case no 04-61159-civ-lenard/klein stephen j . mazur...
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UNITED STATES DISTRICT COURTSOUTHERN DISTRICT OF FLORID A
CASE NO . 04-61159-CIV-LENARD/KLEI NWG~•iT L30X
STEPHEN J . MAZUR, individually and t 0on behalf of all others similarly situated, ` /
;Ai ~i '1 [0115 -J(' `Plaintiff,
cL.Ak\LNi,L MAL ;DO A
vs, CLERK, USDC / SDFL r MIP.
IRA B. LAMPERT, HARLAN PRESS,RICHARD FINKBEINER, BRIAN F .KING and CONCORD CAMERA CORP . ,
Defendant s
CONSOLIDATED CLASS ACTION COMPLAIN T
Lead Plaintiff, Stephen J . Mazur ("Lead Plaintiff'), individually and on behalf of all other
persons similarly situated, by and through his counsel, alleges the following upon persona l
knowledge as to himself and his acts, and as to all other matters, upon information and belief, base d
upon, inter (Ilia, the investigation made by and through his attorneys and private im esti`aators .
including a review of the public filings of Concord Camera Corp . ("Concord" or the "Company" )
with the United States Securities and Exchange Commission ("SEC"), Company press releases ,
analyst reports, interviews, court filings related to the Company, news articles, and other publicl y
available information concerning Concord and the individual defendants herein . Ira B . Lampert ,
Harlan I . Press, Richard M . Finkbeiner and Brian F . King (collectively, "Individual Defendants" )
as well as consultation with an accounting expert . Individuals who provided information in drafting
this complaint did so on a confidential basis and are identified as follows by number as confidentia l
witness ("CW_") with a description of their connection to the Company :
"WI 1 oncor Executive Administrative Assistant during the C lass Perioda Concord employee during the ass Period vd ho was response e or inventor)Management including receiving, invoicing and reconciliatio n
':W 3 n Accounting Supervisor at Concord during the Class Periodn accountant w to worked at oncord during the ass Peno d
tg y placed individual in supply chain management at Concord dunng th elass Period
f~
NATURE OF THE CAS E
1 . This is a class action under the federal securities laws brought on behalf of the
Plaintiff and certain other persons or entities who bought the securities of Concord during the period
August 14, 2003 to August 31,2004 inclusive (the "Class Period"), and who were damaged thereby .
2 . During the Class Period, Concord was a designer, manufacturer and marketer o f
single use and digital cameras, with manufacturing facilities in the People's Republic of China
("China") . In recent years, Concord has focused on evolving from a contract manufacturer and
distributor of single use cameras to also developing, manufacturing and selling digital cameras . In
fiscal 2003, the Company introduced 17 new digital products, and planned the introduction of 14
new digital products in fiscal 2004 . (The Company's fiscal 2003 year ended June 2 8 . 2003 . and its
2004 fiscal year ended on June 28, 2004 )
3 . The Company distributed its products in two ways -- through a retail channel, an d
through a contract manufacturing channel . In fiscal 2003, 76 .8% of the Company's total net sales
were derived from direct sales to retailers, including Wal-Mart (19 .1 % of net sales) and `Value eens
(17.2% of net sales). Contract sales accounted for 23 .2% of total net sales, with Eastman Kodak
Company ('`Kodak") representing the vast majority of those sales, or 15 .6% of total net sales .
4 . During the class period defendants disseminated reports and press releases containing
inflated sales and earnings, as well as false earnings guidance, based on knowing or reckless false
sales and earnings, in order to artificially inflate the price of Concord stock .
5. Defendants reported false sales and earnings, as well as falsely optimistic earning s
guidance, based on inflated inventory numbers which required substantial writedowns of the
company's excess, obsolete or otherwise impaired inventory . Such writedowns were not timely
taken. Credible evidence exists from confidential witnesses that defendants knew there were
substantial quantities of excess, obsolete and impaired inventory which should ha,, e been written
down, but were not because defendants turned a blind eye to the needed writedowns . S 12 .5 million
in inventory writedowns were required by Generally Accepted Accounting Principles ("GAAP") at
August 14, 2003. Instead of taking the writedowns, defendants knowingly or recklessly deceived
the investing public by splintering the writedown and taking it in several pieces during the balance
of fiscal 2004 in order to minimize the impact of the writedown .
6. Defendants further inflated sales and earnings by improperly recognizing revenue s
on new digital cameras where GAAP does not permit revenue recognition because defendants could
not set any realistic provision for returns . No realistic provision for reserves could be set because
there was a lack of history for these new products and because no reasonable method for estimating
returns on these new digital products existed, in part because Concord cameras did not contain serial
numbers and therefore returns could not be tracked . Credible evidence exists from confidential
witnesses that defendants knew they could not track the returns and, therefore, had no basis in fact
to set any meaningful provision for returns .
7. The fraudulent accounting was facilitated through defendants opportunisti c
exploitation of a woefully deficient system of internal accounting controls which hid their fraud from
employees . As ultimately admitted by Concord's auditors, Concord's accounting system lacked the
internal controls that were needed to provide reasonable assurance that material misstatements
caused by error or fraud in "the Company's inventory valuation, revenue recognition and reserves
and allowances processes" could be "detected within a timely period by employees in the normal
course of performing their assigned functions . "
8 . Not only did defendants misrepresent their sales, earnings, inventory and accounting
controls during the class period, but they also withheld material information about their key
personnel and their customers . During the Class Period, defendants failed to disclose the January 1,
2004 departure of defendant Brian F . King, a key member of management who oversaw operations,
and affirmatively misrepresented to the market that he continued to participate in management until
May 11, 2004 when his departure was belatedly disclosed . Additionally, although Kodak provided
19 .6% of the Company' s sales in fiscal 2004, Concord did not disclose until October 1, 2004, that
Kodak had notified the Company that it would stop purchasing cameras from Concord under tw o
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manufacturing contracts . Defendants were aware but concealed the fact du ring the class period that
Kodak was upset because the Company had infringed on Kodak's patents and, therefore, Kodak had
cancelled these material contracts claiming an entitlement to royalties .
9. The price of the Company's stock was at $10 .30 on August 14, 2003 at the beginning
of the class period . It closed at $1 .68 on August 31, 2004 the end of the class period .
The chart below shows the stock prices and movements during the relevant period .
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10. The truth about defendants misstatements was partially revealed on May 11 2004 .
That day Concord Camera delayed the filing of its Form 10-Q with the Securities and Exchange
Commission due to "recent adverse changes in the marketplace" that it believed would impact its
operations and explained that it was reevaluating its estimates for sales returns and allowance in light
of price declines in the digital camera market . Concord Camera announced it expects a loss of
between $19 million and $20 million for the quarter, including the adverse impact of inventory
provisions of $6 million to $7 million . The company also said Brian King was leaving his senior vice
president position .
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©BIgCharts .com
F M A M J J A S O N D 04 F M A M J J A S 0 N D 05 F M A M J
11, (a) The stock plummeted on May 11, 2004 and thereafter on the shocking news of
the $6 to 7 million inventory writedown, the fact that the company was reevaluating its returns
allowance, and the departure of Brian King. On unusually heavy volume, the stock declined from
its closing on May 10, 2004 of $4 .62 to $3 .04 on May 11 . The price continued to decline on Max'
12 and 13 to $2 .68, on continuing heavy volume .
(b) On August 31, 2004 the dismal state of the company's accounting functions wa s
further revealed . The company disclosed in a terse 8K, a filing reserved for material disclosures
which could affect the price of a company's stock, that Donald Dawn, the company's ne\,.vly
appointed Chief Financial Officer, resigned his position after just twelve days on the job . This abrupt
resignation followed the resignation of former CFO defendant Richard Finkbeiner, and occurred
immediately prior to the time when Concord was scheduled to report it fourth quarter fiscal 2004
results . Upon that announcement, Concord's stock dropped another 14% to S 1 .68 from S 1 .95 the day
before the 8K filing .
12. Defendants were motivated to commit fraud to increase Concord's ability to borro w
from its principal lender . This lending relationship was critical to the Company's manufacturing
activities in China. Insiders also profited on their class period sales of Concord securities at
artificially inflated prices . Shortly after the end of the Class Period, the Company announced that
its principal lender had substantially reduced Concord's credit facilities and subordinated
approximately $20 million in inter-company payables from the Company's Hong Kong subsidiary,
the primary borrower on the credit facilities .
JURISDICTION AND VENU E
13 . This Cou rt has ju risdiction over the subject matter of this action pursuant to § 27 of
the 1934 Act ( 15 U.S .C. § 78aa ) and 28 U.S .C. § 1331 . The claims asse rted herein arise under
Sections 10 ( b) and 20(a) of the Exchange Act, 15 U.S .C . ` 78j(b) and 78t(a), and the rules and
regulations promulgated thereunder by the SEC, including Rule 10b-5 , 17 C .F.R. ~ 240.10b-5 .
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14 . Venue is proper in this Dist ri ct pursuant to Section 27 of tile Exchange Act, 28 U .S.C .
§ 1391(b). Many of the acts and transactions giving rise to the violations of law complained of
herein , including the preparation and dissemination to the investing public of false and misleading
information , occurred in this District . In addition , Concord maintains its principal executive offices
in this Judicial District .
15 . In connection with the acts , conduct and other wrongs complained of herein, the
defendants used the means and instrumentalities of interstate commerce , including the mails,
telephone communications and the facilities of national secu rities exchanges .
THE PARTIES
16 . Lead Plaintiff Stephen J . Mazur, a resident of Port St . Lucie, Florida, was appointed
Lead Plaintiff by Order of the Court dated June 15, 2005 . Lead Plaintiff purchased Concord
common stock during the Class Period and was damaged as a result of the wrongful acts of
defendants alleged herein . Lead Plaintiff's purchases and sales of Concord common stock during
the Class Period are set forth in the certification filed as part of Lead Plaintiff's initial complaint on
November 16, 2004 and is incorporated herein by reference .
17. Defendant Concord is headquartered in Hollywood, Florida . As of August 29, 2003 ,
Concord had 28 .61 million shares of common stock outstanding. During the Class Period, Concord
stock traded on the National Association of Securities Dealers Association Quotal-System
(NASDAQ) under the ticker symbol "LENS ." After the Class Period, as a result of the Company's
delinquency in filing its third quarter fiscal 2005 Form I 0-Q, a fifth character "E" N\ as appended to
its trading symbol on May 17, 2005, which was recently dropped .
18. Defendant Ira B . Lampert ("Lampert") is the President and Chief Executive Officer
of the Company and Chairman of the Board.
19. Defendant Harlan I . Press ("Press") is the Vice President, Treasurer and Assistant
Secretary .
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20. Defendant Richard M . Finkbeiner ("Finkbeiner") was the Chief Financial Officer
("CFO") and Senior Vice President throughout the Class Period . Finkbeiner stepped down as CFO
of Concord effective July 27, 2004 . Finkbeiner was succeeded by Donald D . Dawn ("Dawn") who
became CFO effective August 16, 2004 . Dawn resigned after twelve days, however, on August 28,
2004. Dawn had 27 years of accounting experience before joining Concord and had held various
positions at KPMG LLP .
21 . Defendant Brian F. King ("King") was the Senior Executive Vice President of th e
Company since February 2002, and the Assistant Secretary of the Company since September 15,
2003. King's employment contract with the Company ended on January 1, 2004 . As set forth
below, however, the Company continued to refer to King as a member of management and as a
contact person in its public announcements, even after King's employment contract had ended . As
of March 29, 2004, the Company entered into a separation agreement with King . King's departure
from the Company was publicly announced on May 11, 2004. King had previously served as Senior
Vice President from August 1998 to February 2002 and as Chief Operating Officer from February
2002 to December 2002 and as secretary from August 1996 to September 14, 2003 . Effective as of
January 1, 2003, King was replaced as Chief Operating Officer of the Company by Keith L . Lampert,
the 33-year old son of Ira B . Lampert .
SUBSTANTIVE ALLEGATION S
Concord 's August 12 , 2003 Announcement ThatIts New Zoom Digital Cameras Are Available for Sal e
22. On August 12, 2003, before the start of the Class Period, Concord issued a press
release announcing two new products ; the Concord Eye-Q 3340z and the Concord Eye-Q 4060AF .
The press release stated that the "Concord Eye-Q 4060AF is now available at Ritz Cameras and other
selected retailers" and that the "Concord Eye-Q 3340z is expected to be available at selected retailers
in August 2003 ."
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Class Period Commences With Defendants' Positive Earnings Guidance on August 14,2003 and Announcement of Concord's Misstated Fiscal 2003 Financial Result s
23 . On August 14, 2003, the day the Class Period commences, Concord issued a pres s
release reporting financial results for the fourth qua rter and fiscal year ended June 28, 2003 and
financial guidance for the first quarter of fiscal 2004. This press release stated, in relevant part :
[N]et sales . . . were $61 .5 million, a 100% increase over the same quarter last year .Net income was $1 .7 million, or $0 .06 per diluted share . This compared to sales of$30.7 million, and net income of $0 .9 million, or $0.03 per diluted share for thefourth quarter of the prior fiscal year . Excluding non-cash variable stock optionexpense of $0.9 million ($0.8 million after taxes) in this year's fourth quarter, netincome was $2 .5 million, or $0 .08 per diluted share .
Commenting on the short-term outlook for the Company, Mr. Lampert continued,"Providing long-term future guidance continues to be challenging . The economyremains difficult to forecast . Currently, for the first quarter of fiscal 2004, we eanticipate revenues in the approximate range of $55 to $60 million and net incomein the approximate range of $2 .1 to $2 .7 million, or $0 .07 to S0 .09 per diluted share,before any non-cash variable stock option expense . "
24. On August 14, 2003, Concord also held a conference call during which defendan t
Lampert reiterated the reported financial results for the fourth quarter and fiscal year ended June 28 ,
2003 and first quarter fiscal 2004 guidance which was set forth in the August 14, 2003 Concord
press release .
25. During the August 14, 2003 conference call, defendant Lampert also stated th e
following with regard to margins associated with Concord's new 3 megapixel CCD camera : "As we ,
to answer your question speci fically , move up with more sophisticated , reasonably priced CCD
products, we will enjoy better margin in terms of dollars and in percentage .
26 . During the August 14, 2003 conference call, defendant King stated the following with
regard to the Company's new Enterprise Resource Planning ("ERP") system and defendant King' s
personal goals through fiscal 2006 :
In digital cameras, it is my objective to achieve a 5 percent market share in theUnited States and European markets, and to derive 50 percent of our total revenuesfrom this product category by the end of our fiscal year 2006 .
