balance of our deferred income tax assets as
of December 30, 2006 and July 1, 2006. During fiscal 2007 YTD and fiscal 2006
YTD, we recorded provisions for income taxes of $35,000 and $189,000,
respectively. The fiscal 2007 YTD and fiscal 2006 YTD income tax provisions
related to income tax liabilities incurred by certain of our foreign
subsidiaries. These foreign subsidiaries do not have net operating losses to
offset such income tax liabilities. For further discussion, see Note 3 --
Summary of Significant Accounting Policies -- Income Taxes in the Notes to
Condensed Consolidated Financial Statements.
Net Loss
We incurred a net loss of $(5.2) million, or $(0.89) per basic and diluted
common share, for fiscal 2007 YTD, as compared to a net loss of $(11.5) million,
or $(1.98) per basic and diluted common share, for fiscal 2006 YTD.
Cost-Reduction Initiatives
We continue to evaluate our cost structure and implement cost-reduction
initiatives as appropriate. During fiscal 2007 YTD and fiscal 2006 YTD,
cost-reduction initiatives included, among other things, the elimination of
certain employee positions. As a result, during fiscal 2007 YTD and fiscal 2006
YTD, we recorded total charges of $0.7 million and $1.1 million, respectively,
for severance costs related to the elimination of certain employee positions.
For further discussion, see Note 12 -- Other Charges in the Notes to the
Condensed Consolidated Financial Statements.
Liquidity and Capital Resources
We are not aware of factors that are reasonably likely to adversely affect
liquidity trends, other than those factors summarized under the caption "Risk
Factors" in our Form 10-K. We are not engaged in hedging activities and had no
forward exchange contracts outstanding at December 30, 2006. In the ordinary
course of business, we enter into operating lease commitments, purchase
commitments and other contractual obligations. These transactions are recognized
in our financial statements in accordance with accounting principles generally
accepted in the United States and are more fully discussed below.
We believe that our cash and cash equivalents, short-term investments,
anticipated cash flow from operations, and amounts available under our financing
facilities provide sufficient liquidity and capital resources for our
anticipated working capital and capital expenditure requirements for at least
the next twelve months.
Although we currently anticipate that we have, or have access to, an amount of
working capital that will be sufficient to fund our operations for the next
twelve months, our cash requirements during this period may exceed the amount of
working capital available to us. Our ability to fund our operating requirements
and maintain an adequate level of working capital will depend primarily on our
ability to generate growth in sales of our single-use and 35mm traditional film
cameras and new products, on our ability to continue to access our financing
facilities and on our ability to control operating expenses. Our failure to
generate substantial growth in the sales of our single-use and 35mm traditional
film cameras and new products, control operating expenses and other events -
including the progress of our new product initiatives, our ability to
manufacture or have manufactured products at an economically feasible cost and
in sufficient quantities and changes in economic or competitive conditions or
our planned business - could cause us to require additional capital. In the
event that we must raise additional capital to fund our working capital needs,
we may seek to raise such capital through borrowings and/or the issuance of debt
securities or equity securities. To the extent we raise additional capital by
issuing equity securities or obtaining borrowings convertible into equity,
existing shareholders may experience ownership dilution and future investors
may be granted rights superior to those of existing shareholders. Moreover,
additional capital may not be available to us on acceptable terms, or at all.
Working Capital - At December 30, 2006, we had working capital of $43.8 million,
compared to $46.8 million at July 1, 2006, a decrease of $3.0 million.
Cash Provided by Operating Activities - Cash provided by operating activities
during fiscal 2007 YTD was $0.3 million, which compared unfavorably to cash
provided by operating activities of $2.1 million during fiscal 2006 YTD. The
cash
25
provided by operating activities is primarily attributable to a reduction in net
loss offset by a net decrease in working capital items.
Cash (Used in) Provided by Investing Activities - Cash used in investing
activities was $(6.5) million for fiscal 2007 YTD as compared to cash provided
by investing activities of $32.3 million for fiscal 2006 YTD. The increase in
cash used in investing activities was primarily due to an $8.6 million increase
in net purchases of available-for-sale investments partially offset by a $2.1
million decrease in restricted cash related to a reduction in our borrowing
capacity under the HSBC financing facilities. See Note 7--Short-Term Borrowings
and Financing Facilities in the Notes to Condensed Consolidated Financial
Statements.
Cash Provided by Financing Activities - Cash provided by financing activities
during fiscal 2007 YTD and fiscal 2006 YTD was approximately $3.5 million and
$0.9 million, respectively. This activity relates to net short-term borrowings
made under our financing facilities. See Note 7 - Short-Term Borrowings and
Financing Facilities in the Notes to Condensed Consolidated Financial
Statements.
Operating Leases - We enter into operating leases in the ordinary course of
business (e.g., warehouse facilities, office space and equipment). The effects
of outstanding leases are not material to us in terms of either annual cash flow
or in total future minimum payments.
Purchase Commitments - See Note 10 - Commitments and Contingencies in the
Notes to Condensed Consolidated Financial Statements.
