FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 1, 2005
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 an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes |X| No |_|
Indicate by check mark whether the registrant is a shell company (as define 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 - 29,189,896 shares as of November 4, 2005
Index
Concord Camera Corp. and Subsidiaries
Part I. FINANCIAL INFORMATION
Page No.
--------
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets as of October 1, 2005 (Unaudited) and July 2, 2005.....................3
Condensed consolidated statements of operations (Unaudited)
for the quarters ended October 1, 2005 and October 2, 2004...................................................4
Condensed consolidated statements of cash flows (Unaudited)
for the quarters ended October 1, 2005 and October 2, 2004...................................................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........................................................29
Item 4. Controls and Procedures...........................................................................................30
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................................................31
Item 1A. Risk Factors........... ..........................................................................................31
Item 5. Other Information.................................................................................................34
Item 6. Exhibits..........................................................................................................34
2
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS
CONCORD CAMERA CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
OCTOBER 1, 2005 JULY 2,
(UNAUDITED) 2005
--------------- ----------
ASSETS
Current Assets:
Cash and cash equivalents $ 6,063 $ 8,016
Short-term investments 35,650 35,200
Accounts receivable, net 23,266 31,860
Inventories 30,533 36,382
Deferred compensation assets 8,985 8,711
Prepaid expenses and other current assets 1,934 2,708
--------- ---------
Total current assets 106,431 122,877
Property, plant and equipment, net 16,074 16,672
Other assets 7,084 7,207
--------- ---------
Total assets $ 129,589 $ 146,756
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings under financing facilities $ 2,891 $ 2,936
Accounts payable 20,949 32,257
Accrued expenses 14,321 14,108
Deferred compensation liabilities 8,846 8,688
Other current liabilities 2,473 3,127
--------- ---------
Total current liabilities 49,480 61,116
Other long-term liabilities 3,436 3,337
--------- ---------
Total liabilities 52,916 64,453
Commitments and contingencies
Stockholders' equity:
Blank check preferred stock, no par value,
1,000 shares authorized, none issued - -
Common stock, no par value, 100,000 shares
authorized; 30,925 and 30,925 shares issued
as of October 1, 2005 and July 2, 2005, respectively 143,518 143,518
Additional paid-in capital 4,983 4,853
Deferred share arrangement 624 624
Accumulated deficit (66,835) (61,075)
--------- ---------
82,290 87,920
Less: treasury stock, at cost, 1,735 and 1,735
shares as of October 1, 2005 and July 2, 2005, respectively (4,993) (4,993)
Less: common stock held in trust, 509 and 509
shares as of October 1, 2005 and July 2, 2005, respectively (624) (624)
--------- ---------
Total stockholders' equity 76,673 82,303
--------- ---------
Total liabilities and stockholders' equity $ 129,589 $ 146,756
========= =========
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
-----------------------------
OCTOBER 1, OCTOBER 2,
2005 2004
---------- ---------
Net sales $ 44,586 $ 43,014
Cost of products sold 40,457 42,594
-------- --------
Gross profit 4,129 420
Selling expenses 3,537 4,198
General and administrative expenses 6,306 6,209
Interest expense 101 236
Other income, net (105) (962)
-------- --------
Loss before income taxes (5,710) (9,261)
Provision for income taxes 50 60
-------- --------
Net loss $ (5,760) $ (9,321)
======== ========
Basic and diluted loss per
common share $ (0.20) $ (0.32)
======== ========
Weighted average
common shares
outstanding - basic
and diluted 29,190 29,200
======== ========
See accompanying notes to condensed consolidated financial statements.
4
CONCORD CAMERA CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
FOR THE QUARTER ENDED
----------------------------
OCTOBER 1, OCTOBER 2,
2005 2004
---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,760) $ (9,321)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 1,175 2,063
Inventory charges 313 2,102
Stock-based compensation 130 -
Changes in operating assets and liabilities:
Accounts receivable, net 8,594 1,195
Inventories 5,536 (3,692)
Deferred compensation assets (274) 500
Prepaid expenses and other current assets 774 1,630
Other assets (200) 284
Accounts payable (11,308) 8,965
Accrued expenses 213 (265)
Deferred compensation liabilities 158 (379)
Other current liabilities (654) (1,482)
Other long-term liabilities 99 (486)
-------- --------
Net cash (used in) provided by operating activities (1,204) 1,114
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (254) (985)
Purchases of short-term investments, net (450) (500)
-------- --------
Net cash used in investing activities (704) (1,485)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments) borrowings under short-term financing facilities, net (45) 8,398
Net proceeds from issuance of common stock - 19
-------- --------
Net cash (used in) provided by financing activities (45) 8,417
-------- --------
Net (decrease) increase in cash and cash equivalents (1,953) 8,046
Cash and cash equivalents at beginning of period 8,016 18,323
-------- --------
Cash and cash equivalents at end of period $ 6,063 $ 26,369
======== ========
See accompanying notes to condensed consolidated financial statements.
5
CONCORD CAMERA CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 1, 2005
(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 October 1, 2005 ("First Quarter Fiscal 2006") are
not necessarily indicative of the results that may be expected for the fiscal
year ending July 1, 2006 ("Fiscal 2006"). For comparative purposes, the quarter
ended October 2, 2004 has been defined as the ("First Quarter Fiscal 2005"). The
balance sheet at July 2, 2005 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 for the
fiscal year ended July 2, 2005 ("Fiscal 2005").
Certain amounts in the prior year have been reclassified to conform to the
current year presentation.
NOTE 2 - SIGNIFICANT CUSTOMERS:
During the First Quarter Fiscal 2006, we experienced an increase in sales to
Walgreen Co. ("Walgreens") and a reduction in sales to Wal-Mart Stores, Inc.
("Wal-Mart") and Eastman Kodak Company ("Kodak") as compared to the First
Quarter Fiscal 2005. The First Quarter Fiscal 2006 increase in sales to
Walgreens was due to such customer's increased purchases of single-use and 35mm
traditional film cameras. The First Quarter Fiscal 2006 reduction in sales to
Wal-Mart was attributable to a reduction in sales of digital cameras partially
offset by an increase in single-use and 35mm traditional film camera sales to
such customer. During the First Quarter Fiscal 2006, sales to Kodak decreased
from the First Quarter Fiscal 2005 as a result of Kodak ceasing single-use
camera purchases under our two design and manufacturing services ("DMS")
contracts. One of the Kodak contracts expired in the third quarter of Fiscal
2005. The loss of any other significant customers or substantially reduced sales
to any other significant customers could have a material adverse effect on
results of operations.
The following table illustrates the percentage of consolidated net sales for
each significant customer during the quarters ended October 1, 2005 and October
2, 2004:
Percent of Net Sales
--------------------
For the quarter ended
---------------------------------------
October 1, October 2,
2005 2004
---------------- ----------------
Walgreens 22.4% 4.4%
Wal-Mart 15.8% 18.9%
Kodak -% 18.1%
---------------- ----------------
Total 38.2% 41.4%
================ ================
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 sales returns, sales allowances, provision for bad
debts, inventory valuation charges, realizability of long-lived and other
assets, realizability of deferred income tax assets, and accounting for
litigation and settlements.
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 the Japanese Yen. Although certain net sales
to customers and purchases of certain components and services are transacted in
local currencies, each of the Company's foreign subsidiaries purchases
substantially all of its finished goods inventories in U.S. Dollars.
Accordingly, the Company has determined the U.S. Dollar is the functional
currency for all of its subsidiaries. The accounting records for subsidiaries
that are maintained in a local currency are remeasured into the U.S. Dollar.
Accordingly, most non-monetary balance sheet items and related statement of
operations accounts are remeasured from the applicable local currency to the
U.S. Dollar using average historical exchange rates, producing substantially the
same result as if the entity's accounting records had been maintained in the
U.S. Dollar. Adjustments resulting from the remeasurement process are recorded
into earnings. Gains or losses resulting from foreign currency transactions and
remeasurement are included in "Other income, net" in the accompanying condensed
consolidated statements of operations. For the First Quarter Fiscal 2006 and the
First Quarter Fiscal 2005, included in "Other income, net" in the accompanying
condensed consolidated statements of operations, are approximately $0.2 million
and ($0.8) million, respectively, of net foreign currency loss (gains).
HEDGING ACTIVITIES
During the First Quarter Fiscal 2006 and the First Quarter Fiscal 2005, the
Company had no forward exchange contracts or other derivatives outstanding and
did not participate in any other type of hedging activities.
INVESTMENTS
At October 1, 2005 and July 2, 2005, the Company's "Short-term investments," as
classified in the accompanying condensed consolidated balance sheets, consisted
of auction rate debt securities and are considered available-for-sale
securities. During the First Quarter Fiscal 2006 and the First Quarter Fiscal
2005, no other comprehensive income or loss is recorded because the variable
interest rate feature and short maturities of the auction rate debt securities
cause 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, and then it would be recorded as an expense. Realized gains and
losses, interest and dividends are classified as investment income in "Other
income, net" in the accompanying condensed consolidated statements of
operations. Investment income of $0.3 million and $0.2 million related to the
short-term investments is included in "Other income, net" for the First Quarter
Fiscal 2006 and the First Quarter Fiscal 2005, respectively. Investments held in
deferred compensation rabbi trusts directed by participants are classified as
trading and changes in the fair value of such investments are recorded in
earnings.