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. . .the Company has decided to implement a world-class enterprise resource planningsystem to replace and expand and enhance upon its current financial, supply chainand manufacturing systems . The new ERP system with software provided by SAPwill provide us with an integrated system for global operations and improvedfunctionality and reporting capabilities in all areas of our business . We believe thenew system is necessary to support our anticipated growth, and will greatly improveour overall operational effectiveness and efficiency .
27. During the August 14, 2003 conference call, Concord's business with Kodak was
discussed .
28. The contents of the August 14, 2003 press release and the comments expressed du ring
the August 14, 2003 conference call had the desired effect . Concord's stock price jumped from a
closing price of $9 .45 on August 13, 2003 to a closing price of S 10 .30 on August 14, 2003 .
29. Unbeknownst to the investing public , however, the contents of the August 14, 2003
press release and ce rtain statements made during the August 14, 2003 conference call were
materially false and misleading because :
a. the reported sales and earnings were materially misstated due to Concord' s
failure to recognize inventory losses arising from Concord's inability to sell its excess, obsolete, an d
otherwise impaired inventory at a price in excess of its carrying value, and due to Concord' s
improper recognition of revenue on de facto contingent sales, as discussed more fully below .
b. defendant Lampert's comments concerning the "better margin in terms o f
dollars and in percentage" associated with the Company's newest 3 megapixel CCD camera was
materially false and misleading because, as later revealed by defendant Lampert during the
Company's February 5, 2004 conference call, "the development . . . was not completed in a reasonable
time so as to provide for low-cost, high-quality, high-volume manufacturing . And as a consequence,
resulted in a negative impact to our gross profits and margins during the second quarter . "
c. defendant King's comments regarding the new ERP system ,\ ere materiall y
false and misleading because, even with a state of the art ERP system, Concord could not achiev e
improved functionality and repo rt ing capabilities due , at least in part, to Concord's woefully
deficient inventory system and its non-serialization of its cameras as discussed more fully below .
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d . the earnings guidance was materially false and misleading because it was
predicated upon Concord's continued failure to comply with GAAP (particularly as it related to
Concord's failure to adjust the carrying value of its inventory to the lower of cost or market as
required by Accounting Research Bulletin No. 43, and due to Concord's failure to comply with the
revenue recognition provisions set forth in FASB Statement No . 48 as discussed below) and because
it concealed the fact that the guidance included a planned partial write-off of the Company's non-
disclosed and non-reserved-for excess, obsolete and otherwise impaired inventory, and that the total
of the Company's excess, obsolete and otherwise impaired inventory approximated 512 .5 million
as of August 14, 2003 and would be written off against earnings, not at once, as required, but
incrementally, during Concord's 2004 fiscal year .
e. defendants concealed the fact that Concord had infringed upon Kodak patent s
and by infringing upon Kodak patents : (I) Concord was liable to Kodak for a material amount of
royalties ; (ii) Concord had violated the terms of its agreement with Kodak, thereby permitting Kodak
to cancel the agreement (which was to run through February 2006) without penalty, and (iii) Concord
would lose a key customer forever and would be stuck with a huge inventory of parts and purchase
commitments to acquire parts that it would not be able to use, triggering the need to take inventory-
related charges against earnings of no less than $6 million .
Concord 's Improper Accounting Practice s
30. It is the practice in some industries for customers to be given the right to return a
product to the seller under certain circumstances . Concord followed such a practice . Its customers
were given a blanket right to return digital cameras purchased from Concord, on a no questions
asked basis .
31 . The GAAP which governs revenue recognition when the right of return exists (FASB
Statement No . 48; a/k/a SFAS No . 48) observes that : "Arrangements in which customers buy
products for resale with the right to return products often are referred to as guaranteed sales ." FASB
Statement No . 48 specifies criteria for recognizing revenue on guaranteed sales (sales in which a
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product may be returned, whether as a matter of contract or as a matter of existing practice, either
by the ultimate customer or by a party who resells the product to others) . It states, i f a company sells
its product but gives the buyer the right to return the product, revenue from the sales transaction is
permitted to be recognized at time of sale only if "the amount offuture returns can be reasonabtr
estimated. "
32 . As stated above, GAAP (FASB Statement No . 48) prohibits the recognition o f
revenue in instances where products are sold on a guaranteed sales basis (i .e ., sales were subject to
the right of return) and the amount of future returns cannot be reasonably estimated . For the reasons
discussed below, at all relevant times, Concord could not reasonably estimate the amount of future
returns and was, therefore, precluded from recognizing revenue upon the sale of returnable products
to its customers .
33 . Several confidential witnesses stated that Concord sold its products to retailers such
as Wal-Mart on a guaranteed sales basis with a de facto blanket return privilege . Accordingly, these
retail customers never took any risk because, if they were unable to sell the products purchased from
Concord, they would return it and receive a refund or a credit towards other purchases .
34. As stated by these confidential witnesses, throughout the Class Period, the Compan y
had been introducing new products which had no track record . Although the Company hoped for
a favorable market acceptance, there was no way to know whether the new products would sell .
Moreover , these new product introductions were subject to rapid obsolescence because they were
introduced during a pe riod when technology was changing so fast that , by the time a company had
introduced a particular product , the competition had introduced a similar improved product at a
lower p rice . Accordingly , there was no way for Concord to estimate reasonably the magnitude of
product retu rns on its new products pursuant to its guaranteed sales arrangements .
35 . Concord was, therefore , precluded from recognizing revenue at the time of sale, and
was permitted by GAAP (FASB Statement No . 48 ) to recognize revenue only -%~ hen the retu rn
privilege has substantially expired . . ." In contravention of GAAP, throughout the Class Period, the
Company recognized revenue upon the sale of its returnable products and established de minimrr/s
provisions for returns .
36. Moreover, according to CW4, an accountant who worked at Concord during the Class
Period and was intimately familiar with Concord's books and records and discussed Concord's
accounting issues with Ernst & Young's audit partner Bill Shillington and Ernst & Young's audit
manager Jesus Socorro : "Concord's cameras were not serialized" (they did not have serial numbers
on them) and, therefore, when cameras were returned for credit by a retail customer (i .e . Wal-Mart --
which was "the customer that returned the most digital cameras") there was no way of determining
when the cameras were sold to that customer .
37. Additionally, CW4 stated that because the price at which Concord sold its camera s
(particularly digital cameras) tended to drop over time (due to technological advances) "there was
no way of determining whether the customer returning the camera was returning one that it had
purchased at the higher initial price or whether the customer returning the camera was returning one
that it had purchased at the lower discounted price . . . . There was no way of tracking when a
customer bought it . "
38. When asked how Concord handled the issuance of credits associated with the return
of cameras, CW4 stated : "It would involve a lot of research to try to determine the correct amount"
and "the effort was not worth it ." Therefore, Concord "accepted the amounts that the customer
deducted from current invoices" as the amount that was credited. In the words of CW4 : "The
customer claimed an amount and took a deduction ; Concord accepted it because there ww as no way
of knowing if it was right or wrong . "
39. CW4 described a situation wherein Concord had (a) no way of associating any
particular sale with any particular return (paragraph 36) ; (b) no way of enforcing any return policy
(i .e ., permitting credit for the return of merchandise only within 30, 60 or 90 days)(paragraph 37) ;
and (c) no way of legitimately disputing customer claims for credit (paragraph 38) .
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40. In view of the inability to associate sales with returns, the amount of future returns
associated with any given sale was not reasonably estimable . Therefore, defendants were required
by GAAP (FASB Statement No . 48, as discussed above) to recognize revenue only when the return
privilege had substantially expired . Concord did not adhere to this GAAP . Instead, throughout the
Class Period, Concord improperly recognized revenue upon sale and established de »1inimis
provisions for returns for which there was no basis .
41 . CW4 stated that "everyone knew that it [the non-control over credits due to the non-
serialization of cameras] was a big problem." CW4 discussed this problem with "supply, sales,
accounting, everyone ." When asked whether defendants knew of the problem, CW4 stated that they
did, and commented that "It is still under discussion now." (August 11, 2005 )
42 . CW5, a highly placed individual in supply chain management at Concord during th e
Class Period, stated that "when a camera had been sold, and was later returned to Concord, there Was
no way of determining when the camera had been sold, to whom, and at what price ." CW3, an
Accounting Supervisor at Concord during the Class Period, confirmed this statement as follows :
"None of the cameras manufactured and sold by Concord Camera bore serial numbers . As a result,
whenever a camera was returned by a customer, there was no way of determining when the camera
was sold, or for what price . "
43. Additionally, according to CW3 : "Whenever Wal-Mart returned cameras to Concord ,
they would obtain a Return Authorization, and Wal-Mart themselves would calculate the amount of
credit they were owed for the returned cameras ." CW3 further stated that "rather than Concord
sending a refund check for the returned cameras, Wal-Mart merely deducted the credit for the
returned cameras from its next Concord Camera invoice, and paid the amount of invoice, less the
credit ." CW5 confirmed this, stating that it was Wal-Mart's practice to just deduct from the next
invoice sent by Concord to Wal-Mart the amount it had calculated as the price Wal-Mart had paid
for the returned cameras .
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44. These statements were echoed by yet another confidential witness, CW2, a Concord
employee during the Class Period who was responsible for inventory management including
receiving, invoicing and reconciliation . CW2 stated:
Concord Camera had an open return policy for its customers, meaning that anyproduct could be returned, at any time, for any reason .
The cameras sold by Concord Camera did not bear serial numbers, and when cameraswere returned to Concord by their customers such as Wal-Mart, there was no way ofdetermining when the camera was purchased, or the price paid when it waspurchased .
45. CW4 stated that "everyone knew that it [the non-control over credits due to the non-
serialization of cameras ] was a big problem ( paragraph 41) ." CW4 discussed this problem with
"supply, sales , accounting , everyone." When asked whether defendants Lambert , King, Press .
Finkbeiner , knew of the problem , CW4 stated that they did, and commented that "It is still under
discussion now ." (August 11, 2005 )
46 . According to CW4 , who frequently discussed Concord ' s computerized accountin g
systems with defendants Lampe rt, Press, and Finkbeiner , stated that throughout the Class Period
these individuals turned a "blind eye" to the computer-related invento ry problems . As long as they
knew what was in invento ry they did not care what the books and records of the Company reflected
with regard to invento ry until the auditors forced them to address the issue . As CW5 stated,
defendants Lampe rt, Press, Finkbeiner , and King "constantly knew what they had in inventory, and
knew which customers were purchasing which cameras . "
47 . There is also a strong inference that each of the individual defendants knew of the
above discussed inventory issues because, as stated in the fiscal 2003 Form 10-K : "Our business is
managed by a small number of key management and operating personnel ." Moreover, according to
CW2, defendant Lampert held "regular meetings regarding inventory" and "Brian King was a critical
component of Concord Camera. He knew everything about the operation from the Chinese
manufacturing plant, to developing major customers such as Wal-Mart . In short, he was the glue tha t
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held Concord Camera together ." Indeed, a September 13, 2004, United Energy Corp . press release
correctly described defendant King as "senior executive vice-president, the number two position i n
the company . "
48 . During the Class Period, even under the Company's improper method of accountin g
for sales, returned merchandise (primarily excess, obsolete, and damaged cameras) was, according
to several confidential witnesses, in significant part never reserved for in the Company's books and
records. As a result, at all relevant times, the Company's reported inventory and earnings were
materially overstated and the reported cost of products sold was materially understated . Accordingly,
each of the Company's financial statements which were disseminated to the investing public during
the Class Period were materially misleading .
49. GAAP (Accounting Research Bulletin No . 43) provides that : "The primary basis o f
accounting for inventory is cost ," but that :
A departure from the cost basis of pricing the inventory is required when the utilityof the goods is no longer as great as the cost . Where there is evidence that the utilityof goods, in their disposal in the ordinary course of business, will be less than cost,whether due to physical deterioration, obsolescence, changes in price levels, or othercauses, the difference should be recognized as a loss of the current period . This isgenerally accomplished by stating such goods at a lower level commonly designatedas market .
50. In contravention of this GAAP (Accounting Research Bulletin No . 43), during th e
Class Period, the Company's financial statements as of and for the fiscal year ended June 28, 200 3
(and throughout the Class Period) failed to recognize charges to earnings to properly reflec t
Concord' s "goods" (inventory) at the lower of cost or market value .
51 . According to various witnesses as set forth herein, at all relevant times, defendant s
Lambert, King, Press, Finkbeiner, knew of the Company's failure to adequately record charges t o
earn ings by writing down the excess , obsolete and otherwise impaired inventory .
52 . As stated by CW I, a Concord Executive Administrative Assistant du ring the Clas s
Period, "at end of fiscal 2003 and the beginning of 2004, there was a great deal of excess inventor y
of cameras in the Concord Camera warehouses in Florida, China, and London ." According to CVO' 1 :
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Some of this inventory was old and obsolete because it consisted of single-usecameras loaded with film which had either reached or passed the film expiration date .There was also in that inventory, 1 .3 megapixel digital cameras built for ConcordCamera, which were not selling because Concord's competitors were selling 3 .0megapixel digital cameras for the same price . The consumers were purchasing thenewer, higher megapixel cameras .
53 . As stated above, during the Class Period, Concord was manufacturing 3 Megapixe l
cameras, such as the Eye-Q 3340z, and the 1 .3 megapixel cameras, which had been produced in bulk
during latter 2001 (on September 7, 2000, Concord announced that it had "obtained rights to certain
Hewlett-Packard digital image acquisition and image enhancement technology for its product lines
of digital cameras that have up to 1 .3 megapixel resolution") and 2002, had been effectively made
obsolete by technological advances in the industry .
54. Additionally, according to CW 1, the "old and obsolete inventory had been carried on
the Concord Camera books for between one to two years after it stopped selling and had never been
marked down on the books and records of Concord . "
55 . These statements were echoed by CW2, who was responsible for inventory
management including receiving, invoicing and reconciliation .
56. CW2 stated that, during the Class Period, "there were 50,000 to 80,000 single use
cameras whose film was either expired or about to expire" and "there were also two models of digital
cameras which were not selling : the Duo LCD 1 .3 megapixel digital camera, and the Duo 1 300 1 .3
megapixel digital camera . "
57. According to CW2, during the Class Period, Concord's 1 .3 megapixel digital cameras
were not selling because "the brand name was not known to the consumers" and because "the p rices
for these cameras was the same price for which competitors were selling 3 .0 megapixel digital
cameras ." Additionally, CW2 stated that the Go LCD 1 .3 megapixel web cam" was also "not
selling."
