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 March 31, 2007
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to ___________
Commission file number 0-17038
Concord Camera Corp.
--------------------
(Exact name of registrant as specified in its charter)
New Jersey 13-3152196
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4000 Hollywood Blvd., 6th Floor, North Tower, Hollywood, Florida 33021
----------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(954) 331-4200
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, no par value - 5,847,408 shares as of May 1, 2007
Index
Concord Camera Corp. and Subsidiaries
Part I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets as of
March 31, 2007 (Unaudited) and July 1, 2006..................... 3
Condensed consolidated statements of operations
(Unaudited) for the quarter and nine months ended
March 31, 2007 and April 1, 2006................................ 4
Condensed consolidated statements of cash flows
(Unaudited) for the nine months ended
March 31, 2007 and April 1, 2006................................ 5
Notes to condensed consolidated financial
statements (Unaudited).......................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......... 26
Item 4. Controls and Procedures............................................. 26
Part II. OTHER INFORMATION
Item 1. Legal Proceedings................................................... 27
Item 1A. Risk Factors........................................................ 27
Item 5. Other Information................................................... 28
Item 6. Exhibits............................................................ 28
2
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Concord Camera Corp. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands)
March 31, 2007 July 1,
(Unaudited) 2006
-------------- -----------
Assets
Current Assets:
Cash and cash equivalents $ 9,027 $ 6,795
Restricted cash 6,200 8,264
Short-term investments 22,675 23,550
Accounts receivable, net 7,791 16,648
Inventories 13,846 28,260
Prepaid expenses and other current assets 2,115 3,277
-------- --------
Total current assets 61,654 86,794
Property, plant and equipment, net 11,406 13,778
Other assets 3,558 4,170
-------- --------
Total assets $ 76,618 $104,742
======== ========
Liabilities and Stockholders' Equity
Current Liabilities:
Short-term borrowings under financing facilities $ 2,166 $ --
Accounts payable 7,338 23,366
Accrued expenses 9,587 14,711
Other current liabilities 1,299 1,874
-------- --------
Total current liabilities 20,390 39,951
Other long-term liabilities 1,415 1,824
-------- --------
Total liabilities 21,805 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 March 31, 2007 and July 1, 2006, respectively 143,860 143,518
Additional paid-in capital 5,181 5,128
Deferred share arrangement 413 624
Accumulated deficit (89,235) (80,686)
-------- --------
60,219 68,584
Less: treasury stock, at cost, 347
shares as of March 31, 2007 and July 1, 2006 (4,993) (4,993)
Less: common stock held in trust, 66 and 102
shares as of March 31, 2007 and July 1, 2006 (413) (624)
-------- --------
Total stockholders' equity 54,813 62,967
-------- --------
Total liabilities and stockholders' equity $ 76,618 $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 nine months ended
------------------------------ -------------------------------
March 31, April 1, March 31, April 1,
2007 2006 2007 2006
--------- --------- --------- ---------
Net sales $ 16,375 $ 18,870 $ 64,537 $ 104,565
Cost of products sold 15,242 17,073 57,400 94,618
--------- --------- --------- ---------
Gross profit 1,133 1,797 7,137 9,947
Selling expenses 1,862 2,641 6,804 10,194
General and administrative
expenses 2,984 4,171 10,198 15,972
--------- --------- --------- ---------
Operating loss (3,713) (5,015) (9,865) (16,219)
Interest expense 85 106 249 314
Other income, net (436) (422) (1,599) (483)
--------- --------- --------- ---------
Loss before (3,362) (4,699) (8,515) (16,050)
income taxes
Provision (benefit) for
income taxes (1) 40 34 228
--------- --------- --------- ---------
Net loss $ (3,361) $ (4,739) $ (8,549) $ (16,278)
========= ========= ========= =========
Basic and diluted loss per
common share $ (0.57) $ (0.81) $ (1.46) $ (2.79)
========= ========= ========= =========
Weighted average
common shares
outstanding - basic and
diluted 5,914 5,838 5,866 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 nine months ended
--------------------------------
March 31, 2007 April 1, 2006
-------------- -------------
Cash flows from operating activities:
Net loss $ (8,549) $(16,278)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 3,102 3,663
Inventory charges 347 523
Restructuring reserve -- (110)
Gain on disposal of property, plant and equipment (74) --
Stock-based compensation 53 332
Changes in operating assets and liabilities:
Accounts receivable, net 8,857 20,369
Inventories 14,067 9,766
Prepaid expenses and other current assets 882 7,767
Other assets 266 380
Accounts payable (16,028) (16,638)
Accrued expenses (5,124) (771)
Other current liabilities (575) (9,598)
Other long-term liabilities (409) (1,591)
-------- --------
Net cash used in operating activities (3,185) (2,186)
-------- --------
Cash flows from investing activities:
Restricted cash 2,064 (8,199)
Purchases of property, plant and equipment (518) (1,928)
Proceeds from the sale of property, plant and equipment 488 --
Proceeds from sales of available-for-sale investments 64,075 34,800
Purchases of available-for-sale investments (63,200) (24,050)
-------- --------
Net cash provided by investing activities 2,909 623
-------- --------
Cash flows from financing activities:
Borrowings (repayments) under short-term financing facilities, net 2,166 (1,372)
Net proceeds from issuance of common stock 342 --
-------- --------
Net cash provided by (used in) financing activities 2,508 (1,372)
-------- --------
Net increase (decrease) in cash and cash equivalents 2,232 (2,935)
Cash and cash equivalents at beginning of period 6,795 8,016
-------- --------
Cash and cash equivalents at end of period $ 9,027 $ 5,081
======== ========
See accompanying notes to condensed consolidated financial statements.
