-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ReDZ/GguULoebjZHHOEi7qf4bEBLzZT9aOiV5/7GIuTNWNarY5qb3NX2E9nxOETl nDLfcc1bv6idZ/jVxA2VDg== 0000891092-08-001838.txt : 20080331 0000891092-08-001838.hdr.sgml : 20080331 20080331170808 ACCESSION NUMBER: 0000891092-08-001838 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20071229 FILED AS OF DATE: 20080331 DATE AS OF CHANGE: 20080331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONCORD CAMERA CORP CENTRAL INDEX KEY: 0000831861 STANDARD INDUSTRIAL CLASSIFICATION: PHOTOGRAPHIC EQUIPMENT & SUPPLIES [3861] IRS NUMBER: 133152196 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1107 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-17038 FILM NUMBER: 08725882 BUSINESS ADDRESS: STREET 1: 4000 HOLLYWOOD BLVD STREET 2: STE 650 NORTH CITY: HOLLYWOOD STATE: FL ZIP: 33021 BUSINESS PHONE: 9543314211 MAIL ADDRESS: STREET 1: 4000 HOLLYWOOD BLVD STREET 2: STE 650 NORTH CITY: HOLLYWOOD STATE: FL ZIP: 33021 10-Q 1 e31059_10q.txt QUARTERLY REPORT United States SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 29, 2007 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to __________ Commission file number 0-17038 Concord Camera Corp. -------------------- (Exact name of registrant as specified in its charter) New Jersey 13-3152196 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4000 Hollywood Blvd., 6th Floor, North Tower, Hollywood, Florida 33021 ---------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (954) 331-4200 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ___ No _X_ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer ___ Accelerated filer ___ Non-accelerated filer _X_ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes___ No _X_ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, no par value - 5,913,610 shares as of March 24, 2008 Index Concord Camera Corp. and Subsidiaries Part I. FINANCIAL INFORMATION Page No. -------- Item 1. Financial Statements (Unaudited) Condensed consolidated balance sheets as of December 29, 2007 (Unaudited) and June 30, 2007 ................ 3 Condensed consolidated statements of operations (Unaudited) for the quarter and six months ended December 29, 2007 and December 30, 2006 ......................... 4 Condensed consolidated statements of cash flows (Unaudited) for the six months ended December 29, 2007 and December 30, 2006 ..................................... 5 Notes to condensed consolidated financial statements (Unaudited) ......................................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ........................... 19 Item 3. Quantitative and Qualitative Disclosures About Market Risk ............................................. 28 Item 4T. Controls and Procedures .......................................... 28 Part II. OTHER INFORMATION Item 1. Legal Proceedings ................................................ 28 Item 1A. Risk Factors ..................................................... 29 Item 4. Submission of Matters to a Vote of Security Holders .............. 30 Item 6. Exhibits ......................................................... 31 2 PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS Concord Camera Corp. and Subsidiaries Condensed Consolidated Balance Sheets (in thousands)
December 29, 2007 June 30, (Unaudited) 2007 ----------------- -------- Assets Current Assets: Cash and cash equivalents $ 4,479 $ 3,853 Restricted cash 6,200 6,200 Short-term investments 2,550 30,475 Accounts receivable, net 7,772 10,702 Inventories 13,534 15,806 Prepaid expenses and other current assets 1,121 1,401 -------- -------- Total current assets 35,656 68,437 Long-term investments 25,200 -- Property, plant and equipment, net 9,207 10,616 Other assets 3,437 3,451 -------- -------- Total assets $ 73,500 $ 82,504 ======== ======== Liabilities and Stockholders' Equity Current Liabilities: Short-term borrowings under financing facilities $ 7,438 $ 2,756 Accounts payable 9,286 17,042 Accrued royalties 2,614 2,499 Accrued expenses 4,341 5,775 Other current liabilities 1,011 1,346 -------- -------- Total current liabilities 24,690 29,418 Other long-term liabilities 1,198 1,442 -------- -------- Total liabilities 25,888 30,860 Commitments and contingencies Stockholders' equity: Blank check preferred stock, no par value, 1,000 shares authorized, none issued -- -- Common stock, no par value, 20,000 shares authorized, 6,261 shares issued as of December 29, 2007 and June 30, 2007 respectively 143,860 143,860 Additional paid-in capital 5,195 5,189 Deferred share arrangement -- 413 Accumulated deficit (96,450) (92,412) -------- -------- 52,605 57,050 Less: treasury stock, at cost, 347 shares as of December 29, 2007 and June 30, 2007 (4,993) (4,993) Less: common stock held in trust, 0 and 66 shares as of December 29, 2007 and June 30, 2007 -- (413) -------- -------- Total stockholders' equity 47,612 51,644 -------- -------- Total liabilities and stockholders' equity $ 73,500 $ 82,504 ======== ========
See accompanying notes to condensed consolidated financial statements. 3 Concord Camera Corp. and Subsidiaries Condensed Consolidated Statements of Operations (Unaudited) (in thousands, except per share data)
For the quarter ended For the six months ended ------------------------------ ------------------------------ December 29, December 30, December 29, December 30, 2007 2006 2007 2006 ------------ ------------ ------------ ------------ Net sales $ 18,404 $ 19,338 $ 40,102 $ 48,163 Cost of products sold 17,098 17,837 35,781 42,159 -------- -------- -------- -------- Gross profit 1,306 1,501 4,321 6,004 Selling expenses 1,821 2,344 3,994 5,317 General and administrative expenses 2,817 3,286 5,659 6,839 -------- -------- -------- -------- Operating loss (3,332) (4,129) (5,332) (6,152) Interest expense 124 98 201 164 Other income, net (456) (698) (772) (1,163) -------- -------- -------- -------- Loss before income taxes (3,000) (3,529) (4,761) (5,153) (Benefit) provision for income taxes (787) 18 (785) 35 -------- -------- -------- -------- Net loss $ (2,213) $ (3,547) $ (3,976) $ (5,188) ======== ======== ======== ======== Basic and diluted loss per common share $ (0.37) $ (0.61) $ (0.67) $ (0.89) ======== ======== ======== ======== Weighted average common shares outstanding -- basic and diluted 5,914 5,846 5,914 5,842 ======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements. 4 Concord Camera Corp. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited) (in thousands)
For the six months ended ---------------------------------------- December 29, 2007 December 30, 2006 ----------------- ----------------- Cash flows from operating activities: Net loss $ (3,976) $ (5,188) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization 1,662 2,186 Inventory charges -- 347 Gain on disposal of property, plant and equipment (63) (58) Unrecognized tax benefit (62) -- Share-based compensation 6 43 Changes in operating assets and liabilities: Accounts receivable, net 2,930 7,728 Inventories 2,272 11,442 Prepaid expenses and other current assets 280 753 Other assets (199) 254 Accounts payable (7,756) (15,177) Accrued expenses (1,434) (1,100) Accrued royalties 115 (641) Other current liabilities (335) 129 Other long-term liabilities (244) (433) -------- -------- Net cash (used in) provided by operating activities (6,804) 285 -------- -------- Cash flows from investing activities: Restricted cash -- 2,064 Purchases of property, plant and equipment (40) (258) Proceeds from the sale of property, plant and equipment 63 342 Proceeds from sales of available-for-sale investments 43,625 38,300 Purchases of available-for-sale investments (40,900) (46,900) -------- -------- Net cash provided by (used in) investing activities 2,748 (6,452) -------- -------- Cash flows from financing activities: Net proceeds from issuance of common stock -- 342 Borrowings under short-term financing facilities, net 4,682 3,114 -------- -------- Net cash provided by financing activities 4,682 3,456 -------- -------- Net increase (decrease) in cash and cash equivalents 626 (2,711) Cash and cash equivalents at beginning of period 3,853 6,795 -------- -------- Cash and cash equivalents at end of period $ 4,479 $ 4,084 ======== ========
See accompanying notes to condensed consolidated financial statements. 5 CONCORD CAMERA CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- December 29, 2007 (Unaudited) Note 1 - Basis of Presentation: - ------------------------------- The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the quarter ended December 29, 2007 ("Second Quarter Fiscal 2008") and the six months ended December 29, 2007 ("Fiscal 2008 YTD") are not necessarily indicative of the results that may be expected for the fiscal year ending June 28, 2008 ("Fiscal 2008"). For comparative purposes, the quarter ended December 30, 2006, has been defined as the ("Second Quarter Fiscal 2007") and the six months ended December 30, 2006 has been defined as ("Fiscal 2007 YTD"). The balance sheet at June 30, 2007 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Concord Camera Corp., a New Jersey corporation, and its consolidated subsidiaries (collectively referred to as the "Company") manage their business on the basis of one reportable segment. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on September 27, 2007 for the fiscal year ended June 30, 2007 ("Fiscal 2007"). Reclassifications Certain amounts in the prior year have been reclassified to conform to the current year presentation. Reverse Split of Common Stock On October 26, 2006, the Board of Directors of the Company approved, without action by the shareholders of the Company, a Certificate of Amendment to the Company's Certificate of Incorporation to implement a one-for-five split of the Company's Common Stock with an effective date of November 21, 2006. On the effective date of the reverse split, each five shares of issued Common Stock (including treasury shares and shares held in trust) were converted automatically into one share of Common Stock, resulting in the total number of shares outstanding being reduced from 28,859,385 shares to 5,771,877 shares, and the number of authorized shares of the Company's Common Stock reduced from 100,000,000 shares to 20,000,000 shares. All Common Stock shares and per-share and related stock option amounts have been restated for the reverse stock split in the accompanying condensed consolidated financial statements and footnotes. Note 2 - Significant Customers: - ------------------------------- During the Second Quarter Fiscal 2008, the Company's sales to Walgreen Co. ("Walgreens") increased and sales to Wal-Mart Stores, Inc. ("Wal-Mart") decreased as compared to the Second Quarter Fiscal 2007. During Fiscal 2008 YTD, the Company's sales to Walgreens and Wal-Mart decreased as compared to Fiscal 2007 YTD. The Second Quarter Fiscal 2008 increase in sales to Walgreens was attributable to increased sales of single-use cameras. The Second Quarter Fiscal 2008 decrease in sales to Wal-Mart was attributable to a decrease in sales of traditional film and single-use cameras and, to a lesser extent, a reduction in the average selling price per camera. The Fiscal 2008 YTD decrease in sales to Wal-Mart and Walgreens was primarily attributable to a decrease in sales of single-use and traditional film cameras and, to a lesser extent, a decrease in the average selling price per camera. The loss of either of these significant customers or substantially reduced sales to these significant customers or any other large customer could have a material adverse effect on the Company's results of operations. 6 The following table illustrates each significant customer's net sales as a percentage of consolidated net sales during the Second Quarter Fiscal 2008, the Second Quarter Fiscal 2007, Fiscal 2008 YTD and Fiscal 2007 YTD. Percent of Net Sales -------------------- For the quarter ended For the six months ended ----------------------------- ----------------------------- December 29, December 30, December 29, December 30, 2007 2006 2007 2006 ------------ ------------ ------------ ------------ Wal-Mart 38.8% 40.5% 37.7% 37.0% Walgreens 17.3% 7.3% 16.6% 27.3% ------------ ------------ ------------ ------------ Total 56.1% 47.8% 54.3% 64.3% ============ ============ ============ ============ Note 3 - Summary of Significant Accounting Policies: - ---------------------------------------------------- Principles of Consolidation The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The more significant of the Company's estimates include, but are not limited to, provisions for sales returns and allowances, provision for bad debts, inventory valuation charges, realizability of long-lived and other assets, realizability of deferred income tax assets and accounting for litigation and settlements, among other things. Foreign Currency Transactions The Company operates on a worldwide basis and its results may be adversely or positively affected by fluctuations of various foreign currencies against the U.S. Dollar, specifically, the Canadian Dollar, European Euro, British Pound Sterling, PRC Renminbi, Hong Kong Dollar and Japanese Yen. Although certain net sales to customers and purchases of certain components and services are transacted in local currencies, each of the Company's foreign subsidiaries purchases substantially all of its finished goods inventories in U.S. Dollars. Accordingly, the Company has determined that the U.S. Dollar is the functional currency for all of its subsidiaries. The accounting records for subsidiaries that are maintained in a local currency are remeasured into the U.S. Dollar. Accordingly, most non-monetary balance sheet items and related statement of operations accounts are remeasured from the applicable local currency to the U.S. Dollar using average historical exchange rates, producing substantially the same result as if the entity's accounting records had been maintained in the U.S. Dollar. Adjustments resulting from the remeasurement process are recorded into earnings. Gains or losses resulting from foreign currency transactions and remeasurement are included in "Other income, net" in the accompanying condensed consolidated statements of operations. For the Second Quarter Fiscal 2008 and the Second Quarter Fiscal 2007, included in "Other income, net" in the accompanying condensed consolidated statements of operations are approximately $0 and $0.1 million, respectively, of net foreign currency losses. For the Fiscal 2008 YTD and Fiscal 2007 YTD, included in "Other income, net" in the accompanying condensed consolidated statements of operations are approximately $0.1 million and $0, respectively, of net foreign currency losses. 7 Hedging Activities During the Second Quarter Fiscal 2008 and the Second Quarter Fiscal 2007, the Company had no forward exchange contracts or other derivatives outstanding and did not participate in any other type of hedging activities. Restricted Cash As of December 29, 2007 and June 30, 2007, the Company had cash deposits pledged as security in the amount of approximately $6.2 million for letters of credits and borrowings under its revolving demand financing facilities. The restricted cash amount is classified as a current asset in the condensed consolidated balance sheets since the borrowings it secures are classified as a current liability. See Note 7 - Short-Term Borrowings and Financing Facilities. Investments At December 29, 2007, the Company classified certain of its auction rate securities as non-current in the Company's condensed consolidated balance sheet because of the current liquidity issues in the auction rate securities market. As of December 29, 2007, the Company had $27.8 million invested in certain auction rate securities of which $25.2 million have been classified as "Long-term investments" and $2.6 million have been classified as "Short-term investments" on the Company's condensed consolidated balance sheet and are considered available-for-sale. Subsequent to December 29, 2007, the Company received net proceeds of $2.6 million resulting from the sale of certain action rate securities which had been classified as current on the Company's condensed consolidated balance sheet. At June 30, 2007, the Company's "Short-term investments," as classified in the accompanying condensed consolidated balance sheets, consisted of auction rate debt securities and were considered available-for-sale securities. The Company's portfolio of auction rate securities are AAA rated, long-term debt obligations secured by student loans, with approximately 100% of such collateral being guaranteed by the U.S. Government under the Federal Family Education Loan Program. Liquidity for these securities has been provided by an auction process that resets the applicable interest rate at pre-determined intervals usually every 28-35 days. In the past, the auction process allowed investors to obtain immediate liquidity, if needed, by selling the securities at face value. Current disruptions in the credit markets have adversely affected the auction market for these types of securities. The Company has recently experienced failed auctions for each of its auction rate securities that have gone to auction resulting in the Company's inability to sell most of these securities. The auction rate securities continue to pay interest at default interest rates which are generally higher than the current market rate and there has been no change in the ratings of these securities to date. It is possible that the potential lack of liquidity in the Company's auction rate security investments could adversely affect the Company's liquidity and its ability to fund its operations. The Company cannot predict whether future auctions related to its auction rate securities will be successful. The Company is currently seeking alternatives for reducing its exposure to the auction rate market, but may not be able to identify any such alternative. Although the Company currently has sufficient working capital to finance its operations in the near term, if the Company's working capital is insufficient in the future and the Company is not able to monetize some or all of its auction rate securities at that time, it could have a material adverse effect on our ability to finance our future ongoing operations. During the Second Quarter Fiscal 2008 and the Second Quarter Fiscal 2007, no other comprehensive income or loss was recorded because the variable interest rate feature and the carrying value of the auction rate debt securities approximated the market value of the securities. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, if incurred, reported as a component of accumulated other comprehensive loss in the stockholders' equity section or recorded as an expense if the loss is other than temporary. The current market for the auction rate securities held by the Company is uncertain and the Company will continue to monitor and evaluate the market for these securities to determine if impairment of the carrying value of the securities has occurred. The Company reviews its investments for impairments in accordance with Financial Accounting Standard Board ("FASB"), FASB Staff Position ("FSP"), Statement of Financial Accounting Standards ("SFAS") 115-1 and 124-1, The Meaning of Other-Than-Temporary Investment and Its Application to Certain Investments, to determine when an investment is considered impaired, whether that impairment is other than temporary and the measurement of the loss. As of December 29, 2007, the Company believes the value of its 8 auction rate securities has not been impaired. If any of the issuers of the auction rate securities are unable to successfully close future auctions and/or their credit ratings deteriorate and if the market values of our auction rate securities permanently decline, the Company may be required to record an impairment charge on these investments. If the Company is required to record an impairment charge on these investments, it could have a material adverse effect on the Company's financial condition. Realized gains and losses, interest and dividends are classified as investment income in "Other income, net" in the accompanying condensed consolidated statements of operations. Investment income of $0.5 million related to the long-term and short-term investments and $0.4 million related to the short-term investments are included in "Other income, net" for the Second Quarter Fiscal 2008 and the Second Quarter Fiscal 2007, respectively. Investment income of $1.0 million related to the long-term and short-term investments and $0.9 million related to the short-term investments are included in "Other income, net" for Fiscal 2008 YTD and Fiscal 2007 YTD, respectively. Inventories Inventories, consisting of raw materials, components, work-in-process and finished goods, are stated at the lower of cost or market value and are determined on a first-in, first-out basis. Work-in-process and component inventory costs include materials, labor and manufacturing overhead. The Company records lower of cost or market value adjustments based upon changes in market pricing, customer demand, technological developments or other economic factors for on-hand, excess, obsolete or slow-moving inventory. Impairment of Long-Lived and Other Assets In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company continually evaluates whether events and circumstances have occurred that provide indications of impairment. The Company records an impairment loss when indications of impairment are present and when the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts. The Company performs an impairment test by summarizing the undiscounted cash flows expected to result from the use and eventual sale of its long-lived assets. If the sum of the undiscounted cash flows exceeds the carrying values of these assets, then the Company concludes these carrying values are recoverable. As of December 29, 2007, the sum of the Company's undiscounted forecasted cash flows exceeded the carrying value of its long-lived assets. Revenue Recognition The Company recognizes revenue, in accordance with Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial Statements, and SAB No. 104, Revenue Recognition: Corrected Copy, when title and risk of loss are transferred to the customer, the sales price is fixed or determinable, persuasive evidence of an arrangement exists and collectibility is probable. Title and risk of loss generally transfer when the product is delivered to the customer or upon shipment, depending upon negotiated contractual arrangements. Sales are recorded net of provisions for anticipated returns, which the Company estimates based on historical rates of return, adjusted for current events as appropriate, in accordance with SFAS No. 48, Revenue Recognition When Right of Return Exists ("SFAS No. 48"). If actual future returns are higher than estimated, then net sales could be adversely affected. Management has assessed the appropriateness of the timing of revenue recognition in accordance with SAB No. 104 and SFAS No. 48. Sales Allowances The Company may enter into arrangements to offer certain pricing discounts and allowances that do not provide an identifiable separate benefit or service. In accordance with Emerging Issues Task Force Issue No. 01-09, Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products) ("EITF Issue No. 01-09"), which addresses the statement of operations classification of consideration between a vendor and a retailer, the Company records these pricing discounts and allowances as a reduction of sales. Advertising and promotional costs, which include advertising allowances and other discounts, are expensed as incurred. In accordance with EITF Issue No. 01-09, the Company records certain variable selling expenses, including advertising allowances, other discounts and other allowances, as a reduction of sales. The Company may enter into arrangements to provide certain free products. In accordance with 9 EITF Issue No. 01-09, the Company records the cost of free products ratably into the cost of products sold based upon the underlying revenue transaction. Share-Based Compensation Effective July 3, 2005, the Company began accounting for its employee and director stock option plans in accordance with the provisions of SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS No. 123R"). SFAS No. 123R revised SFAS No. 123, "Accounting for Stock-Based Compensation," and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB Opinion No. 25"). The revised statement addresses the accounting for share-based payment transactions with employees and other third parties, eliminates the ability to account for share-based payments using APB Opinion No. 25 and requires that the compensation costs relating to such transactions be recognized in the consolidated statement of operations based upon the grant-date fair value of those instruments. During the Second Quarter Fiscal 2008 and the Second Quarter Fiscal 2007, the Company recorded approximately $1,000 and $16,000, respectively, of share-based compensation expense. During Fiscal 2008 YTD and Fiscal 2007 YTD, the Company recorded approximately $6,000 and $43,000, respectively, of share-based compensation expense. The Company considers all of its share-based compensation expense as a component of general and administrative expenses. In addition, no amount of share-based compensation expense was capitalized as part of capital expenditures or inventory for the periods presented. Income Taxes Effective July 1, 2007, the Company adopted FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109," ("FIN 48") which clarifies the accounting and disclosure for uncertain tax positions. The Company previously had accounted for tax contingencies in accordance with Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies." As a result of the implementation of FIN 48, the Company recorded a $0.1 million increase in the liability for unrecognized tax benefits, which was accounted for as an increase in the July 1, 2007 accumulated deficit balance. The Company had unrecognized tax benefits of $1.0 million and $0.1 million as of July 1, 2007 and December 29, 2007, respectively. The reduction in unrecognized tax benefits favorably affected the Company's effective tax rate as of December 29, 2007. During the Second Quarter of Fiscal 2008, the settlement of the German tax audit reduced the unrecognized tax benefits by $0.9 million including approximately $0.1 million related to income taxes, inclusive of interest and approximately $0.8 million related to a reduction for tax positions of prior years. The Company recognizes interest and penalties accrued related to unrecognized tax benefits as components of its provision for income taxes. The Company accrued approximately $25,000 for interest and penalties at July 1, 2007. Subsequent changes to accrued interest and penalties through December 29, 2007 have not been significant. The Company files U.S. Federal income tax returns as well as income tax returns in various states and foreign jurisdictions. At the beginning of Fiscal 2008, the Company was subject to examination by the Internal Revenue Service for fiscal years 2005 through 2006, by the German Taxing Authorities for fiscal years 2000 through 2005 and by taxing authorities in various state and other foreign jurisdictions for fiscal years 2003 through 2007, with few exceptions. During the Second Quarter Fiscal 2008, the Company and the German Tax Authorities settled the net liabilities resulting from an audit of the Company's German subsidiary for fiscal years 2000 through 2005 of approximately 131,000 euros related to value added taxes and approximately 88,000 euros related to income taxes, inclusive of interest. The Company accrued a liability of approximately 92,000 euros related to value added taxes in the condensed consolidated balance sheet as of September 29, 2007 and recorded the remaining 39,000 euros in the Second Quarter of Fiscal 2008. The Company periodically evaluates the realizability of its deferred income tax assets. In the Second Quarter Fiscal 2008 and the quarter ended June 30, 2007 ("Fourth Quarter Fiscal 2007"), based upon all the available evidence, the Company determined that it was not more likely than not that its deferred income tax assets will be fully realized. Accordingly, the Company has a valuation allowance recorded for the entire balance of its deferred income tax assets as of December 29, 2007 and June 30, 2007. 