Other Contractual Obligations - We do not have any material financial
guarantees or other contractual commitments that are reasonably likely to have
an adverse effect on liquidity. See Note 7 - Short-term Borrowings and Financing
Facilities in the Notes to Consolidated Condensed Financial Statements. For
additional information about the corporate guarantees we provided in connection
with our financing facilities. See also Note 10 - Commitments and Contingencies
in the Notes to Condensed Consolidated Financial Statements.
License Agreements - See Note 10 - Commitments and Contingencies in the Notes
to Condensed Consolidated Financial Statements.
Intellectual Property Claims - See Note 10 - Commitments and Contingencies and
Note 11 - Litigation and Settlements in the Notes to Condensed Consolidated
Financial Statements.
Hong Kong Financing Facilities - As of December 30, 2006, we had $1.4 million
in letters of credit outstanding, which were issued primarily to certain
suppliers to guarantee payment of our purchase orders with such suppliers. The
letters of credit are issued under our import facilities that have been granted
to CCHK. See Note 7 - Short-Term Borrowings and Financing Facilities in the
Notes to Condensed Consolidated Financial Statements.
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 Form
10-K and subsequently filed reports. We wish to caution the reader that these
forward-looking statements, including, without limitation, statements regarding
expected cost reductions, anticipated or expected results of the implementation
of our restructuring initiatives, cost-reduction initiatives, and possible new
business initiatives, anticipated financial benefits of de-emphasizing the sale
of digital cameras, eliminating our reliance on internally designed and
manufactured digital cameras and increasing the design, co-development and
purchase of digital cameras from outsourced manufacturers and increasing our
emphasis on the sale of single-use and 35mm traditional film cameras, the
viability of marketing and selling cameras and competing in the camera market,
the cost structure
26
requirements needed to maintain a presence in the camera market and to market
and sell cameras, the development of our business, anticipated revenues or
capital expenditures, our preliminary estimates of the potential range of
royalties we may have to pay to two entities for alleged infringement, our
expectation of increases in sales to certain customers, our ability to maintain
or improve gross profit on the sale of our products, projected profits or losses
and other statements contained in this report regarding matters that are not
historical facts, are only estimates or predictions. No assurance can be given
that future results will be achieved. Actual events or results may differ
materially as a result of risks facing us or actual results differing from the
assumptions underlying such statements. In particular, our expected results
could be adversely affected by, among other things, production difficulties or
economic conditions negatively affecting the market for our products, by our
inability to develop and maintain relationships on favorable terms with
component and material suppliers and contract manufacturers or by our inability
to negotiate favorable terms with our licensors. Obtaining the results expected
from the introduction of any new products or product lines may require timely
completion of development, successful ramp-up of full-scale production on a
timely basis and customer and consumer acceptance of those products. In
addition, future relationships or agreements may require an ability to meet high
quality and performance standards, to successfully implement production at
greatly increased volumes and to sustain production at greatly increased
volumes, as to all of which there can be no assurance. There also can be no
assurance that products and new business initiatives under consideration or
development will be successfully developed or that once developed such products
and initiatives will be commercially successful. Any forward-looking statements
contained in this report represent our estimates only as of the date of this
report, or as of such earlier dates as are indicated herein, and should not be
relied upon as representing our estimates as of any subsequent date. While we
may elect to update forward-looking statements at some point in the future, we
specifically disclaim any obligation to do so, even if our estimates change.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
There have been no material changes in the disclosures set forth in Part II,
Item 7A in our Form 10-K during this reporting period.
Item 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rules 13a-15(e)
and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), designed to ensure that information required to be disclosed in our
filings under the Exchange Act is (1) recorded, processed, summarized and
reported within the time periods specified in SEC rules and forms, and (2)
accumulated and communicated to our management, including the chief executive
officer and principal financial officer, to allow timely decisions regarding
required disclosure.
Our management has reviewed and evaluated the effectiveness of the design and
operation of our disclosure controls and procedures as of the end of the period
covered by this quarterly report on Form 10-Q. Based on that evaluation, our
chief executive officer and principal financial officer concluded that as of
December 30, 2006, our disclosure controls and procedures were not effective as
a result of the continued existence of three material weaknesses in internal
control over financial reporting described in our Form 10-K.
Because of these three material weaknesses, we performed additional manual
controls, procedures and analyses and other pre- and post-closing procedures
designed to ensure that our unaudited condensed consolidated financial
statements are presented fairly in all material respects in accordance with
accounting principles generally accepted in the United States. We relied on
increased monitoring and review to compensate for the material weaknesses in our
internal control over financial reporting. Accordingly, management believes that
the unaudited condensed consolidated financial statements included in this
report fairly present in all material respects our financial position, results
of operations and cash flows for the periods presented.
27
(b) Changes in Internal Control over Financial Reporting
Although management is continuing to take corrective actions to remediate the
remaining three material weaknesses disclosed in our Form 10-K, these material
weaknesses were not remediated as of December 30, 2006. As a result, there were
no changes in our internal control over financial reporting in connection with
the evaluations referred to above that occurred during the second quarter of
fiscal 2007 that have materially affected, or are likely to materially affect,
our internal control over financial reporting.