5
CONCORD CAMERA CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2007
(Unaudited)
Note 1 - Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States 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 March 31, 2007 ("Third Quarter Fiscal 2007") and
the nine months ended March 31, 2007 ("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 April 1,
2006 has been defined as the ("Third Quarter Fiscal 2006") and the nine months
ended April 1, 2006 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 Third Quarter Fiscal 2007, the Company's sales to Walgreen Co.
("Walgreens") increased and sales to Wal-Mart Stores, Inc. ("Wal-Mart")
decreased as compared to the Third Quarter Fiscal 2006. During Fiscal 2007 YTD,
the Company's sales to Walgreens and Wal-Mart decreased as compared to Fiscal
2006 YTD. The Third Quarter Fiscal 2007 increase in sales to Walgreens was
attributable to increased sales of single-use and 35mm traditional film cameras.
The Third Quarter Fiscal 2007 decrease in sales to Wal-Mart was attributable to
decreased sales of single-use cameras resulting from overstocked inventory
levels. The Fiscal 2007 YTD decrease in sales to Walgreens was due to a decrease
in sales of single-use 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 loss of either of these significant customers or
substantially reduced sales to these significant customers or any other large
customer could have a material adverse effect on the Company's results of
operations.
6
The following table illustrates each significant customer's net sales as a
percentage of consolidated net sales during the Third Quarter Fiscal 2007, Third
Quarter Fiscal 2006, Fiscal 2007 YTD and Fiscal 2006 YTD.
Percent of Net Sales
--------------------
For the quarter ended For the nine months ended
---------------------------------- -----------------------------------
March 31, 2007 April 1, 2006 March 31, 2007 April 1, 2006
-------------- ------------- -------------- -------------
Wal-Mart 31.2% 38.1% 35.5% 24.0%
Walgreens 21.8% 13.3% 25.9% 19.6%
--------- --------- --------- ---------
Total 53.0% 51.4% 61.4% 43.6%
========= ========= ========= =========
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 Third Quarter Fiscal
2007 and the Third Quarter Fiscal 2006, included in "Other expense (income),
net" in the accompanying condensed consolidated statements of operations are
approximately $34,000 and $(62,000), respectively, of net foreign currency
losses (gains). For Fiscal 2007 YTD and Fiscal 2006 YTD, included in "Other
expense (income), net" in the accompanying condensed consolidated statements of
operations, are $0.1 million and approximately $0.5 million, respectively, of
net foreign currency losses.
7
Hedging Activities
During the Third Quarter Fiscal 2007 and the Third 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 March 31, 2007 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 March 31, 2007 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 Third Quarter Fiscal 2007 and the Third 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 $0.5 million and $0.4 million related to the
short-term investments is included in "Other expense (income), net" for the
Third Quarter Fiscal 2007 and the Third Quarter Fiscal 2006, respectively.
Investment income of $1.4 million and $1.1 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.
As of March 31, 2007, the sum of the Company's undiscounted forecasted cash
flows exceeded the carrying value of its long-lived assets.
Revenue Recognition
The Company recognizes revenue, in accordance with Staff Accounting Bulletin
("SAB") No. 101, Revenue Recognition in Financial Statements, and SAB No. 104,
Revenue Recognition: Corrected Copy, when title and risk of loss are transferred
to the customer, the sales price is fixed or determinable, persuasive evidence
of an arrangement exists and collectibility is probable. Title and risk of loss
generally transfer when the product is delivered to the customer or upon
shipment, depending upon negotiated contractual arrangements. Sales are recorded
net of provisions for anticipated returns which the
8
Company estimates based on historical rates of return, adjusted for current
events as appropriate, in accordance with SFAS No. 48, Revenue Recognition When
Right of Return Exists ("SFAS No. 48"). If actual future returns are higher than
estimated, then net sales could be adversely affected. Management has assessed
the appropriateness of the timing of revenue recognition in accordance with SAB
No. 104 and SFAS No. 48.
Sales Allowances
The Company may enter into arrangements to offer certain pricing discounts and
allowances that do not provide an identifiable separate benefit or service. In
accordance with Emerging Issues Task Force Issue No. 01-09, Consideration Given
by a Vendor to a Customer (Including a Reseller of the Vendor's Products) ("EITF
Issue No. 01-09"), 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 Third 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 March 31, 2007 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 Third Quarter Fiscal 2007 and the Third
Quarter Fiscal 2006, the Company recorded a provision (benefit) for income taxes
of approximately $(1,000) and $40,000, respectively. During Fiscal 2007 YTD and
Fiscal 2006 YTD, the Company recorded a provision for income taxes of $34,000
and $0.2 million, respectively. The Third 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 Third Quarter Fiscal 2007 and Fiscal 2007 YTD, the Company's comprehensive
loss
9
was $(3.4) million and $(8.5) 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. During the Third Quarter Fiscal 2006 and Fiscal
2006 YTD, the Company's comprehensive loss was $(4.7) million and $(16.3)
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 Third
Quarter Fiscal 2007 and the Third Quarter Fiscal 2006, the Company issued no
shares 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 Third Quarter Fiscal 2007
and the Third Quarter Fiscal 2006, potentially dilutive securities were
comprised of stock options to purchase 313 and 13,666 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
zero and 19,977 shares of Common Stock, respectively, that were not included in
the calculation of diluted loss per share because their impact was antidilutive.
In the Third Quarter Fiscal 2007 and Fiscal 2007 YTD and the Third 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)
March 31, July 1,
2007 2006
--------- --------
Raw materials, components, and $ 3,629 $ 9,589
work-in-process
Finished goods 10,217 18,671
------- -------
Total inventories $13,846 $28,260
======= =======
During the Third Quarter Fiscal 2007 and the Third 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 March 31, 2007 and April 1,
2006. For the Third Quarter Fiscal 2007 and the Third 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 $0.5 million, respectively, and increasing cost of products sold by
$0.3 million and $0.5 million, respectively.