58. Another con fidential witness, CW3, an Accounting Superv isor at Concord du ring the
Class Pe riod , confirmed that "many single -use cameras which were not selling contained film which
was either expired or was about to expire " and that "the cameras which were not selling were the 1 . 3
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megapixel digital camera ." Additionally, CW3 had no recollection of ever receiving a single chec k
from any customers for the purchase of the Webcam sold by Concord .
59. CW3 stated that Concord's digital cameras were not selling because of th e
competition from other manufacturers who sold a higher megapixel digital camera (and thus highe r
resolution) for the same price .
60. Additionally, CW3 spoke of personally receiving "many of the returned digita l
cameras with letters from dissatisfied customers who complained that there was too short a batter y
life, poor picture quality, and the camera was difficult to use." CW2 also stated that : "The Eye-Q
3340Z was retu rned quite often because of the battery life issue . "
61 . To make matters worse, throughout the Class Period, Concord's perpetual inventor y
system was, as stated by CW4, "known by everyone to be inaccurate ." Elaborating, CW4 stated that :
a. "The inventory function was a separate stand alone computer module" tha t
"never tied into the general ledger . "
b. "There were always differences between the inventory report and the genera l
ledger ."
c. "The inventory report was unreliable . "
d. "Figures were always out of balance and had to be manually adjusted . "
62. For example, as stated by CW5 (the highly placed person in Concord's supply chain
management during the Class Period), Concord established a West Coast warehouse outside Lo s
Angeles operated by Hellman . According to CW5, as of fiscal year end 2004 , S2 million of thi s
West Coast warehouse inventory was found to have been non-existent :
The computerized inventory system utilized by Hellman did not interface with thesystem used by Concord in Florida . As a result, the inventory shown to exist inCalifornia did not jive with the inventory which Concord Florida believed they had,and was off by $2 million .
63 . CW2 stated that prior to the ERP conversion (which occurred in August 2004) ,
inventory reports were generated on a weekly basis and disseminated to the sales side of the busines s
and to Urs Stampfli (Concord's Senior Vice President and Director of Global Sales) who in turn ,
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disseminated them to defendants Lampert, Press, and Finkbeiner . Because the reports were known
by all parties to be inaccurate, according to CW2, defendant Lampert held "regular meetings
regarding inventory."
64 . CW5 confirmed this stating : "on a weekly basis, a computerized Management Order
Report (MOR) was prepared on Friday and was disseminated to Ira Lampert, Harlan Press, Richard
Finkbeiner, Brian King [to the extent that he was employed during the Class Period], and Urs
Stampfli . "
65 . CW4, who frequently discussed Concord's computerized accounting systems wit h
defendants Lampert, Press, and Finkbeiner, stated that throughout the Class Period these individuals
turned a "blind eye" to the computer-related inventory problems . As long as they knew ,vat was
in inventory they did not care what the books and records of the Company reflected with regard to
inventory until the auditors forced them to address the issue . As CW5 stated, defendants Lampert,
Press, Finkbeiner, and King "constantly knew what they had in inventory, and knew which
customers were purchasing which cameras . "
66 . In summary, the confidential witnesses described a situation wherein, throughout th e
Class Period, Concord's inventory controls were woefully deficient, Concord's inventorVaccounting
systems was inaccurate, and excess, obsolete and otherwise impaired inventory had been stockpiled,
without being properly written down . This, in conjunction with Concord's failure to comply with
GAAP revenue recognition methodologies, caused each and every financial statement which
Concord disseminated to the investment community during the Class Period to be materially false
and misleading .
Improper Accounting, False Earnings Guidance, And Material Non-disclosures Caused ThePrice Of Concord 's Stock To Soa r
67. Following the August 14, 2003 conference call, the price of Concord stock continued
to climb from $10 .30 on August 14, 2003 to S 12 .25 on August 28, 2003 .
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Defendant Press's Sale of 48,000 Shares onAugust 28, 2003 for Proceeds of $588,00 0
68. On August 28, 2003, defendant Press sold 48,000 shares of Concord stock at S 12 .2 5
per share, realizing proceeds of approximately $588,000 .00 .
Company's False And Misleading Fiscal 2003Form 10-K Filed on September 25, 2003 by Defendant s
69. On September 25, 2003, the Company filed its Form 10-K for the fiscal year ended
June 28, 2003 with the SEC ("the fiscal 2003 Form 10-K") . This document, which was signed by
defendants Lampert, Press, and Finkbeiner, reported substantially the same materially false an d
misleading sales and earnings which were reported in Concord's August 14, 2003 press release .
70. The fiscal 2003 Form 10-K made no mention of Concord's inventory of obsolete 1 . 3
megapixel digital cameras which were being carried at grossly inflated amounts .
71 . Discussing defendant King's employment agreement , the fiscal 2003 Form 10- K
stated : "The term of the employment agreement for Brian F. King expires on January 1, 2004, unless
renewed by mutual agreement of the part ies, and may be terminated on thirty (30) days' notice by
the Company at any time or by the executive after Janua ry 1, 2004 . "
72. In addition, the fiscal 2003 Form IO-K stated :
Our business is managed by a small number of key management and operatingpersonnel . In particular, we rely on the continued services of Ira B . Lampert, ourChairman, Chief Executive Officer and President . The loss of his or any other kevemployee services could have a material adverse impact on our business . (emphasisadded) .
73 . Defendant King was one of the "small number of key management and operating
personnel ." According to Concord's December 18, 2003 Form DEF 14A :
Brian F. King has been Senior Executive Vice President of the Company sinceFebruary 2002 and an Assistant Secretary of the Company since September 15 . 2003 .Mr. King served as Senior Vice President of the Company from August 1998 toFebruary 2002 and as Chief Operating Officer from February 2002 to December2002 . In addition, he served as Secretary of the Company from August 1996 toSeptember 14, 2003, and served as Managing Director of Concord HK from August1996 through April 2000. Mr. King served as the Company's Vice President ofCorporate and Strategic Development from June 1996 to August 1998 .
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74. According to CW2, "Brian King was a critical component of Concord Camera . He
knew everything about the operation from the Chinese manufacturing plant, to developing major
customers such as Wal-Mart . In short, he was the glue that held Concord Camera together ." Indeed,
a September 13, 2004 press release of United Energy Corp . (a public company headquartered in
Secaucus, New Jersey) regarding King's prior employment at Concord correctly described defendant
King as "senior executive vice-president, the number two position in the company . "
75. CW3 stated : "King was an integral part of the business which Concord Camera
conducted . He had been living and working in Japan and managing the Chinese factory which
manufactured the Concord cameras . He was then brought back to the US, and was replaced by Keith
Lampert (Ira Lampert's son) who then headed up the manufacturing operations . King made most
of the decisions at Concord Camera . He was the individual who had the personal relationships with
most of the major customers . He was the one who dealt directly with the Chinese manufacturing
operations, and had everything to do with the cameras which were coming out of China . "
76. As alleged above, defendant King departed from Concord on January 1, 2004 .
77 . Although defendant King was the "senior executive vice-president, the number two
position in the company" and "the glue that held Concord Camera together" his departure was
concealed from the investment community until May 11, 2004 .
78. The fiscal 2003 Form 10-K discussed Concord's contract manufacturing services
business, referred to as Design and Manufacturing Services ("DMS"), stating :
Over the years we have acquired DMS business from several leading companiesincluding Kodak, Hewlett- Packard Company ("Hewlett-Packard") . Nokia MobilePhones Ltd . ("Nokia") and Polaroid . Currently, we are manufacturing two single usecamera products for Kodak under two separate Supply Agreements, the most recentof which was entered into in September 2002 and has a minimum term offorty-two months . We continue to invest in product development and low costmanufacturing to increase business from our existing DMS customers .
79. The foregoing statement regarding the "minimum term of forty-two nmonths" was
materially false and misleading as subsequently revealed in October 2004 when Concord filed its
fiscal 2004 Form 10-K announcing that Kodak was permitted to cancel its contracts ("by the end o f
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the second quarter of Fiscal 2005") prior to the 42 month contractual expiration . In addition . the
fiscal 2003 Form 10-K was materially false and misleading because it failed to disclose that :
a . Concord had infringed upon Kodak patents.
b. By infringing upon Kodak patents, Concord was liable to Kodak for a materia l
amount of royalties .
c. By infringing upon Kodak patents, Concord had violated the terms of it s
agreement with Kodak, thereby permitting Kodak to cancel the agreement (which was to run throug h
February 2006) without penalty .
d. By infringing upon Kodak patents, Concord would lose a key custome r
forever .
e . Because Kodak would cancel its agreement with Concord, Concord would
be stuck with a huge inventory of parts and purchase commitments to acquire parts that it no longe r
would need or be able to use ; that an inventory-related charge to earnings of no less than S6 millio n
would be required.
80 . The fiscal 2003 Form 10-K stated the following with regard to Concord's accountin g
policies and the financial statements which were materially impacted by them :
a. "The accompanying consolidated financial statements have been prepared i n
accordance with accounting principles generally accepted in the United States and include th e
accounts of the Company and its subsidiaries . "
b. "Revenues are recognized when title and risk of loss are transferred to the
customer, which is generally when the product is shipped . Net sales includes a provision for return s
based on historical trends in product returns ."
c. "Inventories, the majority of which are raw materials, components an d
work-in-progress, are stated at the lower of cost or market value and are determined on a first-in,
first-out basis . Work- in-progress and component inventory costs include materi als, labor, and
manufacturing overhead . The Company records lower of cost or market value adjustments fo r
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excess, obsolete or slow-moving invento ry based on changes in customer demand , technological
developments or other economic factors . "
81 . Each of the foregoing statements were materially false and misleading because the
Company's fi nancial statements did not comply with GAAP , specifically the provisions of FASB
Statement No . 48 and Accounting Research Bulletin No . 43, as pa rt iculari zed above .
82 . The fiscal 2003 Form 10-K also contained ce rt ifications by defendants Lampert an d
Finkbeiner as required by Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as
amended, and certifications pursuant to 18 U .S .C . Section 1350, as adopted in Section 906 of the
Sarbanes-Oxley Act of 2002 . These certifications were materially false and misleadin g
because, contrary to the representations of defendants Lampert and Finkbeiner, the fiscal 2003 Form
10-K as particularized herein :
a. contained untrue statements of material fact (i .e, that Concord's financial
statements had been prepared in accordance with GAAP ; that net sales included a provision for
returns based on historical trends in product returns ; and that inventories were stated at the lower of
cost or market value) .
b. omitted to state material facts necessary to make the statements made, in ligh t
of the circumstances under which such statements were made, not misleading (i .e ., that Concord was
precluded from recognizing revenue when its product was shipped to customers, and was required
to defer the recognition of revenue until the return privilege had substantially expired, in observance
of the provisions of FASB Statement No . 48 as specified above; that Concord had failed to adjust
the carrying value of its inventory to the lower of cost or market in compliance with the provisions
of Accounting research Bulletin No . 43 ; that Concord had infringed upon Kodak patents ; that the
Company's internal accounting controls were insufficient to enable the preparation of reliable
financial statements ; and that belated charges to earnings aggregating approximately S 12 .5 million
would be written off against earnings, incrementally, during Concord's 2004 fiscal year .)
contained financial statements and other financial information which did no t
fairly present, in all material respects , the financial condition and results of operations of Concord
(for the reasons specified above) .
On September 29, 2003, Sidon & Company initiated coverage on Concord with a
"Buy" recommendation setting a $16.00 12-month price target .
Concord's November 6, 2003 Press Releas e
83 . On November 6, 2003, Concord issued a press release announcing results for th e
fiscal 2004 first quarter as well as downwardly revised revenue guidance for the fiscal 2004 secon d
quarter, citing an increasingly competitive market for its digital, single-use, and traditional camer a
products .
84. The November 6, 2003 press release also announced a change in Concord's metho d
of allocating costs between items in inventory and items sold, so that the carrying value of inventor \
was decreased by $3 .4 million and this same dollar amount was added to the cost of products sold .
The press release stated :
For the first quarter ended September 27, 2003, net sales ("sales") were S57 .4
million, a 90% increase over the same quarter last year. The net loss was S0 .6
million, or $0.02 per share . This compared to sales of S30.2 million, and net income
of $1 .4 million, or $0 .05 per diluted share for the first quarter of the prior fiscal year .
Excluding this year's first quarter non-cash variable stock option expense of S3 .1
million ($2 .7 million after taxes), net income was $2 .1 million, or S0.07 per diluted
share . In addition, starting in fiscal 2004, the Company changed its method of
applying manufacturing labor and overhead costs to inventory. The Company
believes the new method will improve the matching of costs to theflow ofproductthrough the production processes. Asa result of this change, the cost of products
sold increased by $3.4 million for the first quarter and therefore gross profit and
net income decreased by $3.4 million and $3 .0 million , respectively, or SO. 10 per
diluted share. Since the effect of the change in the first quarter was to reduce by $3 .4million the amount of labor and overhead costs that would have been allocated to theCompany's inventory at the end of the quarter under the prior method, cost of salesin subsequent quarters in fiscal 2004 should be commensurately reduced asinventories decline with an attendant increase in gross profit and net income .
Commenting on the financial results, Ira B . Lampert, Concord's Chairman, ChiefExecutive Officer and President, said, "Concord's sales for the first quarter offiscal 2004 of $57.4 million was right in the middle of the range (S55 to S60million) of the guidance we announced in August. Excluding non-cash variable
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stock option expense, net income was $2.1 million , or $0.07 per diluted shareversus guidance of $2.1 to $2.7 million , or $0.07 to $0.09 per diluted share. "
85 . Because the previous guidance was in line with the reported earnings, the market
recognized that the shocking $3 .4 million decrease to inventory and associated charge to earnings
had been planned, although not previously disclosed . This lack of forthrightness caused the
investment community to question the integrity of management, sending the price of the Company's
stock into a tail spin . The price of the Company's stock, which closed at S1 3 .95 the day before the
announcement, dropped by 28% to close at $10 on November 6, 2003 on an inordinately high trading
volume of 5,219,953 shares .
Concord 's False And Misleading September 27, 2003Form 10-0 Filed On November 12, 2003 By Defendant s
86. On November 12, 2003, the Company filed its Form l0-Q for the quarterly period
ended September 27, 2003 with the SEC ("the September 27, 2003 Form I 0-Q") . This document,
which was signed by defendant Finkbeiner, reflected substantially the same financial information
which was presented in the November 6, 2003 press release . It also incorporated, by reference, the
representations regarding Concord's accounting policies which are specified above ("For further
information, refer to the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended June 28, 2003 . . .") .