Our management is dedicated to improving our internal control over financial
reporting and intends to continue monitoring and upgrading our internal controls
as necessary and appropriate for our business.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
See Part I, Item 1, Financial Statements, Note 11 - Litigation and Settlements
in the Notes to Condensed Consolidated Financial Statements.
Item 1A. RISK FACTORS
There have been no material changes in the risk factors set forth in Part 1,
Item 1A, "Risk Factors" in our Form 10-K for the fiscal year ended July 1, 2006.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our annual meeting of shareholders on December 14, 2006, to re-elect
four directors to serve until the next annual meeting of shareholders and until
their successors are duly elected and qualified and to ratify the appointment of
BDO Seidman, LLP as our independent registered public accounting firm for fiscal
2007.
The names of the nominees whose terms expired at our 2006 annual meeting of
shareholders and who were re-elected to serve as directors until the next annual
meeting of shareholders are as follows:
Nominee For Withheld Vote
------- --- -------------
Ira B. Lampert 22,836,140 3,096,599
Ronald S. Cooper 23,900,637 2,032,102
Morris H. Gindi 22,551,572 3,381,167
William J. O'Neill, Jr. 23,909,312 2,023,427
The shareholders ratified the appointment of BDO Seidman, LLP as our independent
registered public accounting firm for fiscal 2007 by the following vote:
24,461,393 votes "for"; 937,595 votes "against"; and 533,751 abstentions.
28
Item 5. OTHER INFORMATION
(b) There have been no material changes in the procedures by which our security
holders may recommend nominees to our board of directors during this reporting
period.
Item 6. EXHIBITS
No. Description Method of Filing
3.1 Certificate of Incorporation, Incorporated by reference to
as amended through May 9, 2000 the Company's annual report on
Form 10-K for the year ended
July 1, 2000.
3.2 Restated By-Laws, as amended Incorporated by reference to
through July 12, 2004 the Company's annual report on
Form 10-K for the year ended
July 3, 2004.
3.3 Certificate of Amendment (No. Incorporated by reference to
7) of Certificate of the Company's current report
Incorporation, dated November on Form 8-K filed November 7,
2, 2006 2006.
3.4 Certificate of Correction of Incorporated by reference to
Certificate of Amendment (No. the Company's current report
7) to Certificate of on Form 8-K filed November 7,
Incorporation, dated November 2006.
3, 2006
10.1 Letter agreement between HSBC Incorporated by reference to
and CCHK, dated July 11, 2006, the Company's current report
relating to the renewal of on Form 8-K filed August 7,
certain financing facilities 2006.
provided to CCHK and the
conditions thereof
10.2 Letter agreement between HSBC Filed herewith.
and CCHK, dated October 18,
2006, relating to the
reduction of the financing
facilities provided to CCHK
and the conditions thereof
10.3 Special Permitted Business Incorporated by reference to
License No. 06999 issued to the Company's current report
Concord Camera Heng Gang on Form 8-K filed September
Electronic Factory (listed as 21, 2006.
"Concord Camera H.G. Limited"
on the license), Longgang,
Shenzhen, on September 15,
2006 by Commerce and Industry
Management Bureau, Shenzhen,
valid from October 28, 1991 to
October 26, 2016 (English
translation)
10.4 Agreement for Contract Incorporated by reference to
Processing among Shenzhen the Company's current report
Henggang Investment Co. Ltd., on Form 8-K filed September
Shenzhen Longgang Xietiao 21, 2006.
Electronics Factory and
Concord Camera HK Limited
dated July 11, 2006 (English
translation)
29
10.5 Letter agreement between Dah Filed herewith.
Sing Bank Limited and CCHK,
dated June 19, 2006, relating
to certain financing
facilities provided to CCHK
and the conditions thereof
10.6 Letter agreement between Filed herewith.
Shanghai Commercial Bank Ltd.
and CCHK, dated June 12, 2006,
relating to certain financing
facilities provided to CCHK
and the conditions thereof
10.7 Amendment No. 6 to Terms of Incorporated by reference to
Employment of Gerald J. Angeli the Company's current report
with the Company, effective as on Form 8-K filed January 9,
of January 1, 2007 2007.
10.8 Amendment No. 5 to Terms of Incorporated by reference to
Employment of Urs W. Stampfli the Company's current report
with the Company, effective as on Form 8-K filed January 9,
of January 1, 2007 2007.
31.1 Certification of Chief Filed herewith.
Executive Officer pursuant to
Rule 13a-14(a)/15d-14(a)
31.2 Certification of Principal Filed herewith.
Financial Officer pursuant to
Rule 13a-14(a)/15d-14(a)
32.1 Certification of Chief Filed herewith.
Executive Officer pursuant to
18 U.S.C. ss.1350
32.2 Certification of Principal Filed herewith.
Financial Officer pursuant to
18 U.S.C. ss.1350
30
S I G N A T U R E
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONCORD CAMERA CORP.
(Registrant)
DATE: February 8, 2007 By: /s/ Blaine A. Robinson
----------------------------------------
(Signature)
Blaine A. Robinson,
Vice President -- Finance, Treasurer and
Assistant Secretary
(Principal Financial and Accounting
Officer)
31