7
INVENTORIES
Inventories, consisting of raw materials, components, work-in-process and
finished goods, are stated at the lower of cost or market value and are
determined on a first-in, first-out basis. Work-in-process and component
inventory costs include materials, labor and manufacturing overhead. The Company
records lower of cost or market value adjustments based upon changes in market
pricing, customer demand, technological developments or other economic factors
and for on-hand excess, obsolete or slow-moving inventory.
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 October 1, 2005, the sum of the Company's undiscounted cash flows exceeded
the carrying value of its long-lived assets. Assets reviewed include patents,
prepaid amounts related to licensing and royalty agreements, and property, plant
and equipment. No impairment charges were recorded during the First Quarter
Fiscal 2006 and the First Quarter Fiscal 2005.
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 anticipated returns which the Company estimates based on historical rates
of return, adjusted for current events as appropriate, in accordance with
Statement of Financial Accounting Standard No. 48, Revenue Recognition When
Right of Return Exists ("SFAS No. 48"). If actual future returns are higher than
estimated, then net sales could be adversely affected. Management has assessed
the appropriateness of the timing of revenue recognition in accordance with SFAS
No. 48. After considering the requirements of SFAS No. 48, the Company concluded
it would defer recognition of revenue from certain customers until such
customers' transactions meet all of the requirements of 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, have been expensed as incurred. In
accordance with EITF Issue No. 01-09, which addresses the statement of
operations classification of consideration between a vendor and a retailer, the
Company records certain variable selling expenses, including advertising
allowances, other discounts and other allowances, as a reduction of sales. The
Company may enter into arrangements to provide certain free products. In
accordance with EITF Issue No. 01-09, the Company records the cost of free
products ratably into cost of products sold based upon the underlying revenue
transaction.
8
STOCK-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. We have adopted the modified prospective method of transition
as provided by SFAS No. 123R, and as a result, compensation expense related to
share-based payments is recorded only for periods beginning July 3, 2005. Under
the modified prospective method, stock-based compensation expense is generally
recognized over the vesting period for new awards granted after July 2, 2005 and
over the remaining vesting period for unvested awards outstanding at July 2,
2005.
INCOME TAXES
The Company periodically evaluates the realizability of its deferred income tax
assets. In the First Quarter Fiscal 2006 and the quarter ended July 2, 2005
("Fourth Quarter Fiscal 2005"), 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 October 1, 2005 and July 2, 2005.
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. A significant portion of the Company's pre-tax loss was
generated by its Hong Kong subsidiary whose statutory tax rate is 8.75%. During
the First Quarter Fiscal 2006 and the First Quarter Fiscal 2005, the Company
recorded a provision for income taxes of $0.1 million in each period,
respectively. The First Quarter Fiscal 2006 and the First Quarter Fiscal 2005
income tax provisions relate to income tax liabilities incurred by certain of
the Company's foreign subsidiaries. These foreign subsidiaries do not have net
operating losses to offset such 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 First Quarter Fiscal 2006 and the First Quarter Fiscal Year 2005, the
Company's comprehensive loss was ($5.8) million and ($9.3) 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.
9
LOSS PER SHARE
Basic and diluted loss per share are calculated in accordance with SFAS No. 128,
Earnings per Share ("SFAS No. 128"). All applicable loss per share amounts have
been presented in conformity with SFAS No. 128 requirements. During the First
Quarter Fiscal 2006 and the First Quarter Fiscal 2005, the Company issued no
shares and 12,500 shares of Common Stock, respectively, upon the exercise of
stock options. In the First Quarter Fiscal 2006 and the First Quarter Fiscal
2005, the weighted average effect of 509,054 shares 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. In the First Quarter Fiscal 2006 and the First Quarter Fiscal
2005, potentially dilutive securities were comprised of stock options to
purchase 417,656 and 327,250 shares of Common Stock, respectively, that were not
included in the calculation of diluted loss per share because their impact was
antidilutive. See Note 9 - Deferred Share Arrangement.
NOTE 4 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In June 2005, the FASB issued Statement of Financial Accounting Standards No.
154, "Accounting Changes and Error Corrections" ("SFAS No. 154"). SFAS 154
replaces APB Opinion No. 20, "Accounting Changes" and SFAS No. 3, "Reporting
Accounting Changes in Interim Financial Statements". SFAS 154 requires that a
voluntary change in accounting principle be applied retrospectively with all
prior period financial statements presented on the new accounting principle.
SFAS 154 also requires that a change in method of depreciating or amortizing a
long-lived non-financial asset be accounted for prospectively as a change in
estimate, and correction of errors in previously issued financial statements
should be termed a "restatement". SFAS 154 is effective for accounting changes
and correction of errors made in fiscal years beginning after December 15, 2005.
The implementation of SFAS 154 is not expected to have a material effect on the
Company's consolidated financial statements.
NOTE 5 - SUPPLEMENTAL CASH FLOW INFORMATION:
(in thousands)
Non-cash Investing Activities:
Deferred Share Arrangement Quarter Ended
October 2, 2004
---------------
Common stock issued to participant and trust $ 373
Treasury stock received by Company (373)
Deferred share arrangement obligation to participant 211
Common stock received and held in trust (211)
---------------
$ -
================
The Company did not have any non-cash investing activities in the First Quarter
Fiscal 2006. See Note 9-Deferred Share Arrangement for a description of the
deferred share arrangement transactions in Fiscal 2005.
10
NOTE 6 - INVENTORIES:
Inventories consist of the following:
(in thousands)
OCTOBER 1, JULY 2,
2005 2005
---------- -------
Raw materials, components, and work-in-
process $ 4,984 $ 6,507
Finished goods 25,549 29,875
------- -------
Total inventories $30,533 $36,382
======= =======
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 and other economic
factors and for on hand excess, obsolete or slow-moving inventory.
During the First Quarter Fiscal 2006, the Company recorded inventory related
pre-tax charges of approximately $0.3 million to reduce the carrying value of
certain finished goods and return camera inventories below their cost basis,
resulting from price declines, to their estimated net realizable value at
October 1, 2005. For the First Quarter Fiscal 2006, the inventory related
pre-tax charges had the effect of decreasing inventories by $0.3 million and
increasing cost of products sold by $0.3 million. During the First Quarter
Fiscal 2005, the Company recorded inventory related pre-tax charges of
approximately $2.1 million to reduce the carrying value of certain finished
goods, components, work-in-process, raw material and return camera inventories
below their costs basis, resulting from price declines, to their estimated net
realizable value at October 2, 2004. For the First Quarter Fiscal 2005, the
inventory related pre-tax charges had the effect of decreasing inventories by
$2.1 million and increasing cost of products sold by $2.1 million.
NOTE 7 - SHORT-TERM BORROWINGS AND FINANCING FACILITIES:
As of October 1, 2005, the Company's Hong Kong subsidiary had various revolving
demand credit facilities with The Hongkong and Shanghai Banking Corporation
Limited ("HSBC") providing an aggregate of approximately $15.9 million in
borrowing capacity. The revolving credit facilities were comprised of: (1) an
approximate $14.0 million Import Facility including an approximate $2.6 million
Packing Credit and Export sub-limit Facility and (2) an approximate $1.9 million
Foreign Exchange Facility (collectively, the "Hong Kong Financing Facilities").
The Hong Kong Financing Facilities are denominated in Hong Kong Dollars and bear
interest at variable rates, as follows: 1.75% over the Hong Kong Interbank
Offered Rate on import loans denominated in Hong Kong Dollars and 1.75% over the
Singapore Interbank Offered Rate for transactions denominated in currency other
than the Hong Kong Dollar. Since 1983, the Hong Kong Dollar has been pegged to
the U.S. Dollar. The Company guarantees all of the amounts under the Hong Kong
Financing Facilities. Pursuant to an agreement dated June 10, 2004, the
Company's Hong Kong subsidiary granted a security interest in substantially all
of its assets to HSBC. On or about February 24, 2005, the Company and HSBC
agreed, among other things, to subordinate approximately $20 million in
inter-company payables from the Company's Hong Kong subsidiary to the Company to
any amounts owing or which may in the future become owing to HSBC by the
Company's Hong Kong subsidiary. All of the Hong Kong Financing Facilities are
subject to certain covenants, and the Company was in compliance with such
covenants as of October 1, 2005 and July 2, 2005. At October 1, 2005 and July 2,
2005, the Company had $2.9 million, respectively, in short-term borrowings
outstanding under the import facility. The weighted average borrowing rates on
the short-term borrowings as of October 1, 2005 and July 2, 2005, were 5.4% and
4.15%, respectively. On October 19, 2005, the Company and HSBC amended certain
terms of the Hong Kong Financing Facilities. See Note 13 - Subsequent Events,
Renewal of Hong Kong Financing Facilities.
11
NOTE 8 - STOCK-BASED COMPENSATION EXPENSE:
At October 1, 2005, the Company had share-based employee compensation plans
which are described in Note 14 to the Annual Report on Form 10-K for Fiscal
2005. In accordance with SFAS No.123R, the Company recorded approximately
$130,000 of share-based compensation during the First Quarter Fiscal 2006. The
Company considers all of its stock-based compensation expense as a component of
general and administrative expenses. In addition, no amount of stock-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 stock-based compensation recorded in
First Quarter Fiscal 2006 was calculated using the assumptions noted 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 of zero is based on the
fact that the Company has never paid cash dividends and has no present intention
to pay cash dividends. The Company estimated its future stock option exercise
and employee termination information used in 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 U.S. Treasury rate for
the period, which approximates the rate in effect at the time of the stock
option grant.