10 The Company estimates its interim effective tax rate before consideration of a deferred income tax valuation allowance based upon its projected consolidated annual effective income tax rate. This rate is largely a function of the annual projected amounts of pre-tax income or loss attributed to both domestic and foreign operations, the application of their respective statutory tax rates and the anticipated utilization of available net operating loss carryforwards to reduce taxable income. During the Second Quarter Fiscal 2008 and the Second Quarter Fiscal 2007, the Company recorded a (benefit) provision for income taxes of approximately $(787,000) and $18,000, respectively. During Fiscal 2008 YTD and Fiscal 2007 YTD, the Company recorded a (benefit) provision for income taxes of approximately $(785,000) and $35,000, respectively. The Second Quarter Fiscal 2008 and Fiscal 2008 YTD income tax benefits include a $(774,000) income tax benefit related to our settlement with the German Tax Authorities of the net liabilities resulting from an audit of our German subsidiary for fiscal years 2000 through 2005 and a net reduction in United States state income tax liabilities. The Second Quarter Fiscal 2007 and Fiscal 2007 YTD income tax provisions relate to income tax liabilities incurred by certain of the Company's foreign subsidiaries. These foreign subsidiaries do not have net operating losses to offset such income tax liabilities. Comprehensive Loss Comprehensive loss in accordance with SFAS No. 130, Reporting Comprehensive Income ("SFAS No. 130"), includes net loss adjusted for certain revenues, expenses, gains and losses that are excluded from net loss under accounting principles generally accepted in the United States of America. Unrealized gains and losses related to the Company's available-for-sale investments are excluded from net loss. During the Second Quarter Fiscal 2008 and Fiscal 2008 YTD, the Company's comprehensive loss was $(2.2) million and $(4.0) million, respectively. During the Second Quarter Fiscal 2007 and Fiscal 2007 YTD, the Company's comprehensive loss was $(3.5) million and $(5.2) million, respectively. In each period, the comprehensive loss was the same as the net loss for the period because the Company did not have any items of other comprehensive loss. Loss per Share Basic and diluted loss per share are calculated in accordance with SFAS No. 128, Earnings per Share ("SFAS No. 128"). All applicable loss per share amounts have been presented in conformity with SFAS No. 128 requirements. During the Second Quarter Fiscal 2008 and the Second Quarter Fiscal 2007, the Company issued no shares and 75,832 shares, respectively, of Common Stock on the exercise of stock options. During Fiscal 2008 YTD and Fiscal 2007 YTD, the Company issued no shares and 75,832 shares, respectively, of Common Stock on the exercise of stock options. In the Second Quarter Fiscal 2008 and the Second Quarter Fiscal 2007, potentially dilutive securities were comprised of stock options to purchase 0 and 3,851 shares of Common Stock, respectively that were not included in the calculation of diluted loss per share because their impact was antidilutive. In Fiscal 2008 YTD and Fiscal 2007 YTD, potentially dilutive securities were comprised of stock options to purchase 0 and 899 shares of Common Stock, respectively that were not included in the calculation of diluted loss per share because their impact was antidilutive. In the Second Quarter Fiscal 2007 and Fiscal 2007 YTD, the weighted average effect of 66,202 shares for which delivery had been deferred under the Company's Deferred Delivery Plan was included in the denominator of both basic and diluted loss per share calculations. The 66,202 deferred shares were delivered on July 2, 2007 and included in the total shares outstanding during the Second Quarter Fiscal 2008 and Fiscal 2008 YTD. See Note 1 - Basis of Presentation, Reverse Split of Common Stock and Note 8 - Deferred Share Arrangement. Note 4 - Recently Issued Accounting Pronouncements: - --------------------------------------------------- In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51" ("SFAS No. 160"). SFAS No. 160 clarifies the accounting for noncontrolling interests and establishes accounting and reporting standards for the noncontrolling interest in a subsidiary, including classification as a component of equity. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. The Company does not currently have any minority interests. In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations" ("SFAS No. 141(R)"), which replaces SFAS No. 141. SFAS No. 141(R) requires assets and liabilities acquired in a business combination, contingent 11 consideration and certain acquired contingencies to be measured at their fair values as of the date of acquisition. SFAS No. 141(R) also requires that acquisition-related costs and restructuring costs be recognized separately from the business combination. SFAS No. 141(R) is effective for fiscal years beginning after December 15, 2008 and will be effective for business combinations entered into after January 1, 2009. In May 2007, the FASB issued FASB Staff Position ("FSP") No. FIN 48-1, Definition of Settlement in FASB Interpretation No.48 ("FSP No. FIN 48-1"), which provides guidance on how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. The guidance in FSP No. FIN 48-1 must be applied upon the initial adoption of FIN 48. The adoption of FSP No. FIN 48-1 did not have a material impact on the Company's condensed consolidated financial statements. In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115," ("SFAS No. 159") which provides companies with an option to report selected financial assets and liabilities at their fair values. The election is made on an instrument-by-instrument basis and is irrevocable. If the fair value option is elected for an instrument, FASB No. 159 specifies that all subsequent changes in fair value for that instrument must be reported in earnings. FASB No. 159 is effective as of the beginning of an entity's first fiscal year that begins after November 15, 2007, which for us will be our fiscal year beginning June 29, 2008. The Company is currently evaluating the effects of the adoption of SFAS No. 159. In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements ("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and expands disclosure about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, SFAS No. 157 does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after December 15, 2007. The Company is currently evaluating the impact, if any, that the adoption of SFAS No. 157 will have on the Company's consolidated financial position and results of operations or cash flows. In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an interpretation of FAS 109, Accounting for Income Taxes" ("FIN 48"), to create a single model to address accounting for uncertainty in income tax positions. FIN 48 clarifies the accounting for income taxes by prescribing a minimum probability threshold a tax position must meet to be recognized in the financial statements. FIN 48 also provides guidance on the measurement, derecognition and classification of recognized tax benefits, interest and penalties, accounting for interim periods, and the transition of the accounting method upon the adoption of FIN 48. FIN 48 is effective for years beginning after December 15, 2006. Accordingly, the Company adopted FIN 48 effective as of July 1, 2007. The effect of the adoption is disclosed in Note 3 - - Summary of Significant Accounting Policies, Income Taxes. Note 5 - Supplemental Cash Flow Information: - -------------------------------------------- Non-cash Investing Activities: (amounts in thousands) Deferred Share Arrangement Fiscal Fiscal 2008 YTD 2007 YTD -------- -------- Deferred share arrangement obligation to participant $(413) $(211) Common stock received and held in trust 413 211 ----- ----- $ -- $ -- ===== ===== See Note 8 - Deferred Share Arrangement for a description of the deferred share arrangement transactions in Fiscal 2008 YTD. 12 Note 6 - Inventories: - --------------------- Inventories consist of the following: (amounts in thousands) December 29, June 30, 2007 2007 ------------ -------- Raw materials, components, and $ 7,740 $ 5,431 work-in-process Finished goods 5,794 10,375 ------- ------- Total inventories $13,534 $15,806 ======= ======= During the Second Quarter Fiscal 2008 and the Second Quarter Fiscal 2007 inventory carrying values approximated their cost basis and no charges were made to reduce the carrying value of the inventory in stock. For Fiscal 2008 YTD and Fiscal 2007 YTD, the inventory pre-tax charges had the effect of decreasing inventories by $0 and approximately $0.3 million, respectively, increasing cost of products sold by $0 and $0.3 million, respectively. Note 7 - Short-Term Borrowings and Financing Facilities: - -------------------------------------------------------- Concord Camera HK Limited ("CCHK"), the Company's Hong Kong subsidiary, has certain demand financing facilities with The Hongkong and Shanghai Banking Corporation ("HSBC"), Dah Sing Bank, Limited ("Dah Sing") and the Shanghai Commercial Bank Ltd ("SCB"). These financing facilities provide CCHK with an aggregate borrowing capacity of approximately US$7.3 million. As security for the financing facilities, among other things, (i) the Company provided a corporate guarantee to SCB of approximately US$1.1 million; (ii) CCHK provided to HSBC and Dah Sing pledged deposits in the amount of approximately $5.2 million and $1.0 million, respectively; and (iii) CCHK executed a mortgage in favor of SCB on the Hong Kong office property owned by CCHK. The HSBC financing facility is subject to review by HSBC by June 15, 2008 and the Dah Sing financing facility expires on June 30, 2008. The SCB financing facility has no stated expiration date. On November 21, 2007, CCHK accepted a proposal from Dah Sing to renew the existing financing facility through June 30, 2008 and to reduce such financing facility by approximately US$1.3 million from approximately US$2.3 million to US$ 1.0 million. On October 16, 2007, Concord Keystone Sales Corp. ("Keystone"), the Company's United States wholly-owned subsidiary, entered into a Financing Agreement (the "Agreement") with The CIT Group/Commercial Services, Inc. ("CIT") for a $15 million secured revolving line of credit (the "CIT Facility"), which includes a letter of credit ("L/C") sub-line of $10 million. The CIT Facility is secured by a first priority lien in CIT's favor on, among other things, Keystone's accounts receivable, other payment rights and inventory. The Agreement has a one-year initial term with annual renewals thereafter, unless terminated by either party upon 30 days' written notice before the expiration of the initial term or any renewal term. Keystone may terminate the Agreement at any time upon 30 days' written notice to CIT. Under the terms of the Agreement, the borrowing base will consist of (i) 90% of the eligible accounts receivable plus (ii) the lesser of (a) 60% of the sum of the eligible inventory and the eligible in-transit inventory or (b) 90% of the eligible accounts receivable, minus (iii) the amount of the availability reserves. All loans, advances and extensions of credit will be made at CIT's discretion. Interest on the CIT Facility is payable monthly in arrears at the prime rate announced by JP Morgan Chase Bank plus 0.25% per annum, or in Keystone's discretion, at the one-month London Interbank Offered Rate (LIBOR) plus 2.25% per annum. Keystone will also be required to pay customary loan facility, credit line, annual renewal and L/C fees. Upon the occurrence of certain events of default, including the Company ceasing to own and control 100% of Keystone's voting shares, CIT's obligation under the Agreement to make revolving loans and assist Keystone with opening L/Cs shall cease and CIT may declare all obligations immediately due and payable (including principal and accrued but unpaid interest on all then outstanding obligations). See Note 12 - Subsequent Events. 13 At December 29, 2007 and June 30, 2007, the Company had $7.4 million and $2.8 million, respectively, in short-term borrowings outstanding under the financing facilities described above. The weighted average borrowing rates on the short-term borrowings as of December 29, 2007 and June 30, 2007, were 7.35% and 6.85%, respectively. Note 8 - Deferred Share Arrangement: - ------------------------------------ The Company's Deferred Delivery Plan allows designated executive officers to elect, subject to the approval of the Compensation and Stock Option Committee of the Company's Board of Directors, to defer the gains on certain stock option exercises by deferring delivery of the "profit" shares to be received upon exercise. On July 2, 2007, the Chairman took delivery of the 66,202 shares held in trust upon expiration of the extended deferral period, reducing the deferred share arrangement balance in stockholders' equity by $412,825. As of December 29, 2007, there were no deferred shares held in trust by the Company. See Note 1 - Basis of Presentation, Reverse Split of Common Stock and Note 5 - Supplemental Cash Flow Information. Note 9 - Commitments and Contingencies: - --------------------------------------- License and Royalty Agreements On May 10, 2004, the Company entered into a twenty-year, worldwide trademark license agreement with Jenoptik AG for the exclusive use of the JENOPTIK brand name and trademark on non-professional consumer imaging products including, but not limited to, digital, single-use and traditional cameras, and other imaging products and related accessories. The license agreement provides for a royalty of one-half of one percent (0.5%) of net sales of non-professional consumer imaging products bearing the JENOPTIK brand name for the first ten (10) years of the license and a royalty of six-tenths of one percent (0.6%) for the second ten (10) years of the license. There are no minimum guaranteed royalty payments. Effective January 1, 2001, the Company entered into a twenty-year license agreement with Fuji Photo Film Ltd. ("Fuji"). Under the license agreement, Fuji granted the Company a worldwide non-exclusive license (excluding Japan until January 1, 2005) to use certain of Fuji's patents and patent applications related to single-use cameras. The license extends until the later of the expiration of the last of the licensed Fuji patents or February 26, 2021. In consideration of the license, the Company agreed to pay a license fee and certain royalty payments to Fuji. Accordingly, a significant portion of the balance for patents, trademarks and licenses, net in "Other assets" in the accompanying condensed consolidated balance sheets at December 29, 2007 and June 30, 2007, was an asset associated with the Fuji license. The Company also recorded as a liability a corresponding amount that was included in licensing related obligations in "Other liabilities" in the accompanying consolidated balance sheets at December 29, 2007 and June 30, 2007, which was equal to the present value of future license fee payments. The Company amortizes these assets based upon quantities of units produced. On August 26, 2002, the Company entered into two Polaroid licensing agreements. The two license agreements provided it with the exclusive (with the exception of products already released by Polaroid into the distribution chain), worldwide use of the Polaroid brand trademark in connection with the manufacture, distribution, promotion and sale of single-use and traditional film based cameras, including zoom cameras and certain related accessories. The license agreements did not include instant or digital cameras. Each license agreement included an initial term expiring on February 1, 2006, provided the Company the right to renew the license under the same economic terms for an additional three-year period and provided for the payment by the Company of $3.0 million of minimum royalties, or $6.0 million in total for both license agreements, which were fully credited against percentage royalties. On November 28, 2005, the Company exercised its right to renew the single-use camera license agreement with Polaroid for an additional three-year term expiring on February 1, 2009 in accordance with the same economic terms included in the original agreement. Pursuant to the terms of the single-use camera license agreement, as of February 1, 2008, the Company paid $3.0 million of minimum royalties and recorded the payment as a prepaid asset. The Company amortizes this asset based upon a percentage of net sales of Polaroid branded single-use cameras during the three-year renewal term expiring February 1, 2009. In January 2006, the Company entered into a new license agreement with Polaroid providing it with the exclusive, worldwide use of the Polaroid brand trademark in connection with the manufacture, distribution, promotion and sale of traditional film cameras. The new license agreement is for a term of three years expiring on January 31, 2009 and provided for the payment by the Company of 14 $50,000 of minimum royalties on or before October 31, 2006, which was fully credited against percentage royalties during the first year of the term. There are no minimum guaranteed royalty payments under the traditional film license agreement after the first year of the term. Additionally, the Company has other license and royalty agreements that require the payment of royalties based on the manufacture and/or sale of certain products. Its license and royalty agreements expire at various dates through Fiscal 2023. Total amortization and royalty expense for all licensing and royalty agreements for the Second Quarter Fiscal 2008 and the Second Quarter Fiscal 2007, was $1.2 million and $1.4 million, respectively. Total amortization and royalty expense for all licensing and royalty agreements for Fiscal 2008 YTD and Fiscal 2007 YTD, was $2.8 million and $3.6 million, respectively. Intellectual Property Claims - ---------------------------- From time to time, the Company receives patent infringement claims which it analyzes and, if appropriate, takes action to avoid infringement, settle the claim or negotiate a license. Those claims for which legal proceedings have been initiated against the Company are discussed in Note 10 - Litigation and Settlements. The Company has also received notifications from two entities, one of which was a significant customer, alleging that certain of the Company's digital cameras infringe upon those entities' respective patents. The Company has engaged in discussions with these entities regarding resolution of the claims. Based on the Company's initial assessment of these claims, infringement of one or more patents is probable if the patents are valid. Based upon the licensing discussions to date, the Company preliminarily estimates the potential royalties due to these two claimants for digital camera sales through December 29, 2007 to be between $0 and approximately $6.7 million in the aggregate. The actual royalty amounts, if any, for past and future sales are dependent upon the outcome of the negotiations. The Company has notified certain of its suppliers of its right to be indemnified by the suppliers if it is required to pay royalties or damages to either claimant. The Company is unable to reasonably estimate the amount of the potential loss, if any, within the range of estimates relating to these claims. Accordingly, the Company has not accrued any amounts related to these claims as of December 29, 2007. Purchase Commitments - -------------------- At December 29, 2007, the Company had $3.4 million in non-cancelable purchase commitments relating to the procurement of raw materials, components and finished goods inventory from various suppliers. In the aggregate, such commitments are not at prices in excess of current market values and typically do not exceed one year. Note 10 - Litigation and Settlements: - ------------------------------------- In September 2004, a class action complaint was filed against the Company and certain of its officers in the United States District Court for the Southern District of Florida by individuals purporting to be holders of the Company's Common Stock. In August 2005, an amended consolidated complaint (the "Amended Complaint") was filed adding a former officer of the Company as a defendant. The lead plaintiff under the Amended Complaint seeks to act as a representative of a class consisting of all persons who purchased the Company's Common Stock during the period from August 14, 2003 through August 31, 2004, inclusive. On March 23, 2007, the court granted the plaintiff's motion for class certification and certified as plaintiffs all persons who purchased the Common Stock between August 14, 2003 and August 31, 2004, inclusive, and who were allegedly damaged thereby (the period August 14, 2003 through August 31, 2004 hereinafter referred to as the "Class Period"). The allegations in the Amended Complaint are centered around claims that the Company failed to disclose, in periodic reports it filed with the SEC and in press releases it made to the public during the Class Period regarding its operations and financial results, (i) the full extent of the Company's excess, obsolete and otherwise impaired inventory; (ii) the departure from the Company of the aforementioned former officer defendant until several months after his departure; and (iii) that Eastman Kodak Company ("Kodak") had notified the Company that it would stop purchasing cameras from the Company under its two design and manufacturing services ("DMS") contracts with the Company due to the Company's alleged infringement of Kodak's patents. The Amended Complaint also alleged that the Company improperly recognized revenue contrary to generally accepted accounting principles due to an alleged inability to 15 reasonably estimate digital camera returns. The Amended Complaint claimed that such failures artificially inflated the price of the Common Stock. The Amended Complaint sought unspecified damages, interest, attorneys' fees, costs of suit and unspecified other and further relief from the court. The Company has reached an agreement with the plaintiffs on the settlement of this lawsuit and, on November 15, 2007, a Stipulation and Agreement of Settlement was filed with the court. The settlement is subject to approval by the class shareholders and the court. The Company has sought coverage from its insurance carrier for this lawsuit under its directors' and officers' liability insurance policy and the insurance carrier is defending the action under a reservation of rights. The agreed upon pending settlement amount is within the policy limits and the insurance carrier has agreed to pay such amount. Although the Company believes the settlement will be consummated and approved by the court, the Company cannot guarantee this result and if the lawsuit continues and is adversely determined, the Company's ultimate liability, which could be material, cannot be ascertained. In a letter dated November 19, 2004, the Company was advised by the staff of the SEC that it is conducting an investigation related to the matters described above. The Company has provided the requested information to the staff of the SEC and has not received any further communication from the SEC with respect to its request since the Company last responded in May 2005. On November 16, 2004, a shareholder derivative suit was filed against certain of the Company's current and former officers and directors, and the Company as a nominal defendant, in the United States District Court for the District of New Jersey by an individual purporting to be a holder of the Company's Common Stock. The complaint alleged that the individual defendants breached their duties of loyalty and good faith by causing the Company to misrepresent its financial results and prospects, resulting in the class action complaint described in the immediately preceding paragraph. The complaint sought unspecified damages, repayment of salaries and other remuneration from the individual defendants, interest, attorneys' fees, costs of suit and unspecified other and further relief from the court. In March 2005, the court granted a motion by the individual defendants and the Company to transfer the action to the United States District Court for the Southern District of Florida where the related class action suit is currently pending. In May 2005, the court consolidated this case with the related class action suit for discovery purposes only. The Company has reached an agreement in principle with the plaintiffs on the settlement of this lawsuit and, on March 7, 2008, a Stipulation and Agreement Settlement was filed with the court. The settlement is subject to the approval by the court. The Company has sought coverage from its insurance carrier for this lawsuit under its directors' and officers' liability insurance policy, and the insurance carrier is defending the action under a reservation of rights. The agreed upon pending settlement amount is within the policy limits and the insurance carrier has agreed to pay such amount. Although the Company believes the settlement will be consummated and approved by the court, the Company cannot guarantee this result and if the lawsuit continues and is adversely determined, the ultimate effect on the Company, which could be material, cannot be ascertained. Pursuant to the Company's Certificate of Incorporation, as amended, the personal liability of the Company's directors is limited to the fullest extent permitted under the New Jersey Business Corporation Act ("NJBCA"), and the Company is required to indemnify its officers and directors to the fullest extent permitted under the NJBCA. In accordance with the terms of the Certificate of Incorporation and the NJBCA, the Board of Directors approved the payment of expenses for each of the current and former officers and directors named as defendants (the "individual defendants") in the above described class action and derivative action litigations (collectively, the "actions") in advance of the final disposition of such actions. The individual defendants have executed and delivered to the Company written undertakings to repay the Company all amounts so advanced if it shall ultimately be determined that the individual defendants are not entitled to be indemnified by the Company under the NJBCA. On October 6, 2004, a patent infringement complaint was filed by Honeywell International, Inc. and Honeywell Intellectual Properties, Inc., against 27 defendants, including the Company, in the United States District Court for the District of Delaware. The complaint asserted that the defendants have conducted activities which infringe U.S. Patent No. 5,280,371, entitled, "Directional Diffuser for a Liquid Crystal Display." The complaint sought unspecified damages, interest, attorneys' fees, costs of suit and unspecified other and further relief from the court. The proceedings in this action against the Company and other similarly situated defendants were stayed by the court pending the resolution of the infringement actions against the liquid crystal display manufacturers. It is too early to assess the probability of a favorable or unfavorable outcome or the loss or range of loss, if any, and therefore, no amounts have been accrued relating to this action. The Company has notified several third parties of its intent to seek indemnity from such parties for any costs or damages incurred by the Company as a result of this action. 16 In June 2006, St. Clair Intellectual Properties Consultants, Inc. filed a patent infringement complaint against 22 defendants, including the Company, in the United States District Court for the District of Delaware. The complaint asserted that the defendants conducted activities which infringe U.S. Patent Nos. 5,138,459, 6,094,219, 6,233,010 and 6,323,899. The complaint sought injunctive relief, unspecified damages, interest, attorneys' fees, costs of suit and unspecified other and further relief from the court. The proceedings in this action against the Company and the other defendants were stayed by the court until further order of the court. It is too early to assess the probability of a favorable or unfavorable outcome or the loss or range of loss, if any, and, therefore, no amounts have been accrued relating to this action. The Company is assessing potential claims of indemnification against certain of its suppliers with respect to this action. The Company is also involved from time to time in routine legal matters incidental to its business. Based upon available information, the Company believes that the resolution of such matters will not have a material adverse effect on its financial position or results of operations. Note 11 -- Other Charges: - ------------------------- Cost-Reduction Initiatives The Company continues to evaluate its cost structure and implement cost-reduction initiatives as appropriate. During the Second Quarter Fiscal 2008, the Company recorded total charges of $0.2 million related to severance costs for the elimination of certain employee positions. During the quarter ended September 29, 2007 ("First Quarter Fiscal 2008"), the Company recorded a $60,000 reduction in a liability related to severance costs accrued for the elimination of certain employee positions. Table I - Other Charges Liability reconciles the beginning and ending balances of the other charges liability. (in thousands) Other Charges Liability - ----------------------- Severance Retention Total --------- --------- ----- Balance as of June 30, 2007 $ 236 $ 9 $ 245 Charges 212 -- 212 Reversal (60) -- (60) Payments (388) (9) (397) ----- ----- ----- Balance as of December 29, 2007 $ -- $ -- $ -- ===== ===== ===== 17 Table II - Other Charges presents the related expenses and their classification in the consolidated statements of operations.