87. The September 27, 2003 Form 10-Q also stated the following with regard to
Concord's accounting policies and the financial statements which were materially impacted by them :
a. "The accompanying unaudited condensed consolidated financial statement s
have been prepared in accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X . "
b. "A provision for sales returns is established based on historical trends in
product returns ."
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c. "Inventories, consisting of raw materials, 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 .
Inventories include materials, labor, and manufacturing overhead costs . The Company provides
inventory provisions for excess, obsolete or slow-moving inventory based on changes in customer
demand, technological developments or other economic factors ."
88 . The November 6, 2003 Concord press release and each of the foregoing statement s
(including those which were incorporated by reference to the fiscal 2003 Form 10-K) were materially
false and misleading because Concord's financial statements did not comply with GAAP,
specifically the provisions of FASB Statement No . 48 and Accounting Research Bulletin No . 43 . as
particularized above . As a result, the Company's reported inventory, revenue, and earnings, as
reflected in both the November 6, 2003 press release and the September 27, 2003 Form 10-Q ww ere
materially overstated and the reported cost of products sold was materially understated . In addition,
each of these documents failed to disclose the material facts concerning Kodak, as specified above .
89 . Additionally, the September 27, 2003 Form 10-Q stated the following with regard to
Concord's changed method of applying manufacturing labor and overhead costs to im entory :
During First Quarter Fiscal 2004, the Company changed its method of applyingmanufacturing labor and overhead costs to inventory . Previously, the Company usedthe ratio of labor and overhead costs compared to material costs incurred during atwelve-month period to estimate labor and overhead costs to be applied to materialcosts in inventory at the end of the period . Under the new method, manufacturinglabor and overhead costs are applied to inventory using a standard cost approach toestimate the costs incurred during the procurement and production processes .
The new standard cost approach was made possible by the Company's efforts toupdate its information systems and capture additional information related to itsstandard costs of manufacturing. Management believes the new method ofapplying manufacturing labor and overhead costs to inventories improves thematching of the costs incurred to manufacture the product with their flow throughthe production process. Under APB Opinion No. 20, Accounting Changes, thisaccounting change is considered to be a change in accounting estimateinseparable from a change in accounting method. For First Quarter Fiscal 2004,this change in applying manufacturing labor and overhead costs to inventorieshad the effect of decreasing inventory by $3 .4 million, increasing cost of products
sold by $3.4 million, decreasing net income by $3 .0 million and decreasing basic
and fully diluted earnings per share by $0.10.
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90. The foregoing representations were mate rially false and misleading because, as
described above, confidential witnesses who were intimately familiar with Concord's invento ry
accounting system stated that du ring the fiscal qua rter ended September 27, 2003 :
a. Concord 's inventory accounting system was "known by everyone to he
inaccurate;" (paragraph 61 )
b. Concord ' s invento ry controls were woefully deficient ; (paragraph 61 )
c. Defendants Lampe rt, Press, and Finkbeiner tu rned a "blind eye" to the
inventory problems ; (paragraph 46) an d
d. Non - seri alization of Concord 's cameras exacerbated the deficiencies which
were pervasive in the Company's invento ry controls (paragraphs 36, 37, 38) .
91 . The purported change in accounting methodology was a subterfuge which justifie d
a partial write-down of Concord's overstated inventory without properly identifying the wvrite-down
as a belated charge to earnings to write off a portion of Concord's excess, obsolete and otherwise
impaired inventory. The representation that Concord was updating its information systems and
capturing additional information also falsely led the investment community to believe that Concord
was improving its computerized inventory capabilities when, in fact, this was untrue .
92. As stated by CW5, "Write-downs of Concord Camera inventory were only done a s
a last resort" and "the ultimate decision to write off excess inventory was made by Ira Lampert ."
According to CW5, even labeling a camera as "obsolete" was for internal accounting purposes and
was discouraged ("There was a real reluctance at Concord Camera to label any camera as 'obsolete'
even though that was often the case . The term which Concord used was 'excess inventory ."') .
93. Therefore, a "change in accounting" that effected the same results as an inventory
write-down was more palatable to defendants . Additionally, it obscured the effect of reporting a
large inventory write-down .
94. The September 27, 2003 Form 10-Q stated that the Company's principal lender had
granted the Company "an aggregate of approximately $23 .5 million in borrowing capacity . "
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95 . The September 27, 2003 Form 10-Q contained certifications by defendants Lamper t
and Finkbeiner which were substantially similar to the ones which were contained in the fiscal 200 3
Form 10-K ; they were materially false and misleading for substantially the same reasons as specifie d
above .
96 . The false and misleading statements were made, in part, to induce the Company's
principal lender to increase the Company's borrowing capability . As later revealed in Concord's
December 27, 2003 Form 10-Q : "During the Second Quarter Fiscal 2004, the Compan}•'s Hong
Kong subsidiary increased its overall borrowing capacity by $2.5 million ." The more than 10`0
increase in borrowing capacity (from $23 .5 million to $26 million) was material .
Defendant King's Undisclosed Departure from Concord
97 . As of mid-November 2003, based upon his intimate knowledge of Concord' s
operations which he acquired in his key position of influence and control, defendant King knew that :
a. there was a great deal of excess inventory of cameras being accumulated i n
Concord's warehouses in Florida, China, and London ;
b. there was a great deal of obsolete 1 .3 megapixel digital cameras in Concord' s
warehouses in Florida, China, and London ;
c . excess, obsolete and otherwise impaired inventory which aggregate d
approximately $12.1 million would be written off against earnings, incrementally, during the
remainder of Concord's 2004 fiscal year ;
d. Concord's Eye-Q 3340z digital camera with a three-megapixel sensor and 3 x
optical zoom , which was introduced in August , was not selling and therefore Concord would be
stuck with a huge quantity of additional materially impaired inventory ;
e. a material portion of the excess, obsolete and other ise impaired inventory
had been carried on Concord's books for between one to two years after it stopped selling withou t
having been marked down on the books and records of Concord ;
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f. Concord was always behind the competition when it came to technological
innovations, improved products, and sales ;
g . the reported sales and earnings, as reflected in the fiscal 2003 Form 10-K and
the September 27, 2003 Form I 0-Q, were materially misstated due to Concord's failure to adjust the
carrying value of its inventory to the lower of cost or market, and due to Concord's failure to comply
with the revenue recognition provisions set forth in generally accepted accounting principles
(Accounting Research Bulletin No. 43 and FASB Statement No . 48) ;
h. defendant Lampert's August 14, 2003 comments concerning the "bette r
margin in terms of dollars and in percentage" associated with the Company's newest 3 me-apixel
CCD camera were materially false and misleading because, as later revealed by defendant Lampert
during the Company's February 5, 2004 conference call, "the development . . . was not completed in
a reasonable time so as to provide for low-cost, high-quality, high-volume manufacturing . And as
a consequence, resulted in a negative impact to our gross profits and margins during the second
quarter" ;
defendant King's August 14, 2003 comments regarding the new ERP syste m
were materially false and misleading because, even with a state of the art ERP system, Concord
could not achieve improved functionality and reporting capabilities due, at least in part, to Concord's
woefully deficient inventory system and its non-serialization of its cameras ;
j . the August 14, 2003 earnings guidance was materially false and misleadin g
because it was predicated upon Concord's continued failure to comply with GAAP (particularly as
it related to Concord's failure to adjust the carrying value of its inventory to the lower of cost or
market as required by Accounting Research Bulletin No . 43, and due to Concord's failure to comply
with the revenue recognition provisions set forth in FASB Statement No . 48 as discussed above) and
because it concealed the fact that the guidance included a planned partial write-off of the Company's
non-disclosed and non-reserved-for excess, obsolete and otherwise impaired inventory ;
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k. sales of Concord's lower end cameras were slowly being eroded by the
introduction of cellular phones with comparable digital photography features ; and
defendants had concealed the fact that Concord had infringed upon Kodak patents and by infringing
upon Kodak patents : (I) Concord was liable to Kodak for a material amount of royalties ; (ii) Concord
had violated the terms of its agreement with Kodak, thereby permitting Kodak to cancel the
agreement (which was run through February 2006) without penalty; and (iii) Concord would lose
a key customer forever and would be stuck with a huge inventory of parts and purchase commitments
to acquire parts that it would not be able to use, triggering the need to take an inventory-related
charge to earnings of no less than $6 million .
98 . Defendant King decided to cash out and leave Concord when his employmen t
contract expired . He ceased working for Concord on January 1, 2004 (as subsequently revealed in
a United Energy Corp . Form 8-K which defendant King caused to be filed with the SEC and which
stated: "Mr. King was employed by Concord Camera Corp . from 1996 through 2003 . . .") . Knowing
that news of his departure would adversely impact the market price of Concord's stock, defendant
King concealed his departure and began to sell blocks of his Concord stock while he negotiated a
severance agreement and discretely searched for new employment .
99. Fearful that news of defendant King's departure might adversely impact Concord's
business arrangements with key suppliers, customers, and financial institutions, defendants Lampert,
Press and Finkbeiner joined defendant King in concealing his departure . As a result, neither
Concord's staff nor the investment community knew of King's January 1, 2004 departure .
100. CW3 stated that, beginning in 2004, defendant "King went on a leave of absence ."
According to this witness : "Du ring the first part of2004, when Brian King. Concord Camera's Chief
Operating Officer was not at work , the employees at Concord Camera were told by senior
management that King was away on personal business , and everyone believed that he was coming
back."
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101 . In early 2004, CW2 was "working at the warehouse when the subject of Brian King
came up . People said that they had not seen him for some time and did not know where he was ."
Concord ' s False And Misleading January 16, 2004 Press Releas e
102. On January 16, 2004, Concord issued a press release updating guidance for the fisca l
2004 second quarter . It stated that "net sales for the second quarter ended December 27, 2003 are
expected to be approximately $65 million, resulting in a net loss of between S(2 .0) million and S(2 .5)
million, or $(0 .07) to $(0 .09) per share ." It also noted that : "Concord had previously provided
guidance for the second quarter of sales in the range of $70 to $75 million and net income in the
range of $5 .2 to $6 .5 million, or $0 .17 to $0 .21 per diluted share, before any non-cash variable stock
option expense ." The press release stated : "The disappointing results are primarily attributable to
lower than anticipated digital camera sales coupled with lower than projected average selling prices .
Furthermore, higher manufacturing costs primarily due to inefficiencies related to delays in the
introduction of certain new digital camera product offerings were a significant contributing factor . "
103. The January 16, 2004 earnings guidance was materially false and misleading becaus e
it was predicated upon Concord's continued failure to comply with GAAP (particularly as it related
to Concord's failure to adjust the carrying value of its inventory to the lower of cost or market as
required by Accounting Research Bulletin No . 43, and due to Concord's failure to comply with the
revenue recognition provisions set forth in FASB Statement No . 48 as discussed above) .
104. On January 17, 2004, The Miami Herald carried a story which confirmed that the
Concord Eye-Q 3340z was introduced in August 2003 and that it was a flop from the outset . The
article stated :
The Hollywood-based camera maker Concord Camera had high hopes for itsConcord Eye-Q 3340z digital camera when it was introduced in August .
But the camera, which originally retailed for S199 and featured a three-megapixelsensor and 3x optical zoom, was a bust . Brian King, Concord 's senior executive vicepresident, speculated the camera's nonextending Zoom lens confused customers.
"It didn 't give the impression of a zoom camera, when it was, " King said.
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Even lowering the price to $169 didn't spur sales . Ultimately, Concord was forcedto slash the price below what it cost to make. Concord now no longer makes the3340z .
The 3340z's flop contributed to a disappointing quarter for Concord . The periodended Dec. 27 traditionally is the firm's busiest . On Friday, it projected it would losefrom $2 million to $2 .5 million, or 7 to 9 cents a share, for the three months . That'sfar off earlier guidance given by Concord : a net profit of S5 .2 million to S6 .2 million,or 17 to 21 cents a share .
The shortfall caused Concord's stock to tumble $1 .02, or 13 percent, to close at S6 .60on Friday.
It wasn't all bad news, though .
"Even though this is a decidedly disappointing quarter, we still had the bestquarter in the company 's history from a revenue standpoint , "King said. It expectsto book $65 million in revenuefor the quarter, up from $61.8 millionfor the sameperiod a year earlier, but short of the $70 million to $75 million expected.
Concord reported that it would take an approximately S2 .5 million write-down forinventory and tooling related to the 3340z and other cameras . . .
King conceded that Concord has stumbled from time to time but said it hasconsistently grown earnings through the years .
"Clearly, as a small company we are susceptible to singular events andoccurrences that have an immediate impact on earnings , "King said. " We look atthis quarter as an aberration in the path toward continued growth andprofitability. "
105 . On January 17, 2004, The South Florida Sun-Sentinel carried a story which confirmed
that the Concord Eye-Q 3340z was introduced in August and that it was a flop from the beginning .
The article stated :
Hollywood-based Concord Camera Corp ., said Friday that lagging digital camerasales and lower selling prices means it will likely report a second quarter loss ofbetween $2 million and $2 .5 million, or between 7 cents and 9 cents per share .Earlier it had anticipated a profit of between S5 .2 million and $6.5 million, or 17cents and 21 cents per share, for the quarter .
"We had some cost overruns and inefficiencies because we did not introduce somenew products on time, "said Brian King , Concord 's senior executive vice president.Also , he said, some of Concord's products didn't attract shopper enthusiasm andhad to be marked down .
One example , he said, is a digital camera with an internal Zoom mechanism thatcustomers didn 't take to, evidently preferring the traditional external zoom .
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"That certainly contributed to lackluster sales and the fact we had to discount itto sell it at all, " he said.
Concord expects sales for the quarter to be about S 65 million, rather than S 70million to $ 75 million, the company's earlier estimate . . .
106. King's comments, as reported in the January 17, 2004 editions of The Miami Herald
and The South Florida Sun-Sentinel were materially false and misleading because they led the
investment community to believe that King was still a key officer working for Concord, when thi s
was not true .