Quarter ended
October 1, 2005
---------------
Expected volatility 73.38%
Expected dividend yield 0%
Expected term (in years) 5.05
Risk-free interest rate 4.01%
A summary of stock option activity under our stock option plans as of October 1,
2005, and changes during the First Quarter Fiscal 2006 are presented below:
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Stock Options Shares Price Term (Years) Value
- --------------------------------------- ------------- -------------- ---------------- -----------------
Outstanding at July 2, 2005 2,262,889 $4.40
Granted 47,000 $1.26
Exercised -- --
Canceled (38,000) $2.43
-------------
Outstanding at October 1, 2005 2,271,889 $4.37 3.9 $9,932,000
=============
Exercisable at October 1, 2005 1,953,257 $6.23 8.0 $8,649,000
=============
The weighted average grant-date fair value of options granted during the First
Quarter Fiscal 2006 and the First Quarter Fiscal 2005 was $0.80 and $1.32,
respectively. The total intrinsic value of options exercised during the First
Quarter Fiscal 2006 and the First Quarter Fiscal 2005 was $0 as no stock options
were exercised in either period. The intrinsic value of a stock option is the
amount by which the current market value of the underlying stock exceeds the
exercise price of the stock option.
12
A summary of the status of our non-vested shares as of October 1, 2005, and
changes during the First Quarter Fiscal 2006 is presented below:
Weighted Average
Grant Date Fair
Nonvested Stock Options Shares Value
- ------------------------------------------------------ -------------------- --------------------
Nonvested at July 2, 2005 344,414 $2.99
Granted 47,000 $0.80
Vested (34,782) $5.70
Canceled (38,000) $1.53
--------------------
Nonvested at October 1, 2005 318,632 $2.54
====================
As of October 1, 2005, there was approximately $555,000 of total unrecognized
compensation cost related to nonvested share-based compensation arrangements
granted under our stock option plans. That cost is expected to be recognized
over a weighted-average vesting period of 2.1 years. The total fair value of
stock options vested during the First Quarter Fiscal 2006 and the First Quarter
Fiscal 2005 was approximately $198,000 and $499,000 respectively.
For the periods prior to July 2, 2005, we accounted for our employee and
director stock option plans in accordance with the provisions of APB Opinion No.
25. As permitted by SFAS No. 123, we measured employee compensation cost of our
stock option plans using the intrinsic value method of accounting.
Prior to the Company's adoption of SFAS No. 123R, SFAS No. 123 required that the
Company provide pro forma information regarding net earnings and net earnings
per common share as if compensation cost for the Company's stock-based awards
had been determined in accordance with the fair value method now prescribed.
The Company had previously adopted the disclosure portion of SFAS No. 148,
"Accounting for Stock-Based Compensation--Transition and Disclosure," requiring
quarterly SFAS No. 123 pro forma disclosure. The pro forma change for
compensation cost related to stock-based awards granted was recognized over the
vesting period. For stock options, the vesting period represents the period of
time between the date of grant and the date each option becomes exercisable.
The following table illustrates the effect on net loss and net loss per share if
the Company had applied the fair value recognition provisions of SFAS No. 123,
as amended by SFAS No. 148, to stock-based employee compensation for periods
prior to the adoption of SFAS No. 123R.
Quarter Ended
October 2, 2004
---------------
Net loss as reported $ (9,321)
Add: variable stock-based compensation expense, net of related tax effects,
included in the determination of net loss as reported -
Deduct: total employee stock-based compensation expense determined under fair
value based method for all awards, net of tax effects (213)
---------
Pro forma net loss $ (9,534)
=========
Net loss per common share:
Basic and diluted - as reported $ (0.32)
=========
Basic and diluted - pro forma $ (0.33)
=========
As a result of adopting Statement No. 123R on July 2, 2005, the Company's loss
before income taxes and net loss for the First Quarter Fiscal 2006 were
approximately $130,000 lower, respectively, than if it had continued to account
for stock-based compensation under APB No. Opinion 25. If the Company had not
adopted SFAS No. 123R during the First Quarter Fiscal 2006, basic and diluted
loss per common share would have remained the same as the reported basic and
diluted loss per common share reported for the First Quarter Fiscal 2006.
13
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.
Pursuant to the Deferred Delivery Plan and an election previously made
thereunder, on August 9, 2004, the Company's Chairman, Chief Executive Officer
and President ("Chairman") tendered 136,269 fully paid and owned shares of
Common Stock to the Company in payment of the exercise price of $373,375 (the
"Payment Shares") of his option to purchase 314,312 shares of Common Stock
("2005 Delivery Plan Transaction"). Upon the 2005 Delivery Plan Transaction, the
136,269 Payment Shares were classified as "Treasury stock" and recorded at a
cost of $373,375. The Company issued 314,312 new shares of Common Stock and
classified them as "Common Stock" at a cost of $373,375, of which 136,269 shares
were issued to the Chairman in exchange for the Payment Shares. The remaining
178,043 shares, the delivery of which was deferred by the Chairman, were issued
to a rabbi trust. The 178,043 shares held in the rabbi trust have been recorded
at a cost of $211,500 and are classified as "Common stock held in trust." The
corresponding liability to the Chairman has been recorded at $211,500 and is
classified as "Deferred share arrangement" in the stockholders' equity section
of the condensed consolidated balance sheets.
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.
On August 26, 2002, the Company entered into two Polaroid licensing agreements.
The two license agreements provide for the exclusive (with the exception of
products already released by Polaroid into the distribution chain), worldwide
use by the Company of the Polaroid brand trademark in connection with the
manufacture, distribution, promotion and sale of single-use and traditional film
based cameras, including zoom cameras, and certain related accessories. The
licenses do not include instant or digital cameras. Each license includes an
initial term of three and a half years and may be renewed under the same
economic terms at the Company's option for an additional three-year period. Each
license agreement provides for the payment by the Company of $3.0 million of
minimum royalties, or $6.0 million in total, which are fully credited against
percentage royalties. Pursuant to the terms of the license agreements, as of
August 2004, the Company paid a total of $6.0 million, which represented $3.0
million for each license agreement, as payment of the minimum royalties and has
recorded these payments as prepaid assets. These assets are amortized based upon
a percentage of sales.
Effective January 1, 2001, the Company entered into a twenty-year license
agreement with Fuji Photo Film Ltd ("Fuji"). Under the license agreement, Fuji
granted to the Company a worldwide non-exclusive license (excluding Japan until
January 1, 2005) to use certain of Fuji's patents and patent applications
related to single-use cameras. The license extends until the later of the
expiration of the last of the licensed Fuji patents or February 26, 2021. In
consideration of the license, the Company agreed to pay a license fee and
certain royalty payments to Fuji. Accordingly, a significant portion of the
balance for patents, trademarks and licenses, net in "Other assets" in the
accompanying condensed consolidated balance sheets at October 1, 2005 and July
2, 2005, was an asset associated with the Fuji license. The Company has also
recorded as a liability a corresponding amount that was included in licensing
related obligations in "Other liabilities" in the accompanying condensed
consolidated balance sheets at October 1, 2005 and July 2, 2005 which was equal
to the present value of future license fee payments. These assets are amortized
based upon quantities of units produced.
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 First Quarter Fiscal 2006 and the First Quarter Fiscal
2005, is $2.5 million and $1.6 million, respectively.
14
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 three entities,
one of which was a significant customer of the Company, alleging that certain of
the Company's digital cameras infringe upon those entities' respective patents.
The Company is engaged in discussions with these three entities regarding
resolution of the claims.
Based on our initial assessment of the first two claims, infringement of one or
more patents is probable if the patents are valid. Based upon the licensing
discussions to date, we preliminarily estimate the potential royalties due to
these two claimants for digital camera sales through October 1, 2005 to be
between $0 and approximately $5.9 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 the Company's
right to be indemnified by the suppliers in the event the Company 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, no amounts have been accrued related to
these claims as of October 1, 2005. With respect to the third claim, 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 claim as of October 1, 2005. The Company is assessing potential
claims of indemnification against certain of its suppliers with respect to this
claim.
PURCHASE COMMITMENTS
At October 1, 2005, the Company had $13.3 million in purchase commitments
relating to the procurement of raw materials, components, and finished goods
inventory from various suppliers.
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 shareholders of the Company. On August
20, 2002, the Company filed a motion to dismiss the complaint and in December
2002, the Company's motion was granted by the court and the complaint was
dismissed. 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. The lead plaintiffs in the Amended Complaint sought to
act as representatives of a class consisting of all persons who purchased the
Company's Common Stock (i) issued pursuant to the Company's September 26, 2000
secondary offering (the "Secondary Offering") or (ii) during the period from
September 26, 2000 through June 22, 2001, inclusive. On April 18, 2003, the
Company filed a motion to dismiss the Amended Complaint and on August 27, 2004,
the court (i) dismissed all claims against the defendants related to the
Secondary Offering and (ii) ruled that the allegations occurring before January
2001 or after April 2001 were not actionable. On September 8, 2005, the court
granted the plaintiffs' motion for class certification and certified as
plaintiffs all persons who purchased the Common Stock between January 18, 2001
and June 22, 2001, inclusive, and who were allegedly damaged thereby (the period
January 18, 2001 through June 22, 2001 hereinafter referred to as the "Class
Period"). The allegations remaining in the Amended Complaint are centered around
claims that the Company failed to disclose, in periodic reports it filed with
the SEC and in press releases it made to the public during the Class Period
regarding its operations and financial results, that a large portion of its
accounts receivable was represented by a delinquent and uncollectible balance
due from then customer, KB Gear Interactive, Inc. ("KB Gear"), and that a
material portion of its inventory consisted of customized components that have
no alternative usage. The Amended Complaint claims that such failures
artificially inflated the price of the Common Stock. The Amended Complaint seeks
unspecified damages, interest, attorneys' fees, costs of suit and unspecified
other and further relief from the court. Pursuant to a scheduling order of the
court, trial in this matter is scheduled to commence on November 13, 2006. The
Company intends to vigorously defend the lawsuit and will continue to engage in
motion practice to dismiss or otherwise limit the claims set forth in the
Amended Complaint. Although the Company believes this lawsuit is without merit,
its outcome cannot be predicted, and if adversely determined, the ultimate
liability of the Company, which could be material, cannot be ascertained. On
September 17, 2002, the Company was advised by the staff of the SEC that it is
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 the previously reported
embezzlement of Company funds by a former employee, uncovered in April 2002. The
Company provided the requested information to the SEC and Nasdaq. The Company
has not received any further communication from the SEC with respect to its
informal inquiry or from Nasdaq with respect to its request since the Company
last responded in February 2003.