(in thousands) Other Charges Severance Retention Leases Total - ------------- --------- --------- ------ ----- Second Quarter Fiscal 2008 Cost of products sold $ 212 $ -- $ -- $ 212 Selling expense -- -- -- -- General and administrative expense -- -- -- -- --------- ------------- ------------- --------- Total $ 212 $ -- $ -- $ 212 ========= ============= ============= ========= Fiscal 2008 YTD Cost of products sold $ 212 $ -- $ -- $ 212 Selling expense (60) -- -- (60) General and administrative expense -- -- -- -- --------- ------------- ------------- --------- Total $ 152 $ -- $ -- $ 152 ========= ============= ============= ========= Second Quarter Fiscal 2007 Cost of products sold $ 132 $ -- $ -- $ 132 Selling expense 50 (7) -- 43 General and administrative 74 -- (1) 73 --------- ------------- ------------- --------- Total $ 256 $ (7) $ (1) $ 248 ========= ============= ============= ========= Fiscal 2007 YTD Cost of products sold $ 309 $ -- $ -- $ 309 Selling expense 279 (7) 16 288 General and administrative expense 74 -- 9 83 --------- ------------- ------------- --------- Total $ 662 $ (7) $ 25 $ 680 ========= ============= ============= =========
As of December 29, 2007, the Company had no amounts accrued as "Other Charges Liabilities" in connection with the Company's cost-reduction initiatives. 18 Note 12 - Subsequent Events: - ---------------------------- In a press release dated February 12, 2008, the Company announced that it was delaying the filing of its Quarterly Report on Form 10-Q for the second quarter of fiscal 2008 with the Securities and Exchange Commission. In that press release, the Company explained that a committee (the "Special Committee") of the Board of Directors (the "Board") of the Company established to explore strategic alternatives for the Company was nearing the conclusion of its work and expected to make its recommendations to the Board within approximately the next sixty days. Because certain of the strategic alternatives being considered by the Special Committee could have impacted the Company's financial statements, the Company explained that it was delaying the filing of its Form 10-Q for the second quarter of fiscal 2008 until the Special Committee made its recommendations to the Board and the Board determined whether or not to implement such recommendations. The Special Committee continues to consider the strategic alternatives available to the Company, but it is likely that additional time, beyond the originally anticipated approximately sixty day period, will be necessary for the Special Committee to complete its evaluation of the strategic alternatives available to the Company and to make an appropriate recommendation to the Board and for the Board to consider such recommendations. Certain of the strategic alternatives being explored, if implemented, may result in the net realizable value of certain of the Company's assets being less than the current carrying value of such assets. On March 4, 2008, Concord Keystone Sales Corp. ("Keystone"), the Company's U.S. subsidiary, received a letter from The CIT Group/Commercial Services, Inc. ("CIT") with notice that an event of default exists under the Financing Agreement between Keystone and CIT as a result of Keystone's failure to provide CIT with the Company's financial information for the Company's second quarter ending December 29, 2007 as required by the Financing Agreement (see the Company's Current Report on Form 8-K, dated February 12, 2008, announcing that it was delaying the filing of its Quarterly Report on Form 10-Q for the period ended December 29, 2007 with the Securities and Exchange Commission). As a result of this event of default, CIT has notified Keystone that it will increase the availability reserve, thereby decreasing the borrowing base, by $500,000. CIT has not exercised its right to accelerate Keystone's obligation to repay the credit facility and CIT continues to make loans to Keystone under the revolving credit facility. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and the notes to such financial statements included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for Fiscal 2007 filed with the SEC on September 27, 2007 ("Form 10-K"). Overview - -------- We market and sell popularly priced, easy-to-use single-use and traditional film cameras. We design, develop, manufacture and assemble most of our single-use cameras and certain of our traditional film cameras at our manufacturing facilities in the People's Republic of China ("PRC") and outsource the manufacture of certain of our single-use and traditional film cameras. In fiscal 2006, we significantly de-emphasized the sale of digital cameras. Digital camera sales in fiscal 2007 were not material and we do not expect to have a material amount of digital camera sales in fiscal 2008. We sell our private label and brand-name products to our customers worldwide either directly or through third-party distributors. Recent Events - ------------- In a press release dated February 12, 2008, the Company announced that it was delaying the filing of its Quarterly Report on Form 10-Q for the second quarter of fiscal 2008 with the Securities and Exchange Commission. In that press release, the Company explained that a committee (the "Special Committee") of the Board of Directors (the "Board") of the Company established to explore strategic alternatives for the Company was nearing the conclusion of its work and expected to make its recommendations to the Board within approximately the next sixty days. Because certain of the strategic alternatives being considered by the Special Committee could have impacted the Company's financial statements, the Company explained that it was delaying the filing of its Form 10-Q for the second quarter of fiscal 2008 until the Special Committee made its recommendations to the Board and the Board determined whether or not to implement such recommendations. The Special Committee continues to consider the strategic alternatives available to the Company, but it is likely that 19 additional time, beyond the originally anticipated approximately sixty day period, will be necessary for the Special Committee to complete its evaluation of the strategic alternatives available to the Company and to make an appropriate recommendation to the Board and for the Board to consider such recommendations. Certain of the strategic alternatives being explored, if implemented, may result in the net realizable value of certain of the Company's assets being less than the current carrying value of such assets. Executive Summary - ----------------- Quarter-Over-Quarter Results of Operations Our operating loss for the second quarter of fiscal 2008 was $(3.3) million as compared to an operating loss of $(4.1) million for the second quarter of fiscal 2007. We experienced a $0.2 million decrease in our quarter-over-quarter gross profit. The decrease in the quarter-over-quarter gross profit was primarily due to a reduction in quarter-over-quarter net sales and gross margin percentages of approximately $0.8 million, partially offset by a decrease in the quarter-over-quarter unfavorable manufacturing material, labor and overhead costs variances of approximately $0.6 million. Our selling, general and administrative expenses decreased by $1.0 million, quarter-over-quarter. Our quarter-over-quarter selling expenses decreased by $0.5 million due to a reduction in selling-related employee compensation costs of $0.2 million, freight costs and royalty costs, each of approximately $0.1 million, and a reduction in certain other costs of $0.1 million. Selling-related employee compensation costs decreased as a result of the elimination of certain positions in connection with our cost-reduction initiatives. Our quarter-over-quarter general and administrative ("G&A") expenses decreased by $0.5 million primarily due to a reduction in G&A-related employee compensation costs of $0.4 million as a result of the elimination of certain positions in connection with our cost-reduction initiatives and a reduction in professional fees of $0.1 million, primarily as a result of a reduction in Sarbanes-Oxley compliance related fees. Second Quarter Fiscal 2008 Results of Operations Although we reduced our operating loss by $0.8 million, or 19.5%, for the second quarter of fiscal 2008 as compared to the second quarter of fiscal 2007, we recorded an operating loss of $3.3 million during the quarter. Factors contributing to the second quarter fiscal 2008 operating loss were: 1. Insufficient Net Sales and Related Gross Profit to Fully Absorb Non-Manufacturing Overhead Costs 2. Unfavorable Manufacturing Material, Labor and Overhead Cost Variances 1. Insufficient Net Sales and Related Gross Profit to Fully Absorb Non-Manufacturing Overhead Costs During the second quarter of fiscal 2008, our net sales and related gross profit were not sufficient to fully absorb our non-manufacturing overhead costs. The insufficient net sales and related gross profit contributed approximately $2.0 million to the operating loss. 2. Unfavorable Manufacturing Material, Labor and Overhead Cost Variances During the second quarter of fiscal 2008, we experienced unfavorable manufacturing material, labor and overhead cost variances of $1.3 million primarily attributable to a lower than anticipated volume of production during the period and, to a lesser extent, increases in costs of film. We continue to take action and review our strategies, including and relating to: (i) acquisition of new single-use and traditional film camera customers, (ii) potential new business initiatives, and (iii) implementation of additional cost reductions related to worldwide overhead costs. There can be no assurances that we will be able to implement any such strategies or that implementing any such 20 strategies will successfully reverse our losses, increase our revenues, decrease our costs or improve our results of operations. Critical Accounting Policies The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and the accompanying notes. Since June 30, 2007, there have been no significant changes to the assumptions and estimates related to those critical accounting policies. See the critical accounting policies disclosed in our Form 10-K. Recently Issued Accounting Pronouncements In December 2007, the Financial Accounting Standard Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 160, "Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51" ("SFAS No. 160"). SFAS No. 160 clarifies the accounting for noncontrolling interests and establishes accounting and reporting standards for the noncontrolling interest in a subsidiary, including classification as a component of equity. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. The Company does not currently have any minority interests. In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations" (SFAS No. 141(R)"), which replaces SFAS No. 141. SFAS No. 141(R) requires assets and liabilities acquired in a business combination, contingent consideration, and certain acquired contingencies to be measured at their fair values as of the date of acquisition. SFAS No. 141(R) also requires that acquisition-related costs and restructuring costs be recognized separately from the business combination. SFAS No. 141(R) is effective for fiscal years beginning after December 15, 2008 and will be effective for business combinations entered into after January 1, 2009. In May 2007, the FASB issued FASB Staff Position ("FSP") No. FIN 48-1, Definition of Settlement in FASB Interpretation No.48 ("FSP No. FIN 48-1"), which provides guidance on how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. The guidance in FSP No. FIN 48-1 must be applied upon the initial adoption of FIN No. 48. The adoption of FSP No. FIN 48-1 did not have a material impact on our condensed consolidated financial statements. In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115," ("SFAS No. 159") which provides companies with an option to report selected financial assets and liabilities at their fair values. The election is made on an instrument-by-instrument basis and is irrevocable. If the fair value option is elected for an instrument, FASB No. 159 specifies that all subsequent changes in fair value for that instrument must be reported in earnings. FASB No. 159 is effective as of the beginning of an entity's first fiscal year that begins after November 15, 2007, which for us will be our fiscal year beginning June 29, 2008. The Company is currently evaluating the effects of the adoption of SFAS No. 159. In September 2006, the FASB issued Statement of Accounting Standards No. 157, Fair Value Measurements ("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and expands disclosure about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, SFAS No. 157 does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after December 15, 2007. The Company is currently evaluating the impact, if any, that the adoption of SFAS No. 157 will have on the Company's consolidated financial position and results of operations or cash flows. In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an interpretation of FAS 109, Accounting for Income Taxes" ("FIN 48"), to create a single model to address accounting for uncertainty in 21 income tax positions. FIN 48 clarifies the accounting for income taxes by prescribing a minimum probability threshold a tax position must meet to be recognized in the financial statements. FIN 48 also provides guidance on the measurement, derecognition and classification of recognized tax benefits, interest and penalties, accounting for interim periods and the transition of the accounting method upon the adoption of FIN 48. FIN 48 is effective for years beginning after December 15, 2006. Accordingly, we adopted FIN 48 effective as of July 1, 2007. The effect of the adoption is disclosed in Note 3 - Summary of Significant Accounting Policies, Income Taxes, in the Notes to the Condensed Consolidated Financial Statements. Results of Operations - --------------------- Quarter Ended December 29, 2007 Compared to the Quarter Ended December 30, 2006 Net Sales Net sales of our products for the second quarter of fiscal 2008 were $18.4 million, a decrease of $0.9 million, or 4.7%, as compared to net sales for the second quarter of fiscal 2007. The decrease in net sales was due primarily to a reduction in sales of traditional film cameras and, to a lesser extent, a decrease in the average selling price per single-use cameras. Net sales from our operations in the Americas for the second quarter of fiscal 2008 were $13.4 million, a decrease of $0.5 million, or 3.6%, as compared to the second quarter of fiscal 2007. The decrease in net sales in the Americas was due primarily to a reduction in sales of traditional film cameras to a significant customer and, to a lesser extent, a decrease in the average selling price per single-use cameras. Net sales from our operations in Europe for the second quarter of fiscal 2008 were $3.2 million, a decrease of $1.0 million, or 23.8%, as compared to the second quarter of fiscal 2007. The decrease in net sales in Europe was due primarily to a reduction in sales of single-use cameras and, to a lesser extent, a reduction in sales of digital cameras attributable to our decision to exit the digital camera market. Net sales from our operations in Asia for the second quarter of fiscal 2008 were $1.8 million, an increase of $0.5 million, or 38.5%, as compared to the second quarter of fiscal 2007. The increase in net sales in Asia was due to increased sales of single-use cameras in Japan. Gross Profit Gross profit for the second quarter of fiscal 2008 was $1.3 million, or 7.1% of net sales, versus gross profit of $1.5 million, or 7.8% of net sales, in the second quarter of fiscal 2007. The decrease in the quarter-over-quarter gross profit was primarily due to a reduction in quarter-over-quarter net sales and gross margin percentages of approximately $0.8 million, partially offset by a decrease in the quarter-over-quarter unfavorable manufacturing material, labor and overhead costs variances of approximately $0.6 million. Product engineering, design and development costs for the second quarter of fiscal 2008 and the second quarter of fiscal 2007, in dollars and as a percentage of net sales, were $0.5 million, or 2.8%, and $0.6 million, or 3.1%, respectively. Operating Expenses Selling expenses for the second quarter of fiscal 2008 were $1.8 million, or 9.8% of net sales, compared to $2.3 million, or 11.9% of net sales, for the second quarter of fiscal 2007. Our quarter-over-quarter selling expenses decreased by $0.5 million primarily due to a reduction in selling-related employee compensation costs of $0.2 million, a reduction in freight costs and royalty costs, each of approximately $0.1 million, and a reduction in certain other costs of $0.1 million. Selling-related employee compensation costs decreased as a result of the elimination of certain positions in connection with our cost-reduction initiatives. 22 G&A expenses for the second quarter of fiscal 2008 were $2.8 million, or 15.2% of net sales, compared to $3.3 million, or 17.1% of net sales, for the second quarter of fiscal 2007. Our quarter-over-quarter G&A expenses decreased by $0.5 million primarily due to a reduction in G&A-related employee compensation costs of $0.4 million as a result of the elimination of certain positions in connection with our cost-reduction initiatives and a reduction in professional fees of $0.1 million primarily as a result of the reduction in costs related to Sarbanes-Oxley compliance. Share-Based Compensation During the second quarter of fiscal 2008 and the second quarter of fiscal 2007, we recorded approximately $1,000 and $16,000, respectively, of share-based compensation expenses. We consider all of our share-based compensation expense as a component of G&A expenses. In addition, no amount of share-based compensation expense was capitalized as part of capital expenditures or inventory for the periods presented. Interest Expense Interest expense was approximately $0.1 million for each of the second quarter of fiscal 2008 and the second quarter of fiscal 2007. Other Income, Net Other income, net was $0.5 million and $0.7 million for the second quarter of fiscal 2008 and the second quarter of fiscal 2007, respectively. The decrease in other income, net was primarily due to the tax refund recovery in Europe of $0.3 million recorded in the second quarter of fiscal 2007, offset by a reduction in foreign exchange losses of $0.1 million. For further discussion, see Note 3 - Summary of Significant Accounting Policies in the Notes to the Condensed Consolidated Financial Statements. Income Taxes In the second quarter of fiscal 2008 and the fourth quarter of fiscal 2007, based upon all of the available evidence, management determined that it was not more likely than not that its deferred income tax assets will be fully realized. Accordingly, we recorded a valuation allowance for the entire balance of our deferred income tax assets as of December 29, 2007 and June 30, 2007. During the second quarter of fiscal 2008 and the second quarter of fiscal 2007, we recorded a (benefit) provision for income taxes of $(787,000) and $18,000, respectively. The second quarter of fiscal 2008 benefit for income taxes includes a $(774,000) income tax benefit related to our settlement with the German Tax Authorities of the net liabilities resulting from an audit of our German subsidiary for fiscal years 2000 through 2005and a net reduction in United States state income tax liabilities of $13,000. The second quarter of fiscal 2007 income tax provision relates to income tax liabilities incurred by certain of our foreign subsidiaries. These foreign subsidiaries do not have net operating losses to offset such income tax liabilities. For further discussion, see Note 3 - Summary of Significant Accounting Policies - Income Taxes in the Notes to the Condensed Consolidated Financial Statements. Net Loss We incurred a net loss of $(2.2) million, or $(0.37) per basic and diluted common share, for the second quarter of fiscal 2008, as compared to a net loss of $(3.5) million, or $(0.61) per basic and diluted common share, for the second quarter of fiscal 2007. Results of Operations Fiscal 2008 YTD Compared to Fiscal 2007 YTD Net Sales Net sales of our products for the six months ended December 29, 2007 ("fiscal 2008 YTD"), were $40.1 million, a decrease of $8.1 million, or 16.8%, as compared to net sales of $48.2 million for the six months ended December 30, 2006, ("fiscal 2007 YTD"). The decrease in net sales was due primarily to a reduction in sales of single-use and traditional film 23 cameras to significant customers and, to a lesser extent, a decrease in the average selling price per single-use and traditional film cameras and no digital camera sales attributable to our decision to exit the digital camera market. Net sales from our operations in the Americas for fiscal 2008 YTD were $29.6 million, a decrease of $8.2 million, or 21.7%, as compared to fiscal 2007 YTD. The decrease in net sales was due primarily to a reduction in sales of single-use and traditional film cameras to significant customers and, to a lesser extent, a decrease in the average selling price per single-use and traditional cameras. Net sales from our operations in Europe for fiscal 2008 YTD were $7.3 million, a decrease of $1.7 million, or 18.9%, as compared to fiscal 2007 YTD. The decrease in net sales in Europe was due primarily to no digital camera sales and, to a lesser extent, a reduction in sales of single-use cameras. Net sales from our operations in Asia for fiscal 2008 YTD were $3.2 million, an increase of $1.8 million, or 128.6% as compared to fiscal 2008 YTD. The increase in net sales in Asia was due primarily to an increase in sales of single-use cameras in Japan. Gross Profit Gross profit for fiscal 2008 YTD was $4.3 million, or 10.7% of net sales, versus gross profit of $6.0 million, or 12.5% of net sales, in fiscal 2007 YTD. During fiscal 2008 YTD as compared to fiscal 2007 YTD, gross profit decreased primarily due to a decrease in year-to-date net sales and a decrease in year-to-date gross margin percentages totaling approximately $3.5 million, partially offset by the decrease in unfavorable manufacturing material, labor and overhead cost variances of approximately $1.8 million. Product engineering, design and development costs for fiscal 2008 YTD and fiscal 2007 YTD, in dollars and as a percentage of net sales, were $1.0 million, or 2.5%, and $1.4 million, or 2.9%, respectively. Operating Expenses Selling expenses for fiscal 2008 YTD were $4.0 million, or 10.0% of net sales, compared to $5.3 million, or 11.0% of net sales, for fiscal 2007 YTD. The $1.3 million decrease in selling expenses was primarily due to a reduction in employee compensation costs of $0.8 million, a reduction in marketing and advertising expenses of $0.2 million and a reduction in royalty fees of $0.1 million and in certain other costs of $0.2 million. Selling related employee compensation costs decreased as a result of the elimination of certain positions in connection with our cost-reduction initiatives. G&A expenses for fiscal 2008 YTD were $5.7 million, or 14.2% of net sales, compared to $6.8 million, or 14.1% of net sales, for fiscal 2007 YTD. The $1.1 million decrease in G&A expenses was primarily due to a reduction in G&A-related employee compensation costs of $0.6 million as a result of the elimination of certain positions in connection with our cost-reduction initiatives and a reduction in professional fees of $0.5 million primarily as a result of a reduction in Sarbanes-Oxley compliance costs. Share-Based Compensation During fiscal 2008 YTD and fiscal 2007 YTD, we recorded approximately $6,000 and $43,000, respectively, of share-based compensation expenses. We consider all of our share-based compensation expense as a component of general and administrative expenses. In addition, no amount of share-based compensation expense was capitalized as part of capital expenditures or inventory for the periods presented. 24 Interest Expense Interest expense was approximately $0.2 million for each of fiscal 2008 YTD and fiscal 2007 YTD. Other Income, Net Other income, net was $0.8 million and $1.2 million for fiscal 2008 YTD and fiscal 2007 YTD, respectively. The year-to-date over year-to-date decrease in other income, net was primarily due to the tax refund recovery in Europe of $0.3 million recorded in fiscal 2007 and, to a lesser extent, an increase in foreign exchange losses. For further discussion, see Note 3 - Summary of Significant Accounting Policies in the Notes to the Condensed Consolidated Financial Statements. Income Taxes In fiscal 2008 YTD and the fourth quarter of fiscal 2007, based upon all of the available evidence, management determined that it was not more likely than not that its deferred income tax assets will be fully realized. Accordingly, we recorded a valuation allowance for the entire balance of our deferred income tax assets as of December 29, 2007 and June 30, 2007. During fiscal 2008 YTD and fiscal 2007 YTD, we recorded a (benefit) provision for income taxes of $(785,000) and $35,000, respectively. The fiscal 2008 YTD benefit for income taxes includes a $(774,000) income tax benefit related to our settlement with the German Tax Authorities of the net liabilities resulting from an audit of our German subsidiary for fiscal years 2000 through 2005 and a net reduction in United States state income tax liabilities of $11,000. The fiscal 2007 YTD income tax provision relates to income tax liabilities incurred by certain of our foreign subsidiaries. These foreign subsidiaries do not have net operating losses to offset such income tax liabilities. For further discussion, see Note 3 - - Summary of Significant Accounting Policies - Income Taxes in the Notes to the Condensed Consolidated Financial Statements. Net Loss We incurred a net loss of $(4.0) million, or $(0.67) per basic and diluted common share, for fiscal 2008 YTD, as compared to a net loss of $(5.2) million, or $(0.89) per basic and diluted common share, for fiscal 2007 YTD. Cost-Reduction Initiatives We continue to evaluate our cost structure and implement cost-reduction initiatives as appropriate. During the second quarter of fiscal 2008, we recorded total charges of $0.2 million related to our ongoing cost-reduction initiatives, primarily for severance costs related to the elimination of certain employee costs. No costs were recorded in the first quarter of fiscal 2008. During fiscal 2007 YTD and the second quarter of fiscal 2007, we recorded total charges of $0.7 million and $0.2 million, respectively, primarily for severance costs related to the elimination of certain employee positions. For further discussion, see Note 11 - Other Charges in the Notes to the Condensed Consolidated Financial Statements. Liquidity and Capital Resources Uncertainties in the Credit Markets - As of December 29, 2007, we had $25.5 million invested in certain auction rate securities which have been classified as "Long-term investments" on our condensed consolidated balance sheet because of the market uncertainties and the liquidity issues in the market for auction rate securities. Our portfolio of auction rate securities are AAA rated, long-term debt obligations secured by student loans, with approximately 100% of such collateral being guaranteed by the U.S. Government under the Federal Family Education Loan Program. Liquidity for these securities has been provided by an auction process that resets the applicable interest rate at pre-determined intervals usually every 28-35 days. In the past, the auction process allowed investors to obtain immediate liquidity if needed by selling the securities at face value. The current disruptions in the credit markets have adversely affected the auction market for these types of securities. We have recently experienced failed auctions for each of our auction rate securities that have gone to auction, resulting in our inability to sell these securities. The auction rate securities 25 continue to pay interest at default rates which are generally higher than the current market rate and there has been no change in the ratings of these securities to date. Based on our expected operating cash flows and other sources of cash, cash equivalents and short-term investments, it is possible that the potential lack of liquidity in our auction rate security investments could adversely affect our liquidity and our ability to fund our operations. We cannot predict whether future auctions related to our auction rate securities will be successful. We are currently seeking alternative short-term financing sources for reducing our exposure to the auction rate market, but may not be able to identify any such alternative. Although we currently have sufficient working capital to finance our operations in the near term, if our working capital is insufficient in the future and we are not able to monetize some or all of our auction rate securities or other assets at that time, it could have a material adverse effect on the our ability to finance our future ongoing operations. Our ability to fund our operating requirements and maintain an adequate level of working capital will depend primarily on our ability to generate growth in sales of our single-use and traditional film cameras and new products, on our ability to continue to access our financing facilities and on our ability to control operating expenses. Our failure to generate substantial growth in the sales of our single-use and traditional film cameras and new products, control operating expenses and other events - including the progress of our new product initiatives, our ability to manufacture or have manufactured products at an economically feasible cost and in sufficient quantities and changes in economic or competitive conditions or our planned business - could cause us to require additional capital. In the event that we must raise additional capital to fund our working capital needs, we may seek to raise such capital through borrowings and/or the issuance of debt securities or equity securities. To the extent we raise additional capital by issuing equity securities or obtaining borrowings convertible into equity, existing shareholders may experience ownership dilution and future investors may be granted rights superior to those of existing shareholders. Moreover, additional capital may not be available to us on acceptable terms, or at all. Working Capital - At December 29, 2007, we had working capital of $11.0 million, compared to $39.0 million at June 30, 2007, a decrease of $ 28.0 million. Working capital and cash and cash equivalents and marketable securities decreased primarily due to the reclassification of certain of our auction rate securities from short-term investments to long-term investments. Current capital market conditions have significantly reduced our ability to liquidate our auction rate securities. For further discussion see Note - 3, Summary of Significant Accounting Policies, Investments in the Notes to Condensed Consolidated Financial Statements. Cash (Used in) Provided by Operating Activities - Cash (used in) operating activities during fiscal 2008 YTD was $(6.8) million, which compared unfavorably to cash provided by operating activities of $0.3 million during fiscal 2007 YTD. During fiscal 2008 YTD, a reduction of accounts receivable and inventories provided cash of $2.9 million and $2.3 million, respectively. During fiscal 2007 YTD, reductions of accounts receivables and inventories provided cash of $7.7 million and $11.4 million, respectively. The reduction in accounts receivables is the result of improved collections and the reduction in inventory is related to seasonal demand for our products in the second quarter of our fiscal year. During fiscal 2008 YTD, the reduction of accounts payable and accrued expenses used cash of $7.8 million and $1.4 million, respectively. This compares with cash used by a reduction in accounts payable and accrued expenses of $15.2 million and $1.1 million, respectively in fiscal 2007 YTD. The reduction in accounts payable and accrued expenses is a result of reduced inventory levels and lower overall costs. Cash Provided by (Used in) Investing Activities - Cash provided by investing activities was $2.7 million for fiscal 2008 YTD as compared to cash (used in) investing activities of $(6.5) million for fiscal 2007 YTD. The increase in cash provided by investing activities was primarily due to the net increase in the proceeds of available-for-sale investments. Cash Provided by Financing Activities - Cash provided by financing activities during fiscal 2008 YTD was $4.7 million as compared to cash provided by financing activities of $3.5 million for fiscal 2007 YTD. This activity results from a net increase of our short-term borrowings made under our financing facilities used for working capital purposes. See Note 7 - Short-Term Borrowings and Financing Facilities in the Notes to the Condensed Consolidated Financial Statements. 