107 . Following the Company's warning on January 16, 2004 of the critical Decembe r
quarter shortfall, Raymond James lowered its rating on the stock from "Outperform" to "Marke t
Perform"; while on January 20, 2004, Roth Capital Partners reiterated its "Buy" rating, stating a s
follows:
Reiterating BUY rating. Despite recent volatility in the stock, we remain optimisticabout the company's long-term growth prospects and feel that LENS shares areattractively valued at current levels. Given our revised outlook, we [are] establishinga 12-month price target of $9 .00 per share, based on 21 x our C2004 EPS estimatesof $0.28, plus the company's sizeable cash position of $3 .13 per share . Our projected3-year earnings growth rate is 20-25% .
VALUATION . Our 12-month p rice target of $9.00 per share is based on 21 x ourC2004 EPS estimate of $0.28, plus the company ' s sizeable cash position of S3.13 pershare . We feel that our target multiple is reasonable, given our projected 3-yearearn ings growth rate of 20-25% .
108 . The stock closed at $6 .60 on Friday, January 16, 2004 and at S7 .288 on Tuesday .
January 20, 2004, following the holiday closure of the market on Monday, January 17, as it absorbed
the news .
109. On January 26, 2004, defendant King sold 7,000 shares of Concord stock at an
art ificially inflated pri ce of $6 .853 per share, reaping proceeds of approximately S47,971 .00. The
sale was suspicious and unusual in view of King's prior trading history .
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Concord 's False And Misleading February 5, 2004 Press Release and Conference Cal l
110. On February 5, 2004, the Company issued a press release announcing results for the
second quarter and six months ended December 27, 2003 . This press release announced a S3 .1
million inventory-related charge to earnings stating, in relevant part :
For the second quarter ended December 27, 2003, net sales ("sales") were S65 .1million, a 5 .2% increase over the same quarter last year . The net loss was S(2 .9)million, or S(0 .10) per share . This compared to sales of $61 .8 million, and net incomeof $2 .1 million, or $0.07 per diluted share for the second quarter of the prior fiscalyear. This year's second quarter includes the pretax recognition of a S09 million lossrelated to the decline in fair value of certain short-term investments, which loss wasrealized upon the sale of the investments subsequent to the end of the quarter, anda pretax $3. 1 million charge with respect to certain inventory and tooling primarilt•attributable to digital camera products.
The press release quoted defendant Lampert as attributing, the disappointing results primarily to
"lower than anticipated digital camera sales coupled with lower than projected average selling
prices" and "significantly higher manufacturing costs that were incurred as a result of production
inefficiencies related to delays in completing the development of certain new digital camera
products ." It also quoted defendant Lampert as stating :
"Currently, for the third quarter of fiscal 2004, we anticipate sales in the range of S30 to S35 million
and a net loss in the range of $3 .0 to $4.0 million, or $(0 .10) to S(0 .14) per share, before any
non-cash variable stock option expense or income . "
111 . The earnings guidance was materially false and misleading because it was predicate d
upon Concord's continued failure to comply with GAAP (particularly as it related to Concord's
failure to adjust the carrying value of its inventory to the lower of cost or market as required by
Accounting Research Bulletin No . 43, and due to Concord's failure to comply with the revenue
recognition provisions set forth in FASB Statement No . 48 as discussed above) .
112 . Additionally, the February 5, 2004 press release was materially false and misleading
because it failed to correct the prior material misstatements which are particularized above, and fo r
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substantially the same reasons that the January 16, 2004 press release was materially false and
misleading as specified above .
113. On February 5, 2004, Concord held a conference call during which financial
information substantially identical to the financial information set forth in the February 5, 2004 press
release was reiterated . This financial information set forth in the February 5 press release and
conference call was materially false and misleading for the reasons specified in ~,] 29-3 5, 48-50, and
82 above .
114. During the conference call, the $3 .1 million inventory charge and the issue of
Concord's inventory quality was addressed as follows :
UNIDENTIFIED SPEAKER : oh, sure . This is actually Jill (indiscernible) callingfrom Amherst (ph) Advisors . Most of my questions have been asked, but back on theinventory issue that you talked about on the 3 megapixel CCD . Was this a qualityissue or more a lack of demand'?
IRA LAMPERT: The latter .
UNIDENTIFIED SPEAKER : Okay, so lack of demand for the product .
IRA LAMPERT : Quality was not the issue . We hate to throw away great components-- literally what we're doing .
IKE GALLO : Ira, are you comfortable with the inventory position where it is today?Even with the write-off of I think around $3 million in the quarter of obsoleteinventory, it was basically flat, I guess down slightly from where it was in the thirdquarter . And you're headed into, obviously, your typically seasonally softest salesperiod of the year . How comfortable are you that the inventory position is okay sothat we can expect not to see any further write-downs in inventory?
IRA LAMPERT: Let me answer the question by providing information and then Iwill comment on my level of comfort . Number one, the inventory contains a lot ofcomponents, and a reason the inventory contains a lot of components -- and probablymore so than ordinarily -- is because of what we believe is a lot of demand forcomponents that come from very limited amounts of -- limited supply base . By wayof example, sensors and optical components . So as a consequence, we probably havecomponents that we have bought that would be out of our normal supply chain cycleso as to meet our demands that we see by forecast . That is number one .
Number two, obviously, our inventories are a little higher than we would haveexpected because sales attainment in the second quarter was not what we anticipated .Having said that, we addressed the issue with the one particular product, and mostlyin components, that we thought was a subject of some problems . And we just took
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a charge and wrote it down. We did not hesitate . And therefore, we dealt with theproblem and issue at hand . That is number one and number two .
Number three, we are reasonably comfortable with our inventories . And one thing wedo with our inventories here is we review them very carefully against what weanticipate to be our forecast on our demands in ensuing quarters . Having said that,would I be in a more comfortable position if our inventories were at a smallerquantum? The answer is yes . Because inventory (indiscernible) it would dictate, atleast in our industry, that we would want our turns to be somewhere in the 4 to 6times a range which we have historically achieved . So yes, the answer to the questionis we are a little long on our inventories ; and further yes, we are comfortable . Buthaving said that, we would have liked to have had our inventories at a somewhatlower level .
115 . Defendant Lampert's comments as specified above were materially false an d
misleading because he failed to disclose that there were millions of dollars of excess, obsolete and
otherwise impaired inventory of cameras being accumulated in Concord's warehouses in Florida .
China, and London, (including a huge quantity of 1 .3 megapixel and Eye-Q 3340z digital camera)
which had not been recognized for financial accounting purposes, and which would be written off
against earnings incrementally during the remainder of Concord's fiscal 2004 year .
116. Following the release of second quarter earnings and the conference call on February
5, 2004, Concord stock closed at $6 .75 . On February 6, 2004, despite the mixed second quarter
results, Roth Capital Partners LLC maintained its "BUY" rating on Concord citing attractive
valuation of the shares at current price levels .
117. On February 9, 2004, defendant King sold 8,000 shares of Concord stock at an
artificially inflated price of $6 per share, reaping proceeds of approximately 548,000 .00 . The sale
was suspicious and unusual in view of King's prior trading history .
Concord's False and Misleading December 27, 2003Form 10-0 Filed On February 10, 2004 By Defendants
118 . On February 10, 2004, the Company filed its Form 10-Q for the quarterly perio d
ended December 27, 2003 with the SEC (" the December 27, 2003 Form l 0-Q") . This document,
which was signed by defendant Finkbeiner , reflected substantially the same financial information
which was presented in the February 5, 2004 press release and du ring the February 5, 2004
conference call . It was mate rially false and misleading for substantially the same reasons that the
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February 5, 2004 press release and the representations made during the February 5, 2004 conference
call were materially false and misleading, as specified above .
119 . The December 27, 2003 Form 10-Q also incorporated, by reference, the
representations regarding Concord's accounting policies which are specified above ("For further
information, refer to the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended June 28, 2003 . . .") . Additionally,
it stated the following with regard to Concord's accounting policies and the financial statements
which were materially impacted by them :
a. "The accompanying unaudited condensed consolidated financial statementshave been prepared in accordance with accounting principles generallyaccepted in the United States for interim financial information and with theinstructions to Form 10-Q and Rule 10-01 of Regulation S-X . "
b. "A provision for sales returns is established based on historical trends inproduct returns ."
c. "Inventories, consisting of raw materials, work-in-process and finishedgoods, are stated at the lower of cost or market value and are determined ona first-in, first-out basis . Inventories include materials, labor, andmanufacturing overhead costs . We establish inventory provisions for excess,obsolete or slow-moving inventory based on changes in customer demand,technological developments or other economic factors . "
120. Each of the foregoing statements (including those which were incorporated by
reference to the fiscal 2003 Form l 0-K) were materially false and misleading because the Company's
financial statements did not comply with GAAP, specifically the provisions of FASB Statement No .
48 and Accounting Research Bulletin No . 43, as particularized above. As a result, the Company's
reported inventory, revenue, and earnings, as reflected in both the February 5, 2004 press release and
the December 27, 2003 Form I 0-Q were materially overstated and the reported cost of products sold
was materially understated .
121 . Additionally, the December 27, 2003 Form 10-Q stated that during the fiscal quarter
ended December 27, 2003, "the Company recorded a pre-tax inventory provision of S2 .6 million
primarily attributable to lowering the carrying amount of finished goods related to a certain 3 .0
megapixel charged-couple device ("CCD") digital camera to the estimated market value and to th e
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write-off of certain components and raw materials related to the production of this and certain othe r
digital cameras . "
122 . It also stated the following with regard to Concord' s changed method of applyin g
manufacturing labor and overhead costs to inventory :
During the quarter ended September 27, 2003 ("First Quarter Fiscal 2004"), theCompany changed its method of applying manufacturing labor and overhead coststo inventory. Previously, the Company used the ratio of labor and overhead costscompared to material costs incurred during a twelve-month period to estimate laborand overhead costs to be applied to material costs in inventory at the end of theperiod . Under the new method, manufacturing labor and overhead costs are appliedto inventory using a standard cost approach to estimate the costs incurred during theprocurement and production processes .
The new standard cost approach was made possible by the Company 's effo rts toupdate its information systems and capture additional information related to itsstandard costs of manufactu ring. Management believes the new method of applyingmanufacturi ng labor and overhead costs to invento ries improves the matching ofcosts incurred to manufacture the product with their flow through the productionprocess. Under APB Opinion No. 20, Accounting Changes, this accounting changeis considered to be a change in accounting estimate inseparable from a change inaccounting method . If the Company had not changed its method of applyingmanufacturi ng labor and overhead costs to invento ry du ring the First Quarter Fiscal2004, then cost of products sold and net loss in the Second Qua rter Fiscal 2004would have been $ 1 .1 million and $1 .0 million higher ($0.03 per share ), respectively .Had the Company not changed its method of applying manufactu ring labor andoverhead costs to invento ry, cost of products sold and net loss in Fiscal 2004 YTDwould have been $2 .3 million and $2 .0 million lower ($0 .07 per share ), respectively .
123 . The foregoing representations were materially false and misleading because, a s
described above, various witnesses who were intimately familiar with Concord's inventory
accounting system stated that during the fiscal quarter ended December 27, 2003 Concord's
inventory accounting system was "known by everyone to be inaccurate, (paragraph 61)" Concord's
inventory controls were woefully deficient (paragraph 61), and defendants Lampert, Press, and
Finkbeiner turned a "blind eye" (paragraph 46) to the inventory problems .
124. The purported change in accounting methodology was a subterfuge which justifie d
a partial write-down of Concord's overstated inventory without properly identifying the write-dow n
as a belated charge to earnings to write off a portion of Concord's excess, obsolete and otherwis e
impaired inventory. The representation that Concord was updating its information systems and
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capturing additional information also falsely led the investment community to believe that Concord
was improving its computerized inventory capabilities when, in fact, this was untrue .
125. The December 27, 2003 Form 10-Q stated that the Company's principal lender had
granted the Company "an aggregate of approximately $26 .0 million in borrowing capacity under
various financing and revolving credit facilities . "
126. The December 27, 2003 Form l0-Q contained certifications by defendants Lampert
and Finkbeiner which were substantially similar to the ones which were contained in the fiscal 2003
Form 10-K; they were materially false and misleading for substantially the same reasons as specified
above .
127 . The false and misleading statements were made, in part, to induce the Company' s
principal lender to increase the Company's borrowing capability . As later revealed in Concord's
July 3, 2004 Form 10-K, the Company's Hong Kong subsidiary increased its overall borrowing
capacity by $12.3 million . The more than 47% increase in borrowing capacity (from S26 million
to $38 .3 million) was material . Significantly, the July 3, 2004 Form 10-K stated : "Due to recent
losses, the level of reliance on our credit facility could increase and, as a result, create liquidity
issuesfor the Company due to funding and debt service requirements . "
Affirmative Misrepresentations Regarding Defendant King Issued By Defendant s
128 . On February 11, 2004, Concord issued a press release announcing that Concord was
scheduled to present at the Roth Capital Partners 16th Annual Growth Stock Conference on
Wednesday, February 18, 2004 . The press release referred to defendant King as the Concord
"contact" person at "954-331-4200 ."
129 . On February 12, 2004, Concord issued a press release announcing "35mm film
camera with an easy to use viewfinder, auto focus, motorized film advance and rewind, auto flash
and red-eye reduction for only $17 .99 ." The press release referred to defendant King as the Concord
"contact" person at "954-331-4200 ."
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130. On February 12, 2004, Concord issued a press release announcing "a new waterproof,
single-use camera , the Polaroid SL32F." The press release referred to defendant King as the Concord
"contact" person at "954-331-4200 . "
131 . On February 12, 2004, Concord issued a press release announcing "a new motorized
35mm film camera, the Polaroid 239 SL . . .Priced at only $12 .99." The press release referred t o
defendant King as the Concord "contact" person at "954-331-4200 . "
132. On February 12, 2004, Concord issued a press release announcing "four exciting an d
affordable VGA and 1 Megapixel digital cameras , the Concord Eye-Q Splash, Concord Eye-Q 1200 ,
Concord Eye-Q 640 and Concord Eye-Q 1000 priced at 539 .99-S69 .99 SRP." The press release
referred to defendant King as the Concord "contact" person at "954-331-4200 . "
133 . On February 12, 2004, Concord issued a press release announcing "shipment of th e
Concord Eye-Q 2040 and Concord Eye-Q 3040 AF, affordable 2 and 3 Megapixel digital cameras
specifically designed for consumers seeking a full -featured, easy to use digital camera at a low
p rice." The press release referred to defendant King as the Concord "contact" person at "954-331-
4200."
134. On February 12, 2004, Concord issued a press release announcing the new Concor d
Eye-Q 5062 AF and Concord Eye-Q 4062 AF digital cameras for under S230. The press release
referred to defendant King as the Concord "contact" person at "954 -331-4200 ."