15
Between September and November 2004, a number of related class action complaints
were 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 shareholders of the Company. 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 in the Amended Complaint seeks to act
as a representative of a class consisting of all persons who purchased the
Company's Common Stock during the period from August 14, 2003 through August 31,
2004, inclusive (the "Class Period"), and who were allegedly damaged thereby.
The allegations in the Amended Complaint are centered around claims that the
Company failed to disclose, in periodic reports it filed with the SEC and in
press releases it made to the public during the Class Period regarding its
operations and financial results, (i) the full extent of the Company's excess,
obsolete and otherwise impaired inventory; (ii) the departure of a former
officer from the Company until several months after his departure; and (iii)
that Kodak would cancel its DMS contracts with the Company due to the Company's
alleged infringement of Kodak's patents. The Amended Complaint also alleges that
the Company improperly recognized revenue contrary to GAAP due to an inability
to reasonably estimate digital camera returns. The Amended Complaint claims that
such failures artificially inflated the price of the Common Stock. The Amended
Complaint seeks unspecified damages, interest, attorneys' fees, costs of suit
and unspecified other and further relief from the court. The Company intends to
vigorously defend 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 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 initiated 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 shareholder of the
Company. The complaint alleges 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 seeks
unspecified damages, repayment of salaries and other remuneration from the
individual defendants, interest, attorneys' fees, costs of suit and unspecified
other and further relief from the court. In March 2005, the New Jersey federal
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 suits are 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.
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 is ultimately be determined that the individual defendants are
not entitled to be indemnified by the Company under the NJBCA.
16
In April 2004, a patent infringement complaint was filed by Compression Labs,
Inc. against 28 defendants, including the Company, in the United States District
Court for the Eastern District of Texas. The complaint asserts that the
defendants have conducted activities which infringe U.S. Patent No. 4,698,672,
entitled Coding System for Reducing Redundancy. The complaint seeks unspecified
damages, interest, attorneys' fees, costs of suit and unspecified other and
further relief from the court. In February 2005, pursuant to an order of the
Judicial Panel on Multi-District Litigation, this action was transferred to the
United States District Court for the Northern District of California. 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.
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 asserts 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 seeks 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 have been 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 November 2005, a patent infringement complaint was filed by Flashpoint
Technology, Inc. against the Company in the United States District Court for the
District of Delaware. The complaint asserts that the defendants have conducted
activities which infringe U.S. Patent Nos. 6,177,956, 6,249,316, 6,847,388,
6,278,447 and 6,223,190. The complaint seeks injunctive relief, unspecified
damages, interest, attorneys' fees, costs of suit and unspecified other and
further relief from the court. The lawsuit is in the earliest stage and the
Company has not yet been served with the complaint. 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 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 - RESTRUCTURING AND OTHER CHARGES:
RESTRUCTURING INITIATIVES
During Fiscal 2005, the Company announced Restructuring Initiatives designed to
eliminate its reliance on internally designed and manufactured digital cameras
and increase the design, co-development and purchase of digital cameras from
outsourced manufacturers to provide competitive products to the retail market.
The Restructuring Initiatives were a result of the Company's previously
announced strategic review process to determine how it may better compete in the
digital camera market. The Company's reliance on internally designed and
manufactured digital cameras ended at the end of Fourth Quarter Fiscal 2005.
Accordingly, during the First Quarter Fiscal 2006, the Company did not record
any additional restructuring charges and made payments to eliminate its
restructuring reserve liability.
At October 1, 2005, the Company had no restructuring reserve recorded because
the Company had no accrued or unpaid employee severance costs related to the
Restructuring Initiatives.
Table I -- Restructuring Charges, below, reconciles the beginning and ending
balances of the restructuring reserve.
Table I -- Restructuring Charges
(in thousands)
Restructuring Reserve
Fiscal Year Beginning Ending
2006 Balance Charges Payments Balance
---- ------- ------- -------- -------
Q1 $ 110 $ - $ (110) $ -
====== ======= ======= ======
17
In connection with the Restructuring Initiatives, the Company also incurred
other charges related to retention costs of employees that were not terminated.
The services of these employees benefit parts of the business other than the
manufacture of digital cameras. Accordingly, these retention costs are
classified as other charges in Table II below. During First Quarter Fiscal 2006,
we incurred approximately $0.1 million in expenses related to employee retention
costs and expect to incur additional expenses of approximately $0.1 million
related to retention costs through December 31, 2005, provided such employees
are retained through that date.
COST-REDUCTION INITIATIVES
During Fiscal 2005, as a result of our continued evaluation of our cost
structure and the strategic review process, we implemented additional
Cost-Reduction Initiatives including, among other things, eliminating certain
employee positions and consolidating certain operations in the United Kingdom,
France and Germany into our operations in Jena, Germany. In addition, we entered
into retention agreements with certain employees affected by our decision to
consolidate certain European operations. Table II--Other Charges, below,
reconciles the beginning and ending balances of the accrual amounts related to
other charges and presents the statement of operations classification of the
other charges.
Table II -- Other Charges
(in thousands)
Accrual
Fiscal
Year Beginning Ending
2006 Item Balance Charges Payments Balance
- --------------- -------------------- --------------- --------------- ---------------- ------------
Retention $ 129 $ 107 $ (37) $ 199
Severance 190 -- (26) 164
--------------- --------------- ---------------- ------------
Q1 Total $ 319 $ 107 $ (63) $ 363
=============== =============== ================ ============
(in thousands)
Other Charges
First Quarter Fiscal 2006 Retention Total
- -------------------------
--------------- ----------
Cost of products sold $ 51 $ 51
Selling expense 6 6
General and administrative expense 50 50
--------------- ----------
Total $ 107 $ $ 107
=============== ==========
NOTE 13 - SUBSEQUENT EVENTS:
RENEWAL OF HONG KONG FINANCING FACILITIES
On October 19, 2005, Concord Camera HK Limited ("CCHK"), the Company's wholly
owned Hong Kong subsidiary, accepted a proposal from HSBC dated September 20,
2005 (the "Agreement") to renew the existing demand financing facilities
available to CCHK.
18
The Agreement provides CCHK with an aggregate of approximately $9.6 million in
total borrowing capacity, comprising an import facility reduced from $14 million
to $7.7 million and an unchanged $1.9 million foreign exchange facility. Under
the Agreement, CCHK also agreed to provide HSBC with security over cash deposits
in the amount of $2.0 million. All other material terms of the Agreement
remained unchanged from the terms of the previous demand financing agreement.
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
Annual Report on Form 10-K for Fiscal 2005, including the consolidated financial
statements, and the related notes thereto. 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 "Risk Factors" below and in our Annual Report on Form
10-K for Fiscal 2005. These factors may cause results to differ materially from
the statements made in this report or otherwise made by or on our behalf of the
Company.
OVERVIEW
We design, develop, manufacture, outsource and sell popularly priced,
easy-to-use image capture products worldwide. Our products include single-use,
digital and 35mm traditional film cameras. We manufacture and assemble certain
of our products in the Peoples Republic of China ("PRC") for sale to retail
sales and distribution ("RSD") and design and manufacturing services ("DMS")
customers. We sell our private label and brand name products to our RSD
customers worldwide (either directly or through third-party distributors).
During Fiscal 2005, we experienced a substantial reduction in DMS single-use
camera sales primarily as a result of the decision of Eastman Kodak Company
("Kodak") to cease purchases under its two DMS contracts with us. Although we
continue to seek and evaluate DMS business opportunities, we had no sales to DMS
customers during the First Quarter Fiscal 2006 and expect DMS sales to be
nominal during the remainder of Fiscal 2006. In Fiscal 2005, we increased
purchases of digital cameras from outsourced manufacturers and we expect that
our reliance on the outsourced manufacture of digital camera products we
provide to our RSD customers will continue in Fiscal 2006. We ceased
manufacturing digital cameras at the end of the fourth quarter of Fiscal 2005.
The primary causes of the reduction of our loss in the First Quarter Fiscal 2006
as compared to the First Quarter Fiscal 2005 were lower manufacturing labor and
overhead costs and product design expenses, lower digital camera and component
inventory charges, and lower selling, general and administrative expenses.
19
We are continuing to review our strategies, including the implementation of
additional cost-reduction initiatives and possible new business initiatives.
There can be no assurances that implementing any such initiatives will
successfully reverse our losses, increase our revenues, decrease our costs or
improve our results of operations.
Significant factors affecting the change in quarter-over-quarter results of
operations are as follows:
1. lower manufacturing labor and overhead costs and product design costs;
2. lower digital camera and component inventory charges; and
3. lower selling and general administrative expenses.