26 Operating Leases - We enter into operating leases in the ordinary course of business (e.g., warehouse facilities, office space and equipment). The effects of outstanding leases are not material to us in terms of either annual cash flow or in total future minimum payments. Purchase Commitments - See Note 9 - Commitments and Contingencies in the Notes to the Condensed Consolidated Financial Statements. Other Contractual Obligations - We do not have any material financial guarantees or other contractual commitments that are reasonably likely to have an adverse effect on liquidity. See Note 7 - Short-Term Borrowings and Financing Facilities in the Notes to the Condensed Consolidated Financial Statements for additional information about the corporate guarantees we provided in connection with our financing facilities. See also Note 9 - Commitments and Contingencies in the Notes to Condensed Consolidated Financial Statements. License Agreements - See Note 9 - Commitments and Contingencies in the Notes to the Condensed Consolidated Financial Statements. Intellectual Property Claims - See Note 9 - Commitments and Contingencies and Note 10 - Litigation and Settlements in the Notes to the Condensed Consolidated Financial Statements. Hong Kong Financing Facilities - As of December 29, 2007, we had $0.9 million in letters of credit outstanding, which were issued primarily to certain suppliers to guarantee payment of our purchase orders with such suppliers. The letters of credit are issued under the import facilities that have been granted to CCHK. See Note 7 - Short-Term Borrowings and Financing Facilities in the Notes to the Condensed Consolidated Financial Statements. Revolving Credit Facility -On October 16, 2007, we obtained access to a revolving credit facility for a $15 million secured revolving line of credit which includes a letter of credit sub-line of $10 million. The revolving credit facility is secured by a first priority lien on, among other things, the accounts receivable and inventory of Concord Keystone Sales Corp., our wholly-owned U.S. subsidiary. See Note 7 - Short-Term Borrowings and Financing Facilities in the Notes to the Condensed Consolidated Financial Statements. Forward-Looking Information: Certain Cautionary Statements The statements contained in this report that are not historical facts are "forward-looking statements" (as such term is defined in the Private Securities Litigation Reform Act of 1995), which can be identified by the use of forward-looking terminology such as: "estimates," "projects," "anticipates," "expects," "intends," "believes," "plans," "forecasts" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. Our actual results could differ materially from those anticipated in such forward-looking statements as a result of certain factors. For a discussion of some of the factors that could cause actual results to differ, see the discussion under "Risk Factors" in Part I, Item 1A of Form 10-K. We wish to caution the reader that these forward-looking statements, including, without limitation, statements regarding expected cost reductions, anticipated or expected results of the implementation of our cost-reduction initiatives and new business initiatives, anticipated financial benefits of exiting the digital camera market and increasing our focus on the sale of single-use and traditional film cameras, the consequences of the loss of any significant customer, potential new business initiatives, the acquisition of new customers, the development of our business, anticipated revenues or capital expenditures, our ability to improve gross margin percentages on the sale of our products, projected profits or losses, our expectations regarding the amount of expected cash payments related to severance costs, our assessment of and estimates of royalty payments in connection with intellectual property claims, the vesting period over which unrecognized compensation expense will be realized, the sufficiency of our working capital and cash to fund our operations in the next twelve months, our expectations regarding the liquidity of our auction rate securities, our belief regarding the lack of merit in pending litigations, our belief regarding the lack of a material impact that the resolution of routine legal matters will have in our business, coverage from our insurance carrier in connection with pending litigations, our expectation that there is no material tax exposure to the Company on account of our operations in the People's Republic of China and the consequences of the loss of our authorizations in the People's Republic of China and other statements contained in this report regarding matters that are not historical facts, are only 27 estimates or predictions. No assurance can be given that future results will be achieved. Actual events or results may differ materially as a result of risks facing us or of actual results differing from the assumptions underlying such statements. In particular, our expected results could be adversely affected by, among other things, regulatory conditions negatively affecting our product costs, production difficulties or economic conditions negatively affecting our suppliers, customers or the market for our products, by our inability to develop and maintain relationships with suppliers, customers or licensors, by our inability to negotiate favorable terms with our suppliers, customers or licensors, by a further decline in the unit sales of our single-use and traditional film cameras, by a further decrease in the average selling price of our film camera products, or by the continued failed auctions and the market uncertainty for auction rate securities. Obtaining the results expected from the introduction of any new products or product lines may require successful and timely completion of development, successful and timely ramp-up of full-scale production and customer and consumer acceptance of those products, as to all of which there can be no assurance. In addition, future relationships or agreements may require an ability to meet high quality and performance standards and to implement and sustain production successfully at greatly increased volumes, as to all of which there can be no assurance. There also can be no assurance that products and new business initiatives under consideration or development will be successfully developed or that once developed such products and initiatives will be commercially successful. Any forward-looking statements contained in this report represent our estimates only as of the date of this report, or as of such earlier dates as are indicated herein, and should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change. Item 3. Quantitative and Qualitative Disclosures about Market Risk. During the reporting period, except as disclosed in our discussion relating to auction rate securities in Part 1, Item 2 under Uncertainties in the Credit Markets and elsewhere in this Quarterly Report on Form 10-Q, there have been no material changes in the disclosures set forth in Part II, Item 7A in our Form 10-K for the fiscal year ended June 30, 2007. Item 4T. Controls and Procedures. (a) Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), designed to ensure that information required to be disclosed in our filings under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (2) accumulated and communicated to our management, including the principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. Our management has reviewed and evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q. Based on that evaluation, our principal executive officer and principal financial officer concluded that as of December 29, 2007, our disclosure controls and procedures were effective in providing reasonable assurance of achieving their objectives as described above. (b) Changes in Internal Control over Financial Reporting No change in our internal control over financial reporting has occurred during the quarter ended December 29, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. PART II. OTHER INFORMATION - --------------------------- Item 1. LEGAL PROCEEDINGS See Part I, Item 1, Financial Statements, Note 10 - Litigation and Settlements in the Notes to the Condensed Consolidated Financial Statements. 28 Item 1A. RISK FACTORS Except as set forth below, there have been no material changes in the risk factors set forth in Part 1, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended June 30, 2007. Continued failure of auctions of our auction rate securities can continue to effect our liquidity. As of December 29, 2007, we had $27.8 million invested in certain auction rate securities, of which $25.5 million were classified as "Long-term investments" on our condensed consolidated balance sheet. Our portfolio of auction rate securities are AAA rated, long-term debt obligations secured by student loans, with approximately 100% of such collateral being guaranteed by the U.S. Government under the Federal Family Education Loan Program. Liquidity for these securities has been provided by an auction process that resets the applicable interest rate at pre-determined intervals usually every 28-35 days. In the past, the auction process allowed investors to obtain immediate liquidity, if needed, by selling the securities at face value. Current disruptions in the credit markets have adversely affected the auction market for these types of securities. We have recently experienced failed auctions for each of our auction rate securities that have gone to auction resulting in our inability to sell most of these securities. The auction rate securities continue to pay interest at default interest rates which are generally higher than the current market rate and there has been no change in the ratings of these securities to date. Based on our expected operating cash flows and other sources of cash, cash equivalents and short-term investments, it is possible that the potential lack of liquidity in our auction rate security investments could adversely affect our liquidity and our ability to fund our operations. We cannot predict whether future auctions related to our auction rate securities will be successful. We are currently seeking alternatives for reducing our exposure to the auction rate market, but may not be able to identify any such alternative. Although we currently have sufficient working capital to finance our operations in the near term, if our working capital is insufficient in the future and we are not able to monetize some or all of our auction rate securities or other assets at that time, it could have a material adverse effect on our ability to finance our future ongoing operations. Continued failure of auctions of our auction rate securities may impair the value of our auction rate securities. If any of the issuers of the auction rate securities are unable to successfully close future auctions and/or their credit ratings deteriorate and if the market values of our auction rate securities permanently decline, we may be required to record an impairment charge on these investments. If we are required to record an impairment charge on these investments, it could have a material adverse effect on our financial condition and results of operations. We are exposed to political, economic and other risks that arise from operating a multinational business. We have significant operations outside the United States. We currently have operations in the Americas, Europe and Asia. Further, we obtain raw materials, components and finished camera products from foreign suppliers, particularly in Asia, and import into the PRC those materials, components and products obtained from suppliers outside of the PRC which may require certain approvals by the PRC, including but not limited to certificates, permits and licenses. Accordingly, our business is subject to the political, economic, regulatory and other risks that are inherent in operating in foreign countries. These risks include, but are not limited to: o the difficulty of ensuring that foreign suppliers and workers are complying with applicable laws, rules and regulations regarding manufacturing, safety and environmental standards; o the difficulty of enforcing agreements, collecting receivables and protecting assets through foreign legal systems; o trade protection measures and import or export licensing requirements; o the imposition of tariffs, exchange controls or other restrictions; o difficulty in staffing and managing widespread operations and the application of foreign labor regulations; o inability to obtain approvals or authorizations necessary to import materials, components and/or products into our manufacturing facility or increased costs relating thereto; 29 o required compliance with a variety of foreign laws and regulations; o changes in the general political and economic conditions in the countries where we operate, particularly in emerging markets; and o increased costs and risks of doing business in a number of foreign jurisdictions. We are currently reliant on certain authorizations by the PRC to import materials used in the manufacture of our products into our manufacturing facility. Our current authorization, which expires during the quarter ending September 27, 2008, includes limitations on our ability to import certain materials into the PRC and we are uncertain whether further authorizations will be issued once we have reached those limitations or what the terms of any such further authorization will be. The inability to obtain a further authorization on reasonable terms, although not expected to impact our ability to manufacture our products, may have a material adverse effect on our results of operations. Our business depends in part on our ability to successfully anticipate and effectively manage these and other risks. We cannot assure you that such risks will not have a material adverse effect on our business, financial condition and results of operations. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS We held our 2007 annual meeting of shareholders on December 13, 2007, to re-elect four directors to serve until the next annual meeting of shareholders and until their successors are duly elected and qualified, to approve the Concord Camera Corp. Fiscal 2008 Incentive Plan and to ratify the appointment of BDO Seidman, LLP as our independent registered public accounting firm for fiscal 2008. The names of the nominees whose terms expired at our 2007 annual meeting of shareholders and who were re-elected to serve as directors until the next annual meeting of shareholders are as follows: Nominee For Withheld Vote - ------- --- ------------- Ira B. Lampert 3,607,579 1,536,507 Ronald S. Cooper 4,348,063 796,022 Morris H. Gindi 4,346,682 797,403 William J. O'Neill, Jr. 4,320,571 823,514 The shareholders approved the Concord Camera Corp. Fiscal 2008 Incentive Plan by the following vote: 2,783,793 votes "for"; 679,720 votes "against"; and 8,806 abstentions. The shareholders ratified the appointment of BDO Seidman, LLP as our independent registered public accounting firm for fiscal 2008 by the following vote: 5,009,745 votes "for"; 120,470 votes "against"; and 13,869 abstentions. 30 Item 6. EXHIBITS
No. Description Method of Filing - --- ----------- ---------------- 3.1 Certificate of Incorporation, as amended Incorporated by reference to the Company's annual report through May 9, 2000 on Form 10-K for the year ended July 1, 2000. 3.2 Restated By-Laws, as amended through July Incorporated by reference to the Company's annual report 12, 2004 on Form 10-K for the year ended July 3, 2004. 3.3 Certificate of Amendment (No. 7) of Incorporated by reference to the Company's current report Certificate of Incorporation, dated on Form 8-K filed November 7, 2006. November 2, 2006 3.4 Certificate of Correction of Certificate of Incorporated by reference to the Company's current report Amendment (No. 7) to Certificate of on Form 8-K filed November 7, 2006. Incorporation, dated November 3, 2006 10.1 Renewal letter from Dah Sing Bank Limited Filed herewith. to Concord Camera HK Limited, dated November 21, 2007, renewing the financing facility until June 30, 2008 under revised conditions 10.2 Financing Agreement between Concord Keystone Filed herewith. Sales Corp. and The CIT Group/Commercial Services, Inc. dated October 16, 2007 10.3 Amendment No. 6 to Terms of Employment of Urs W. Incorporated by reference to the Company's current report Stampfli with the Company, effective as of on Form 8-K filed December 27, 2007. January 1, 2008 31.1 Certification of Chief Executive Officer Filed herewith. pursuant to Rule 13a-14(a)/15d-14(a) 31.2 Certification of Principal Financial Filed herewith. Officer pursuant to Rule 13a-14(a)/15d-14(a) 32.1 Certification of Chief Executive Officer Filed herewith. pursuant to 18 U.S.C. ss.1350 32.2 Certification of Principal Financial Filed herewith. Officer pursuant to 18 U.S.C. ss.1350
31 S I G N A T U R E Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CONCORD CAMERA CORP. ------------------------------- (Registrant) DATE: March 31, 2008 By: /s/ Blaine A. Robinson ----------------------------- (Signature) Blaine A. Robinson, Vice President - Finance, Treasurer and Assistant Secretary (Principal Financial and Accounting Officer and Duly Authorized Officer) 32 Exhibit Index No. Description - --- ----------- 10.1 Renewal letter from Dah Sing Bank Limited to Concord Camera HK Limited, dated November 21, 2007, renewing the financing facility until June 30, 2008 under revised conditions 10.2 Financing Agreement between Concord Keystone Sales Corp. and The CIT Group/Commercial Services, Inc. dated October 16, 2007 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) 31.2 Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. ss.1350 32.2 Certification of Principal Financial Officer pursuant to 18 U.S.C. ss.1350 33 EX-10.1 2 e31059ex10_1.txt BANK CREDIT FACILITY Exhibit 10.1 (LOGO) Dah Sing Financial Centre Dah Sing Bank 108 Gloucester Road, Hong Kong 21st November, 2007 Private & Confidential Concord Camera HK Ltd. 14/F, ADP Pentagon Centre, 98 Texaco Road Tsuen Wan, N.T. Attn.: Mr. Paul Wong Dear Sirs, Re: Banking Facilities We have the pleasure to inform you that we have revised the under-mentioned banking facilities in your favour to expire on 30th June, 2008 subject to the following terms and conditions: OPENING OF LETTER OF CREDIT &/OR DRAFT LOAN (30 DAYS) &/OR NEGOTIATING EXPORT L/C WITH LETTER OF GUARANTEE &/OR OUTWARD BILLS LOAN (30 DAYS) &/OR TRUST RECEIPT (120 DAYS) &/OR INVOICE FINANCING (120 DAYS) &/OR PACKING LOAN (120 DAYS) &/ADVANCE AGAINST RECEIVABLES (120 DAYS) ..................USD1,000,000.00 Interest Rate: Hong Kong Dollar : @1.5% p.a. over HK Inter-Bank Offer Rate; United States Dollar : @1.5% p.a. over London Inter-bank Offer Rate Other Currency : @1.5% p.a. over Dah Sing Bank's Base Rate. - -------------------------------------------------------------------------------- Telephone: 2507 8866 Cable: Dahsingbank Telex: 74063 DSB HX Fax: 2598 5052 Website: www.dahsing.com DahSing Bank, Ltd. -2- 21st November, 2007 Concord Camera HK Ltd. Notes: 1. Maximum tenor for D/L and T/R under one transaction is not to exceed 120 days. 2. L/C commission, commission in lieu of exchange and HKD bills commission to be charged at: 1/4% for the first USD50,000.00; 1/16% for the balance. 3. Packing loan is up to 80% of export L/C amount and tenor is set for 120 days from date of advance or expiry date of export L/C whichever is earlier. 4. Invoice Financing is restricted to the following suppliers: - Ability Enterprise Co. Ltd., Taiwan - Gauss Electronics Co. Ltd., Hong Kong - Kin Sang Chemical Ltd, Hong Kong - Shenzhen Laiyinda Industrial Co. Ltd., Shenzhen, PRC - Golden Eagle (Tianjin) Electronics Co. Ltd., Tianjin, PRC 5. For AAR, the advance is up to 90% of the sales invoices to the buyers and documents no need to send out through our bank. It is also restricted to the buyer Boots (Retail Buying) Ltd., England. 6. Any excess on bills line should be against earmarking its HKD current account or USD current account. Terms and Conditions: 1. Against charge to us fixed deposit for amount not less than USD1,000,000.00. 2. Audited financial statements of the Concord Camera HK Ltd. to be submitted for our reference not later than nine months from the respective statement date. 3. Renewal fee of HKD5,000.00 is to be charged by us. Other Terms and Conditions The above credit facilities are available for your acceptance and/or draw down within 2 months from the date hereof and are subject to complete collateral and/or documentation at all times. The facilities are subject to review at any time and also subject to our overriding right of withdrawal and repayment on demand. The facility shall be subject to termination or cancellation at any time unconditionally by the bank without giving any prior notice or reason therefore. DahSing Bank, Ltd. -3- 21st November, 2007 Concord Camera HK Ltd. The Borrower and/or Guarantor hereby undertakes to inform the bank as soon as there is any change in the directorship or partners of the company or partnership. In respect of the Code of Banking Practice, we would draw to your attention that by accepting this facility letter, you have given your consent to our providing, from time to time, relevant information or documents in respect of the above facilities or any subsequent amendment/renewal thereof including but not limited to loan outstanding, statement of account, copy of contract evidencing the obligation guaranteed and copy of formal demand for overdue payments to the guarantor(s) or securities providers of the facilities. Please note that Section 83 of the Banking Ordinance has imposed on us as a licensed bank certain limitations on advances to persons related to our directors and employees. In acknowledging this Facility Letter, you undertake to advise us whether you are in any way related to any of our directors or employees within the meaning of Section 83. In the absence of such advice, we will assume that you are not so related. You are also requested to advise us in writing should you become so related subsequent to acknowledging this Facility Letter. We offer full range of commercial banking services. As our valued clients, we are pleased to provide you with professional services and esteemed services at privileged offerings. The details of our contacts are as follows: Corporate Card/Purchasing Card Connie Cheung Tel: 8108-6382 Mandatory Provident Fund Larry Lau Tel: 2507-8778 General Insurance Jack Ng Tel: 2808-5202 This supersedes all our previous letters concerning banking facilities. Please confirm your acceptance of the above by signing and returning to us the duplicate copy of this letter at your earliest convenience. Yours faithfully, For and on behalf of Dah Sing Bank, Limited Henry P.H. Lau - --------------------------------- Authorized Signature Commercial Banking Division HL/(3916-001)/mm EX-10.2 3 e31059ex10_2.txt FINANCING AGREEMENT Exhibit 10.2 FINANCING AGREEMENT Effective as of October 16, 2007 (the "Effective Date"), THE CIT GROUP/COMMERCIAL SERVICES, INC., a New York corporation, with offices located at Two Wachovia Center, Suite 2500, 301 South Tryon Street, Charlotte, North Carolina 28202 (hereinafter "CIT"), is pleased to confirm, the terms and conditions under which CIT shall make loans and other financial accommodations to CONCORD KEYSTONE SALES CORP., an Illinois corporation, with its principal office located at the address set forth in Section 1(e) of the Schedule (herein the "Company"). SECTION 1 DEFINITIONS As used in this Agreement: Accounts shall mean any and all of the Company's present and future: (a) accounts (as defined in the UCC); (b) instruments, documents, chattel paper (including electronic chattel paper) (all as defined in the UCC) relating to the foregoing; (c) unpaid seller's or lessor's rights (including rescission, replevin, reclamation, repossession and stoppage in transit) relating to the foregoing or arising therefrom; (d) rights to any goods represented by any of the foregoing, including rights to returned, reclaimed or repossessed goods; (e) reserves and credit balances arising in connection with or pursuant to this Agreement; (f) guaranties, other supporting obligations, payment intangibles and letter of credit rights (all as defined in the UCC) relating to any of the foregoing; (g) insurance policies or rights relating to any of the foregoing; (h) general intangibles pertaining to any of the foregoing (including rights to payment, including those arising in connection with bank and non-bank credit cards), and all books and records and any electronic media and software relating thereto; (i) notes, deposits or other property of the Company's account debtors securing the obligations owed by such account debtors to the Company; and (j) all Proceeds of any of the foregoing. Agreement shall mean this Financing Agreement, together with the Schedule and any other schedules, exhibits, supplements or annexes hereto, all as may be renewed, amended, restated or supplemented from time to time. Availability shall mean, at any time, the amount by which (a) the lesser of the Revolving Credit Limit or the Borrowing Base at such time exceeds (b) the sum at such time of the outstanding balance of the Revolving Loan Account plus the undrawn amount of all outstanding Letters of Credit. Availability Reserve shall mean an amount equal to the sum of: (a) any reserve which CIT may establish from time to time pursuant to the express terms of this Agreement; plus (b) any additional reserves identified in Section 2.3 of the Schedule; plus (c) such other reserves against Availability as CIT deems necessary in the exercise of its reasonable business judgment as a result of (i) negative forecasts and/or trends in the Company's business, industry, prospects, profits, operations or financial condition or (ii) other issues, circumstances or facts that could otherwise negatively impact the Company or its business, prospects, profits, operations, industry, financial condition or assets. Base Rate shall mean the rate of interest per annum announced by JPMorgan Chase Bank (or its successor) from time to time as its prime rate in effect at its principal office in New York