135 . On February 12, 2004, Concord issued a press release announcing its new Eye- Q
4363z and Eye-Q 3343z digital cameras . The press release referred to defendant King as the Concord
"contact" person at "954-331-4200 . "
136. On February 12, 2004, Concord issued a press release announcing its new 5345 z
digital camera . The press release referred to defendant King as the Concord "contact" person at "954-
331-4200 ."
137 . On February 26, 2004, Concord issued a press release announcing that the Compan y
was scheduled to present at the Raymond James 25th Annual Institutional Investors Conference on
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Wednesday, March 3, 2004 at 2 :15 pm Eastern Time . The press release referred to defendant King
as the Concord "contact" person at "954-331-4200 . "
138. On March 4, 2004, Concord issued a press release announcing the appointment of
BoonHow Chong to the newly created position of Vice President, Worldwide Quality . The press
release referred to defendant King as the Concord "contact" person at "954-331-4200 . "
139. On March 15, 2004, Concord issued a press release announcing the appointment of
Masaharu Ito as Vice President for Worldwide Product Development . The press refereed to
defendant King as the Concord "contact" person at "954-331-4200 . "
140 . On April 5, 2004, Concord issued a press release announcing that Concord had signed
an agreement with WYNIT, Inc . to distribute Concord's higher-megapixel digital cameras . The
press release referred to defendant King as the Concord "contact" person at "954-331-4200 . "
141 . On April 14, 2004, Concord issued a press release announcing a distribution
agreement with Ingram Micro, whereby Ingram Micro was to distribute Concord's range of digital
cameras from VGA to 5 MP . The press refereed to defendant King as the Concord "contact" person
at "954-331-4200 . "
142 . The designation of defendant King as the Concord "contact" person in each of th e
above press releases was materially false and misleading because it falsely led the investment
community to believe that defendant King was, at the date of the press release, currently serving as
Concord's Senior Executive Vice President and Assistant Secretary when this was not true . As
noted above, defendant King later admitted that he had terminated his employment with Concord
on January 1, 2004 .
Concord's May 11, 2004 Press Releases Partially Revealed The Truth , But Prolonged The
Fraud Because Defendants Continued To Mislead The Investing Publi c
143 . On May 11, 2004, Concord issued a press release announcing "that it will file Form
12b-25 with the Securities and Exchange Commission extending the Company's time to file a Form
10-Q for the period ended March 27, 2004" because "recent price declines in the digital camer a
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market have negatively impacted the net realizable value of digital camera inventories and, i n
response to market conditions, the Company is re-evaluating its estimates for sales returns and
allowances and the realizability of its deferred tax assets ." The press release also reported that :
The Company's estimated net sales for the quarter ended March 27, 2004 ("ThirdQuarter Fiscal 2004") were in the range of $26 million to S28 million, whichrepresents a decrease of $8 million to $10 million as compared to net sales of S36million for the quarter ended March 29, 2003 ("Third Quarter Fiscal 2003") . Thedecrease in net sales was primarily due to pricing pressures for digital cameras, lowerunit sales for all products and increases in estimated sales returns and allowances .
The Company's net loss for Third Quarter Fiscal 2004 is expected to be in the rangeof $19 million to $20 million, as compared to net income of Sl million for ThirdQuarter Fiscal 2003 . The estimated net loss in Third Quarter Fiscal 2004 reflectsthe impact of significant inventory provisions estimated to be in the range of S6million to $ 7 million in response to pricing reductions by the Company'scompetitors and excess inventory levels at its customers . In addition, the loss alsoincludes unfavorable production variances due to lower than expectedproductionvolumes and manufacturing inefficiencies. The net loss also includes the impact ofestablishing a valuation allowance against the Company's deferred tax assetsestimated to be in the range of $8 million to $9 million . These charges in ThirdQuarter Fiscal 2004 were offset by variable stock-based compensation income ofapproximately $4 million . . . Concord had previously provided guidancefor the thirdquarter of net sales in the range of $30 to $35 million and a net loss in the rangeof $3.0 to $4.0 million , or S(0.10) to $(0.14) per share, before any variable stockoption expense or income.
144. Although defendants informed the investing public that they were going to take a S 6
to $7 million inventory write-down and were revising their estimates for sales returns and
allowances, the above referenced financial representations were materially false and misleading
because they were predicated upon Concord's continued failure to comply with GAAP (particularly
as it related to Concord's failure to adjust the carrying value of its inventory to the lower of cost or
market as required by Accounting Research Bulletin No . 43, and due to Concord's failure to comply
with the revenue recognition provisions set forth in FASB Statement No . 48 as discussed above) .
145 . A partial admission of Concord's improper revenue recognition was later contained
in Concord's fiscal 2004 Form 10-K which was filed on October 1, 2004 as follows: "During Fourt h
Quarter Fiscal 2004, the Company determined that net sales for the Third Quarter Fiscal 2004 had
been overstated by $4.0 million due to ce rtain errors including the timing of reco gn izing revenu e
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from certain customers and the estimation of sales returns and allowances ." What Concord
described as "errors" caused a material 16% overstatement of reported net sales ("Net sales for the
Third Quarter Fiscal 2004 were $28 .3 million ." -- March 27, 2004 Form 10-Q) .
146. Additionally, the May 11, 2004 press release was materially false and misleading
because it continued to conceal the material information and failed to correct the prior material
misstatements which are particularized above .
147 . According to CWI, the statement in the May 11, 2004 press release that price declines
in digital camera markets negatively impacted Concord's digital camera inventory. causing them to
write off between $6 million and $7 million "was not accurate ." According to this witness : "The real
reason Concord Camera had to write off those amounts was its excessive old and obsolete inventory
of 1 .3 megapixel digital Concord Cameras which would not sell due to competitors selling higher
megapixel cameras for the same price . "
148. CW3 confirmed this stating that, contrary to the May 11, 2004 press release whic h
attributed Concord's write-offs to recent price declines in the digital camera market, the write-off
was due to Concord's inability to sell its obsolete Cameras . This witness stated that in late 2003 and
early 2004, sales of Concord's cameras were declining . The problem was that Concord was not
keeping up with the competition in terms of higher megapixel and better quality, and as a result, was
unable to sell its older digital cameras .
149 . Concord issued another press release on May 11, 2004, announcing the departure of
defendant King effective as of July 1, 2004 . The press release stated that
"effective July 1, 2004 Brian King will be separating from the Company . Mr. King currently serves
as Concord's Senior Executive Vice President . "
150. The foregoing press release, though making the belated partial disclosure of King's
separation from the Company, was materially false and misleading because it led the investment
community to believe that defendant King was still serving as Concord's Senior Executive Vice
President and Assistant Secretary and would continue to do so until the fiscal year end, when thi s
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was not true . As noted above, defendant King later admitted that he had terminated his employmen t
with Concord on January 1, 2004 .
151 . The price of Concord stock dropped precipitously on this announcement, from a clos e
of $4.62 on May 10, 2004 to a close of $3 .04 on May 1 l , 2004 and $2 .94 on May 12, 2004 . Volume
on May 11, 2004 and May 12, 2004 was 3,300,700 and 1,272,100, respectively, a huge increase ove r
the stock' s average daily volume .
152. Following the announcements, on May 12, 2004, Roth Capital Partners LLC lowere d
its rating on Concord to "Neutral" from "Buy" and its 12-month price target to S3 .00 from S9 .00 .
The stock dropped to $3 .04 on May 11, 2004 from a close of S4.62 on May 10 , 2004 on heavy
volume of 3,301,000 shares .
153 . On May 13, 2004, defendant King sold 75,000 shares of Concord stock at a n
artificially inflated price of $2 .70 per share to $2 .724 per share, reaping proceeds of approximatel y
$203,000.00 .
154. On May 14, 2004, defendant King sold 104,000 shares of Concord stock at a n
artificially inflated price of $2 .685 per share to $2 .7554 per share, reaping proceeds of approximatel y
$283,000.00 .
Concord ' s False And Misleading May 17, 2004 Press Releas e
155 . On May 17, 2004, Concord issued a press release repo rt ing financial results for the
third quarter and nine months of fiscal 2004 ended March 27, 2004 . It stated :
For the third quarter ended March 27, 2004 ("Third Quarter Fiscal 2004"), net saleswere $28.3 million, a 22.0% decrease from the same quarter last year . Net (loss) was$(17 .6) million, or $(0 .61) per share . . .The Third Quarter Fiscal 2004 loss includes theimpact of a significant reduction in the carrying values of certain digital camera andcomponent inventory of $6 .8 million related to recent volatility in the digital cameramarket, resulting from recent price declines and pricing reductions by the Company'scompetitors and excess inventory levels at its customers . In addition, the ThirdQuarter Fiscal 2004 loss includes unfavorable production variances due to lower thanexpected production volumes and manufacturing inefficiencies which createdsignificant under absorption of manufacturing labor and overhead costs .
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Commenting on the financial results, Ira B . Lampert, Concord's Chairman, ChiefExecutive Officer and President, said, "Concord's net sales for the third quarter offiscal 2004 of $28 .3 million were below the guidance we issued in February of S30million to $35 million, primarily due to pricing pressures for digital cameras, lowerunit sales for all products and increases in estimated sales returns and allowances .Recent price declines in the digital camera market have negatively impacted the netrealizable value of digital camera and component inventory and, in response tomarket conditions, the Company has significantly lowered the carrying value of thisinventory and reduced its net deferred tax assets .
156. The financial representations in the May 17, 2004 press release were mate ri ally false
and misleading because they were predicated upon Concord 's continued failure to comply with
GAAP (part icularly as it related to Concord 's failure to adjust the carrying value of its inventory to
the lower of cost or market as required by Accounting Research Bulletin No. 43, and due to
Concord 's failure to comply with the revenue recognition provisions set fo rth in FASB Statement
No. 48 as discussed above) .
157. Additionally , the May 17, 2004 press release was mate ri ally false and misleadin g
because it failed to correct the prior material misstatements and because it concealed substantially
the same facts which were concealed in preiously specified documents and press releases as
discussed above .
Concord 's False And Misleading March 27, 2004 Form 10-0 Filed On May 17, 2004
158. On May 17, 2004, Concord filed its Form I 0-Q for the quarterly period ended \larc h
27, 2004 with the SEC ("the March 27, 2004 Form 10-Q") . This document, which was signed by
defendant Finkbeiner, reflected substantially the same financial information which was presented
in the May 17, 2004 press release . It was materially false and misleading for substantially the same
reasons that the May 17, 2004 press release was materially false and misleading, as specified above .
159. The March 27, 2004 Form 10-Q also incorporated, by reference, the representations
regarding Concord's accounting policies which are specified above ("For further information, refer
to the consolidated financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended June 28, 2003 . . .") . Additionally, it stated the
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following with regard to Concord's accounting policies and the financial statements which were
materially impacted by them :
a. "The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted in the united States
for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X" ;
b. "Revenues are recognized when title and risk of loss are transferred to th e
customer, which is generally when the product is shipped . Revenues are recorded net of anticipated
returns which the Company estimates based on historical rates of return, adjusted for current events
as appropriate, in accordance with Statement of Financial Accounting Standard ("SFAS") No . 48,
Revenue Recognition When Right of Return Exists . Revenues are also recorded net of certain
allowances provided to customers, including those related to advertising, discounts, and other
promotions, in accordance with Emerging Issues Task Force ("EITF") Issue No . 01-09,
Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products)",
and
c. "Inventories, consistingofraw materials, 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 .
Inventories include materials, labor, and manufacturing overhead costs . The Company establishes
inventory provisions for excess, obsolete or slow-moving inventory based on changes in customer
demand, technological developments or other market and economic factors . "
160 . Each of the foregoing statements (including those which were incorporated b y
reference to the fiscal 2003 Form 10-K) were materially false and misleading because the Company's
financial statements did not comply with GAAP, specifically the provisions of FASB Statement No .
48 and Accounting Research Bulletin No . 43, as particularized above . As a result, the Company's
reported inventory, revenue, and earnings, as reflected in both the May 17, 2004 press release an d
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the March 27, 2004 Form 10-Q were materially overstated and the reported cost of products sold wa s
materially understated .
161 . Additionally, the March 27, 2004 Form 10-Q stated the following with regard t o
Concord's inventory:
During the Third Quarter Fiscal 2004, the Company recorded an inventory relatedpre-tax charge of $6.8 million primarily attributable to recent price declines in thedigital camera market, increased competitive pricing pressures and excess customerinventory levels which have negatively impacted the value of its digital camera andcomponent inventory. The Company reduced the carrying value of certain digitalcamera and component inventory below their cost basis to their estimated netrealizable value at March 27, 2004 . The inventory related pre-tax charge of S2 .6million recorded in the Second Quarter Fiscal 2004 was primarily attributable tolowering the carrying value of finished goods related to a certain 3 .0 megapixelcharged-couple device ("CCD") digital camera and certain components and rawmaterials related to the production of this and certain other digital cameras belowtheir cost basis to their estimated net realizable value . For the Third Quarter Fiscal2004, the inventory related pre-tax charge had the effect of decreasing inventory by
$6 .8 million and increasing cost of products sold by $6 .8 million . For Fiscal 2004
YTD, the inventory related pre-tax charges had the effect of decreasing inventory
by $9.4 million and increasing cost of products sold by $ 9.4 million .
During the quarter ended September 27, 2003 ("First Quarter Fiscal 2004"), theCompany changed its method of applying manufacturing labor and overhead coststo inventory . Previously, the Company used the ratio of labor and overhead costscompared to material costs incurred during a twelve-month period to estimate laborand overhead costs to be applied to material costs in inventory at the end of theperiod . Under the new method, manufacturing labor and overhead costs are appliedto inventory using a standard cost approach to estimate the costs incurred during theprocurement and production processes .
The new standard cost approach was made possible by the Company's efforts toupdate its information systems and capture additional information related to itsstandard costs of manufacturing . Management believes the new method of applyingmanufacturing labor and overhead costs to inventories improves the matching ofcosts incurred to manufacture the product with their flow through the productionprocess . Under APB Opinion No . 20, Accounting Changes, this accounting changeis considered to be a change in accounting estimate inseparable from a change inaccounting method . If the Company had not changed its method of applyingmanufacturing labor and overhead costs to inventory during the First Quarter Fiscal2004: (i) cost of products sold and net loss in the Third Quarter Fiscal 2004 wouldhave been $1 .0 million and $0 .9 million lower ($0 .03 per diluted common share),
respectively; and (ii) cost of products sold and net loss in Fiscal 2004 YTD wouldhave been $3 .3 million and $2.9 million lower ($0.10 per diluted common share),
respectively.