1. Lower Manufacturing Labor and Overhead Costs and Product Design Costs
As a result of the Restructuring Initiatives designed to eliminate our reliance
on internally designed and manufactured digital cameras and increase the design,
co-development and purchase of digital cameras from outsourced manufacturers
implemented in Fiscal 2005, we significantly lowered our manufacturing labor and
overhead costs and curtailed product design costs. As compared to the First
Quarter Fiscal 2005, these manufacturing-related cost reductions, together with
increased efficiencies and production volumes, created over-absorption of
manufacturing labor and overhead of $2.1 million. Since we are increasing our
reliance on outsourced suppliers for digital cameras, we no longer have
significant digital product design requirements. As a result, in the First
Quarter Fiscal 2006, our product design costs have decreased $1.4 million as
compared to the First Quarter Fiscal 2005.
2. Lower Digital Camera and Component Inventory Charges
We continue to experience significant competition and substantial price declines
in the digital camera market. We decreased the carrying values of certain
digital camera finished goods and return camera inventory below their cost
basis to their estimated net realizable market values during the First Quarter
Fiscal 2006. In the First Quarter Fiscal 2006, we recorded inventory charges of
approximately $0.3 million mainly related to digital camera inventory as
compared to $2.1 million in inventory charges recorded in the First Quarter
Fiscal 2005. First Quarter Fiscal 2006 sales of certain digital cameras whose
carrying values were lowered to their estimated net realizable market values in
prior periods also significantly reduced gross profit. Further, we anticipate
that sales of certain digital cameras whose carrying values were lowered in
Fiscal 2005 and the First Quarter Fiscal 2006 will have an adverse effect on our
Fiscal 2006 results of operations resulting from significantly lower and/or no
gross profit on these sales.
3. Lower Selling and General and Administrative Expenses
As a result, of our Restructuring Initiatives and Cost-Reduction Initiatives
including, among other things, eliminating certain employee positions and
consolidating certain European operations into our offices in Jena, Germany,
implemented in Fiscal 2005, we realized the benefits of lower selling, general
and administrative expenses in the First Quarter Fiscal 2006 of $0.6 million as
compared to the First Quarter Fiscal 2005. This decrease is primarily
attributable to a reduction in personnel and freight-related costs partially
offset by an incremental $1.8 million of professional fees related to compliance
measures under Section 404 of the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley
compliance measures").
Although we have made significant strides to increase gross margin and lower our
cost structure, we still have not achieved our gross margin goals. We continue
to face challenges in achieving our gross margin targets in the digital camera
market even while operating under a new business model under which we outsource
the manufacture of digital cameras. Gross margins on the sales of digital
cameras remain significantly less than expected, and digital camera competition
remains substantial, especially in Europe. In the Americas, our increased focus
on the sale of single-use and 35mm traditional film cameras, including a
de-emphasis on the sale of digital cameras, has resulted in increases in our
gross margins. In light of these trends, management continues to assess the
viability of marketing and selling digital cameras and competing in the digital
camera market and continues to assess the cost structure requirements needed to
maintain a presence in the digital camera market and to market and sell digital
cameras.
20
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the Condensed Consolidated Financial Statements and Notes thereto. Our
application of accounting policies affects these estimates and assumptions.
Actual results could differ from these estimates under different assumptions or
conditions. We believe the following critical accounting policies affect the
more significant estimates and assumptions used in the preparation of our
Condensed Consolidated Financial Statements and Notes thereto:
REVENUE RECOGNITION
We recognize revenue in accordance with Staff Accounting Bulletin ("SAB") No.
101, Revenue Recognition in Financial Statements, as amended by SAB No. 104,
Revenue Recognition: Corrected Copy, when title and risk of loss are transferred
to the customer, the sales price is fixed or determinable, persuasive evidence
of an arrangement exists, and collectibility is probable. Title and risk of loss
generally transfer when the product is delivered to the customer or upon
shipment, depending upon negotiated contractual arrangements. Sales are recorded
net of anticipated returns which we estimate based on historical rates of
return, adjusted for current events as appropriate, in accordance with Statement
of Financial Accounting Standard No. 48, Revenue Recognition When Right of
Return Exists ("SFAS No. 48"). If actual future returns are higher than
estimated, then net sales could be adversely affected. Management has assessed
the appropriateness of the timing of revenue recognition in accordance with SFAS
No. 48. After considering the requirements of SFAS No. 48, we concluded we would
defer recognition of revenue from certain customers until such customers'
transactions meet all of the requirements of SFAS No. 48.
SALES RETURNS
We establish a provision for estimated sales returns based on historical product
return trends. If the actual future returns are higher than we originally
estimated, which we based upon historical data, our net sales could be adversely
affected.
SALES ALLOWANCES
The Company may enter into arrangements to offer certain pricing discounts and
allowances that do not provide an identifiable separate benefit or service. In
accordance with Emerging Issues Task Force No. 01-09, Consideration Given by a
Vendor to a Customer (Including a Reseller of the Vendor's Products) ("EITF
Issue No. 01-09"), the Company records these pricing discounts and allowances as
a reduction of sales. Advertising and promotional costs, which include
advertising allowances and other discounts, have been expensed as incurred. In
accordance with EITF Issue No. 01-09, which addresses the statement of
operations classification of consideration between a vendor and a retailer, the
Company records certain variable selling expenses, including advertising
allowances, other discounts and other allowances, as a reduction of sales. The
Company may enter into arrangements to provide certain free products. In
accordance with EITF Issue No. 01-09, the Company records the cost of free
products ratably into cost of products sold based upon the underlying revenue
transaction.
PROVISION FOR DOUBTFUL ACCOUNTS
The provision for doubtful accounts is based on our assessment of the
collectibility of specific customer accounts and the aging of accounts
receivable. If there is a deterioration of a major customer's credit worthiness
or actual defaults are higher than our historical experience, our estimates of
the recoverability of amounts owed to us could be adversely affected.
21
INVENTORIES
Inventory purchases and commitments are based upon estimates of future demand
that are difficult to forecast. If (i) there is a sudden and significant
decrease in demand for our products; (ii) there is a higher rate of inventory
obsolescence because of rapidly changing technology and customer requirements;
and/or (iii) the market value and selling prices of our products to our
customers decline or the price at which these customers can purchase similar
products from other manufacturers is lower than ours, we may be required to
reduce our inventory values which would result in lower-of-cost-or-market value
adjustments. Such a reduction could have a material adverse effect on our gross
profit. The obsolescence risk related to digital cameras is more significant
than 35mm traditional film and single-use cameras due to, among other factors,
the shorter life cycles of digital products. See Risk Factors below and in our
Annual Report on Form 10-K for Fiscal 2005.
DEFERRED INCOME TAXES
The deferred income tax asset valuation allowance is based on our assessment of
the realizability of our deferred income tax assets on an ongoing basis and may
be adjusted from time to time as necessary. In determining the valuation
allowance, we have considered future taxable income and the feasibility of tax
planning initiatives and strategies. We have a full valuation allowance on all
of our deferred income tax assets as of October 1, 2005 and July 2, 2005. Should
we determine that it is more likely than not that we will realize certain of our
deferred income tax assets in the future, an adjustment would be required to
reduce the existing valuation allowance and increase income. Alternatively, if
we determine that we would not be able to realize a recorded deferred income tax
asset, an adjustment to increase our valuation allowance would be charged to the
results of operations in the period in which we reach such a conclusion.
IMPAIRMENT OF LONG-LIVED AND OTHER ASSETS
Periodically, we review our long-lived assets for impairment. We record an
impairment loss when indications of impairment are present and undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying values. Since we incurred significant operating losses in Fiscal 2005
and Fiscal 2004, a potential impairment indicator, we performed an impairment
test of our long-lived and other assets as of October 1, 2005 by summarizing the
undiscounted cash flows expected to result from the use and eventual sale of our
long-lived and other assets, excluding goodwill. The sum of the undiscounted
cash flows exceeded the carrying values of these assets and, accordingly, we
concluded these carrying values are recoverable. Assets reviewed included
patents, prepaid amounts related to licensing and royalty agreements and
property, plant and equipment. No impairment charges were recorded in the First
Quarter Fiscal 2006 and the First Quarter Fiscal 2005.
ACCOUNTING FOR LITIGATION AND SETTLEMENTS
We are involved in various legal proceedings. Due to their nature, such legal
proceedings involve inherent uncertainties including, but not limited to, court
rulings, negotiations between affected parties and the possibility of
governmental intervention. We accrue an undiscounted liability for those
contingencies where the incurrence of a loss is probable and the amount can be
reasonably estimated. We do not record liabilities when the likelihood that the
liability has been incurred is probable but the amount cannot be reasonably
estimated, or when the liability is believed to be only reasonably possible or
remote. While certain of these matters involve substantial amounts, management
believes based on available information that the ultimate resolution of such
legal proceedings will not have a material adverse effect on our financial
condition taken as a whole.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
For a discussion of recently issued accounting pronouncements, See Note 4 -
Recently Issued Accounting Pronouncements in the Notes to Condensed Consolidated
Financial Statements.
22
RESULTS OF OPERATIONS
QUARTER ENDED OCTOBER 1, 2005 COMPARED TO THE QUARTER ENDED OCTOBER 2, 2004
NET SALES
Net sales for the First Quarter Fiscal 2006 were $44.6 million, an increase of
$1.6 million, or 3.7%, as compared to net sales for the First Quarter Fiscal
2005. The increase in net sales was due to an overall increase in RSD
single-use, digital, and 35mm traditional film camera sales, partially offset by
a significant decrease in DMS single-use camera sales.