City, which rate is not intended as the lowest rate of interest charged by JPMorgan Chase Bank to its borrowers. Base Rate Loan shall mean a loan outstanding under this Agreement when the interest rate applicable thereto is based upon the Base Rate. Borrowing Base shall have the meaning set forth in Section 2.2 of the Schedule. Business Day shall mean any day on which CIT is open for business. CIT's Bank Account shall mean CIT's bank account at JPMorgan Chase Bank (or its successor) in New York, New York or such other account of CIT as CIT may designate from time to time. CIT's System shall mean CIT's StuckyNet or other internet-based loan accounting and reporting system. Collateral shall mean all present and future Accounts, Inventory, Documents of Title and Other Collateral. Default shall mean any event specified in Section 8.1 hereof, regardless of whether any requirement for the giving of notice, the lapse of time, or both, or any other condition, event or act has occurred or been satisfied. Depository Account shall mean each bank account (and the related lockbox, if any) subject to CIT's control that is established by CIT, at CIT's option, or the Company pursuant to Section 2.1.2 or Section 5.1.11 hereof. Documents of Title shall mean all of the Company's present and future documents (as defined in the UCC) relating to Inventory, and any and all warehouse receipts, bills of lading, shipping documents, chattel paper, instruments and similar documents relating to Inventory, all whether negotiable or non-negotiable, and all Proceeds of any of the foregoing. Eligible Accounts shall mean the gross amount of the Company's Trade Accounts that are subject to a valid, exclusive, first priority and fully perfected security interest in favor of CIT, which conform to the warranties contained herein and which, at all times, continue to be acceptable to CIT in the exercise of its reasonable business judgment, less, without duplication, the sum of: (a) actual returns, discounts, claims, disputes, credits and allowances of any nature (whether issued, owing, granted, claimed or outstanding), plus (b) reserves for such Trade Accounts that arise from, or are subject to or include: (i) sales to the United States of America, any state or other governmental entity or to any 2 agency, department or division thereof, except for any such sales as to which the Company has complied with the Assignment of Claims Act of 1940 or any other applicable statute, rules or regulation to CIT's satisfaction in the exercise of its reasonable business judgment; (ii) foreign sales, other than sales which otherwise comply with all of the other criteria for eligibility hereunder and are (x) secured by letters of credit (in form and substance satisfactory to CIT) issued or confirmed by, and payable at, banks acceptable to CIT having a place of business in the United States of America, or (y) to customers residing in Canada; provided that, such Accounts are payable in United States Dollars; (iii) Accounts that remain unpaid more than the earlier of ninety (90) days from invoice date or sixty (60) days from due date; (iv) contra accounts; (v) sales to any subsidiary (direct or indirect) or parent (direct or indirect) of the Company, or to any other person or entity otherwise affiliated with the Company or with any shareholder, subsidiary (direct or indirect) or parent (direct or indirect) of the Company in any way; (vi) bill and hold (deferred shipment), consignment sales, guaranteed sales, sale and return, sale on approval or other terms under which payment by the account debtor may be conditional or contingent; (vii) sales to any customer which is either (w) insolvent, (x) the debtor in any bankruptcy, insolvency, arrangement, reorganization, receivership or similar proceedings under any federal or state law, (y) negotiating, or has called a meeting of its creditors for purposes of negotiating, a compromise of its debts, or (z) financially unacceptable to CIT or has a credit rating unacceptable to CIT; (viii) all sales to any customer if fifty-percent (50%) or more of the aggregate dollar amount of all outstanding invoices to such customer are unpaid more than the earlier of ninety (90) days from invoice date or sixty (60) days from due date; (ix) the amount at any time that the aggregate outstanding sales to Walgreen Co. and/or its affiliates exceeds forty-five percent (45%) or more of all Eligible Accounts at such time; (x) the amount at any time that the aggregate outstanding sales to Wal-Mart Stores Inc. and/or its affiliates exceeds sixty percent (60%) or more of all Eligible Accounts at such time; (xi) the amount at any time that the aggregate outstanding sales to any customer (other than Wal-Mart Stores Inc. or Walgreen Co.) and/or its affiliates exceeds twenty percent (20%) or more of all Eligible Accounts at such time; (xii) pre-billed receivables and receivables arising from progress billings; and (xiii) sales not payable in United States currency; plus (c) reserves established by CIT to account for increases in the dilution of the Company's Trade Accounts above the Company's historical dilution levels as determined by CIT in the exercise of its reasonable business judgment; plus (d) such other reserves against Trade Accounts as CIT deems necessary in the exercise of its reasonable business judgment and which are customary either in the commercial finance industry or in the lending practices of CIT. It is understood and agreed that: (1) CIT may, but shall not be obligated to, increase from time to time the concentration percentages contained in clauses (b)(ix), (b)(x) and (b)(xi) above if requested by the Company, such increases to be in amounts and for periods of time determined by CIT in its reasonable credit judgment based on information provided to CIT by the Company; and 3 (2) CIT may reduce the percentage contained in clause (b)(x) above based on CIT's reasonable credit judgment but not below forty-five percent (45%). Eligible Inventory shall mean the gross amount of the Company's Inventory that is subject to a valid, exclusive, first priority and fully perfected security interest in favor of CIT and that conforms to the warranties contained herein and that, at all times, continues to be acceptable to CIT in the exercise of its reasonable business judgment, less, without duplication: (a) all work-in-process; (b) all supplies (other than raw materials); (c) all Inventory not present in the United States of America except for Inventory in-transit to the Company's customers located in Canada; (d) all Inventory returned or rejected by the Company's customers (other than goods that are undamaged and resalable in the normal course of business) and goods to be returned to the Company's suppliers; (e) all Inventory in the possession of, or located with, a warehouseman, bailee, third party processor, or other third party (other than carriers engaged by the Company), unless such warehouseman, bailee, third party processor or third party has executed a notice of security interest agreement or waiver agreement (in form and substance satisfactory to CIT); and (f) the amount of such other reserves against Inventory as CIT deems necessary in the exercise of its reasonable business judgment, including, without limitation, reserves for special order, or private label goods, Inventory subject to a license agreement, discontinued, slow-moving and obsolete Inventory, market value declines, bill and hold (deferred shipment), shrinkage and any applicable customs, freight, duties and taxes. Eligible In-Transit Inventory shall mean the gross amount of the Company's finished goods Inventory that is in transit to the United States of America, that conforms to the warranties contained herein, that at all times continues to be acceptable to CIT in the exercise of its reasonable business judgment and that meets the following additional requirements: (a) such Inventory is shipped via shipping terms that provide for the passage of title of such Inventory to the Company at or prior to the time such Inventory is loaded on the carrier; (b) all documents issued by the carrier or bailee thereof are negotiable and issued in the name of CIT; (c) such Inventory is covered by cargo insurance reasonably acceptable to CIT with CIT as loss payee; and (d) a bailment agreement, in form and content satisfactory in all respects to CIT, has been duly executed and delivered to CIT by each freight forwarder or customs agent with respect to such Inventory or related Documents of Title, less such reserves against in-transit Inventory as CIT deems necessary in the exercise of its reasonable business judgment, including, without limitation, reserves for any applicable customs, freight, duties and taxes. ERISA shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and the rules and regulations promulgated thereunder from time to time. Event of Default shall have the meaning given to such term in Section 8.1 hereof. GAAP shall mean generally accepted accounting principles in the United States of America as in effect from time to time and for the period as to which such accounting principles are to apply. Inventory shall mean all of the Company's present and hereafter acquired inventory (as defined in the UCC) including, without limitation, all merchandise and inventory in all stages of 4 production (from raw materials through work-in-process to finished goods), and all additions, substitutions and replacements thereof, wherever located, together with all goods and materials used or usable in manufacturing, processing, packaging, selling, promoting or shipping of the foregoing, and all Proceeds of any of the foregoing. Inventory Formula Amount shall mean the lesser of (a) sixty percent (60%) of the aggregate value of the Eligible Inventory, valued at the lower of cost or market on a first in, first out basis or (b) eighty-five percent (85%) of the Net Forced Liquidation Value. In-Transit Inventory Formula Amount shall mean the lesser of (a) sixty percent (60%) of the aggregate value of the Eligible In-Transit Inventory, valued at cost, (b) eighty-five percent (85%) of the Net Forced Liquidation Value. Issuing Institution shall mean CIT, any affiliate of CIT or any bank issuing a Letter of Credit for the Company. Letters of Credit shall mean all letters of credit issued for or on behalf of the Company with the assistance of CIT by an Issuing Institution, and any banker's acceptances covered by a Letter of Credit Guaranty in accordance with Section 2.2 hereof. Letter of Credit Guaranty shall mean any guaranty or similar agreement delivered by CIT to an Issuing Institution of the Company's reimbursement obligation under such Issuing Institution's reimbursement agreement, application for letter of credit or other like document. Letter of Credit Sub-Line shall mean the commitment of CIT to assist the Company in obtaining Letters of Credit in an aggregate amount set forth in Section 2.4 of the Schedule. LIBOR Rate shall mean at any time of determination, and subject to availability, for each calendar month, the higher of the one-month London Interbank Offered Rate paid in London on dollar deposits from other banks as published under "Money Rates" in the New York City edition of the Wall Street Journal or, if there is no such publication or statement therein as to the London Interbank Offered Rate, then in any publication used in the New York City financial community. LIBOR Rate Loan shall mean a loan outstanding under this Agreement when the interest rate applicable thereto is based upon the LIBOR Rate. Loan Documents shall mean this Agreement, the other closing documents executed by the Company, and any other ancillary loan and security agreements executed by the Company from time to time in connection with this Agreement, all as may be renewed, amended, restated or supplemented from time to time. Net Forced Liquidation Value shall mean, at any time of determination, the product of (a) the cost of all of the Eligible Inventory at such time (determined on a first-in, first-out basis) multiplied by (b) the percentage of the cost of the Eligible Inventory that was determined by the 5 most recent appraisal of all of the Company's Inventory conducted in accordance with Section 6.8 hereof to be the net forced liquidation value of such Eligible Inventory. Obligations shall mean: (a) all loans, advances and other extensions of credit made by CIT to the Company or to others for the Company's account (including, without limitation, all Revolving Loans and all obligations of CIT under Letter of Credit Guaranties); (b) any and all other indebtedness, obligations and liabilities which may be owed by the Company to CIT and arising out of, or incurred in connection with, this Agreement or any of the other Loan Documents (including all Out-of-Pocket Expenses), whether (i) now in existence or incurred by the Company from time to time hereafter, (ii) secured by pledge, lien upon or security interest in any of the Company's assets or property or the assets or property of any other person, firm, entity or corporation, (iii) such indebtedness is absolute or contingent, joint or several, matured or unmatured, direct or indirect, or (iv) the Company is liable to CIT for such indebtedness as principal, surety, endorser, guarantor or otherwise; (c) all indebtedness, obligations and liabilities owed by the Company to CIT under any other agreement or arrangement now or hereafter entered into between the Company, on the one hand, and CIT, on the other hand, whether or not such agreement or arrangement relates to the transactions contemplated by this Agreement (including, without limitation, indebtedness for goods and services purchased by the Company from any party whose accounts are factored or financed by CIT); (d) indebtedness, obligations and liabilities incurred by, or imposed on, CIT as a result of environmental claims relating to the Company's operations, premises or waste disposal practices or disposal sites; (e) the Company's liabilities to CIT as maker or endorser on any promissory note or other instrument for the payment of money; and (f) the Company's liabilities to CIT under any instrument of guaranty or indemnity, or arising under any guaranty, endorsement or undertaking which CIT may make or issue to others for the Company's account, including any accommodations extended by CIT with respect to applications for Letters of Credit, CIT's acceptance of drafts or CIT's endorsement of notes or other instruments for the Company's account and benefit. Other Collateral shall mean: (a) all present and hereafter established lockbox, blocked account and other deposit accounts maintained with any bank or financial institution into which the proceeds of Collateral are or may be deposited (including the Depository Accounts); (b) all cash and other monies and property in the possession or control of CIT (including negative balances in the Revolving Loan Account and cash collateral held by CIT pursuant to this Agreement); (c) all books, records, invoices, ledger cards, bills of lading and other shipping evidence, statements, correspondence, credit files and other data relating to the Collateral or any account debtor, disks and related data processing software at any time evidencing or containing information relating to any of the Collateral described herein or otherwise necessary or helpful in the collection thereof or realization thereon; and (d) all Proceeds of any of the foregoing. Out-of-Pocket Expenses shall mean all of CIT's present and future costs, fees and expenses incurred from third parties in connection with this Agreement and the other Loan Documents, including, without limitation, (a) the cost of lien searches (including tax lien and judgment lien searches), pending litigation searches and similar items, (b) fees and taxes imposed in connection with the filing of any financing statements or other personal property security documents; (c) all costs and expenses incurred by CIT in opening and maintaining the Depository Accounts and any related lockboxes, depositing checks, and receiving and 6 transferring funds (including charges imposed on CIT for "insufficient funds" and the return of deposited checks); (d) note taxes and intangible taxes; (e) all appraisal fees and expenses payable by the Company under Section 6.8 hereof, and all reasonable costs, fees and expenses incurred by CIT in connection with any action taken under Section 6.7 hereof, including reasonable travel, meal and lodging expenses of CIT personnel; (f) all reasonable costs that CIT may incur to maintain the insurance required hereunder and all reasonable costs, fees and expenses incurred by CIT in connection with the collection of insurance proceeds with respect to the Collateral; (g) all reasonable costs, fees, expenses and disbursements of outside counsel hired by CIT to consummate the transactions contemplated by this Agreement (including the documentation and negotiation of this Agreement, the other Loan Documents and all amendments, supplements and restatements thereto or thereof), and to advise CIT as to matters relating to the transactions contemplated hereby; and (h) without duplication, all reasonable costs, fees and expenses incurred by CIT in connection with the administration, collection, liquidation, enforcement, protection and defense of the Obligations, the Collateral and CIT's rights under this Agreement, including, without limitation, all reasonable costs, fees, expenses and disbursements of outside counsel to CIT incurred as a result of a workout, restructuring, reorganization, liquidation, insolvency proceeding and in any appeals arising therefrom, whether incurred before, during or after the termination of this Agreement or the commencement of any case with respect to the Company or any subsidiary of the Company (as the case may be) under the United States Bankruptcy Code or any similar statute. Parent shall mean Concord Camera Corp., a New Jersey corporation. Permitted Encumbrances shall mean: (a) liens existing on the Closing Date and set forth in Section 1(g) of the Schedule; (b) statutory liens of landlords and liens of carriers, warehousemen, bailees, mechanics, materialmen and other like liens imposed by law, created in the ordinary course of business and securing amounts not yet due (or which are being contested in good faith, by appropriate proceedings or other appropriate actions which are sufficient to prevent imminent foreclosure of such liens), and with respect to which adequate reserves or other appropriate provisions are being maintained by the Company in accordance with GAAP; (c) deposits made (and the liens thereon) in the ordinary course of business of the Company (including, without limitation, security deposits for leases, indemnity bonds, surety bonds and appeal bonds) in connection with workers' compensation, unemployment insurance and other types of social security benefits or to secure the performance of tenders, bids, contracts (other than for the repayment or guarantee of borrowed money or purchase money obligations), statutory obligations and other similar obligations arising as a result of progress payments under government contracts; (d) liens granted to CIT by the Company; (e) liens of judgment creditors; provided that, such liens do not exceed $100,000 in the aggregate at any time (other than liens bonded or insured to the reasonable satisfaction of CIT); and (g) Permitted Tax Liens. Permitted Tax Liens shall mean liens for taxes not yet due and payable and liens for taxes that the Company is contesting in good faith, by appropriate proceedings which are sufficient to prevent imminent foreclosure of such liens, and with respect to which adequate reserves are being maintained by the Company in accordance with GAAP; provided that, in either case, such liens (a) are not filed of record in any public office, (b) are not senior in priority to the liens granted by the Company to CIT, or (c) do not secure taxes owed to the United States 7 of America (or any departmental or agency thereof) or any State or State authority, if applicable State law provides for the priority of tax liens in a manner similar to the laws of the United States of America. Proceeds shall have the meaning given to such term in the UCC, including, without limitation, all (a) payments or other proceeds from an insurance carrier with respect to any loss, casualty or damage to Collateral, and (b) payments received on account of any condemnation or other governmental taking of any Collateral. Renewal Date shall mean, initially, the date set forth in Section 6 of the Schedule and, subsequently, the same date in every year thereafter. Revolving Credit Limit shall mean the amount set forth in Section 2.1 of the Schedule. Revolving Line of Credit shall mean the commitment of CIT to make Revolving Loans pursuant to Section 2.1 hereof and assist the Company in opening Letters of Credit pursuant to Section 2.2 hereof, in an aggregate amount not to exceed the Revolving Credit Limit. Revolving Loan Account shall mean the account on CIT's books, in the Company's name, in which the Company will be charged with all Obligations in accordance with Section 2.1.3 hereof. Revolving Loans shall mean the loans made from time to time to or for the account of the Company by CIT pursuant to Section 2.1 of this Agreement. Schedule shall mean the Schedule attached hereto and incorporated herein by reference. Subordinated Debt shall mean all indebtedness of the Company (and the note(s) evidencing such indebtedness) that is subordinated to the prior payment and satisfaction of the Obligations pursuant to a subordination agreement between the subordinating creditor and CIT. Trade Accounts shall mean that portion of the Company's Accounts which arises from the sale of Inventory or the rendition of services in the ordinary course of the Company's business. UCC shall mean the Uniform Commercial Code as the same may be amended and in effect from time to time in the State of New York. SECTION 2 FINANCIAL COMMITMENTS Subject to the terms and conditions set forth in this Agreement, CIT agrees to make the following financial accommodations to the Company: 8 2.1 Revolving Loans and Collections 2.1.1 Amounts and Requests. Subject to the terms and conditions of this Agreement, CIT may make in its discretion loans and advances to the Company on a revolving basis in amounts requested by the Company, but not in excess of the Availability on the date of the request therefor or the funding thereof. All requests by the Company for a Revolving Loan must be received by CIT no later than 11:00 a.m., Charlotte, North Carolina time on the Business Day that a Revolving Loan is required. The Company hereby authorizes CIT to make Revolving Loans to the Company based upon a telephonic or e-mail request (or, if permitted by CIT, based upon a request posted on CIT's System) made by any officer or other employee of the Company that the Company has authorized in writing to request Revolving Loans hereunder, as reflected by CIT's records. Each telephonic, e-mail or posted request by the Company shall be irrevocable, and the Company agrees to confirm any such request for a Revolving Loan in a writing approved by CIT and signed by such authorized officer or employee, within one (1) Business Day of CIT's request for such confirmation. CIT shall have the right to rely on any telephonic, e-mail or posted request for a Revolving Loan made by anyone purporting to be an officer or other employee of the Company that the Company has authorized in writing to request Revolving Loans hereunder, without further investigation. 2.1.2 Handling of Proceeds of Collateral; Cash Dominion. (a) Collection of Accounts and Other Proceeds. The Company, at its expense, will enforce and collect payments and other amounts owing on all Accounts in the ordinary course of the Company's business subject to the terms hereof. The Company agrees to direct its account debtors and any credit card processors to send payments on all Accounts directly to a lockbox associated with a Depository Account or the Depository Account directly, as the case may be, and to include on all of the Company's invoices the address of such a lockbox as the sole address for remittance of payment. Notwithstanding the foregoing, should the Company ever receive any payment on an Account or other Proceeds of the sale of Collateral, including checks, cash, receipts from credit card sales and receipts, notes or other instruments or property with respect to any Collateral, the Company agrees to hold such proceeds in trust for CIT, separate from the Company's other property and funds, and to deposit such proceeds directly into a Depository Account not more than two (2) Business Days after receipt. (b) Transfer of Funds from Depository Accounts. Funds remaining on deposit in a Depository Account shall be transferred to CIT's Bank Account on each Business Day (except Veterans Day), and the Company agrees to take all actions reasonably required by CIT or any bank at which a Depository Account is maintained in order to effectuate the transfer of funds in this manner. Subject to Section 3.2.3 hereof, all amounts received from a Depository Account and any other proceeds of the Collateral deposited into CIT's Bank Account will, for purposes of calculating Availability and interest, be credited to the Revolving Loan Account on the date of deposit in CIT's Bank Account. No checks, drafts or other instruments received by CIT shall constitute final payment to CIT unless and until such instruments have actually been collected. 9 (c) New Depository Accounts. The Company agrees not to open any lockbox or new bank account into which Proceeds of Collateral are to be delivered or deposited unless concurrently with the opening of such lockbox and/or bank account, CIT, the Company and the bank which will maintain such lockbox or at which such account will be maintained, execute a depository account control agreement, in form and substance satisfactory to CIT with respect to such lockbox and/or related bank account. Upon compliance with the terms set forth above, such lockbox and/or bank account shall constitute a Depository Account for purposes of this Agreement. 2.1.3 Revolving Loan Account. CIT shall charge the Revolving Loan Account for all loans and advances made by CIT to the Company or for the Company's account, and at CIT's option for any other Obligations, including Out-of-Pocket Expenses, interest and fees when due and payable hereunder. The Company confirms that any charges which CIT may make to the Revolving Loan Account as provided herein will be made as an accommodation to the Company and solely at CIT's discretion, without notice to the Company. If a credit balance exists in the Revolving Loan Account, such credit balance shall not accrue interest in favor of the Company but shall be available to the Company at any time or times so long as no Default or Event of Default exists. 2.1.4 Repayment of Overadvances. If at any time the sum of the outstanding balance of the Revolving Loan Account and the undrawn amount of outstanding Letters of Credit exceed either the Revolving Credit Limit (or any applicable sublimits thereof) or the Borrowing Base at such time, the amount of such excess shall be immediately due and payable, unless CIT otherwise agrees in writing. Should CIT for any reason honor requests for loans or advances in excess of Availability, such loans or advances shall be made in CIT's sole discretion and subject to any additional terms CIT deems necessary. 2.1.5 Application of Proceeds of Collateral. Unless this Financing Agreement expressly provides otherwise, so long as no Event of Default shall have occurred and remain outstanding, CIT agrees to apply (i) all Proceeds of Trade Accounts and Inventory to the Revolving Loan Account and (ii) any other payment received by CIT with respect to the Obligations, in such order and manner as CIT may elect in its sole discretion. If an Event of Default shall have occurred and remain outstanding, CIT may apply all Proceeds of Collateral and all other payments received by CIT to the payment of the Obligations in such manner and in such order as CIT may elect in its sole discretion. 2.1.6 Monthly Statement. Within ten (10) Business Days after the end of each month, CIT agrees to prepare and make available to the Company (by access to CIT's System or as otherwise mutually agreed to by the Company and CIT), a statement showing the accounting for the charges, loans, advances and other transactions occurring between CIT and the Company during that month. Absent manifest error, each monthly statement shall be deemed correct and binding upon the Company and shall constitute an account stated between the Company and CIT unless CIT receives a written statement of exception from the Company within thirty (30) days of the date of such monthly statement. 