Note 7 - Short-Term Borrowings and Financing Facilities:
During the fiscal quarter ended December 31, 2006, Concord Camera HK Limited
("CCHK"), the Company's Hong Kong subsidiary, (i) reduced the demand financing
facilities provided by The Hongkong 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 Dah Sing and SCB 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. At March 31, 2007, the Hong Kong prime rate was 6.39% and the U.S.
prime rate was 8.25%.
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 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,
11
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. Dah Sing has notified CCHK that it will
review the financial performance of CCHK and the Company before the expiration
date.
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 $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 of each of CCHK and the
Company within nine months after the Company's fiscal year end; (C) an audited
report of CCHK showing a net profit as of June 30, 2007, the end of the
Company's 2007 fiscal year; and (D) to direct import/export business to Dah Sing
of not less than HKD60.0 million (approximately US$7.5 million) per year.
As of March 31, 2007 and July 1, 2006, the Company had $2.2 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 March 31, 2007 and July 1, 2006, were 6.81% and
6.79%, respectively.
Note 8 - Share-Based Compensation Expense:
During the Third Quarter Fiscal 2007 and the Third Quarter Fiscal 2006, the
Company recorded approximately $10,000 and $83,000, respectively, of share-based
compensation expense. During Fiscal 2007 YTD and Fiscal 2006 YTD, the Company
recorded approximately $53,000 and $332,000, 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 Third Quarter Fiscal 2007 and the Third Quarter Fiscal 2006 was
calculated using the assumptions included in the following table. Expected
volatilities are based on the historical volatility of the Company's Common
Stock over the period of time commensurate with the expected life of the stock
options. The dividend yield is zero percent as the Company has never paid cash
dividends and has no present intention to pay cash dividends. The Company uses
historical data to estimate option exercise and employee termination information
within the valuation model. The expected term of options granted is based upon
the observed and expected time to the date of post-vesting exercise and
forfeitures of options by the Company's employees. The risk-free interest rate
is derived from the average five-year U.S. Treasury constant maturity rate for
the appropriate quarter, which approximates the rate in effect at the time of
the stock option grant.
Quarter ended Quarter ended
March 31, 2007 April 1, 2006
-------------------------------
Expected volatility 63.3% 66.5%
Expected dividend yield 0% 0%
Expected term (in years) 4 5
Risk-free interest rate 4.6% 4.7%
A summary of stock option activity under the Company's stock option plans as of
March 31, 2007 and changes during the Third Quarter Fiscal 2007 and Fiscal YTD
2007 are presented below:
12
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Total Stock Options Shares Price Term (Years) Value
------------------------------------- ------ ---------- ------------ ----------
Outstanding at December 30, 2006 224,144 $ 25.44
Granted 6,000 $ 4.71
Exercised -- $ 0.00
Forfeited or expired (14,553) $ 37.31
Outstanding at March 31, 2007 215,591 $ 24.07 3.4 $ 5,460
======= ========= ====== =========
Exercisable at March 31, 2007 188,145 $ 26.53 2.9 $ --
======= ========= ====== =========
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 8,000 $ 4.22
Exercised (75,532) $ 4.53
Forfeited or expired (44,567) $ 31.50
---------
Outstanding at March 31, 2007 215,591 $ 24.07 3.4 $ 5,460
======= ========= ====== =========
Exercisable at March 31, 2007 188,145 $ 26.53 2.9 $ --
======= ========= ====== =========
The weighted average grant-date fair value of options granted during the Third
Quarter Fiscal 2007 and the Third Quarter Fiscal 2006 was $2.6 and $3.5,
respectively. The total intrinsic value of options exercised during the Third
Quarter Fiscal 2007 and Fiscal 2007 YTD was $0 and $2,000. No options were
exercised in the Third 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.
A summary of the status of nonvested shares as of March 31, 2007 and changes
during the Third Quarter Fiscal 2007 and Fiscal 2007 YTD are presented below:
Weighted Average
Grant Date
Nonvested Stock Options Shares Fair Value
------------------------------ ------ ----------------
Nonvested at December 30, 2006 25,355 $5.06
Granted 6,000 $2.57
Vested (2,176) $7.07
Forfeited (1,733) $4.98
------- -----
Nonvested at March 31, 2007 27,446 $4.36
======= =====
13
Weighted Average
Grant Date
Nonvested Stock Options Shares Fair Value
------------------------------ ------ ----------------
Nonvested at July 1, 2006 32,169 $7.90
Granted 8,000 $2.30
Vested (7,510) $15.54
Forfeited (5,213) $6.97
------- ------
Nonvested at March 31, 2007 27,446 $4.36
======= ======
As of March 31, 2007, there was approximately $97,000 of total unrecognized
compensation expense related to nonvested share-based compensation arrangements
granted under the Company's stock option plans. The unrecognized compensation
expense is expected to be recognized over a weighted-average vesting period of
3.0 years. The total grant date fair value of stock options vested during the
Third Quarter Fiscal 2007 and the Third Quarter Fiscal 2006 was approximately
$15,000 and $35,000, respectively. The total grant date fair value of stock
options vested during Fiscal 2007 YTD and Fiscal 2006 YTD was approximately
$117,000 and $466,000, 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
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
March 31, 2007 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 March 31, 2007 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 traditional film cameras,
including zoom cameras and certain related accessories. The license agreements
did not include
14
instant or digital cameras. Each license agreement included an initial term
expiring on February 1, 2006, provided the Company the right to renew the
license under the same economic terms for an additional three-year period and
provided for the payment by the Company of $3.0 million of minimum royalties, or
$6.0 million in total, which were fully credited against percentage royalties.