RSD net sales were $ 44.6 million for the First Quarter Fiscal 2006, an increase
of $9.8 million, or 28.2%, as compared to the First Quarter Fiscal 2005, and
accounted for 100% of total net sales.
RSD net sales from our operations in the Americas for the First Quarter Fiscal
2006 were $24.3 million, an increase of $7.7 million, or 46.4%, as compared to
the First Quarter Fiscal 2005. The increase in RSD net sales was due primarily
to increased single-use and 35mm traditional film camera sales to Walgreens and
Wal-Mart, partially offset by a decrease in digital camera sales. See Note 2 -
Significant Customers in the Notes to Condensed Consolidated Financial
Statements.
RSD net sales from our operations in Europe for the First Quarter Fiscal 2006
were $20.1 million, an increase of $2.9 million, or 16.9%, as compared to the
First Quarter Fiscal 2005. The increase was mostly due to an increase in digital
camera sales.
DMS net sales were $0 for the First Quarter Fiscal 2006, a decrease of $8.3
million, or 100.0%, as compared to the First Quarter Fiscal 2005. The decrease
in DMS net sales was primarily attributable to the cessation of sales to Kodak,
for whom we had manufactured products under two DMS agreements. One of the Kodak
contracts expired in the third quarter of Fiscal 2005. Sales to Kodak in the
First Quarter Fiscal 2006 accounted for 0% of total net sales as compared to
18.1% of total net sales in the First Quarter Fiscal 2005. See Note 2 -
Significant Customers in the Notes to Condensed Consolidated Financial
Statements.
Net sales from our operations in Asia for the First Quarter Fiscal 2006 were
$0.2 million, a decrease of $0.8 million, or 79.3%, as compared to the First
Quarter Fiscal 2005. The decrease was attributable primarily to a reduction in
sales by our subsidiary in Japan.
GROSS PROFIT
Gross profit for the First Quarter Fiscal 2006 was $4.1 million, or 9.2% of net
sales, versus gross profit of $0.4 million, or 0.9% of net sales, in the First
Quarter Fiscal 2005. During the First Quarter Fiscal 2006, gross profit, in
dollars and as a percentage of net sales, was positively affected by the
following factors: (i) lower manufacturing labor and overhead costs and higher
production volume and efficiencies resulting in over absorption of $2.1 million
as compared to the First Quarter Fiscal 2005, (ii) lower product design costs of
$1.4 million as compared to the First Quarter Fiscal 2005, and (iii) a $0.3
million charge to reduce the carrying value of certain finished goods and return
camera inventory below their cost basis to their estimated net realizable market
value resulting from price declines. The First Quarter Fiscal 2006 sales of
certain digital cameras whose carrying values were lowered to their estimated
net realizable market in prior periods also significantly reduced gross profit.
Product engineering, design and development costs for the First Quarter Fiscal
2006 and the First Quarter Fiscal 2005, in dollars and as a percentage of net
sales, were $1.1 million (2.4%) and $2.5 million (5.8%), respectively. We expect
engineering, design and product development costs, excluding restructuring and
other charges, to decrease during the remainder of Fiscal 2006 as we continue to
purchase digital cameras from outsourced manufacturers. For further discussion,
see "Inventories" in the Critical Accounting Policies above, and Note 12 -
Restructuring and Other Charges in the Notes to Condensed Consolidated Financial
Statements.
23
OPERATING EXPENSES
Selling expenses for the First Quarter Fiscal 2006 were $3.5 million, or 7.8% of
net sales, compared to $4.2 million, or 9.8% of net sales, for the First Quarter
Fiscal 2005. The decrease was primarily due to a reduction of sales and
marketing personnel and in freight-related shipping costs.
General and administrative ("G&A") expenses for the First Quarter Fiscal 2006
were $6.3 million, or 14.1% of net sales, compared to $6.2 million, or 14.4% of
net sales, for the First Quarter Fiscal 2005. The increase in G&A expenses was
primarily due to an increase in professional fees of $1.8 million associated
with implementing measures to comply with Sarbanes-Oxley, partially offset by
decreases in professional fees associated with implementing our Enterprise
Resource Planning System ("ERP System") and costs associated with a reduction in
personnel. We expect costs associated with Sarbanes-Oxley compliance measures
will increase during Fiscal 2006.
STOCK-BASED COMPENSATION
Effective July 3, 2005, the Company began accounting for its employee and
director stock option plans in accordance with 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. We have adopted the modified prospective method of transition
as provided by SFAS No. 123R, and as a result, compensation expense related to
share-based payments is recorded only for periods beginning July 3, 2005. Under
the modified prospective method, stock-based compensation expense is generally
recognized over the vesting period for new awards granted after July 2, 2005 and
for unvested awards outstanding at July 2, 2005. The Company considers all of
our stock-based compensation expense or income as a component of general and
administrative costs.
During the First Quarter Fiscal 2006, the Company recorded approximately
$130,000 in compensation costs related to stock options outstanding under its
stock option plans. In addition, no amount of share-based compensation cost was
capitalized as part of capital expenditures or inventory for the periods
presented. As of October 1, 2005, there was approximately $555,000 of total
unrecognized compensation cost related to nonvested share-based compensation
arrangements granted under our stock option plans. That cost is expected to be
recognized over a weighted-average vesting period of 2.1 years.
Prior to the Company's adoption of SFAS No. 123R, SFAS No. 123 required that the
Company provide pro forma information regarding net earnings and net earnings
per common share as if compensation cost for the Company's stock-based awards
had been determined in accordance with the fair value method now prescribed. The
Company had previously adopted the disclosure portion of SFAS No. 148,
"Accounting for Stock-Based Compensation--Transition and Disclosure," requiring
quarterly SFAS No. 123 pro forma disclosure. The pro forma change for
compensation cost related to stock-based awards granted was recognized over the
vesting period. For stock options, the vesting period represents the period of
time between the date of grant and the date each option becomes exercisable.
As a result of adopting Statement No. 123R on July 2, 2005, the Company's loss
before income taxes and net loss for the First Quarter Fiscal 2006 were
approximately $130,000 lower, respectively, than if it had continued to account
for stock-based compensation under APB No. Opinion 25. If the Company had not
adopted SFAS No. 123R during the First Quarter Fiscal 2006, basic and diluted
loss per common share would have remained the same as the reported basic and
diluted loss per common share reported for the First Quarter Fiscal 2006.
For further discussion, see Note 8--Stock-Based Compensation in the Notes to
Condensed Consolidated Financial Statements.
INTEREST EXPENSE
Interest expense was $0.1 million and $0.2 million for the First Quarter Fiscal
2006 and the First Quarter Fiscal 2005, respectively.
OTHER INCOME, NET
Other income, net was $0.1 million and $1.0 million for the First Quarter Fiscal
2006 and the First Quarter Fiscal 2005, respectively. The decrease is primarily
attributable to foreign exchange losses incurred in the First Quarter Fiscal
2006. See Note 3 - Summary of Significant Accounting Policies in the Notes to
Condensed Consolidated Financial Statements.
24
INCOME TAXES
Management periodically evaluates the realizability of the Company's deferred
income tax assets. As part of assessing the realizability of its deferred income
tax assets management evaluated whether it is more likely than not that some
portion, or all of its deferred income tax assets will be realized. The
realization of its U.S., Europe and Hong Kong deferred income tax assets related
directly to the Company's tax planning initiatives and strategies for U.S.
federal and state, Europe, Japan and Hong Kong tax purposes. In the First
Quarter Fiscal 2006 and the Fourth Quarter of Fiscal 2005, 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, the
Company recorded a valuation allowance for the entire balance of its deferred
income tax assets as of October 1, 2005 and July 2, 2005.
The Company estimates its interim effective tax rate before consideration of a
valuation allowance based upon its projected consolidated annual effective
income tax rate. This rate is largely a function of the 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. A significant portion of the Company's pre-tax loss was generated by its
Hong Kong, subsidiary whose statutory tax rate is 8.75%. During the First
Quarter Fiscal 2006 and the First Quarter Fiscal 2005, the Company recorded a
provision for income taxes of $0.1 million in each period, respectively. The
First Quarter Fiscal 2006 and the First Quarter Fiscal 2005 income tax
provisions relate to income tax liabilities incurred by certain of the Company's
foreign subsidiaries. These foreign subsidiaries do not have net operating
losses to offset such liabilities.
NET LOSS
We incurred a net loss of $(5.8) million, or $(.20) per basic and diluted common
share, for the First Quarter Fiscal 2006 as compared to a net loss of $(9.3)
million, or $(0.32) per basic and diluted common share, for the First Quarter
Fiscal 2005. The decrease in our net loss is attributable to the matters
described above.
RESTRUCTURING AND OTHER CHARGES:
RESTRUCTURING INITIATIVES
During Fiscal 2005, the Company announced Restructuring Initiatives designed to
eliminate its reliance on internally designed and manufactured digital cameras
and increase the design, co-development and purchase of digital cameras from
outsourced manufacturers to provide competitive products to the retail market.
The Restructuring Initiatives were a result of the Company's previously
announced strategic review process to determine how it may better compete in the
digital camera market. The Company's reliance on internally designed and
manufactured digital cameras ended at the end of the Fourth Quarter Fiscal 2005.
Accordingly, during the First Quarter Fiscal 2006, the Company did not record
any additional restructuring charges and made payments to eliminate its
restructuring reserve liability.