10 2.1.7 Access to CIT's System. CIT shall provide to the Company access to CIT's System during normal business hours, for the purposes of (i) obtaining information regarding loan balances and Availability, and (ii) if permitted by CIT, making requests for Revolving Loans and submitting borrowing base certificates. Such access shall be subject to the following terms, in addition to all terms set forth on the website for CIT's System: (a) CIT shall provide to the Company an initial password for secured access to CIT's System. The Company shall provide CIT with a list of officers and employees that are authorized from time to time to access CIT's System, and the Company agrees to limit access to the password and CIT's System to such authorized officers and employees. After the initial access, the Company shall be solely responsible for (i) changing and maintaining the integrity of the Company's password and (ii) any unauthorized use of the Company's password or CIT's System by the Company's officers and employees. (b) The Company shall use CIT's System and the Company's information thereon solely for the purposes permitted above, and shall not access CIT's System for the benefit of third parties or provide any information obtained from CIT's System to third parties. CIT makes no representation that loan balance or Availability information is or will be available, accurate, complete, correct or current at all times. CIT's System may be inoperable or inaccessible from time to time, whether for required website maintenance, upgrades to CIT's System, or for other reasons, and in any such event the Company must obtain loan balance and Availability information, and (if permitted by CIT) make requests for Revolving Loans and submit borrowing base certificates using other available means. (c) The Company hereby confirms and agrees that CIT's System consist of proprietary software, data, tools, scripts, algorithms, business logic, website designs and interfaces and related intellectual property, information and documentation. CIT's System and related intellectual property, information and documentation are the sole and exclusive property of CIT, and the Company shall have no right, title or interest therein or thereto, except for the limited right to access CIT's System for the purposes permitted above. Upon termination of this Agreement, the Company agrees to cease any use of CIT's System. (d) All agreements, covenants and representations and warranties made by the Company in any borrowing base certificate submitted to CIT by means of CIT's System are incorporated herein by reference. 2.2 Letters of Credit 2.2.1 Amounts and Form. Subject to the terms and conditions of this Agreement, CIT agrees to either issue Letters of Credit or assist the Company in establishing or opening Letters of Credit with an Issuing Institution by joining in the applications for such Letters of Credit, and/or issuing one or more Letter of Credit Guaranties; provided that, the face amount of any such Letter of Credit shall not exceed Availability on the date of the request therefor or the issuance thereof and the aggregate undrawn amount of all outstanding Letters of Credit shall not at any time exceed the Letter of Credit Sub-Line. The terms, form and purpose of each Letter of 11 Credit and all documentation in connection therewith, and any amendments, modifications or extensions thereof must be mutually acceptable to CIT, the Issuing Institution and the Company. 2.2.2 Authority to Charge Revolving Loan Account. The Company hereby authorizes CIT, without notice to the Company, to charge the Revolving Loan Account with the amount of all indebtedness, liabilities and obligations of any kind incurred by CIT under a Letter of Credit or Letter of Credit Guaranty, including the charges of an Issuing Institution, as such indebtedness, liabilities and obligations are charged to or paid by CIT, or if earlier, upon the occurrence of an Event of Default. 2.2.3 Compliance of Goods, Documents and Shipments with Agreed Terms. CIT shall not be responsible for: (a) the existence, character, quality, quantity, condition, packing, value or delivery of the goods purporting to be represented by any documents relating to any Letter of Credit; (b) any difference or variation in the character, quality, quantity, condition, packing, value or delivery of the goods from that expressed in such documents; (c) the validity, sufficiency or genuineness of such documents or of any endorsements thereon, even if such documents should in fact prove to be in any or all respects invalid, insufficient, fraudulent or forged; (d) the time, place, manner or order in which shipment is made; (e) partial or incomplete shipment, or failure or omission to ship any or all of the goods referred to in the Letters of Credit or documents relating thereto; (f) any deviation from instructions; (g) delay, default, or fraud by the shipper and/or anyone else in connection with the goods or the shipping thereof; or (h) any breach of contract between the shipper or vendors and the Company. 2.2.4 Handling of Goods, Documents and Shipments. The Company agrees that any action taken by CIT in good faith, or any action taken by the Issuing Institution of whatever nature, under or in connection with a Letter of Credit, a Letter of Credit Guaranty, drafts or acceptances relating to such Letter of Credit or the goods subject thereto, shall be binding on the Company and shall not result in any liability whatsoever of CIT to the Company. CIT shall have the full right and authority to (a) clear and resolve any questions of non-compliance of documents, (b) give instructions as to acceptance or rejection of any documents or goods, (c) execute steamship or airway guaranties (and applications therefor), indemnities or delivery orders, (d) grant any extensions of the maturity of, time of payment for, or presentation of, any drafts, acceptances or documents, and (e) agree to any amendments, renewals, extensions, modifications, changes or cancellations of any of the terms or conditions of any of the applications, Letters of Credit, Letter of Credit Guaranties or drafts or acceptances relating to Letters of Credit. An Issuing Institution shall be entitled to comply with and honor any documents or instruments executed by or received solely from CIT, without notice to or consent from the Company. Notwithstanding any prior course of conduct or dealing with respect to the foregoing (including amendments to and non-compliance with any documents, and/or the Company's instructions with respect thereto), CIT may exercise its rights hereunder in its sole but reasonable business judgment. The Company agrees not to, without CIT's prior written consent, which consent shall not be unreasonably withheld: (a) execute any applications for steamship or airway guaranties, indemnities or delivery orders; (b) grant any extensions of the maturity of, time of payment for, or time of presentation of, any drafts, acceptances or documents; (c) agree to any amendments, renewals, extensions, modifications, changes or cancellations of any terms or conditions of any applications, Letters of Credit, drafts, or 12 acceptances; (d) clear or resolve any questions of non-compliance of documents; or (e) give any instructions as to acceptances or rejection of any documents or goods. 2.2.5 Compliance with Laws; Payment of Levies and Taxes. The Company agrees that (a) all necessary import and export licenses and certificates necessary for the import or handling of the Collateral will be promptly procured, (b) all foreign and domestic governmental laws and regulations in regard to the shipment and importation of the Collateral or the financing thereof will be promptly and fully complied with, and (c) any certificate in that regard that CIT may at any time request will be promptly furnished to CIT. In connection herewith, the Company represents and warrants to CIT that all shipments made under any Letter of Credit are and will be in compliance with the laws and regulations of the countries in which the shipments originate and terminate, and are not prohibited by any such laws and regulations. The Company assumes all risk, liability and responsibility for, and agrees to pay and discharge, all present and future local, state, federal or foreign taxes, duties, or levies pertaining to the importation and delivery of the Collateral. Any embargo, restriction, law, custom or regulation of any country, state, city, or other political subdivision, where the Collateral is or may be located, or wherein payments are to be made, or wherein drafts may be drawn, negotiated, accepted, or paid, shall be solely the Company's risk, liability and responsibility. 2.2.6 Subrogation Rights. Upon any payments made to an Issuing Institution under a Letter of Credit Guaranty, CIT shall acquire by subrogation, any rights, remedies, duties or obligations granted to or undertaken by the Company to the Issuing Institution in any application for Letters of Credit, any standing agreement relating to Letters of Credit, under the UCC or otherwise, all of which shall be deemed to have been granted to CIT and apply in all respects to CIT and shall be in addition to any rights, remedies, duties or obligations contained herein. SECTION 3 INTEREST, FEES AND EXPENSES 3.1 Interest 3.1.1 Interest on Revolving Loan Account. During the month or months that Revolving Loans are Base Rate Loans, interest on the daily debit balance of the Revolving Loan Account at the close of each day during each month shall be due and payable monthly on the first day of the immediately following month and shall accrue interest at the Base Rate plus 0.25% per annum. During the month or months that Revolving Loans are LIBOR Rate Loans, interest on the daily debit balance of the Revolving Loan Account at the close of each day during each month shall be due and payable monthly on the first day of the immediately following month and shall accrue interest at the LIBOR Rate plus 2.25% per annum. 3.1.2 Selection of Interest Rate. The Company may select the interest rate (i.e., either the Base Rate or the LIBOR Rate) that will apply to all Revolving Loans for a particular calendar month by giving notice to CIT not later than 11:00 a.m. (New York time) on the third (3rd) Business Day prior to the first day of such month. The Base Rate or the LIBOR Rate applicable to any month will be the Base Rate or the LIBOR Rate on the first day of such month, and such Base Rate or LIBOR Rate will remain constant throughout such month and will not fluctuate. If the Company does not notify CIT of its selection of the applicable interest rate (i.e., either the 13 Base Rate or the LIBOR Rate) for any month by 11:00 a.m. (New York time) on the third (3rd) Business Day prior to the first day of such month, the Company will be deemed to have selected for the next month the rate of interest then in effect, which rate will be reset to the Base Rate or the LIBOR Rate in effect on the first day of such month. For the calendar month in which the Closing Date occurs, all Revolving Loans shall be deemed to be outstanding as LIBOR Rate Loans. In the event of a Default or Event of Default, all Revolving Loans shall, at CIT's option, be deemed to be converted to Base Rate Loans, and the Company shall not be permitted to select the LIBOR Rate as the applicable rate of interest. All interest rates shall be calculated based on a 360-day year and actual days elapsed. 3.1.3 Default Interest Rate. Upon the occurrence of an Event of Default, all Obligations may, at the election of CIT, bear interest at a rate equal to two percent (2.0%) per annum greater than the applicable interest rate charged under this Section 3.1 until such Event of Default is waived by CIT. 3.1.4 Inability to Determine LIBOR Rate. Notwithstanding any other provision of this Agreement to the contrary, (a) if CIT determines in the exercise of its reasonable business judgment (which determination shall be conclusive and binding upon the Company) that by reason of circumstances affecting the interbank LIBOR market, adequate and reasonable means do not exist for ascertaining the LIBOR Rate or (b) if any law, regulation, treaty or directive shall make it unlawful for CIT to make or maintain any LIBOR Rate Loan or shall result in increasing the cost to CIT of making or maintaining any LIBOR Rate Loan, CIT shall give written notice of such determination to the Company, all LIBOR Rate Loans outstanding shall convert automatically to Base Rate Loans and the obligation of CIT thereafter to continue making LIBOR Rate Loans shall be suspended until CIT determines that adequate and reasonable means once again exist for ascertaining the LIBOR Rate or such law, regulation, treaty or directive ceases to be in effect and CIT rescinds the earlier notice. 3.2 Fees and Expenses 3.2.1 Loan Facility Fee. The Company agrees to pay CIT a Loan Facility Fee in the amount set forth in Section 3.2 of the Schedule, which shall be due and payable as set forth in Section 3.2 of the Schedule, and fully earned upon execution of this Agreement by CIT and the Company. 3.2.2 Line of Credit Fee. On the first day of each month, the Company agrees to pay to CIT a Line of Credit Fee equal to the following: (a) (i) the Revolving Credit Limit minus (ii) the average daily balance of the Revolving Loan Account and the average daily undrawn amount of Letters of Credit outstanding during the immediately preceding month, multiplied by, (b) the rate per annum set forth in Section 3.3 of the Schedule divided by twelve (12). Such Line of Credit Fee shall be calculated based on a 360-day year and actual days elapsed. 3.2.3 Annual Renewal Fee. Unless this Agreement is terminated pursuant to Section 9 hereof, the Company agrees to pay CIT an Annual Renewal Fee in the amount set forth in Section 3.4 of the Schedule, which shall be due and payable as set forth in Section 3.4 of the Schedule, and fully earned upon each Renewal Date. 14 3.2.4 Letter of Credit Guaranty Fees and Charges. In consideration of CIT providing its assistance in obtaining Letters of Credit pursuant to Section 2.2 hereof, the Company agrees to pay CIT: (a) the Letter of Credit Guaranty Fees equal to the rates and in the manner set forth in Section 3.5 of the Schedule; (b) all standard fees imposed by CIT for processing, amending, cancelling or handling the Letters of Credit and any drafts thereunder as set forth in Annex C attached hereto; and (c) any amounts paid or incurred by CIT or charged to CIT by an Issuing Institution under any Letter of Credit or the reimbursement agreement relating thereto, any application for Letters of Credit, Letter of Credit Guaranty or other like document which pertains either directly or indirectly to Letters of Credit. CIT may change the fees that are set forth in Annex C attached hereto from time to time upon notice to the Company; provided, however, any failure to give the Company such notice does not constitute a breach of this Agreement and does not impair CIT's ability to institute any such change. To effectuate any such change in such fees, CIT may in its discretion send or transmit to the Company a new Annex C which shall replace Annex C in effect on the date thereof. 3.2.5 Standard Operational Fees. In addition to all Out-of-Pocket Expenses, the Company agrees to pay CIT (a) CIT's standard fees for the use of CIT's in-house legal department relating to any and all modifications, waivers, releases, legal file reviews or additional collateral with respect to this Agreement, the Collateral and/or the Obligations, (b) CIT's standard charges for any employee of CIT used to conduct any of the examinations, verifications, inspections, physical counts and other valuations (currently $1,000 per person, per day), and (c) CIT's standard charges for each wire transfer made by CIT to or for the benefit of the Company (currently $30 per wire); provided that, such standard charges may be increased by CIT from time to time. Such charges shall be due and payable in accordance with CIT's standard practices, as in effect from time to time. 3.2.6 Out-of-Pocket Expenses. The Company agrees to reimburse or pay CIT for all Out-of-Pocket Expenses when charged to or paid by CIT. SECTION 4 COLLATERAL 4.1 Grant of Security Interest. As security for the prompt payment in full of all Obligations, the Company hereby pledges and grants to CIT a continuing general lien upon, and security interest in, all of the Collateral. The security interests granted hereunder shall extend and attach to all Collateral which is presently in existence or hereafter acquired and which is owned by the Company or in which the Company has any interest, whether held by the Company or by others for the Company's account, and wherever located. 4.2 Nature of Security Interest. (a) The rights and security interests granted to CIT hereunder shall continue in full force and effect, notwithstanding the termination of this Agreement or the fact that the Revolving Loan Account may, from time to time, be temporarily in a credit position, until the termination of this Agreement and the full and final payment and satisfaction of the Obligations. Any reserves or balances to the credit of the Company (in the Revolving Loan Account or otherwise), and any other property or assets of the Company in the possession of CIT, may be held by CIT as Other Collateral, and applied in whole or partial 15 satisfaction of such Obligations when due, subject to the terms of this Agreement. The liens and security interests granted to CIT herein and any other lien or security interest which CIT may have in any other assets of the Company secure payment and performance of all present and future Obligations. (b) Notwithstanding CIT's security interests in the Collateral, to the extent that the Obligations are now or hereafter secured by any assets or property other than the Collateral, or by the guaranty, endorsement, assets or property of any other person, CIT shall have the right in its sole discretion to determine which rights, security, liens, security interests or remedies CIT shall at any time pursue, foreclose upon, relinquish, subordinate, modify or take any other action with respect to, without in any way modifying or affecting any of such rights, security, liens, security interests or remedies, or any of CIT's rights under this Agreement. 4.3 Limited License. Regardless of whether CIT's security interests in any of the General Intangibles has attached or is perfected, the Company hereby irrevocably grants to CIT a royalty-free, non-exclusive license to use the Company's trademarks, copyrights, patents and other proprietary and intellectual property rights, in connection with the (i) advertisement for sale, and the sale or other disposition of, any finished goods Inventory by CIT in accordance with the provisions of this Agreement, and (ii) if applicable, the manufacture, assembly, completion and preparation for sale of any unfinished Inventory by CIT in accordance with the provisions of this Agreement. 4.4 Collateral Reporting. Until the termination of this Agreement and the full and final payment and satisfaction of the Obligations, the Company agrees to furnish to CIT the reports, documents and information listed in Section 4.1 of the Schedule. 4.5 Collateral Representations, Warranties and Covenants. 4.5.1 Generally. The Company represents, warrants and agrees that: (a) upon the filing of UCC financing statements covering the Collateral in all required jurisdictions, this Agreement creates a valid, perfected and first priority security interest in the Collateral in which a security interest may be perfected by filing of a UCC financing statement in the appropriate state or jurisdiction and the security interests granted herein constitute and shall at all times constitute the first and only liens on the Collateral except for Permitted Encumbrances; (b) the Company is, or will be at the time additional Collateral is acquired by the Company, the absolute owner of the Collateral with full right to pledge, sell, transfer and create a security interest therein, free and clear of any and all claims or liens in favor of others except for Permitted Encumbrances; and (c) the Company will, at its expense, forever warrant and, at CIT's request, defend the same from any and all claims and demands of any other person. 4.5.2 Agreements Regarding Accounts and Inventory. (a) The Company represents and warrants to CIT that: (i) each Trade Account is, or will be when an additional Trade Account is created, based on an actual and bona fide sale and delivery of Inventory or rendition of services to customers, made by the Company in the ordinary course of its business; (ii) the invoices evidencing any such Trade Accounts are and will at all times be in the name of the Company; (iii) the customers of the Company have accepted the Inventory or services, owe and 16 are obligated to pay the full amounts stated in the invoices according to their terms, without dispute, offset, defense, counterclaim or contra, except for disputes and other matters arising in the ordinary course of business which the Company has notified CIT pursuant to Section 4.4 hereof; and (iv) the Company's Inventory is and will at all times be marketable in ordinary course of the Company's business, and no Inventory has been or will be produced in violation of the Fair Labor Standards Act (29 U.S.C. ss.201 et seq.), as amended. (b) The Company agrees to issue credit memoranda promptly upon accepting returns or granting allowances and to deliver to CIT copies of such credit memoranda as and when required to do so under Section 4.4 hereof. In no event shall prior recourse to any Account or other security granted to or by the Company be a prerequisite to CIT's right to demand payment of any of the Obligations. In addition, the Company agrees that CIT shall have no obligation whatsoever to perform in any respect any of the Company's contracts or obligations relating to the Accounts. (c) The Company agrees not to acquire any Inventory on a consignment basis, nor co-mingle its Inventory with any goods of its customers or any other person (whether pursuant to any bill and hold sale or otherwise). The Company agrees to safeguard, protect and hold all Inventory for CIT's account and to make no sale or other disposition thereof except in the ordinary course of its business, on open account and on commercially reasonable terms consistent with the Company's past practices. Notwithstanding the ordinary course of the Company's business and the Company's past practices, the Company agrees not to sell Inventory on a consignment basis, nor retain any lien on or security interest in any Inventory sold by the Company. As to any such sale, transfer, lease or other disposition of Inventory, CIT shall have all of the rights of an unpaid seller, including stoppage in transit, replevin, rescission and reclamation. Upon the occurrence of an Event of Default which has not been waived in accordance with this Agreement and on notice from CIT, the Company agrees that all returned, reclaimed or repossessed merchandise or goods shall be set aside by the Company, marked with CIT's name (as secured party) and held by the Company for CIT's account. (d) Anything in this Financing Agreement to the contrary notwithstanding, CIT and the Company acknowledge and agree that the private-label Inventory manufactured by the Company for Walgreen Co. is impressed with a trademark owned by Walgreen Co., and thus the sale and/or other disposition thereof may be subject to certain limitations and restrictions. There is no written agreement between the Company and Walgreen Co. relating to such production or restrictions. 4.5.3 Agreements Regarding Equipment. The Company agrees to (i) maintain its equipment (as defined in the UCC) in good and substantial repair and condition, reasonable wear and tear excepted and (ii) make any and all repairs and replacements when and where necessary. 4.5.4 Agreements Regarding General Intangibles. The Company represents and warrants to CIT that as of the date hereof, the Company possesses all general intangibles (as defined in the UCC) necessary to conduct the Company's business as presently conducted. The Company agrees to maintain the Company's rights in, and the value of, all such general intangibles, and to pay when due all payments required to maintain in effect any licensed rights. 17 4.5.5 Letter of Credit Rights. The Company represents and warrants to CIT that as of the date hereof, the Company is not the beneficiary of any letter of credit. 4.5.6 Further Assurances. The Company agrees to comply with the requirements of all state and federal laws in order to grant to CIT valid and perfected first priority security interests in the Collateral. CIT is hereby authorized by the Company to file from time to time any financing statements or continuations, or amendments upon which CIT and the Company have agreed, covering the Collateral without the Company's signature in accordance with the provisions of the UCC. CIT shall provide the Company with notice of the filing of any such financing statements or amendments. The Company hereby consents to and ratifies the filing of any financing statements covering the Collateral by CIT on or prior to the Effective Date. The Company agrees to do whatever CIT may reasonably request, from time to time, by way of: (a) filing notices of liens, financing statements, agreed upon amendments, renewals and continuations thereof; (b) cooperating with CIT's agents and employees; (c) keeping Collateral records; (d) transferring proceeds of Collateral to CIT's possession in accordance with the terms hereof; (e) obtaining waivers from landlords, warehousemen, third party processors and mortgagees; and (f) performing such further acts as CIT may reasonably require in order to effect the purposes of this Agreement. SECTION 5 CONDITIONS PRECEDENT 5.1 Conditions Precedent to Initial Funding. Without limiting CIT's discretion to make loans and financial accommodations hereunder, CIT will not make the initial loans and financial accommodations hereunder unless the following conditions precedent have been satisifed: 5.1.1 Loan Documents. The Company shall have executed and delivered to CIT this Agreement and all Loan Documents required by CIT or its counsel to consummate the lending arrangement contemplated between the Company and CIT. 5.1.2 Lien Searches. CIT shall have received tax, judgment, litigation, and UCC searches from all jurisdictions reasonably required by CIT, and such searches shall verify that CIT has a first priority security interest in the Collateral and any other assets securing the Obligations, subject to Permitted Encumbrances. 5.1.3 Insurance. The Company shall have delivered to CIT evidence satisfactory to CIT that: (i) all insurance required by this Agreement is in full force and effect and (ii) CIT has been named as loss payee with respect thereto in a manner satisfactory to CIT. 5.1.4 UCC Filings. All UCC financing statements and similar documents required to be filed in order to create in favor of CIT a first priority perfected security interest in the Collateral and any other assets securing the Obligations (to the extent that such a security interest may be perfected by a filing under the UCC or applicable law) shall have been properly filed in each office in each jurisdiction required. CIT shall have received (i) acknowledgment copies of all such filings and (ii) evidence that all necessary filing fees, taxes and other expenses related to such filings have been paid in full. 18 5.1.5 Resolutions. CIT shall have received a copy of the resolutions of the Board of Directors, members or managers of the Company (as the case may be), authorizing the execution, delivery and performance of the Loan Documents, certified as the date hereof by the Secretary or manager of the Company (as the case may be), together with a certificate of such Secretary or manager (as the case may be) as to the incumbency and signature of the officers of the Company executing such Loan Documents. 5.1.6 Organizational Documents. CIT shall have received a copy of the Certificate or Articles of Incorporation of the Company, certified by the Secretary of State of the state of its formation and a copy of the by-laws, as amended through the date hereof, certified by the Secretary of the Company. 5.1.7 Officer's Certificate. CIT shall have received an executed officer's certificate for the Company, satisfactory in form and substance to CIT, certifying that as of the Effective Date, (a) the representations and warranties contained herein are true and correct in all material respects, (b) the Company is in compliance with all of the terms and provisions set forth herein and (c) no Default or Event of Default has occurred. 5.1.8 Appraisals. CIT shall have received and be satisfied with an appraisal of the Company's Inventory conducted by an appraiser selected by CIT. 5.1.9 Disbursement Authorizations. The Company shall have delivered to CIT all wire transfer instructions for the initial and subsequent loans and/or advances to be made under this Agreement in a form satisfactory to CIT. 5.1.10 Examination & Verification. CIT shall have completed and be satisfied with an updated examination and verification of the Accounts, Inventory and books and records of the Company. 5.1.11 Depository Accounts. The Company shall have established one or more Depository Accounts and CIT, the Company and each depository bank maintaining such Depository Accounts shall have entered into a depository account control agreement, in form and substance satisfactory to CIT. 5.1.12 Opinions. Counsel for the Company shall have delivered to CIT an opinion letter, in form and substance satisfactory to CIT. 5.1.13 Legal Restraints/Litigation. As of the Effective Date, there shall be no (x) injunction, writ or restraining order restraining or prohibiting the consummation of the financing arrangements contemplated under this Agreement, or (y) suit, action, investigation or proceeding (judicial or administrative) pending against the Company, any subsidiary of the Company or any of their assets, which, in the opinion of CIT, if adversely determined, could have a material adverse effect on the Company. 