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162. The foregoing representations were materially false and misleading because, as
described above, various witnesses who were intimately familiar with Concord's inventory
accounting system stated that during the fiscal quarter ended March 27, 2004 Concord's inventory
accounting system was "known by everyone to be inaccurate (paragraph 61)," Concord's inventory
controls were woefully deficient (paragraph 61), and defendants Lampert, Press, and Finkbeiner
turned a "blind eye" to the inventory problems (paragraph 46) .
163. The purported change in accounting methodology was a subterfuge which justifie d
a partial write-down of Concord's overstated inventory without properly identifying the write-down
as a belated charge to earnings to write off a portion of Concord's excess, obsolete and otherwise
impaired inventory. The representation that Concord was updating its information systems and
capturing additional information also falsely led the investment community to believe that Concord
was improving its computerized inventory capabilities when, in fact, this was untrue .
164. The March 27, 2004 Form 10-Q stated that the Company's principal lender had
granted the Company "an aggregate of approximately $26 .0 million in borrowing capacity under
various financing and revolving credit facilities ."
165 . The March 27, 2004 Form 10-Q contained certifications by defendants Lampert and
Finkbeiner which were substantially similar to the ones which were contained in the fiscal 2003
Form 10-K; they were materially false and misleading for substantially the same reasons as specified
in paragraph 174.
166 . Following the announcement on May 17, 2004, the stock closed at S2 .76 .
Defendant Finkbeiner Resigns, His Replacement Quits I nTwelve Days and a Delinquent Fiscal 2004 Form 10-K Is File d
167 . Effective August 16, 2004, Donald Dawn became Concord's new CFO . According
to an August 2, 2004 press release issued by Concord :
Mr. Dawn, 49, has more than 27 years of experience in finance and accounting . Heis responsible for overseeing Concord's Worldwide Accounting and FinanceOrganization, reporting directly to Ira B . Lampert, Concord's Chairman and ChiefExecutive Officer .
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Mr. Dawn comes to Concord from the Jet Aviation Group, an S800 million,international business aviation services organization with more than 3,000 employeesand seven lines of business . From 2000-2004, he was Worldwide Chief FinancialOfficer, where he was responsible for all areas of finance and accounting, and servedas a member of its Group Management Committee . During his tenure, Mr. Dawnimplemented a variety of programs that reduced costs, increased operating efficiency,mitigated financial and operational risk and improved the transparency of results .
From 1977-2000, Mr. Dawn held positions of increasing authority at hPMG LLP,where he served numerous public and private companies across a broad range ofindustries . He was promoted to Partner-in-Charge of the West Palm Beach, FLoffice in 1992, was named an SEC Reviewing Partner in 1996 and served asProfessional Practice Partner for the firm's South Florida Business Unit in 1999 .Each of these leadership positions requires a deep understanding of technicalaccounting, disclosure and risk management.
168 . The August 2, 2004 press release quoted Dawn as stating :
I am excited to join Concord at this important stage of its growth and development .As an established leader of high-quality, popularly priced digital, single use andtraditional cameras, Concord is now expanding its presence in Europe, addressingnew domestic and foreign sales channels, and introducing a variety of exciting newproducts . I look forward to working with Concord's dedicated group of professionalsto build a world class accounting and finance department to support our anticipatedfuture growth .
The Truth is Revealed
169. Twelve days later , on August 28, 2004, Donald Dawn resigned as Concord's CFO .
In a Form 8-K which Concord filed with the SEC on August 31, 2004, the Company stated :
"Donald D . Dawn resigned his position as Senior Vice President and Chief FinancialOfficer of Concord Camera Corp. (the "Company"), effective August 28, 2004 . Mr .Dawn's decision was unrelated to the Company's accounting principles or practices .The Company has commenced a search for an interim and permanent Chief FinancialOfficer ."
170. Dawn's abrupt disassociation from Concord sent a foreboding message which put th e
investment community on inquiry notice with regard to the lack of veracity and legitimacy of
Concord's financial reporting . Accordingly, on August 31, 2004, CL King & Associates downgraded
the stock to "Neutral ." The stock closed at a new low of $1 .68 (down from the S 1 .95 previous day's
closing price) in anticipation of the imminent disclosure of the adverse information which caused
Dawn to resign .
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Post Class Period Disclosures
171 . On September 13, 2004, United Energy Corp . issued a press release stating :
United Energy, UNRG, names Brian F . King to fill its CEO position . Brian is bestknown for his key role in the growth of Concord Camera in the 1996 -2003 timeperiods . Investors saw Concord revenues grow from $40 million to S200 million andequally important the Concord Camera stock rose from under S4 .00 to over S30.00,including one 2 :1 stock split . Over the seven year period, Brian filled a number ofstrategic positions, including the overseeing and development of Concord's Asianactivities . At the conclusion of his Concord tenure , he was senior executive vice-president, the number two position in the company .
172. Joseph Leonardo, Vice President and Director of Concord's Operations, left Concor d
on October 1, 2004 .
173 . On October 1, 2004, Concord filed its fiscal 2004 Form 10-K with the SEC ("th e
fiscal 2004 Form 10-K") . This document which was signed by defendants Lampert and Press
admitted that :
a. because there existed "significant delays in accumulating data, performin g
analysis, and evaluating results, the Company's financial statement closing process does not ensur e
that on a timely basis employees in the normal course of their duties will identify all material error s
to accounts that involve significant estimates" ;
b. in performing its audit of Concord's fiscal 2004 financial statements, th e
Company's auditors, Ernst & Young LLP, identified "reportable conditions . . . related to the
Company's inventory valuation, revenue recognition and reserves and allowances processes" ,
c. the "Company did not change its internal controls during the fourth fisca l
quarter as a result of the material weaknesses and reportable conditions . "
d . "net sales for the Third Quarter Fiscal 2004 had been overstated by S4 . 0
million" ;
C . net sales were overstated due to errors in "the timing of recognizing revenu e
from certain customers and the estimation of sales returns and allowances" ; and
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f. although Concord had recorded sales to certain customers "throughout th e
fiscal year," at fiscal year end the Company had revisited its revenue recognition practices and
discontinued the recognition of revenue on transactions with these customers because th e
transactions did not meet all of the GAAP requirements for revenue recognition .
g. Kodak had stated that it would " cease purchases under our two DMS contract s
by the end of the second quarter of Fiscal 2005 . "
h. a patent infringement claim had been lodged by "one of our largest
customers " and "resolution of the claims may involve licensing and payments by the Company ."
On October 4, 2004, CL King & Associates dropped coverage of Concord " based on the material
weakness in financial controls and possible non-compliance with Sarbanes-Oxley . . .which we
believe makes LENS' current financial reports unreliable ." The stock closed on October 4, 2004
at $1 .88 .
i . Concord had "recorded inventory related pre-tax charges of approximatel y
$6 .7 million to reduce the carrying value of certain finished goods, components, w; ork-in-process ,
raw material and return camera inventories below their cost basis to their estimated market value a t
January 1, 2005" ; and
j . Concord's principal lender had slashed Concord's credit facilities to Sl 4
million and subordinated "approximately $20 million in inter-company payables from th e
Company's Hong Kong subsidiary to the Company to any amounts owing or which may in the futur e
become owing" to the lender .
SCIENTER ALLEGATION S
174 . As alleged herein , defendants acted with scienter in that defendants knew that th e
public documents, press releases, and statements, issued or disseminated by or in the name of th e
Company, were materially false and misleading ; knew or recklessly disregarded that such statements
or documents would be issued or disseminated to the investing public ; and knowingly an d
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substantially participated or acquiesced in the issuance or dissemination of such statements or
documents as primary violators of the federal securities laws . As set forth elsewhere herein in detail,
defendants, by virtue of their receipt of information reflecting the true facts regarding Concord and
its business practices (particularly regarding inventory, revenue recognition, accounting controls,
personnel departures, liquidity and their relationship with Kodak) their control over and/or receipt
of Concord's allegedly materially misleading misstatements and/or their associations ,N ith the
Company which made them privy to confidential proprietary information concerning Concord were
active and culpable participants in the fraudulent scheme alleged herein . Defendants knew and . or
recklessly disregarded the falsity and misleading nature of the information which they caused to be
disseminated to the investing public . Specifically, as particularized above, at all relevant times,
defendants :
a. knew of the problem arising from the non-control over credits due to the non-serialization of cameras .
b. knew of their inability to associate sales with subsequent returns .
c. knew of their inability to reasonably estimate future returns .
d. knew or recklessly failed to know that Concord improperly recognizedrevenue in violation of rules set forth in GAAP (FASB Statement No . 48) .
e. knew of the enormous accumulation of excess, obsolete and otherwiseimpaired inventory, and knew or reckleesly failed to know that Concordimproperly failed to recognize inventory losses in violation of rules set forthin GAAP (Accounting Research Bulletin No . 43) .
f. knew that each defendant turned a "blind eye" to the Company's computer-related inventory problems .
g. knew that the system of internal controls was highly deficient and could notbe used to generate reliable financial statements particularly in the areas ofinventory valuation, revenue recognition and reserves and allowanceprocesses . (particularly defendant Press who is a member of the AmericanInstitute of Certified Public Accountants, the New York State Society ofCertified Public Accountants and the Financial Executives Institute) thatthere existed "reportable conditions" related to the Company's inventoryvaluation, revenue recognition and reserves and allowances processes thatrendered the Company's financial statements unreliable, at best .
h. knew and concealed the fact that defendant King had left Concord January 1,2004 .
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i . knew and concealed the fact that defendants had infringed upon Kodakpatents thereby rendering Concord liable to Kodak for royalties, enablingKodak to cancel its contracts with Concord without penalty, exposingConcord to the risk of loss of a major customer, and causing Concord to bestuck with a huge inventory of parts and purchase commitments to acquireparts that it would not be able to use .
Defendant Press, who was a member of the American Institute of Certified Public
Accountants, the New York State Society of Certified Public Accountants and the Financial
Executives Institute, would have been particularly knowledgeable about these accounting issues
because of his background as an accountant .
All of the above statements are confirmed by various confidential witnesses, all of whom
were in a position to know these facts . The statements of those confidential witnesses relevant to
these issues are found in paragraphs 36-39, 41-47, 52, 54-65, 75-75, 100-101, 147-148 .
175. The ongoing fraudulent scheme described in this complaint could not have bee n
perpetrated over a substantial period of time, as has occurred, without the knowledge and complicity
of the personnel at the highest level of the Company, including the Individual Defendants, each as
stated in the fiscal 2003 Form 10-K, being a part of the small nucleus of Concord's "key management
and operating personnel ."
Individual Defendants ' Scienter May Be Inferred from the PervasivenessOf Defendants' Non-Disclosures , Particularly the Failure to Recognizeand Report Revenues and Expenses in Accordance With GAAP
176. Defendants were required to cause Concord's SEC filings and the financial s
statements contained therein to disclose the existence of the material facts described herein and to
appropriately recognize and report revenues and expenses in conformity with GAAP . Defendants
failed to cause the Company to make such disclosures and to account for and to report revenue and
expenses in conformity with GAAP . Due to the pervasive mosaic of non-disclosures, deceptive
disclosures, and failure to comply with GAAP, the Forms 10-K and l0-Q (and the financial
statements contained therein) which defendants caused the Company to file with the SEC during the
Class Period were materially false and misleading . Defendants (particularly defendant Press) kne w
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and ignored, or were reckless in not knowing, the facts which indicated that the above specified
Concord filings with the SEC and all of the Company's interim financial statements, press releases,
public statements, and filings with the SEC which were disseminated to the investing public during
the Class Period, were materially false and misleading for the reasons set forth above .
177 . SEC Regulation S-X requires that financial statements filed with the SEC conform
GAAP. Financial statements filed with the SEC which are not prepared in conformity with GAAP
are presumed to be misleading or inaccurate . 17 C.F.R. §210 .401(a)(1) . The financial statements
of the Company, which were disseminated to the investing public during the Class Period (which
were represented as in compliance with GAAP) were not only false and misleading for the reasons
alleged above but also because they did not conform to GAAP .
178. Financial statements fi led in any documents with the Securities and Exchange
Commission are required by Regulation S-X to conform to GAAP. The Company's financial
statements which were included in the Company's public filings with the SEC during the Class
Period were not prepared in accordance with GAAP as set forth herein .
Individual Defendants Were Motivated To Engage In The SchemeTo Increase Its Borrowing Capacity With The Company's Principal Lende r
179. Individual Defendants were motivated to engage in the scheme in order to induce the
Company's principal lender to increase the Company's borrowing capacity in order to fund the
Company's manufacturing activities in China .
180. The Company, until the end of the Class Period, manufactured its products in China .
The Company conducted these activities through Concord Camera (Shenzhan) Company Limited,
which is a wholly owned subsidiary of Concord Camera HK Limited ("Concord HK") . Concord
HK, in turn, is a subsidiary of the Company .
181 . The Company's manufacturing activities in China were dependent upon the
availability of funds in China, avoiding the difficulty of foreign investment and repatriazation of any
unused funds . The Company's principal lender, HSBC, fulfilled this function .
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182. At year end 2003, the Company through its Hong Kong subsidiary, Concord HK, had
various financing and revolving credit facilities with HSBC providing an aggregate of S23 .5 million
in borrowing capacity .
183 . At year end 2003, the facilities consisted of the following :
a. an approximately $11 .0 million Import Facility ;
b. an approximately $2 .6 million Export Facility ;
c. an approximately $1 .9 million Foreign Exchange Facility ;
d . an approximately $8 .0 million Accounts Receivable Facility .
184 . During the Second Quarter Fiscal 2004, the Company's Hong Kong subsidiary
increased its overall borrowing capacity by $2 .5 million from $23 .5 to S26 million (primarily related
to the Import Facility) .
185. In conjunction with the revised facilities, the Company was required to issue an
additional corporate guarantee of $10 .3 million in U .S. Dollars and another guarantee for 560,000
Euros .
186. During the Third Quarter Fiscal 2004, the Company again sought to increase the
amounts available to the Hong Kong subsidiary under the facilities .