At October 1, 2005, the Company had no restructuring reserve recorded because
the Company had no accrued or unpaid employee severance costs related to the
Restructuring Initiatives.
25
Table I -- Restructuring Charges, below, reconciles the beginning and ending
balances of the restructuring reserve.
Table I -- Restructuring Charges
(in thousands)
Restructuring Reserve
Fiscal Year Beginning Ending
2006 Balance Charges Payments Balance
---- ------- ------- -------- -------
Q1 $ 110 $ - $ (110) $ -
================== ================ ================== ====================
In connection with the Restructuring Initiatives, the Company also incurred
other charges related to retention costs of employees that were not terminated.
The services of these employees benefit parts of the business other than the
manufacture of digital cameras. These retention costs are classified as other
charges in Table II below. During the First Quarter Fiscal 2006, we incurred
approximately $0.1 million in expenses related to employee retention costs and
expect to incur additional expenses of approximately $0.1 million related to
retention costs through December 31, 2005, provided such employees are retained
through that date.
COST-REDUCTION INITIATIVES
During Fiscal 2005, as a result of our continued evaluation of our cost
structure and the strategic review process, we implemented additional
Cost-Reduction Initiatives including, among other things, eliminating certain
employee positions and consolidating certain operations in the United Kingdom,
France and Germany into our operations in Jena, Germany. In addition, we entered
into retention agreements with certain employees affected by our decision to
consolidate certain European operations. Table II--Other Charges, below,
reconciles the beginning and ending balances of the accrual amounts related to
other charges and presents the statement of operations classification of the
other charges.
Table II -- Other Charges
(in thousands)
Accrual
Fiscal
Year Beginning Ending
2006 Item Balance Charges Payments Balance
- --------------- -------------------- --------------- --------------- ---------------- ------------
Retention $ 129 $ 107 $ (37) $ 199
Severance 190 -- (26) 164
--------------- --------------- ---------------- ------------
Q1 Total $ 319 $ 107 $ (63) $ 363
=============== =============== ================ ============
26
(in thousands)
Other Charges
First Quarter Fiscal 2006 Retention Total
- ------------------------- --------------- ------------
Cost of products sold $ 51 $ 51
Selling expense 6 6
General and administrative expense 50 50
--------------- ------------
Total $ 107 $ 107
=============== ============
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 this report and in our most recent Annual Report filed with the SEC
on Form 10-K for Fiscal 2005. We are not engaged in hedging activities and had
no forward exchange contracts outstanding at October 1, 2005. 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 working capital, 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.
Working Capital - At October 1, 2005, we had working capital of $57.0 million
compared to $61.8 million at July 2, 2005, a decrease of $4.8 million.
Cash Used In Operating Activities - Cash used in operating activities during the
First Quarter Fiscal 2006 was $(1.2) million, which compared unfavorably to cash
provided by operating activities of $1.1 million during the First Quarter Fiscal
2005. The changes in cash used in operating activities for the respective fiscal
periods were primarily attributable to the reduction of accounts payable
partially offset by reduction in accounts receivable and inventory.
Cash Provided By Investing Activities - Capital expenditures for the First
Quarter Fiscal 2006 and the First Quarter Fiscal 2005 were $(0.3) million and
$(1.0) million, respectively. The decrease related primarily to reduced
expenditures on plant and equipment for our manufacturing facilities in the PRC.
Cash (Used in) Provided by Financing Activities - Cash (used in) provided by
financing activities during the First Quarter Fiscal 2006 and the First Quarter
Fiscal 2005 was approximately $(45) thousand and $8.4 million, respectively. The
decrease relates to net repayments made in the First Quarter Fiscal 2006 as
compared to net short-term borrowings made under the Hong Kong Financing
Facilities in the First Quarter Fiscal 2005.
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 - In the ordinary course of our business, we enter into
purchase commitments for components, raw materials, supplies, services, finished
camera products, and property, plant and equipment. At October 1, 2005, the
Company had $13.3 million in non-cancelable purchase commitments relating to the
purchase 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 (except for those instances, in which the cost basis has
been lowered to net realizable value) and typically do not exceed one year.
27
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 Hong Kong Financing Facilities below for additional
information about our financial guarantees. See also Note 10-Commitments and
Contingencies in the Notes to Condensed Consolidated Financial Statements.
Hong Kong Financing Facilities - As of October 1, 2005, the Company's Hong Kong
subsidiary, Concord Camera HK Limited ("CCHK"), had various revolving demand
credit facilities with The Hongkong and Shanghai Banking Corporation Limited
("HSBC") providing an aggregate of approximately $15.9 million in borrowing
capacity. The revolving credit facilities were comprised of: (1) an approximate
$14.0 million Import Facility including an approximate $2.6 million Packing
Credit and Export sub-limit Facility, and (2) an approximate $1.9 million
Foreign Exchange Facility (collectively, the "Hong Kong Financing Facilities").
The Hong Kong Financing Facilities are denominated in Hong Kong Dollars and bear
interest at variable rates, as follows: 1.75% over the Hong Kong Interbank
Offered Rate on import loans denominated in Hong Kong Dollars and 1.75% over the
Singapore Interbank Offered Rate for transactions denominated in currency other
than the Hong Kong Dollar. Since 1983, the Hong Kong Dollar has been pegged to
the U.S. Dollar. The Company guarantees all of the amounts under the Hong Kong
Financing Facilities. Pursuant to an agreement dated June 10, 2004, CCHK granted
a security interest in substantially all of its assets to HSBC. On or about
February 24, 2005, the Company and HSBC agreed, among other things, to
subordinate approximately $20 million in inter-company payables from CCHK to the
Company to any amounts owing or which may in the future become owing to HSBC by
CCHK. All of the Hong Kong Financing Facilities are subject to certain
covenants, and the Company was in compliance with such covenants as of October
1, 2005 and July 2, 2005, respectively. At October 1, 2005 and July 2, 2005, the
Company had $2.9 million, respectively, in short-term borrowings outstanding
under the import facility. The weighted average borrowing rates on the
short-term borrowings as of October 1, 2005 and July 2, 2005, were 5.4% and
4.15%, respectively. On October 19, 2005, CCHK accepted a proposal from the HSBC
dated September 20, 2005 (the "Agreement") to renew the existing demand
financing facilities available to CCHK. The Agreement provides CCHK with an
aggregate of approximately $9.6 million in total borrowing capacity, comprising
an import facility reduced from $14 million to $7.7 million and an unchanged
$1.9 million foreign exchange facility. Under the Agreement, CCHK also agreed to
provide HSBC with security over cash deposits in the amount of $2.0 million. All
other material terms of the Agreement remained unchanged from the terms of the
previous demand financing agreement. See Note 13 - Subsequent Events, Renewal of
Hong Kong Financing Facilities. Each of the Hong Kong Financing Facilities is a
demand facility pursuant to which HSBC has the right at any time to demand
repayment of the obligations under the facilities or insist that we provide
additional collateral to secure the facilities. HSBC is scheduled to review the
Hong Kong Financing Facilities on or about November 30, 2005.
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.
RECENT EVENT
As previously disclosed in our Annual Report on Form 10-K for Fiscal 2005, in
Fiscal 2005 and Fiscal 2004, certain foreign subsidiaries inadvertently sold
approximately $16,000 and $22,000, respectively, of our products that were
shipped to Cuba, Iran and Syria. One or more of the shipments may be in
violation of regulations of the U.S. Treasury Department's Office of Foreign
Assets Control ("OFAC"). On November 14, 2005, the Company made a voluntary
disclosure of these matters pursuant to the Economic Sanctions Enforcement
Guidelines of OFAC. The Company also implemented an Export & International Trade
Policy to ensure future compliance with all OFAC regulations. To the extent the
Company violated any regulations with respect to either of the transactions
described above or any other transactions, we may be subject to civil fines or
other sanctions, which we believe will not be material. We do not expect these
matters to have a material adverse effect on our financial position and results
of operations. See Note 10-Commitments and Contingencies in the Notes to
Condensed Consolidated Financial Statements.
28
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," 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" below and in our most recent
Annual Report on Form 10-K for Fiscal 2005 filed with the SEC and subsequently
filed reports. We wish to caution the reader that these forward-looking
statements, including statements regarding expected cost reductions, anticipated
or expected results, the implementation of our Restructuring Initiatives and
Cost-Reduction Initiatives, anticipated financial benefits of eliminating our
reliance on internally designed and manufactured digital cameras and increasing
the design, co-development, and purchase of digital cameras from contract
manufacturers, the viability of marketing and selling digital cameras and
competing in the digital camera market, the cost structure requirements needed
to maintain a presence in the digital camera market and to market and sell
digital cameras, the development of our business, anticipated revenues or
capital expenditures, our ability to improve gross profit margin on the sale of
our digital 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
production difficulties or economic conditions negatively affecting the market
for our products, by our inability to successfully develop and maintain
relationships with contract manufacturers or by our inability to negotiate
favorable terms with our licensors or with the PRC in connection with the
processing agreement that expires in October 2006. 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 DMS 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 under consideration or development will be successfully
developed or that once developed such products 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. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no material changes in the disclosures set forth in Item 7A of
our Annual Report on Form 10-K for Fiscal 2005 during this reporting period.
29
ITEM 4. CONTROLS AND PROCEDURES.