5.2 Conditions to Each Extension of Credit. Without limiting CIT's discretion to make loans and financial accommodations hereunder, CIT will not make any loans and financial accommodations hereunder (including, without limitation, the initial extension of credit) unless 19 the following conditions precedent are satisfied: 5.2.1 Representations and Warranties. Each of the representations and warranties made by the Company in or pursuant to this Agreement, including all representations and warranties in a borrowing base certificate, shall be true and correct in all material respects on and as of the date of such loan or financial accommodation as though made on and as of such date, except to the extent that such representations and warranties relate solely to an earlier date. 5.2.2 No Default or Material Adverse Change. No Default or Event of Default shall have occurred and be continuing or would result from the making of such loan or financial accommodation and no material adverse change shall have occurred in the financial condition, business, prospects, profits, operations or assets of the Parent, the Company or the Company's affiliates since the date of the latest financial statements delivered to CIT prior to the Effective Date. SECTION 6 REPRESENTATIONS, WARRANTIES AND COVENANTS. The Company represents and warrants to CIT as follows, and the Company covenants that the following representations will continue to be true, and that the Company will at all times comply with all of the following covenants until the termination of this Agreement and the full and final payment and satisfaction of the Obligations: 6.1 Organization Matters; Collateral Locations. Section 1 of the Schedule correctly and completely sets forth (a) the Company's exact name, as currently reflected by the records of the Company's State of incorporation, (b) the Company's State of incorporation, (c) the Company's federal employer identification number and state organization identification number and (d) the address of the Company's chief executive office and all locations of Collateral other than Inventory in-transit. 6.2 Financial Condition. (a) The amount of the Company's assets, at fair valuation, exceeds the book value of the Company's liabilities, (b) the Company is generally able to pay its debts as they become due and payable, and (c) the Company does not have unreasonably small capital to carry on its business as currently conducted absent extraordinary and unforeseen circumstances. All financial statements of the Company previously or hereafter furnished to CIT present fairly, in all material respects, the financial condition of the Company as of the date of such financial statements. 6.3 Power and Authority; Conflicts; Enforceability. (a) The Company has full power and authority to execute and deliver this Agreement and the other Loan Documents to which it is a party, and to perform all of the Company's obligations thereunder. (b) The execution and delivery by the Company of this Agreement and the other Loan Documents to which it is a party, and the performance of the Company's obligations thereunder, have been duly authorized by all necessary corporate action, and do not (i) require any consent or approval of any director or shareholder of the Company that has not been obtained, (ii) violate any term, provision or covenant contained in the organizational documents of the Company (such as the certificate or articles of incorporation or the by-laws), (iii) violate, 20 or cause the Company to be in default under, any law, rule, regulation, order, judgment or award applicable to the Company or its assets, or (iv) violate any term, provision, covenant or representation contained in, or constitute a default under, or result in the creation of any lien under, any loan agreement, lease, indenture, mortgage, deed of trust, note, security agreement or pledge agreement to which the Company is a signatory or by which the Company or any of the Company's assets are bound or affected. (c) This Agreement and the other Loan Documents to which the Company is a party constitute legal valid and binding obligations of the Company, enforceable in accordance with their respective terms, subject to applicable bankruptcy, insolvency, moratorium, fraudulent transfer and other laws affecting creditors' rights generally, and subject to general principles of equity, regardless of whether considered in a proceeding at law or in equity. (d) The Company agrees to qualify to do business, and to remain qualified to do business and in good standing, in each jurisdiction where the failure to so qualify or to remain qualified or in good standing, would have a material adverse effect on the Company. 6.4 Compliance with Laws. The Company and the Company's properties are and will continue to be in compliance with all federal, state and local acts, rules and regulations, and all orders of any federal, state or local legislative, administrative or judicial body or official, except to the extent the failure to so comply would not have a material adverse effect on the Company. The Company has obtained and will continue to maintain all permits, approvals, authorizations and licenses necessary to conduct its business as presently conducted, except to the extent the failure to have such permits, approvals, authorizations or licenses would not have a material adverse effect on the Company. 6.5 Environmental Matters. (a) None of the operations of the Company are the subject of any federal, state or local investigation to determine whether any remedial action is needed to address the presence or disposal of any environmental pollution, hazardous material or environmental clean-up of any real property now or previously owned or operated by the Company. No enforcement proceeding, complaint, summons, citation, notice, order, claim, litigation, investigation, letter or other communication from a federal, state or local authority has been filed against or delivered to the Company, regarding or involving any release of any environmental pollution or hazardous material on any real property now or previously owned or operated by the Company. (b) The Company has no known contingent liability with respect to any release of any environmental pollution or hazardous material on any real property now or previously owned or operated by the Company. (c) The Company is and will continue to be in compliance with all environmental statutes, acts, rules, regulations and orders applicable to the operation of the Company's business, except to the extent that the failure to so comply would not have a material adverse effect. The Company agrees to promptly notify CIT in writing of (i) any expenditure (actual or anticipated) in excess of $100,000 for environmental clean-up, environmental 21 compliance or environmental testing and (ii) the Company's receipt of notice from any local, state or federal authority advising the Company of any environmental liability (real or potential). 6.6 Pending Litigation. Except as previously disclosed by the Company to CIT in writing, there exist no actions, suits or proceedings of any kind by or against the Company pending in any court or before any arbitrator or governmental body, or to the best of the Company's knowledge threatened against the Company, that, individually or in the aggregate, could reasonably be expected to have a material adverse effect on the Company. 6.7 Maintenance of Financial Records; Inspections. The Company agrees to maintain books and records pertaining to the Collateral and the Company's financial matters in such detail, form and scope as CIT reasonably shall require and agrees that such books and records will reflect CIT's interest in the Collateral. The Company agrees that CIT or its agents, upon at least twenty-four (24) hours prior notice from CIT to the Company (except that during the occurrence of a Default or Event of Default, no such notice shall be required), may enter upon the Company's premises at any time during normal business hours, and from time to time, in order to (i) examine and inspect the books and records of the Company, and make copies thereof and take extracts therefrom, and (ii) verify, inspect and perform physical counts and other valuations of the Collateral and any and all records pertaining thereto. The Company irrevocably authorizes all accountants and third parties to disclose and deliver directly to CIT, at the Company's expense, all financial statements and information, books, records, work papers and management reports generated by them or in their possession regarding the Company or the Collateral. All out-of-pocket costs, fees and expenses incurred by CIT in connection with such examinations, inspections, physical counts and other valuations shall constitute Out-of-Pocket Expenses. 6.8 Asset Appraisals. From time to time upon the request of CIT, the Company agrees to permit CIT to perform appraisals of the Company's Inventory. The Company agrees to reimburse CIT for the costs and expenses relating to (a) one (1) Inventory appraisal in each calendar year, so long as no Event of Default shall have occurred and remain outstanding and (b) all such appraisals performed while an Event of Default remains outstanding. To the extent that the Company is required by this Section 6.8 to reimburse CIT for CIT's costs and expenses relating to appraisals, such costs and expenses shall constitute Out-of-Pocket Expenses. 6.9 Insurance. The Company agrees to maintain insurance, including, without limitation, insurance on its business and assets, under such policies of insurance, with such insurance companies, in such reasonable amounts and covering such insurable risks as are at all times reasonably satisfactory to CIT. All policies covering the Inventory are, to be made payable to CIT, in case of loss, under a standard non-contributory "lender" or "secured party" clause or endorsement, and are to contain such other provisions as CIT may require to fully protect CIT's interest in the Inventory and to any payments to be made under such policies, including, without limitation, provisions (x) for not less than thirty (30) days prior written notice to CIT of the exercise of any right of cancellation or material change and (y) that CIT's right to payment under any property insurance policy will not be invalidated by any act or neglect of, or any breach of warranty or condition by, the Company or any party. All original policies or true copies thereof are to be delivered to CIT, premium prepaid, with such loss payable endorsement in CIT's favor. If the Company fails to maintain such insurance on its assets and business, CIT may arrange for 22 such insurance, but at the Company's expense and without any responsibility on CIT's part for: (i) obtaining the insurance; (ii) the solvency of the insurance companies; (iii) the adequacy of the coverage; or (iv) the collection of claims. CIT may apply any insurance proceeds to the cost of repairs, or replacement of any Collateral and/or, at CIT's option, to payment of any of the Obligations in any order or manner as CIT determines. 6.10 Taxes. The Company agrees to pay when due all taxes lawfully levied, assessed or imposed upon the Company or the Collateral (including all sales taxes collected by the Company on behalf of the Company's customers in connection with sales of Inventory and all payroll taxes collected by the Company on behalf of the Company's employees), unless the Company is contesting such taxes in good faith, by appropriate proceedings, and is maintaining adequate reserves for such taxes in accordance with GAAP. Notwithstanding the foregoing, if a lien securing any taxes is filed in any public office, then the Company shall pay all taxes secured by such lien immediately and remove such lien of record promptly. Pending the payment of such taxes and removal of such lien, CIT may, at its election and without curing or waiving any Event of Default which may have occurred as a result thereof, (i) establish an Availability Reserve in the amount of such taxes (or such other amount as CIT shall deem appropriate in the exercise of its reasonable business judgment) or (ii) pay such taxes on behalf of the Company, and the amount paid by CIT shall become an Obligation which is due and payable on demand by CIT. 6.11 Anti-Money Laundering and Terrorism Regulations. The Company agrees to comply with all applicable anti-money laundering and terrorism laws, regulations and executive orders in effect from time to time (including, without limitation, the USA Patriot Act (Pub. L. No. 107-56). The Company also agrees to ensure that no person who owns a controlling interest in or otherwise controls the Company is a person designated under Section 1(b), (c) or (d) of Executive Order No. 13224 (issued September 23, 2001) or any other similar Executive Order. The Company acknowledges that CIT's performance hereunder is subject to compliance with all such laws, regulations and executive orders, and in furtherance of the foregoing, the Company agrees to provide to CIT all information about the Company's ownership, officers, directors, customers and business structure as CIT reasonably may require to comply with, such laws, regulations and executive orders. 6.12 Financial and Other Reporting. The Company agrees that it will deliver to CIT: (a) on a timely basis, the financial statements and/or information listed in Section 5.1 of the Schedule; (b) notice of the occurrence of any Default or Event of Default immediately upon knowledge thereof; and (c) from time to time, such further information regarding the business affairs and financial condition of the Company as CIT may reasonably request. In addition, should the Company modify its accounting principles and procedures from those in effect on the Effective Date, the Company agrees to prepare and deliver to CIT statements of reconciliation in form and substance reasonably satisfactory to CIT. 6.13 Negative Covenants. The Company agrees not to: 6.13.1 Indebtedness. Incur or create any indebtedness, except for (a) current indebtedness maturing in less than one (1) year and incurred in the ordinary course of business for inventory, supplies, equipment, services, taxes or labor, (b) Subordinated Debt, (c) 23 indebtedness arising under the Letters of Credit and this Agreement and (d) any other indebtedness to which CIT has expressly consented in writing. 6.13.2 Sale of Assets. Sell, lease, assign, transfer or otherwise dispose of (i) Collateral, except as otherwise specifically permitted by this Agreement, or (ii) all or any substantial part of its assets, if any, which do not constitute Collateral. 6.13.3 Pledge of Assets. Mortgage, assign, pledge, transfer or otherwise permit any lien, charge, security interest, encumbrance or judgment (whether as a result of a purchase money or title retention transaction, or other security interest, or otherwise) to exist on any of the Collateral, whether now owned or hereafter acquired, except for Permitted Encumbrances. 6.13.4 Corporate Change. Merge, consolidate or otherwise alter or modify its corporate name, principal place of business, structure, or existence, or enter into or engage in any operation or activity materially different from that presently being conducted by the Company. 6.13.5 Guaranty Obligations. Assume, guarantee, endorse, or otherwise become liable upon the obligations of any person, firm, entity or corporation, except by the endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business; 6.13.6 Dividends and Distributions. Declare or pay any dividend or distributions of any kind on, or purchase, acquire, redeem or retire, any of its equity interests (of any class or type), except for (a) dividends payable solely in stock or other equity interests and (b) so long as no Default or Event of Default remains outstanding, dividends payable to the Parent in the ordinary course of business and in accordance with past practices. 6.13.7 Restricted Payments. Make any payment of the principal of, or interest on, any Subordinated Debt, or purchase, acquire or redeem any of the Subordinated Debt, unless (x) such payment, purchase, acquisition or redemption is expressly permitted by the terms of the applicable subordination agreement and (y) no Default or Event of Default shall have occurred and remain outstanding on the date on which such payment or transaction occurs, or would occur as a result thereof. 6.13.8 Investments. (a) Create any new subsidiary, or (b) make any advance or loan to, or any investment in, any firm, entity, person or corporation, or (c) acquire all or substantially all of the assets of, or any capital stock or any equity interests in, any firm, entity or corporation, other than current investments of the Company in existing subsidiaries and, so long as no Default or Event of Default remains outstanding, loans to the Parent and/or the Company's affiliates in the ordinary course of business and in accordance with past practices. 6.13.9 Related Party Transactions. (a) Enter into any transaction, including, without limitation, any purchase, sale, lease, loan or exchange of property, with any shareholder, officer, director, parent (direct or indirect), subsidiary (direct or indirect) or other person or entity otherwise affiliated with the Company, unless (i) such transaction otherwise complies with the provisions of this Agreement, (ii) such transaction is for the purchase or sale of goods or services rendered in the ordinary course of business and pursuant to the reasonable requirements of the 24 Company, and upon standard terms and conditions and fair and reasonable terms, no less favorable to the Company than the Company could obtain in a comparable arms length transaction with an unrelated third party, and (iii) no Default or Event of Default shall have occurred and remain outstanding at the time such transaction occurs, or would occur after giving effect to such transaction, or (b) pay any management, consulting or other similar fees to any shareholder, director, subsidiary (direct or indirect) or other person or entity otherwise affiliated with the Company other than the Parent. SECTION 7 POWERS The Company hereby authorizes CIT, or any person or agent CIT may designate, at the Company's cost and expense, to exercise all of the following powers, which authority shall be irrevocable until termination of this Agreement and the full and final payment and satisfaction of all Obligations: (a) to receive, take, endorse, sign, assign and deliver, all in the name of CIT or the Company, any and all checks, notes, drafts, and other documents or instruments relating to the Collateral; (b) to receive, open and dispose of all mail addressed to the Company and to notify postal authorities to change the address for delivery thereof to such address as CIT may designate; (c) to request from customers indebted on Accounts at any time, in the name of CIT information concerning the amounts owing on the Accounts; (d) to request from customers indebted on Accounts at any time, in the name of the Company, in the name of a certified public accountant designated by CIT or any other designee of CIT, information concerning the amounts owing on the Accounts; (e) to transmit to customers indebted on Accounts notice of CIT's interest therein and to notify customers indebted on Accounts to make payment directly to CIT for the Company's account; and (f) to take or bring, in the name of CIT or the Company, all steps, actions, suits or proceedings deemed by CIT necessary or desirable to enforce or effect collection of the Accounts. The powers set forth in clauses (b), (c), (e) and (f) of this Section 7 may only be exercised if an Event of Default shall have occurred and remain outstanding. SECTION 8 EVENTS OF DEFAULT AND REMEDIES 8.1 Events of Default. Each of the following events shall constitute an "Event of Default": 8.1.1 The failure of the Company to pay any of the Obligations when due; 8.1.2 The cessation of the business of the Company or the calling of a meeting of the creditors of the Company for purposes of compromising its debts and obligations; 8.1.3 The commencement by the Company of any bankruptcy, insolvency, arrangement, reorganization, receivership, assignment for the benefit of creditors or similar proceedings under any federal or state law; 8.1.4 The commencement against the Company of any bankruptcy, insolvency, arrangement, reorganization, receivership, assignment for the benefit of creditors or similar proceeding under any federal or state law by creditors of the Company, but only if such proceeding is not contested by the Company within ten (10) days and not dismissed or vacated 25 within thirty (30) days of commencement, or any of the actions or relief sought in any such proceeding shall occur or be authorized by the Company; 8.1.5 Any representation or warranty made or furnished by the Company to CIT in this Financing Agreement, any other Loan Document or any certificate or financial statement proves to have been false or misleading in any material respect when made or furnished or when reaffirmed pursuant to Section 5.2.1; 8.1.6 The breach or violation by the Company of any covenant contained in this Financing Agreement (other than those referred to in Section 8.1.7 below), provided that such breach or violation shall not be deemed to be an Event of Default unless the Company fails to cure such breach or violation to CIT's reasonable satisfaction within thirty (30) days from the date of such breach or violation; 8.1.7 The breach or violation by the Company of any warranty, representation or covenant contained in Sections 2.1.2, 4.4, 4.5.6, 6.12 and 6.13; 8.1.8 The occurrence of any default or event of default (after giving effect to any applicable grace or cure period) under any of the other Loan Documents, or any of the other Loan Documents ceases to be valid, binding and enforceable in accordance with its terms; 8.1.9 The Company shall (i) engage in any "prohibited transaction" as defined in ERISA, (ii) incur any "accumulated funding deficiency" as defined in ERISA, (iii) incur any "reportable event" as defined in ERISA, (iv) terminate any "plan", as defined in ERISA or (v) become involved in any proceeding in which the Pension Benefit Guaranty Corporation shall seek appointment, or is appointed, as trustee or administrator of any "plan", as defined in ERISA, and with respect this subsection 8.1.9, such event or condition either (x) remains uncured for a period of thirty (30) days from date of occurrence and (y) could, in CIT's reasonable business judgment, subject the Company to any tax, penalty or other liability having a material adverse effect on the Company; 8.1.10 The Parent ceases to own and control 100% of the voting equity of the Company; 8.1.11 A final judgment for the payment of money in excess of $100,000 (to the extent not covered by insurance as to which the carrier has been notified of the potential claims and has not disputed coverage) shall be rendered against the Company; 8.1.12 The occurrence of any default or event of default (after giving effect to any applicable grace or cure periods) under any instrument or agreement evidencing or governing (x) Subordinated Debt or (y) any other indebtedness of the Company having a principal amount in excess of $100,000; 8.1.13 The Company shall modify the terms or provisions of any agreement, instrument or other document relating to any Subordinated Debt without CIT's prior written consent or make any payment, purchase, acquire or redeem of any Subordinated Debt which is not 26 expressly not permitted by the terms of the subordination agreement with respect to such Subordinated Debt in favor of CIT; or 8.1.14 Any other event shall have occurred that has had or could reasonably be expected to have a material adverse effect on the Parent, the Company or its affiliates. 8.2 Remedies With Respect to Outstanding Obligations. Upon the occurrence of a Default or an Event of Default, at the option of CIT, all loans, advances and extensions of credit provided for in Section 2 hereof shall be thereafter made in CIT's sole discretion, and the obligation of CIT to make Revolving Loans and to assist the Company in opening Letters of Credit, shall cease unless such Default is cured to CIT's reasonable satisfaction or such Event of Default is waived in accordance herewith. In addition, upon the occurrence of an Event of Default, CIT may, at its option (a) declare all Obligations immediately due and payable, (b) charge the Company the default rate of interest on all then-outstanding or thereafter-incurred Obligations in lieu of the interest provided for in Section 3.1.3 hereof, and (c) immediately terminate this Agreement upon notice to the Company. Notwithstanding the foregoing, (x) CIT's commitment to make loans, advances and extensions of credit provided for in Section 2 hereof automatically shall terminate without any declaration, notice or demand by CIT upon the commencement of any proceeding described in Sections 8.1.3 or 8.1.4 hereof, and (y) this Agreement automatically shall terminate and all Obligations shall become due and payable immediately without any declaration, notice or demand by CIT, upon the commencement of any proceeding described in Section 8.1.3 hereof or the occurrence of an Event of Default under Section 8.1.4 hereof. The exercise of any option is not exclusive of any other option that may be exercised at any time by CIT. 8.3 Remedies With Respect to Collateral. Immediately after the occurrence of an Event of Default, CIT may, at its option, to the extent permitted by applicable law: (a) remove from any premises where same may be located any and all books and records, computers, electronic media and software programs associated with any Collateral (including electronic records, contracts and signatures pertaining thereto), documents, instruments and files, and any receptacles or cabinets containing same, relating to the Accounts, and CIT may use, at the Company's expense, such of the Company's personnel, supplies or space at the Company's places of business or otherwise, as may be necessary to properly administer and control the Accounts or the handling of collections and realizations thereon; (b) bring suit, in the name of the Company or CIT, and generally shall have all other rights respecting the Accounts, including, without limitation, the right to (i) accelerate or extend the time of payment, (ii) settle, compromise, release in whole or in part any amounts owing on any Accounts and (iii) issue credits in the name of the Company or CIT; (c) sell, assign and deliver the Collateral and any returned, reclaimed or repossessed merchandise, with or without advertisement, at public or private sale, for cash, on credit or otherwise, at CIT's sole option and discretion, and CIT may bid or become a purchaser at any such sale, free from any right of redemption, which right is hereby expressly waived by the Company; (d) foreclose CIT's security interests in the Collateral by any available judicial procedure, or take possession of any or all of the Collateral without judicial process, and to enter any premises where any Collateral may be located for the purpose of taking possession of or removing the same; and (e) exercise any other rights and remedies provided in law, in equity, by contract or otherwise. CIT shall have the right, without notice or advertisement, to sell, lease, or otherwise dispose of all or 27 any part of the Collateral whether in its then condition or after further preparation or processing, in the name of the Company or CIT, or in the name of such other party as CIT may designate, either at public or private sale or at any broker's board, in lots or in bulk, for cash or for credit, with or without warranties or representations (including, without limitation, warranties of title, possession, quiet enjoyment and the like), and upon such other terms and conditions as CIT in its sole discretion may deem advisable, and CIT shall have the right to purchase at any such sale. If any Inventory shall require rebuilding, repairing, maintenance or preparation, CIT shall have the right, at its option, to do such of the aforesaid as is necessary, for the purpose of putting the Inventory in such saleable form as CIT shall deem appropriate. The Company agrees, at the request of CIT, to assemble the Inventory, and to make it available to CIT at premises of the Company or elsewhere and to make available to CIT the premises and facilities of the Company for the purpose of CIT's taking possession of, removing or putting the Inventory in saleable form. If notice of intended disposition of any Collateral is required by law, it is agreed that ten (10) days notice shall constitute reasonable notification and full compliance with the law. The net cash proceeds resulting from CIT's exercise of any of the foregoing rights (after deducting all Out-of-Pocket Expenses relating thereto) shall be applied by CIT to the payment of the Obligations, whether due or to become due, in such order as CIT may elect, and the Company shall remain liable to CIT for any deficiencies, and CIT in turn agrees to remit to the Company or its successors or assigns, any surplus resulting therefrom. The enumeration of the foregoing rights is not intended to be exhaustive and the exercise of any right shall not preclude the exercise of any other right of CIT under applicable law or the other Loan Documents, all of which shall be cumulative. SECTION 9 TERMINATION Except as otherwise provided in Section 8.2 hereof, CIT may terminate this Agreement and the Revolving Line of Credit only as of the initial or any subsequent Renewal Date, and then only by giving the Company at least thirty (30) days prior written notice of termination. The Company may terminate this Agreement at any time prior to any Renewal Date upon thirty (30) days prior written notice to CIT. THIS AGREEMENT, UNLESS TERMINATED AS HEREIN PROVIDED, SHALL AUTOMATICALLY CONTINUE FROM RENEWAL DATE TO RENEWAL DATE. All Obligations shall become due and payable in full on the date of any termination hereunder. Pending a final accounting of the Obligations, unless supplied with an indemnity satisfactory to CIT, the Company shall pay to CIT in immediately available funds, or CIT may withhold any credit balances in the Revolving Loan Account as a cash reserve, an amount sufficient to cover any contingent Obligation then outstanding, including, but not limited to, an amount equal to one hundred ten percent (110%) of the face amount of any outstanding Letters of Credit. All of CIT's rights, liens and security interests granted pursuant to the Loan Documents shall continue after any termination of this Agreement until all Obligations have been fully and finally paid and satisfied. SECTION 10 GENERAL INDEMNITY In addition to the Company's agreement to reimburse CIT for Out-of-Pocket Expenses, but without duplication, the Company hereby agrees to indemnify CIT and its officers, directors, employees, attorneys and agents (each, an "Indemnified Party") from, and to defend and hold 28 each Indemnified Party harmless against, any and all losses, liabilities, obligations, claims, actions, judgments, suits, damages, penalties, costs, fees, expenses (including reasonable attorney's fees) of any kind or nature which at any time may be imposed on, incurred by, or asserted against, any Indemnified Party: (a) as a result of CIT's exercise of (or failure to exercise) any of CIT's rights and remedies hereunder, including, without limitation, (i) any sale or transfer of the Collateral, (ii) the preservation, repair, maintenance, preparation for sale or securing of any Collateral, and (iii) the defense of CIT's interests in the Collateral (including the defense of claims brought by the Company, as a debtor-in-possession or otherwise, any secured or unsecured creditors of the Company, or any trustee or receiver in bankruptcy); (b) as a result of any environmental pollution, hazardous material or environmental clean-up relating to any real property now or previously owned or operated by the Company, the Company's operation and use of any real property now or previously owned or operated by the Company, and the Company's off-site disposal practices; (c) arising from or relating to (i) the maintenance and operation of any Depository Account, (ii) any agreement or document relating to any Depository Account to which any Indemnified Party is party and (iii) any action taken (or failure to act) by any Indemnified Party with respect thereto; (d) arising from any transactions or occurrences relating to Letters of Credit established or opened for the Company's account, the Collateral relating thereto and any drafts or acceptance thereunder, including any such loss, claim or liability arising from any error, omission, negligence, misconduct or other action taken by an Issuing Institution; (e) in connection with any regulatory investigation or proceeding by any regulatory authority or agency having jurisdiction over the Company; and (f) otherwise relating to or arising out of the transactions contemplated by this Agreement and the other Loan Documents, or any action taken (or failure to act) by any Indemnified Party with respect thereto; provided that, an Indemnified Party's conduct in connection with the any of the foregoing matters does not constitute gross negligence or willful misconduct, as finally determined by a court of competent jurisdiction, and provided further, that the Company shall have no indemnification obligations under the Section 10 with respect to any losses, liabilities, obligations, claims, actions, judgments, suits, damages, penalties, costs, fees and expenses to the extent attributable to the failure by CIT or any of its employees, agents or other representatives to act in a commercially reasonable manner in connection with exercise by CIT of its rights and remedies with respect to the Collateral. This indemnification shall survive the termination of this Agreement and the payment and satisfaction of the Obligations. CIT may from time to time establish Availability Reserves with respect to this indemnity as CIT may deem advisable in the exercise of its reasonable business judgment, and upon termination of this Agreement, CIT may hold such reserves as cash reserves as security for this indemnity. 