On November 28, 2005, the Company exercised its right to renew the single-use
camera license agreement with Polaroid for an additional three-year term
expiring on February 1, 2009 in accordance with the same economic terms included
in the original agreement. Pursuant to the terms of the renewed single-use
camera license agreement, in February 2006, the Company paid $2.0 million as a
pre-payment of the minimum royalties for the renewal term and recorded this
payment as a prepaid asset. The Company amortizes this asset based upon a
percentage of net sales of Polaroid branded single-use cameras sold during the
renewal term of the single-use camera license agreement. In January 2006, the
Company entered into a new license agreement with Polaroid providing it with the
exclusive, worldwide use of the Polaroid brand trademark in connection with the
manufacture, distribution, promotion and sale of traditional film cameras,
including zoom cameras and certain related accessories and excluding instant
cameras. This 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
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 Third Quarter Fiscal 2007 and the Third Quarter
Fiscal 2006, was $1.3 million and $1.8 million, respectively. Total amortization
and royalty expense for all licensing and royalty agreements for Fiscal 2007 YTD
and Fiscal 2006 YTD, was $4.9 million and $6.2 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 March 31, 2007 to be
between $0 and approximately $6.7 million in the aggregate. The actual royalty
amounts, if any, for past and future sales are dependent upon the outcome of the
negotiations. The Company has notified certain of its suppliers of its right to
be indemnified by the suppliers if it is required to pay royalties or damages to
either claimant. The Company is unable to reasonably estimate the amount of the
potential loss, if any, within the range of estimates relating to these claims.
Accordingly, the Company has not accrued any amounts related to these claims as
of March 31, 2007.
Purchase Commitments
At March 31, 2007, the Company had $14.9 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
15
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 were 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. On October 13, 2006, a Stipulation of Settlement
was filed with the court and 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. 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. 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. On March 23,
2007, the court granted the plaintiff's motion for class certification and
certified as plaintiffs all persons who purchased the Common Stock between
August 14, 2003 and August 31, 2004, inclusive, and who were allegedly damaged
thereby (the period August 14, 2003 through August 31, 2004 hereinafter referred
as the "Class Period"). The allegations in the Amended Complaint are centered
around claims that the Company failed to disclose, in periodic reports it filed
with the SEC and in press releases it made to the public during the Class Period
regarding its operations and financial results, (i) the full extent of the
Company's excess, obsolete and otherwise impaired inventory; (ii) the departure
from the Company of the aforementioned former officer defendant until several
months after his departure; and (iii) that Eastman Kodak Company ("Kodak") had
notified the Company that it would stop purchasing cameras from the Company
under its two design and manufacturing services ("DMS") contracts with the
Company due to the Company's alleged infringement of Kodak's patents. The
Amended Complaint also alleged that the Company improperly recognized revenue
contrary to generally accepted accounting principles ("GAAP") due to an alleged
inability to reasonably estimate digital camera returns. The Amended Complaint
claimed that such failures artificially inflated the price of the Common Stock.
The Amended Complaint sought unspecified damages, interest, attorneys' fees,
costs of suit and unspecified other and further relief from the court. The
Company is vigorously defending the lawsuit. Although the Company believes the
lawsuit is without merit, the outcome cannot be predicted, and if adversely
determined, the ultimate liability of the Company, which could be material,
cannot be ascertained. In a letter dated November 19, 2004, the Company was
advised by the staff of the SEC that it is conducting an investigation related
to the matters described above. The Company has provided the requested
information to the staff of the SEC and has not received any further
communication from the SEC with respect to its request since the Company last
responded in May 2005.
On November 16, 2004, a shareholder derivative suit was filed against certain of
the Company's current and former officers and directors, and the Company as a
nominal defendant, in the United States District Court for the District of New
Jersey by an individual purporting to be a holder of the Company's Common Stock.
The complaint alleged that the individual defendants breached their duties of
loyalty and good faith by causing the Company to misrepresent its financial
results and prospects, resulting in the class action complaints described in the
immediately preceding paragraph. The complaint sought unspecified damages,
repayment of salaries and other remuneration from the individual defendants,
16
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.
On October 6, 2004, a patent infringement complaint was filed by Honeywell
International, Inc. and Honeywell Intellectual Properties, Inc., against 27
defendants, including the Company, in the United States District Court for the
District of Delaware. The complaint asserted that the defendants have conducted
activities which infringe U.S. Patent No. 5,280,371, entitled, "Directional
Diffuser for a Liquid Crystal Display." The complaint sought unspecified
damages, interest, attorneys' fees, costs of suit and unspecified other and
further relief from the court. The proceedings in this action against the
Company and other similarly situated defendants were stayed by the court pending
the resolution of the infringement actions against the liquid crystal display
manufacturers. It is too early to assess the probability of a favorable or
unfavorable outcome or the loss or range of loss, if any, and therefore, no
amounts have been accrued relating to this action. The Company has notified
several third parties of its intent to seek indemnity from such parties for any
costs or damages incurred by the Company as a result of this action.
In June 2006, St. Clair Intellectual Properties Consultants, Inc. filed a patent
infringement complaint against 22 defendants, including the Company, in the
United States District Court for the District of Delaware. The complaint
asserted that the defendants conducted activities which infringe U.S. Patent
Nos. 5,138,459, 6,094,219, 6,233,010 and 6,323,899. The complaint sought
injunctive relief, unspecified damages, interest, attorneys' fees, costs of suit
and unspecified other and further relief from the court. The proceedings in this
action against the Company and the other defendants were stayed by the court
until further order of the court. It is too early to assess the probability of a
favorable or unfavorable outcome or the loss or range of loss, if any, and,
therefore, no amounts have been accrued relating to this action. The Company is
assessing potential claims of indemnification against certain of its suppliers
with respect to this action.