Our management, with the participation of the Chief Executive Officer and
Principal Financial Officer, has reviewed and evaluated our disclosure controls
and procedures (as defined in Rules 13a-14 and 15d-14 of the Securities Exchange
Act of 1934, as amended (the "Exchange Act")) as of the end of the period
covered by this report. This evaluation included, among other things,
consideration of the controls, processes and procedures that comprise our
internal control over financial reporting. Based on that evaluation, our Chief
Executive Officer and Principal Financial Officer concluded that our disclosure
controls and procedures are ineffective in providing reasonable assurance of
achieving their objectives and are not effective to ensure that information that
we are required to disclose in reports that we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in SEC rules and forms.
In light of the ineffective disclosure controls and procedures, we performed
additional manual controls, procedures and analyses and other pre- and
post-closing procedures designed to ensure that our consolidated financial
statements are presented fairly in all material respects in accordance with
accounting principles generally accepted in the United States. We relied on
increased monitoring and review to compensate for the material weaknesses in the
preventative and detective controls noted below. Accordingly, management
believes that the 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. The certifications of
our Chief Executive Officer and the Principal Financial Officer attached as
Exhibits 31.1 and 31.2 to this report include, in paragraph 4 of the
certifications, information concerning our disclosure controls and procedures
and internal control over financial reporting. These officers believe the
certifications to be accurate because, as we indicated, we had procedures in
place during the First Quarter Fiscal 2006 to prevent and detect errors in our
systems. Accordingly, the certifications should be read in conjunction with the
information contained in this Item 4 for a more complete understanding of the
matters covered by the certifications.
There were no changes in our internal control over financial reporting during
the quarter ended October 1, 2005 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
As previously disclosed in our Annual Report on Form 10-K for the fiscal year
ended July 2, 2005 ("Fiscal 2005 Form 10-K"), despite expending substantial
efforts and committing significant financial and human resources, management was
unable to complete its assessment of internal control over financial reporting
as of July 2, 2005 that is required under Section 404 of the Sarbanes-Oxley Act
of 2002. Our independent registered public accounting firm issued a disclaimer
of opinion with respect to our internal control over financial reporting, which
we included in Item 9A of our Fiscal 2005 Form 10-K. The disclaimer of opinion
indicated that the auditors did not express an opinion as to management's
assessment of internal control over financial reporting and as to the
effectiveness of our internal control over financial reporting as of July 2,
2005. The disclaimer of opinion noted, however, that the auditors audited our
consolidated balance sheet as of July 2, 2005, and the related consolidated
statements of operations, stockholders' equity and cash flows for Fiscal 2005,
and that they expressed an unqualified opinion on those consolidated financial
statements.
We expect to complete our assessment of internal control over financial
reporting as of July 2, 2005 during the second quarter of Fiscal 2006, which
ends on December 31, 2005. We believe that our independent registered public
accounting firm will also have completed its attestation to our assessment and
will have rendered its opinion as to the effectiveness of our internal control
systems within this time frame. Accordingly, on or before December 31, 2005, we
anticipate filing an amendment to our Fiscal 2005 Form 10-K with the SEC that
will include the completed management's assessment of our internal control over
financial reporting and the auditors' attestation and opinion.
While our assessment is not yet complete, the auditors and our management have
identified a number of material weaknesses in our internal control systems that
caused management to conclude that our internal control over financial reporting
was ineffective as of July 2, 2005. A discussion of these material weaknesses is
included in Item 9A of our Fiscal 2005 Form 10-K.
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In light of these material weaknesses, we performed additional manual controls,
procedures and analyses and other pre- and post-closing procedures designed to
ensure that our 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 weaknesses noted above in the preventative and detective
controls. Accordingly, management believes that the 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.
In Item 9A of our Fiscal 2005 Form 10-K, we described the steps taken to
remediate our material weaknesses. In the First Quarter Fiscal 2006, we have
taken the following additional steps to remediate our material weaknesses:
ERP System. As previously disclosed in Item 9A of our Fiscal 2005 Form
10-K, we have committed and continue to commit significant financial resources
and IT personnel resources, whose primary functions are to identify and
remediate ERP system issues. In the First Quarter Fiscal 2006, we committed
additional financial and human resources to ERP System Training.
Additional Personnel. As previously disclosed in Item 9A of our Fiscal
2005 Form 10-K, we continue to seek to hire additional, qualified finance and
accounting staff with significant depth and expertise to supplement existing
personnel, including a Director of Internal Audit. During the fourth quarter of
Fiscal 2005, we retained a financial consultant to advise us on the organization
and composition of the finance and accounting department. In the First Quarter
Fiscal 2006, we hired additional, qualified finance and accounting staff. We are
also in the process of establishing an Internal Audit function including the
hiring of a Director of Internal Audit.
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
You should carefully consider the following risks regarding our Company. These
and other risks could materially and adversely affect our business, results of
operations or financial condition. You should also refer to the other
information contained or incorporated by reference in this report, including the
"Risk Factors" described in our most recent Annual Report on Form 10-K for
Fiscal 2005 filed with the SEC.
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THERE ARE MATERIAL WEAKNESSES IN OUR INTERNAL CONTROL OVER FINANCIAL REPORTING.
OUR INTERNAL CONTROL MAY BE INSUFFICIENT TO DETECT IN A TIMELY MANNER
MISSTATEMENTS THAT COULD OCCUR IN OUR FINANCIAL STATEMENTS IN AMOUNTS THAT MAY
BE MATERIAL.
As previously disclosed in our Annual Report on Form 10-K for Fiscal 2005,
during Fiscal 2005, we identified eight material weaknesses in our internal
control over financial reporting.
We may continue to experience significant deficiencies and material weaknesses
in our internal control over financial reporting in the future, which, if not
remediated, may render us unable to detect in a timely manner misstatements that
could occur in our financial statements in amounts that may be material. We
cannot assure you that we and our independent registered public accounting firm
will determine that the material weaknesses have been remedied by the end of
Fiscal 2006.
A DELISTING OF OUR COMMON STOCK COULD ADVERSELY AFFECT THE PRICE AND LIQUIDITY
OF OUR COMMON STOCK AND OUR ABILITY TO ACCESS CAPITAL MARKETS.
We were unable to timely file this report due to the disruption of our corporate
operations and the lives of our employees caused by Hurricane Wilma. In Fiscal
2005, we failed to timely file our periodic reports primarily as a result of the
material weaknesses that we identified in earlier reports filed with the SEC.
Should we continue to experience difficulties in filing our reports on time, we
cannot assure you that our common stock will not be delisted from NASDAQ/NMS,
that we will be able to meet or satisfy all conditions and requirements for
continued listing or that NASDAQ/NMS will not initiate delisting proceedings in
the future if we are unable to file future periodic reports on time or comply
with other listing requirements. A delisting of our common stock could
materially reduce the liquidity of our common stock and may result in a material
reduction in the price of our common stock. In addition, any such delisting
could harm our ability to raise capital through alternative financing sources on
terms acceptable to us, or at all, and may result in the loss of confidence in
our financial stability by suppliers, customers and employees. If our securities
are delisted from NASDAQ/NMS, we may face a lengthy process to re-list our
securities if we are able to re-list them at all.
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THE EXPIRATION OF OUR PROCESSING AGREEMENT WITH THE PRC WOULD DISRUPT OUR
OPERATIONS.
Our operations are substantially dependent upon our ability to manufacture and
assemble our products in the Peoples Republic of China ("PRC"). Our current
processing agreement with the PRC governmental entities, which allows us to
operate in the PRC, expires in October 2006. We expect to continue manufacturing
in the PRC after October 2006 either under a renewal of our processing agreement
or pursuant to some other form of legal authorization. If, however, we are
unable either to renew the current agreement or enter into an alternative
arrangement that will permit us to continue to operate in the PRC under similar
terms and conditions, our results of operations and our ability to carry on our
business would be materially adversely affected.
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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, as amended through Incorporated by reference to the Company's annual report
May 9, 2000 on Form 10-K for the year ended July 1, 2000.
3.2 Restated By-Laws, as amended through July 12, Incorporated by reference to the Company's quarterly
2004 report on Form 10-K for the year ended July 3, 2004
10.1 Letter agreement between HSBC and CCHK, Incorporated by reference to the Company's report on Form
dated January 21, 2005, relating to the 8-K dated October 21, 2005
provision of certain banking facilities and
the guarantee of same by the Company
10.2 Capitalization and Subordination Agreement Incorporated by reference to the Company's report on Form
dated as of March 31, 2005 between the 8-K dated October 21, 2005
Company and CCHK
10.3 Subordination Agreement dated as of March Incorporated by reference to the Company's report on Form
31, 2005 between the Company and CCHK 8-K dated October 21, 2005
10.4 Letter agreement between HSBC and CCHK, Incorporated by reference to the Company's report on Form
dated September 20, 2005, relating to the 8-K dated October 21, 2005
provision of certain banking facilities and
the guarantee of same by the Company
31.1 Certification of Chief Executive Officer Filed herewith.
pursuant to Rule 13a-14(a)/15d-14(a)
31.2 Certification of Principal Financial Filed herewith.
Officer pursuant to Rule 13a-14(a)/15d-14(a)
32.1 Certification of Chief Executive Officer Filed herewith.
pursuant to 18 U.S.C. ss.1350
32.2 Certification of Principal Financial Filed herewith.
Officer pursuant to 18 U.S.C. ss.1350
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S I G N A T U R E
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONCORD CAMERA CORP.
------------------------------------
(Registrant)
DATE November 22, 2005 By: /s/ Harlan I. Press
---------------------------------
(Signature)
Harlan I. Press
Vice President, Treasurer and
Assistant Secretary
(Principal Financial Officer)
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