29 SECTION 11 MISCELLANEOUS 11.1 Waivers. The Company hereby waives diligence, demand, presentment, protest and any notices thereof as well as notices of nonpayment, intent to accelerate and acceleration. No waiver of an Event of Default by CIT shall be effective unless such waiver is in writing and signed by CIT. No delay or failure of CIT to exercise any right or remedy hereunder, whether before or after the happening of any Event of Default, shall impair any such right or remedy, or shall operate as a waiver of such right or remedy, or as a waiver of such Event of Default. A waiver on any one occasion shall not be construed as a bar to or waiver of any right or remedy on any future occasion. No single or partial exercise by CIT of any right or remedy precludes any other or further exercise thereof, or precludes any other right or remedy. 11.2 Entire Agreement; Amendments; Sale of Interest. (a) This Agreement and the other Loan Documents: (a) constitute the entire agreement between the Company and CIT; (b) supersede any prior agreements (including the agreements set forth in any commitment letter); (c) may be amended only by a writing signed by the Company and CIT; and (d) shall bind and benefit the Company and CIT and their respective successors and assigns, except that the Company shall not have the right to assign (by operation of law or otherwise) its rights or obligations hereunder without the prior written consent of CIT. Should the provisions of any other Loan Document conflict with the provisions of this Agreement, the provisions of this Agreement shall apply and govern. (b) The Company hereby consents to CIT's participation, sale, assignment, transfer or other disposition, at any time or times hereafter, of this Agreement and any of the other Loan Documents, or of any portion hereof or thereof, including, without limitation, CIT's rights, title, interests, remedies, powers, and duties hereunder or thereunder. In the case of an assignment, the assignee shall have, to the extent of such assignment, the same rights, benefits and obligations as it would if it were "CIT" hereunder, and CIT shall be relieved, to the extent of any such assignment, of all obligations hereunder upon any such assignment. The Company agrees that it will use its best efforts to assist and cooperate with CIT in any manner reasonably requested by CIT to effect the sale of participations in or assignments of any of the Loan Documents or any portion thereof or interest therein, including, without limitation, assisting in the preparation of appropriate disclosure documents. The Company further agrees that CIT may disclose credit information regarding Borrower and its affiliates to any potential participant or assignee, provided, that, before disclosing any then confidential and non-public information concerning the Borrower or any of its affiliates to any potential participant or assignee, CIT shall obtain in writing from each such recipient appropriate confidentiality undertakings. . 11.3 Usury Limit. In no event shall the Company, upon demand by CIT for payment of any indebtedness relating hereto, by acceleration of the maturity thereof, or otherwise, be obligated to pay interest and fees in excess of the amount permitted by law. Regardless of any provision herein or in any agreement made in connection herewith, CIT shall never be entitled to receive, charge or apply, as interest on any indebtedness relating hereto, any amount in excess of the maximum amount of interest permissible under applicable law. If CIT ever receives, collects or applies any such excess, it shall be deemed a partial repayment of principal and treated as such. 30 If as a result, the entire principal amount of the Obligations is paid in full, any remaining excess shall be refunded to the Company. This Section 11.3 shall control every other provision of the Agreement, the other Loan Documents and any other agreement made in connection herewith. 11.4 Severability. If any provision hereof or of any other Loan Document is held to be illegal or unenforceable, such provision shall be fully severable, and the remaining provisions of the applicable agreement shall remain in full force and effect and shall not be affected by such provision's severance. Furthermore, in lieu of any such provision, there shall be added automatically as a part of the applicable agreement a legal and enforceable provision as similar in terms to the severed provision as may be possible. 11.5 WAIVER OF JURY TRIAL; JUDICIAL REFERENCE; SERVICE OF PROCESS. (a) TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE COMPANY AND CIT EACH HEREBY WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THE LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREUNDER. (b) THE COMPANY HEREBY IRREVOCABLY WAIVES PERSONAL SERVICE OF PROCESS AND CONSENTS TO SERVICE OF PROCESS BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED. IN NO EVENT WILL EITHER PARTY BE LIABLE FOR LOST PROFITS OR OTHER SPECIAL OR CONSEQUENTIAL DAMAGES. 11.6 Notices. Except as otherwise herein provided, any notice or other communication required hereunder shall be in writing (messages sent by e-mail or other electronic transmission (other than by telecopier) shall not constitute a writing, however any signature on a document or other writing that is transmitted by e-mail or telecopier shall constitute a valid signature for purposes hereof), and shall be deemed to have been validly served, given or delivered when received by the recipient if hand delivered, sent by commercial overnight courier or sent by facsimile, or three (3) Business Days after deposit in the United States mail, with proper first class postage prepaid and addressed to the party to be notified as follows: (a) if to CIT, at: The CIT Group/Commercial Services, Inc. Two Wachovia Center, Suite 2500 301 South Tryon Street Charlotte, North Carolina 28282 Attention: Account Executive - Concord Keystone Facsimile: (704) 339-2910 (b) if to the Company, at: Concord Keystone Sales Corp. 4000 Hollywood Boulevard Hollywood, Florida 33021 Attention: Vice President, General Counsel Facsimile: (954) 989-4103; or 31 (c) to such other address as any party may designate for itself by like notice. 11.7 Counterparts; Electronic Execution. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement. Delivery of an executed counterpart of this Agreement by telefacsimile or by electronic transmission in "pdf" or other imaging format shall be equally as effective as delivery of an original executed counterpart of this Agreement. Any party delivering an executed counterpart of this Agreement by telefacsimile or electronic transmission also shall deliver an original executed counterpart of this Agreement but the failure to deliver an original executed counterpart shall not affect the validity, enforceability and binding effect of this Agreement. 11.8 CHOICE OF LAW. THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK EXCEPT TO THE EXTENT THAT ANY OTHER LOAN DOCUMENT INCLUDES AN EXPRESS ELECTION TO BE GOVERNED BY THE LAWS OF ANOTHER JURISDICTION. 11.8 32 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and effective by their proper and duly authorized officers as of the date set forth above. CONCORD KEYSTONE SALES CORP. THE CIT GROUP/COMMERCIAL SERVICES, INC. By: /s/ Blaine Robinson By: /s/ Dan Upchurch ------------------------------------------ ---------------------------- Blaine Robinson, Vice President - Finance, Dan Upchurch, Vice President Treasurer and Assistant Secretary [Financing Agreement] SCHEDULE TO FINANCING AGREEMENT BETWEEN CONCORD KEYSTONE SALES CORP. AND THE CIT GROUP/COMMERCIAL SERVICES, INC. SECTION 1 COMPANY INFORMATION (a) Name of Company: Concord Keystone Sales Corp. (b) Type of Entity and State An Illinois corporation of Incorporation/Formation: (c) Federal Employer ID No.: 36-3727995 (d) State Organization No.: 56066748 (e) Chief Executive Office Address: 4000 Hollywood Boulevard 6th Floor North Tower Hollywood, Florida 33021 (f) Address where Collateral is (i) 301 Westmont Drive located, if different than above: San Pedro, California 90731 (ii) 5388 Airways Boulevard Memphis, Tennessee 38116 (g) Existing Liens: N/A SECTION 2 FINANCIAL COMMITMENTS 2.1 Revolving Credit Limit: $15,000,000 2.2 Borrowing Base: At any time, an amount equal to the sum at such time of: (a) 90% of the outstanding Eligible Accounts; plus (b) the lesser of (i) the amount described in clause (a) of this definition or (ii) the sum of the Inventory Formula Amount plus the In-Transit Inventory Formula Amount; minus Schedule 1 (c) the amount of the Availability Reserve in effect at such time. Notwithstanding the foregoing to the contrary, the In-Transit Inventory Formula Amount shall comprise no more than thirty-five percent (35%) of the amount described in the foregoing clause (b). 2.3 Additional Availability A reserve equal to (i) three (3) months Reserves: rental payments or similar charges for any of the Company's leased premises or other Collateral locations (other than the Company's headquarters location on the date of this Financing Agreement and the Company's premises subleased by the Company on the Effective Date), and (ii) three (3) months estimated payments (plus any other fees or charges owing by the Company) to any applicable warehousemen or third party processor (as determined by CIT in the exercise of its reasonable business judgment); provided that, any of the foregoing amounts shall be adjusted from time to time hereafter upon delivery to CIT of an acceptable waiver agreement. 2.4 Letter of Credit Sub-Line: $10,000,000 SECTION 3 INTEREST, FEES AND EXPENSES 3.2 Loan Facility Fee: $56,250 on the Effective Date. 3.3 Line of Credit Fee: 0.20% per annum 3.4 Annual Renewal Fee: $28,125 on each Renewal Date. 3.5 Letter of Credit Guaranty Fee: (a) Documentary Letters of On the first day of each month, 0.167% Credit: on the daily average outstanding balance during the immediately preceding month (but in no event less than $100.00) (b) Standby Letters of Credit: On the first day of each month, 0.167% on the daily average outstanding balance during the immediately preceding month Schedule 2 SECTION 4 COLLATERAL 4.1 Collateral Reporting: See Annex A attached hereto. SECTION 5 REPRESENTATIONS, WARRANTIES AND COVENANTS 5.1 Financial Reporting: (a) within sixty (60) days after the Effective Date, monthly projections of the Company's consolidated balance sheet, and consolidated statements of profits and loss and cash flow of the Company, prepared in accordance with GAAP, as well as monthly projected Availability for the Company for the first and second fiscal quarters of the Company's 2008 fiscal year; (b) by November 30, 2007, monthly projections of the Company's consolidated balance sheet, and consolidated statements of profits and loss and cash flow of the Company, prepared in accordance with GAAP, as well as monthly projected Availability for the Company for the third and fourth fiscal quarters of the Company's 2008 fiscal year; (c) within ninety (90) days after the end of each fiscal year of the Parent, a consolidated balance sheet as at the close of such year, and consolidated statements of profit and loss and cash flow of the Parent for such year, prepared in accordance with GAAP and audited by independent public accountants selected by the Parent and satisfactory to CIT, together with (i) the unqualified opinion of the accountants preparing such financial statements, (ii) an officer's certificate substantially in the form set forth on Annex B attached hereto, signed by the treasurer or chief financial officer of the Company, and (iii) if requested by CIT after the occurrence of a Default or Event of Default, such accountants' management practice letter; (d) within forty-five (45) days after the end of each fiscal quarter of the Parent, a consolidated balance sheet as at the close of such fiscal quarter, and consolidated statements of profit and loss and cash flow of the Parent for such fiscal quarter and for the period commencing on the first day of the current fiscal year through the end of such fiscal quarter, prepared in accordance with GAAP Schedule 3 and certified by the treasurer or chief financial officer of the Parent (or any other authorized officer satisfactory to CIT); (e) within thirty (30) days after the end of each fiscal month of the Company, (i) a consolidated balance sheet as at the end of such month, (ii) consolidated statements of profit and loss and cash flow of the Company for such month and for the period commencing on the first day of the current fiscal year through the end of such month, (iii) comparative statements of profit and loss and cash flow of the Company for the same month and same fiscal year-to-date period in the prior fiscal year, prepared in accordance with GAAP and certified by the treasurer or chief financial officer of the Company (or any other authorized officer satisfactory to CIT), and (iv) an officer's certificate substantially in the form set forth on Annex B attached hereto, signed by the treasurer or chief financial officer of the Company; (f) as and when filed by the Company, copies of all (i) financial reports, registration statements and other documents filed by the Company with the U.S. Securities and Exchange Commission, as and when filed by the Company, and (ii) upon CIT's request, annual reports filed pursuant to ERISA in connection with each benefit plan of the Company subject to ERISA; and (g) no later than thirty (30) days prior to the beginning of each fiscal year of the Company, monthly projections of the Company's consolidated balance sheet, and consolidated statements of profits and loss and cash flow of the Company, prepared in accordance with GAAP, as well as monthly projected Availability for the Company for such fiscal year. SECTION 6: TERMINATION Initial Renewal Date: October 16, 2008 Schedule 4 ANNEX A - Collateral Reporting Provisions A. The Company agrees to furnish to CIT: (1) At least once each week (but more frequently upon CIT's reasonable request), a borrowing base certificate in form and substance satisfactory to CIT, certified by the treasurer or chief financial officer of the Company (or any other authorized officer satisfactory to CIT), updating Elgible Accounts weekly and Eligible Inventory and Eligible In-Transit Inventory monthly, together with such confirmatory schedules of Trade Accounts (in form and substance satisfactory to CIT) weekly and such confirmatory schedules of Inventory (in form and substance satisfactory to CIT) monthly, in each case, as CIT reasonably may request. CIT, in its sole discretion, may permit the Company to access CIT's System for the purpose (in addition to those set forth in Section 2.1.7 of the Agreement) of completing and submitting borrowing base certificates when required hereunder. (2) On or before the fifteenth (15th) day of each month (but more frequently upon CIT's reasonable request), a summary of Inventory (containing such detail from the Company's perpetual inventory as CIT may require) as of the last Business Day of the preceding week, together with information sufficient to allow CIT to update the amount of ineligible Inventory. (3) On or before the fifteenth (15th) day of each month (but more frequently upon CIT's reasonable request), a detailed and summary aging report of Trade Accounts existing as of the last day of the preceding month and a roll-forward of Trade Accounts from the first day of the preceding month through the last day of the preceding month, all in such form as CIT reasonably shall require, certified by the treasurer or the chief financial officer of the Company (or any other authorized officer satisfactory to CIT), together with (x) a reconciliation, as of the last day of the preceding month, of the Company's Trade Accounts aging report to the Company's general ledger, and (y) if required by CIT, such other information sufficient to allow CIT to (A) reconcile, as of the date of such report, the Company's Trade Accounts aging report to the applicable borrowing base certificate delivered by the Company to CIT and (B) update the amount of Eligible Accounts, Eligible In-Transit Inventory and Eligible Inventory. (4) On or before the fifteenth (15th) day of each month (but more frequently upon CIT's reasonable request), an aged trial balance of all the Company's accounts payable as of the last day of the preceding month. (5) Prompt written disclosure of (x) all matters adversely affecting the value, enforceability or collectibility of the Trade Accounts of the Company, (y) all customer disputes, offsets, defenses, counterclaims, returns, rejections and all reclaimed or repossessed merchandise or goods, and (z) all matters adversely affecting the value or marketability of the Inventory, all in such detail and format as CIT reasonably may require; provided that, to the extent that any such matter would not have a material adverse effect on the Company, the Company may disclose Annex A-1 such matter to CIT when the Company provides CIT with the borrowing base certificate described in clause (1) above. (6) Prior written notice of any change in the location of any Collateral and any material change in type, quantity, quality or mix of the Inventory. (7) From time to time, access to the Company's computers, electronic media, software programs (including any electronic records, contracts and signatures) and such other documentation and information relating to the Trade Accounts, Inventory and other Collateral as CIT reasonably may require. B. The Company may deliver to CIT any borrowing base certificate, collateral report or other material that the Company is required to deliver to CIT under clauses (1), (2) and (3) of Section A of this Annex A by e-mail or other electronic transmission (an "Electronic Transmission"), subject to the following terms: (1) Each Electronic Transmission must be sent by the treasurer or chief financial officer of the Company (or any other authorized officer satisfactory to CIT), and must be addressed to the loan officer and the collateral analyst of CIT that handle the Company's account, as designated by CIT from time to time. If any Electronic Transmission is returned to the sender as undeliverable, the material included in such Electronic Transmission must be delivered to the intended recipient in the manner required by Section 11.6 of the Agreement. (2) Each certificate, collateral report or other material contained in an Electronic Transmission must be in a "pdf" or other imaging format and, to the extent that such material must be certified by an officer of the Company under this Annex A, must contain the signature of the officer submitting the Electronic Transmission. As provided in Section 11.7, any signature on a certificate, collateral report or other material contained in an Electronic Transmission shall constitute a valid signature for purposes hereof. CIT may rely upon, and assume the authenticity of, any such signature, and any material containing such signature shall constitute an "authenticated" record for purposes of the Uniform Commercial Code and shall satisfy the requirements of any applicable statute of frauds. (3) The Company agrees to maintain the original versions of all certificates, collateral reports and other materials delivered to CIT by means of an Electronic Transmission and agrees to furnish to CIT such original versions within five (5) Business Days of CIT's request for such materials, signed and certified (to the extent required hereunder) by the officer submitting the Electronic Transmission. C. The Company hereby authorizes CIT to regard the Company's printed name or rubber stamp signature on assignment schedules or invoices as the equivalent of a manual signature by one of the Company's authorized officers or agents. The Company's failure to promptly deliver to CIT any schedule, report, statement or other information set forth in this Annex A shall not affect, diminish, modify or otherwise limit CIT's security interests in the Collateral. Annex A-2 ANNEX B FORM OF COMPLIANCE CERTIFICATE [Date] The CIT Group/Commercial Services, Inc. Two Wachovia Center, Suite 2500 301 South Tryon Street Charlotte, North Carolina 28282 RE: Financing Agreement dated as of October 16, 2007 (as amended, the "Financing Agreement") between The CIT Group/Commercial Services, Inc. ("CIT") and Concord Keystone Sales Corporation (the "Company") Ladies and Gentlemen: Reference is made to the Financing Agreement. Capitalized terms used herein and not specifically defined shall have the meanings given to such terms in the Financing Agreement. Pursuant to Sections 4.4 and 6.12 of the Financing Agreement, I enclose: (a) the Company's financial statements for the month ended _______, 200__ (the "Reporting Month") and the fiscal year-to-date period ended _______, 200__; and (b) a borrowing base certificate as of the last day of the Reporting Month, together with a detailed and summary aging report of Trade Accounts existing as of the last day of the Reporting Month and a roll-forward of Trade Accounts from the first day of the Reporting Month through the last day of the Reporting Month. As the ________ of the Company, I hereby certify to CIT that: (a) the financial statement(s) fairly and accurately represent the Company's financial condition at the end of the particular accounting periods covered by such financial statements, as well as the Company's operating results during such accounting periods, subject to year-end accountant reviewed adjustments; (b) the borrowing base certificate is true, correct, and based on information contained in the Company's own financial accounting records; (c) during the Reporting Month, (i) to my knowledge, there has occurred no Default or Event of Default under the Financing Agreement, or, if I have knowledge that any Default or Event of Default has occurred during such period, a detailed description thereof is set forth on the Exhibit __ attached hereto, and (ii) the Company has not received any notice of cancellation with respect to its property insurance policies; and (d) Exhibit __ attached hereto sets forth detailed calculations showing compliance with all financial covenants contained in the Financing Agreement, for the periods of measurement covered by or ending on the last day of the Reporting Month. Very truly yours, [attach appropriate exhibits] ANNEX C CIT STANDARD FEE SCHEDULE FOR DOCUMENTARY LETTERS OF CREDIT Transaction Fee Issuance (a) Processing Fee $70.00 (b) Cable Fee $35.00 Amendments (a) L/C Amount Increase 0.25% of the increased amount (b) Processing Fee - First Four Amendments $95.00 - After Fourth Amendment $130.00 (c) Cable Fee $10.00 Guarantees $50.00 Plus: Processing Fee $50.00 Discrepancies $75.00 Cancellations $50.00 Unutilized L/C Fee $100.00 Payments (a) Sight $20.00 plus 0.125% of amount (but in no event less than $55.00 per set) (b) Time $30.00 plus 1.5% per annum on draft amount for term (but in no event less than $70.00) EX-31.1 4 e31059_ex31-1.txt CERTIFICATION EXHIBIT 31.1 CERTIFICATION ------------- ` I, Ira B. Lampert, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Concord Camera Corp. (the "registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) [Reserved]; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: March 31, 2008 /s/ Ira B. Lampert --------------------------------------- Ira B. Lampert, Chairman of the Board, Chief Executive Officer and President EX-31.2 5 e31059_ex31-2.txt CERTIFICATION EXHIBIT 31.2 CERTIFICATION ------------- I, Blaine A. Robinson, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Concord Camera Corp. (the "registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) [Reserved] (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: March 31, 2008 /s/ Blaine A. Robinson ------------------------------------------------ Blaine A. Robinson, Vice President - Finance, Treasurer and Assistant Secretary (Principal Financial and Accounting Officer) EX-32.1 6 e31059_ex32-1.txt CERTIFICATION EXHIBIT 32.1 CERTIFICATION ------------- In connection with the Quarterly Report of Concord Camera Corp. (the "Company") on Form 10-Q for the fiscal quarter ended December 29, 2007 (the "Report") and pursuant to 18 U.S.C. Section 1350, as adopted in Section 906 of the Sarbanes-Oxley Act of 2002, I, IRA B. LAMPERT, Chief Executive Officer of the Company, certify that to the best of my knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: March 31, 2008 /s/ Ira B. Lampert ----------------------------------------- Ira B. Lampert, Chief Executive Officer EX-32.2 7 e31059_ex32-2.txt CERTIFICATION EXHIBIT 32.2 CERTIFICATION ------------- In connection with the Quarterly Report of Concord Camera Corp. (the "Company") on Form 10-Q for the fiscal quarter ended December 29, 2007 (the "Report") and pursuant to 18 U.S.C. Section 1350, as adopted in Section 906 of the Sarbanes-Oxley Act of 2002, I, BLAINE A. ROBINSON, Vice President - Finance, Treasurer and Assistant Secretary (Principal Financial and Accounting Officer) of the Company, certify that to the best of my knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: March 31, 2008 /s/ Blaine A. Robinson ---------------------------------------------- Blaine A. Robinson, Vice President - Finance and Treasurer Assistant Secretary (Principal Financial and Accounting Officer) -----END PRIVACY-ENHANCED MESSAGE-----