The Company is also involved from time to time in routine legal matters
incidental to its business. Based upon available information, the Company
believes that the resolution of such matters will not have a material adverse
effect on its financial position or results of operations.
Note - 12 Other Charges:
Cost-Reduction Initiatives
The Company continues to evaluate its cost structure and implement
cost-reduction initiatives as appropriate. During Fiscal 2007 YTD,
cost-reduction initiatives included, among other things, the elimination of
certain employee positions. As a result, during the Third Fiscal Quarter 2007
and Fiscal 2007 YTD, the Company recorded total charges of $56,000 and $762,000,
respectively, related to severance costs for the elimination of certain employee
positions.
17
Table I - 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 762 -- 26 788
Reversal (44) (7) (1) (52)
Payments (1,759) -- (25) (1,784)
--------- --------- --------- ---------
Balance as of
March 31, 2007 $ 134 $ -- $ -- $ 134
========= ========= ========= =========
Table II - Other Charges presents the related expenses and their classification
in the consolidated statements of operations.
(in thousands)
Other Charges Severance Retention Leases Total
------------- --------- --------- -------- ---------
Third Quarter Fiscal 2007
-------------------------
Cost of products sold $ 32 $ -- $ -- $ 32
Selling expense 23 -- -- 23
General and administrative
expense 1 -- -- 1
--------- --------- --------- ---------
Total $ 56 $ -- $ -- $ 56
========= ========= ========= =========
Fiscal 2007 YTD
Cost of products sold $ 341 -- -- 341
Selling expense 302 (7) 16 311
General and administrative
expense 75 -- 9 84
--------- --------- --------- ---------
Total $ 718 $ (7) $ 25 $ 736
========= ========= ========= =========
Third Quarter Fiscal 2006
Cost of products sold $ -- $ -- $ -- $ --
Selling expense 72 -- -- 72
General and administrative
expense 11 (21) -- (10)
--------- --------- --------- ---------
Total $ 83 $ (21) $ -- $ 62
========= ========= ========= =========
Fiscal 2006 YTD
Cost of products sold $ -- $ 96 $ -- $ 96
Selling expense 72 14 -- 86
General and administrative
expense 1,149 46 -- 1,195
--------- --------- --------- ---------
Total $ 1,221 $ 156 $ -- $ 1,377
========= ========= ========= =========
As a result of the cost-reduction initiatives implemented in Fiscal 2006 and
Fiscal 2007, the Company expects to make cash payments totaling approximately
$0.1 million during the remainder of Fiscal 2007 related to severance costs.
18
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis should be read in conjunction with the
condensed consolidated financial statements and the notes to such financial
statements included elsewhere in this Form 10-Q and our Annual Report on Form
10-K for Fiscal 2006 filed with the SEC as of September 14, 2006 ("Form 10-K").
Except for historical information contained herein, the matters discussed below
are forward-looking statements made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Such statements involve
risks and uncertainties, including, but not limited to, economic, governmental,
political, competitive and technological factors affecting the Company's
operations, markets, products, prices and other factors discussed elsewhere in
this report and other reports filed with the SEC. See Part I Item 1A, "Risk
Factors" in this report and in our Form 10-K. These factors may cause results to
differ materially from the statements made in this report or otherwise made by
or on behalf of the Company.
Overview
We market and sell popularly priced, easy-to-use 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 third quarter of fiscal 2007 was $(3.7) million as
compared to an operating loss of $(5.0) million for the third 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 $0.8 million due to lower selling-related employee
compensation costs in the amount of $0.7 million. Employee compensation costs
decreased as a result of the elimination of certain positions in connection with
our cost reduction initiatives. Quarter-over-quarter general and administrative
("G&A") expenses decreased by $1.2 million primarily due to a decrease in
G&A-related employee compensation costs of $0.8 million as a result of the
elimination of certain positions in connection with our cost-reduction
initiatives and of certain other costs.
Although we experienced decreases in our quarter-over-quarter selling, general
and administrative expenses of $2.0 million, our gross profit for the third
quarter of fiscal 2007 decreased as compared to the gross profit for our third
quarter of fiscal 2006 by $0.7 million. The decrease in the quarter-over-quarter
gross profit was primarily due to unfavorable manufacturing material, labor and
overhead cost variances of $1.3 million, partially offset by a $0.6 million
increase resulting from improved gross margin percentages on lower
quarter-over-quarter net sales.
19
Third Quarter Fiscal 2007 Results of Operations
Although we reduced our operating loss by $1.3 million, or 26.0%, for the third
quarter of fiscal 2007 as compared to the third quarter of fiscal 2006, we
recorded an operating loss of $3.7 million during the quarter.
Factors contributing to the third quarter fiscal 2007 operating loss were:
1. Unfavorable 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
1. Unfavorable Manufacturing Material, Labor and Overhead Cost Variances
During the third quarter of fiscal 2007, we experienced unfavorable
manufacturing material, labor and overhead cost variances of $1.1 million
primarily attributable to a lower than anticipated volume of production during
the period.
2. Insufficient Net Sales and Related Gross Profit to Fully Absorb
Non-Manufacturing Overhead Costs
During the third 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 $2.3 million to the operating
loss.
3. Professional Fees
During the third 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 in our internal control over
financial reporting.
We continue to take action and review our strategies, including and relating to:
(i) acquisition of new single-use and 35mm traditional film camera customers,
(ii) potential new business initiatives, and (iii) implementation of additional
cost reductions related to worldwide overhead costs. There can be no assurances
that we will be able to implement any such strategies or that implementing any
such strategies will successfully reverse our losses, increase our revenues,
decrease our costs or improve our results of operations.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in conformity with accounting principles generally accepted in the United
States. The preparation of these financial statements requires management to
make estimates and assumptions that affect the amounts reported in the condensed
consolidated financial statements and the accompanying notes. Since 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.
20
Results of Operations
Quarter Ended March 31, 2007 Compared to the Quarter Ended April 1, 2006
Net Sales
Net sales of our products for the third quarter of fiscal 2007 were $16.4
million, a decrease of $2.5 million, or 13.2%, as compared to net sales for the
third 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 offset by an increase in sales of
single-use and to a lesser extent 35mm traditional film cameras.
Net sales from our operations in the Americas for the third quarter of fiscal
2007 were $12.0 million, an increase of $.02 million, or 1.7%, as compared to
the third quarter of fiscal 2006.
Net sales from our operations in Europe for the third quarter of fiscal 2007
were $2.6 million, a decrease of $4.3 million, or 62.3%, as compared to the
third 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, partially offset by an increase
in single-use cameras.
Net sales from our operations in Asia for the third quarter of fiscal 2007 were
$1.8 million an increase of $1.6 million, or 800%, as compared to the third
quarter of fiscal 2006. The increase in net sales in Asia was due to increased
sales of single-use cameras in Japan in the third quarter of fiscal 2007.
Gross Profit
Gross profit for the third quarter of fiscal 2007 was $1.1 million, or 6.7% of
net sales, versus gross profit of $1.8 million, or 9.5% of net sales, in the
third quarter of fiscal 2006. During the third quarter of fiscal 2007 as
compared to the third quarter of fiscal 2006, gross profit was negatively
affected, in dollars and as a percentage of net sales, by unfavorable
manufacturing material, labor and overhead cost variances and negatively
affected, in dollars, by a reduction in net sales.
Product engineering, design and development costs for the third quarter of
fiscal 2007 and the third quarter of fiscal 2006, in dollars and as a percentage
of net sales, were $0.6 million, or 3.7%, and $0.9 million, or 4.8%,
respectively.
Operating Expenses
Selling expenses for the third quarter of fiscal 2007 were $1.9 million, or
11.6% of net sales, compared to $2.6 million, or 13.8% of net sales, for the
third quarter of fiscal 2006. The decrease in selling expenses was primarily due
to a reduction of selling-related employee compensation costs of $0.7 million,
resulting from the elimination of certain positions in connection with our
cost-reduction initiatives.
G&A expenses for the third quarter of fiscal 2007 were $3.0 million, or 18.3% of
net sales, compared to $4.2 million, or 22.2% of net sales, for the third
quarter of fiscal 2006. The decrease in G&A expenses was due to a reduction in
G&A-related employee compensation costs of $0.8 million as a result of the
elimination of certain positions in connection with our cost-reduction
initiatives and a reduction in certain other costs.
Stock-Based Compensation
During the third quarter of fiscal 2007 and the third quarter of fiscal 2006, we
recorded approximately $10,000 and $83,000, 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.
21
Interest Expense
Interest expense was approximately $0.1 million for each of the third quarter of
fiscal 2007 and the third quarter of fiscal 2006.
Other (Income) Expense, Net
Other (income) expense, net was $(0.4) million for each the third quarter of
fiscal 2007 and the third quarter of fiscal 2006, respectively.
Income Taxes
In the third 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 March 31, 2007 and July 1, 2006. During the
third quarter of fiscal 2007 and the third quarter of fiscal 2006, we recorded a
provision (benefit) for income taxes of $(1,000) and $40,000, respectively. The
third quarter of fiscal 2007 and the third quarter of fiscal 2006 income tax
provision (benefit) relate 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 $(3.4) million, or $(0.57) per basic and diluted
common share, for the third quarter of fiscal 2007, as compared to a net loss of
$(4.7) million, or $(0.81) per basic and diluted common share, for the third
quarter of fiscal 2006.
Results of Operations
Fiscal 2007 YTD Compared to Fiscal 2006 YTD
Net Sales
Net sales of our products for the nine months ended March 31, 2007, ("fiscal
2007 YTD"), were $64.5 million, a decrease of $40.1 million, or 38.3%, as
compared to net sales for the nine months ended April 1, 2006 ("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 partially offset by an increase in single-use cameras.
Net sales from our operations in the Americas for fiscal 2007 YTD were $49.8
million, a decrease of $11.5 million, or 18.8%, 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, single-use and digital cameras.
Net sales from our operations in Europe for fiscal 2007 YTD were $11.5 million,
a decrease of $31.2 million, or 73.1%, 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 and, to a lesser extent, 35mm traditional film cameras, partially offset
by an increase in single-use cameras.
Net sales from our operations in Asia for fiscal 2007 YTD were $3.2 million an
increase of $2.6 million, or 433%, as compared to fiscal 2006 YTD. The increase
in net sales in Asia was due to an increase in sales of single-use cameras in
Japan.
22
Gross Profit
Gross profit for fiscal 2007 YTD was $7.1 million, or 11.0% of net sales, versus
gross profit of $9.9 million, or 9.5% 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
negatively affected, in dollars, by a reduction in net sales
Product engineering, design and development costs for fiscal 2007 YTD and fiscal
2006 YTD, in dollars and as a percentage of net sales, were $2.0 million, or
3.1%, and $3.0 million, or 2.9%, respectively.
Operating Expenses
Selling expenses for fiscal 2007 YTD were $6.8 million, or 10.5% of net sales,
compared to $10.2 million, or 9.8% of net sales, for fiscal 2006 YTD. The
decrease in the dollar amount was primarily due to a reduction in freight and
royalty costs in the amounts of $1.1 million and $0.6 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 $1.7 million including
a year-over-year increase in other charges of $0.2 million, resulting from the
elimination of certain positions in connection with our cost-reduction
initiatives.
G&A expenses for fiscal 2007 YTD were $10.2 million, or 15.8% of net sales,
compared to $16.0 million, or 15.3% of net sales, for fiscal 2006 YTD. The
decrease in the dollar amount was primarily due to a reduction in employee
compensation costs of $3.6 million, including a year-over-year decrease in other
charges of $1.1 million, resulting from the elimination of certain positions in
connection with our cost-reduction initiatives. In addition, the decrease in G&A
expenses was due to a reduction in professional fees of $1.6 million incurred in
connection with internal control remediation efforts and a reduction of certain
other costs.
Stock-Based Compensation
During fiscal 2007 YTD and fiscal 2006 YTD, we recorded approximately $53,000
and $332,000, 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 and $0.3 million for fiscal 2007
YTD and fiscal 2006 YTD. The decrease was attributable to decreased short-term
borrowings in fiscal 2007 YTD.
Other Income, Net
Other income, net was $1.6 million and $0.5 million 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 valuation allowance for the entire balance of our deferred income tax
assets as of March 31, 2007 and July 1, 2006. During
23
fiscal 2007 YTD and fiscal 2006 YTD, we recorded provisions for income taxes of
$34,000 and $0.2 million, 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 $(8.5) million, or $(1.46) per basic and diluted
common share, for fiscal 2007 YTD, as compared to a net loss of $(16.3) million,
or $(2.79) 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 $0.8 million and $1.2 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 March 31, 2007. In the ordinary course
of business, we enter into operating lease commitments, purchase commitments and
other contractual obligations. These transactions are recognized in our
financial statements in accordance with accounting principles generally accepted
in the United States and are more fully discussed below.
We believe that our cash and cash equivalents, short-term investments,
anticipated cash flow from operations, and amounts available under our financing
facilities provide sufficient liquidity and capital resources for our
anticipated working capital and capital expenditure requirements for at least
the next twelve months.
Although we currently anticipate that we have, or have access to, an amount of
working capital that will be sufficient to fund our operations for the next
twelve months, our cash requirements during this period may exceed the amount of
working capital available to us. Our ability to fund our operating requirements
and maintain an adequate level of working capital will depend primarily on our
ability to generate growth in sales of our single-use and 35mm traditional film
cameras and new products, on our ability to continue to access our financing
facilities and on our ability to control operating expenses. Our failure to
generate substantial growth in the sales of our single-use and 35mm traditional
film cameras and new products, control operating expenses and other events -
including the progress of our new product initiatives, our ability to
manufacture or have manufactured products at an economically feasible cost and
in sufficient quantities and changes in economic or competitive conditions or
our planned business - could cause us to require additional capital. In the
event that we must raise additional capital to fund our working capital needs,
we may seek to raise such capital through borrowings and/or the issuance of debt
securities or equity securities. To the extent we raise additional capital by
issuing equity securities or obtaining borrowings convertible into equity,
existing shareholders may experience ownership dilution and future investors may
be granted rights superior to those of existing shareholders. Moreover,
additional capital may not be available to us on acceptable terms, or at all.
Working Capital - At March 31, 2007, we had working capital of $41.3 million,
compared to $46.8 million at July 1, 2006, a decrease of $5.5 million.
Cash Used in Operating Activities - Cash used in operating activities during
fiscal 2007 YTD was $3.2 million, which compared unfavorably to cash used in
operating activities of $2.2 million during fiscal 2006 YTD. The cash used in
operating activities is primarily attributable to a net decrease in working
capital items offset by a reduction in net loss.
24
Cash Provided by Investing Activities - Cash provided by investing activities
was $2.9 million for fiscal 2007 YTD as compared to cash provided by investing
activities of $0.6 million for fiscal 2006 YTD. The increase in cash provided by
investing activities was primarily due to a $10.3 million decrease in restricted
cash attributable to a reduction in our borrowing capacity under the HSBC
financing facilities, a decrease of $1.9 million in capital expenditures
partially offset by a $9.9 million decrease in proceeds from the sale of
available-for-sale investments. See Note 7 - Short-Term Borrowings and Financing
Facilities in the Notes to Condensed Consolidated Financial Statements.
Cash Provided by (Used in) Financing Activities - Cash provided by (used in )
financing activities during fiscal 2007 YTD and fiscal 2006 YTD was
approximately $2.5 million and $(1.4) 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 Condensed Consolidated Financial Statements for additional
information about the corporate guarantees we provided in connection with our
financing facilities. See also Note 10 - Commitments and Contingencies in the
Notes to Condensed Consolidated Financial Statements.
License Agreements - See Note 10 - Commitments and Contingencies in the Notes to
Condensed Consolidated Financial Statements.
Intellectual Property Claims - See Note 10 - Commitments and Contingencies and
Note 11 - Litigation and Settlements in the Notes to Condensed Consolidated
Financial Statements.
Hong Kong Financing Facilities - As of March 31, 2007, we had $1.6 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 requirements needed to maintain a presence in the camera
market and to market and sell cameras, the development of our business including
our new business initiatives, anticipated revenues or capital expenditures, our
expectations as to the sufficiency of our capital resources, our preliminary
estimates of the potential range of royalties we may have to pay to two entities
for alleged infringement, our assessment of active claims against us and the
materiality thereof, our expectation of
25
increases in sales to certain customers (including sales of single-use cameras
to Walgreens, Wal-Mart and other large current and potential 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, our inability to obtain film for our single-use cameras 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
March 31, 2007, our disclosure controls and procedures were not effective as a
result of the continued existence of a material weakness in internal control
over financial reporting described in our Form 10-K.
Because of this material weakness, 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 weakness 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.
26
(b) Changes in Internal Control over Financial Reporting
The following two previously identified material weaknesses in our internal
control over financial reporting were remediated during our third fiscal quarter
ended March 31, 2007:
o ERP System: Management believes that the employees have been
provided effective training on our ERP System and certain previously
identified configuration deficiencies in the system no longer result
in operational inefficiencies.
o Sales, Accounts Receivable and Revenue Recognition: Management
believes that the controls related to the sale and return and
allowances of our products, collection of receivables and
recognition of revenue, including the ability to verify the
completeness and accuracy of sales orders shipped and invoiced, are
now operating effectively.
Although management believes these material weaknesses in our internal control
over financial reporting have been remediated to the extent disclosed, our
independent registered public accounting firm has not opined on management's
assessment and we cannot assure you that these remediation efforts have been
successful or that we will not identify additional weaknesses in our controls
and procedures in the future. However, we will continue to monitor the
effectiveness of theses actions and will make any changes that management
determines appropriate.
We continue to take corrective actions to remediate the remaining material
weakness in Information Technology that was disclosed in our Form 10-K. 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
We depend on third-party suppliers, and our revenue, gross profits and margins
could suffer if we encounter supplier issues and/or fail to manage supplier
issues properly.
We currently purchase certain components from our suppliers and outsource the
manufacture of certain of our single-use and 35mm traditional film camera and
other products for sale to our customers worldwide. The term "components"
includes film, batteries, packaging and any other items used in the manufacture
of our products by our company or outsourced manufacturers. Our manufacturing,
sales and distribution operations depend on our ability to anticipate our needs
for components and products and our suppliers' ability to deliver sufficient
quantities of quality components and products at reasonable prices in time to
meet critical manufacturing, sales and distribution schedules. Given the variety
of products that we offer and might offer in the future, the dispersal of our
suppliers and outsourced manufacturers across the globe, the diminishing number
of our suppliers of certain components and the long lead times that are required
to manufacture, assemble and deliver certain components and products, adverse
circumstances, issues and problems could arise in planning production,
procurement and managing inventory levels that could negatively impact our
business and increase our financial exposure and risk. Other supplier problems
that we could face include component and product shortages, excess supply and
risks related to fixed-price contracts that would require us to pay more than
the open market price, as more fully described below.
o Supply shortages. We may experience a shortage of supply of, or a delay
in receiving, certain components and products as a result of strong
demand, capacity constraints, diminishing sources of supply or other
problems experienced by suppliers. The number of film suppliers has
diminished and we currently rely on our two major competitors in the
single-use camera market to supply a significant portion of the film used
in the manufacture of our
27
products. If shortages or delays occur or persist, the price of these
components and products may increase, we may be exposed to quality issues
or the components and products may not be available at all. We may not be
able to secure enough components and/or products at reasonable prices or
of acceptable quality to build, sell and distribute new products in a
timely manner in the quantities or configurations needed. Accordingly, our
revenue, gross profits and margins could suffer as we could lose
time-sensitive sales, incur additional freight costs or be unable to pass
on price increases to our customers. If we cannot adequately address
supply issues, we may have to re-engineer and/or seek other sources for
some components and products, resulting in additional costs, delays or
insufficient supply of products for our customers.
o Oversupply. In order to secure products or components for the production
of products, at times we may make advance payments to suppliers or might
purchase components in advance of forecasted requirements, or we may enter
into non-cancelable commitments with suppliers. If we fail to properly
anticipate customer demand, an oversupply of products and/or components
could result in excess or obsolete inventory. This excess or obsolete
inventory may result in lowering the carrying value of these components
and/or products by recording an inventory charge which could adversely
affect our gross profits and margins.
o Long-term pricing commitments. As a result of binding price or purchase
commitments with suppliers, we may be obligated to purchase components
and/or products at prices that are higher than those available in the
current market and be limited in our ability to respond to changing market
conditions. In the event that we become committed to purchase components
and/or products in advance of forecasted requirements and/or for prices in
excess of the current market price, we may be at a disadvantage to
competitors who have access to components and/or products at the times
required and/or at lower prices. This excess in component purchases and in
purchase price over current market price may result in lowering the
carrying value of those components and/or products by recording an
inventory charge that could adversely affect our gross profits and
margins.
In many instances, we rely on offshore suppliers, including, but not limited to,
manufacturers in the PRC, for the production of cameras and other products and
other suppliers in Asia for product assembly and manufacture. Regional economic,
business, environmental, political, medical or military conditions or events
could disrupt supplies in foreign locations.
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
as amended through May 9, 2000 to 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 the
through July 12, 2004 Company's annual report on Form
10-K for the year ended July 3,
2004.
3.3 Certificate of Amendment (No. 7) Incorporated by reference to the
of Certificate of Incorporation, Company's current report on Form
dated November 2, 2006 8-K filed November 7, 2006.
3.4 Certificate of Correction of Incorporated by reference to the
Certificate of Amendment (No. 7) Company's current report on Form
to Certificate of Incorporation, 8-K filed November 7, 2006.
dated November 3, 2006
28
31.1 Certification of Chief Executive Filed herewith.
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
29
S I G N A T U R E
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONCORD CAMERA CORP.
----------------------------------------
(Registrant)
DATE: May 10, 2007 By: /s/ Blaine A. Robinson
------------------------------------
(Signature)
Blaine A. Robinson,
Vice President - Finance, Treasurer
and Assistant Secretary (Principal
Financial and Accounting Officer)
30