187. On April 23, 2004, HSBC agreed to extend an additional Revolving Loan Facility t o
the Hong Kong subsidiary in the amount of 10 million Euros (or 512 .3 million) . As part of this
additional facility, the Company was required to issue an additional corporate guarantee of S12 .3
million and as a special condition, to provide a copy of the Hong Kong subsidiary's aged accounts
receivable listing and its inventory listing . As such, the Company had no incentive to accurately
reflect the value of its inventory. This additional Revolving Loan Facility was made available by
HSBC to the Company's subsidiary on June 10, 2004 .
188 . As a result, as of July 3, 2004 (year end 2004), during the Class Period . the
Company's available borrowings had increased to $38 .3 million .
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189 . The Company's reliance on its credit facilities increased due to the inventor y
problems described above . Without the funding from the credit facilities, Concord could no t
produce its products in China .
Insiders Sold Millions of Dollars of Stock During the Class Period
190. Individual Defendants engaged in such a scheme to inflate the price of Concord
common stock in order to : (i) protect and enhance their executive positions ; (ii) artificially enhanc e
the price of Concord stock ; (iii) sell their personal holdings of Concord stock at artificially inflated
prices and/or (iv) maximize their performance-based bonuses .
191 . During the Class Period, insiders sold millions of dollars worth of their Concor d
Camera stock at prices ranging from $2 .73 to $12 .3175 per share. These sales were unusual in both
timing and amount, they far exceeded these insiders' previous sales, occurred immediately after the
inception of several fraudulent statements to the market, and preceeded defendants' revelations of
problems related to inventories .
Insider Stampfli's Sale s
192 . According to Form 4s filed on September 3, 2003, with the SEC, beginning Augus t
22, 2003, Urs W . Stampfli sold 25,000 shares of Concord common stock for proceeds of S289,84 4
as set forth below :
DATE SOLD SHARES SOLD RIUE ALU E5/22/U3 1 1 0 . -1)8 74,U60
32,034183,/50
193 . The timing of these sales was unusual . According to an analysis of insider sales ,
Stampfli had previously last sold stock on January 28, 2000 . At that time, he sold 20,000 shares a t
a price of $13 .88 for proceeds of $277,500. He retained 10 ,000 shares . These 10,000 retained share s
constituted the shares that Stampfli sold 3 V2 years later on August 22, 2003 .
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Defendant Press's Sale s
194 . According to a Form 4 also filed with the SEC on September 3, 2003, Harlan I . Press,
the Company's Vice President and Treasurer sold over a half a million dollars worth of Concord
stock immediately after the inception of the Class Period, as set forth below :
195. According to this Form 4, Press sold 62% of his holdings in Concord Camera and
retained 30,000 shares . The timing of this sale was unusual . Press had not previously sold any
shares of Concord Camera .
Insider Wand 's Sales
196. Additionally, on a Form 4 filed with the SEC on September 22, 2003, the ww ife o f
David M. Wand, Director of Supply Chain and Information Systems for Concord Camera HK
Limited, and Vice President and Director of World Wide Supply Chain and Information Technology
of the Company since March 25, 2002, whose functions included the management of warehouses,
product distribution, inventory functions and related personnel sold 6,000 shares of the Company
stock on September 18, 2003 at a price per share of $12 .20 for proceeds of S73,000 to S200,000 .
Mrs. Wand's sale was providential, since commencing November 6, 2003, the first inkling of the
Company's problems related to digital cameras manufacturing and sales would begin to emerge . It
was the Wands' only sale ever and eliminated their entire position in the Company .
Insider Hakman 's Sales
197 . One of the Company's directors also took the opportunity to sell . According to a
Form 4 filed with the SEC on 20, 2003, commencing on September 17, 2003, Director J . David
Hakman made the following sales :
77= 1bUU 2 . 2
77 1
911 N/U3 486,3 0
1
. ~0 0553,675.3 0
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These sales totaled $553,675 .00, and represented sales of 13% of Mr . Hakman's beneficial position
in the Company . Mr. Hakman had never previously sold .
Defendant King ' s Sales
198. Subsequently, defendant King, who served as the Senior Executive Vice President
of the Company, and who had been Chief Operating Officer of the Company from February 2002
to December 2002, sold substantial numbers of shares in the Company . Defendant King's sales
commenced during the second half of fiscal 2004 after his departure, as follows :
U/1J/V-t F,J,'VV P, .,., r,. . .,, .. ., .,
P/ 1 Y/ VY r7 V, J J J W-1 t . . .. . ,---
G1/ 1Y/V-t Y-V,VVV Fy .: . . I .'S r.. .., . . ..
Defendant King sold 15 ,000 of these shares at substantially higher prices before the news of his
departure was publicly disclosed . Defendant King had not previously sold any shares of Concord
stock which he owned .
STATUTORY SAFE HARBO R
199. The federal statutory safe harbor provided for forward-looking statements under
certain circumstances does not apply to any of the allegedly false statements pleaded in this
Complaint . Further, none of the statements pleaded herein which were forward-looking statements
were identified as "forward-looking statements" when made . Nor was it stated that actual results
"could differ materially from those projected ." Nor were the forward-looking statements pleaded
accompanied by meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from the statements made therein . Defendants are liable for the
forward-looking statements pleaded because, at the time each of those forward-looking statements
was made, the speaker knew the forward-looking statement was false and the forward-lookin g
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statement was autho rized and/or approved by an executive officer of Concord who knew that those
statements were false when made .
UNDISCLOSED ADVERSE INFORMATIO N
200. The market for Concord securities was open, well-developed and efficient at all
relevant times . As a result of these materially false and misleading statements and failures to
disclose, Concord securities traded at artificially inflated prices during the Class Period . The
artificial inflation continued until the time Concord admitted that it was experiencing declining sales
and these admissions were communicated to, and/or digested by, the securities markets . Lead
Plaintiff and other members of the Class purchased or otherwise acquired Concord relying upon the
integrity of the market price of Concord and market information relating to Concord, and have been
damaged thereby .
201 . During the Class Period, defendants materially misled the investing public, thereb y
inflating the price of Concord, by publicly issuing false and misleading statements and omitting to
disclose material facts necessary to make defendants' statements, as set forth herein, not false and
misleading . Said statements and omissions were materially false and misleading in that they failed
to disclose material adverse information and misrepresented the truth about the Company, its
business and operations .
202. At all relevant times, the material misrepresentations and omissions particularize d
in this Complaint directly or proximately caused or were a substantial contributing cause of the
damages sustained by plaintiff and other members of the Class . As described herein, during the
Class Period, defendants made or caused to be made a series of materially false or misleading
statements about Concord's business, prospects and operations . These material misstatements and
omissions had the cause and effect of creating in the market an unrealistically positive assessment
of Concord and its business, prospects and operations, thus causing the Company's securities to be
overvalued and artificially inflated at all relevant times . Defendants' materially false and misleading
statements during the Class Period resulted in plaintiff and other members of the Class purchasing
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the Company's securities at artificially inflated prices, thus causing the damages complained o f
herein .
APPLICABILITY OF PRESUMPTION OF RELIANCE :FRAUD-ON-THE-MARKET DOCTRIN E
203. At all relevant times, the market for Concord common stock was an efficient marke t
for the following reasons, among others :
a. Concord common stock met the requirements for listing, and was listed an d
actively traded , on the NASDAQ, a highly efficient market ;
b. As a regulated issuer, Concord filed periodic public reports with the SEC an d
the NASD;
c. Concord common stock was followed by securities analysts employed b y
major brokerage firms who wrote reports which were distributed to the sales force and certai n
customers of their respective brokerage firms . Each of these reports was publicly available an d
entered the public marketplace; and
d. Concord regularly issued press releases and transcripts of conference call s
which were carried by national newswires . Each of these releases and transc ri pts was publicly
available and entered the public marketplace .
204. As a result , the market for Concord securities promptly digested current informatio n
with respect to Concord from all publicly-available sources and reflected such information in
Concord's stock price . Under these circumstances, all purchasers of Concord common stock during
the Class Period suffered similar injury through their purchase of stock at artificially inflated prices
and a presumption of reliance applies .
CLASS ACTION ALLEGATION S
205 . Lead Plaintiff brings this action as a class action pursuant to Rule 23(a) and (b)(3) o f
the Federal Rules of Civil Procedure on behalf of a class (the "Class") consisting of all persons wh o
purchased the securities of Concord during the Class Period, August 14, 2003 through August 31 ,
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2004. Excluded from the Class are the defendants herein, members of each Individual Defendant's
immediate family, any entity in which any defendant has a controlling interest, and the legal
affiliates, representatives, heirs, controlling persons, successors, and predecessors in interest or
assigns of any such excluded party .
206. Because Concord has millions of shares of common stock outstanding, and becaus e
the Company's common stock was actively traded, on the NASDAQ National Markets, members
of the Class are so numerous that joinder of all members is impracticable . As of August 28, 20031
Concord had 28 .61 million shares outstanding. While the exact number of Class members can only
be determined by appropriate discovery, plaintiff believes that Class members number at least in the
thousands and that they are geographically dispersed .
207 . Lead Plaintiff's claims are typical of the claims of the members of the Class, because
plaintiff and all of the Class members sustained damages arising out of defendants' wrongful conduct
complained of herein .
208 . Lead Plaintiff will fairly and adequately protect the interests of the Class members
and have retained counsel who are experienced and competent in class and securities litigation . Lead
Plaintiff has no interests that are contrary to or in conflict with the members of the Class Lead
Plaintiff seeks to represent .
209. A class action is superior to all other available methods for the fair and efficien t
adjudication of this controversy, since joinder of all members is impracticable . Furthermore, as the
damages suffered by individual members of the Class may be relatively small, the expense and
burden of individual litigation make it impossible for the members of the Class individually to
redress the wrongs done to them . There will be no difficulty in the management of this action as a
class action .
210. Questions of law and fact common to the members ofthe Class predominate over any
questions that may affect only individual members, in that defendants have acted on -round s
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generally applicable to the entire Class . Among the questions of law and fact common to the Clas s
are :
a. whether the federal secu ri ties laws were violated by defendants' acts as
alleged herein ;
b. whether the Company's publicly disseminated releases and statements during
the Class Period omitted and/or misrepresented material facts and whether defendants breached an y
duty to convey material facts or to correct material facts previously disseminated ;
c. whether defendants participated in and pursued the fraudulent scheme o r
course of business complained of,
d . whether the defendants acted willfully, with knowledge or recklessly, i n
omitting and/or misrepresenting material facts ;
e . whether the market prices of Concord common stock and other Concor d
securities during the Class Period were artificially inflated due to the material non-disclosures and o r
misrepresentations complained of herein ; and
f. whether the members of the Class have sustained damages and, if so, wha t
is the appropriate measure of damages .
COUNT I
For Violations Of Section 10(b) Of The1934 Act And Rule 10b-5 Promulgate dThereunder Against All Defendants
211 . Lead Plaintiff repeats and realleges the allegations set forth above as though fully se t
forth herein . This claim is asserted against defendants Concord and the Individual Defendants .
212. During the Class Period, Concord, Lampert, Press, Finkbeiner and King, and each o f
them, carried out a plan, scheme and course of conduct which was intended to and, throughout the
Class Period, did : (i) deceive the investing public, including plaintiff and other Class members, as
alleged herein; (ii) artificially inflate and maintain the market price of Concord common stock ; and
(iii) cause plaintiff and other members of the Class to purchase Concord stock at artificially inflated
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prices . In furtherance of this unlawful scheme, plan and course of conduct, defendants Concord and
the Individual Defendants, and each of them, took the actions set forth herein .
213 . These defendants : (a) employed devices, schemes, and artifices to defraud, (b) made
untrue statements of material fact and/or omitted to state material facts necessay to make the
statements not misleading ; and (c) engaged in acts, practices and a course of business which operated
as a fraud and deceit upon the purchasers of the Company's common stock in an effort to maintain
artificially high market prices for Concord common stock in violation of Section 10(b) of the
Exchange Act and Rule lOb-5 . These defendants are sued as primary participants in the wrongful
and illegal conduct charged herein . These defendants are also sued herein as controlling persons of
Concord, as alleged below .
214. In addition to the duties of full disclosure imposed on defendants as a result of thei r
making of affirmative statements and reports, or participation in the making of affirmative
statements and reports to the investing public, they each had a duty to promptly disseminate truthful
information that would be material to investors in compliance with the integrated disclosure
provisions of the SEC as embodied in SEC Regulation S-X (17 C .F .R. § 210.01 et seq .) and S-K (17
C .F .R. § 229 .10 et seq .) and other SEC regulations, including accurate and truthful information ww ith
respect to the Company's operations, financial condition and performance so that the market prices
of the Company's publicly traded securities would be based on truthful, complete and accurate
information .
215 . Concord, Lampert, Press, Finkbeiner and King, individually and in concert, directl y
and indirectly, by the use of means or instrumentalities of interstate commerce and/or of the mails,
engaged and participated in a continuous course of conduct to conceal adverse material information
about the business, business practices, performance, operations and future prospects of Concord as
specified herein . These defendants employed devices, schemes and artifices to defraud, while in
possession of material adverse non-public information and engaged in acts, practices, and a course
of conduct as alleged herein in an effort to assure investors of Concord's value and performance an d
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substantial growth, which included the making of, or the participation in the making of, untrue
statements of material facts and omitting to state material facts necessary in order to make the
statements made about Concord and its business, operations and future prospects in the light of the
circumstances under which they were made, not misleading, as set forth more particularly herein,
and engaged in transactions, practices and a course of business which operated as a fraud and deceit
upon the purchasers of Concord securities during the Class Period .
216. Lampert's, Press's, Finkbeiner's and King's primary liability, and controlling person
liability, arise from the following facts : (i) Lampert, Press, Finkbeiner and King were all high-level
executives and/or directors at the Company during the Class Period ; (ii) each of these defendants,
by virtue of his responsibilities and activities as a senior executive officer and/or director of the
Company, was privy to and participated in the creation, development and reporting of the Company's
internal budgets, plans, projections and/or reports ; (iii) the Individual Defendants enjoyed significant
personal contact and familiarity with each other and were advised of and had access to other
members of the Company's management team, internal reports, and other data and information about
the Company's financial condition and performance at all relevant times ; and (iv) these defendants
were aware of the Company's dissemination of information to the investing public which they knew
or recklessly disregarded was materially false and misleading .
217. These defendants had actual knowledge of the misrepresentations and omissions o f
material facts set forth herein, or acted with reckless disregard for the truth in that they failed to
ascertain and to disclose such facts, even though such facts were readily available to them . Such
defendants' material misrepresentations and/or omissions were done knowingly or recklessly and
for the purpose and effect of concealing Concord's operating condition, business practices and future
business prospects from the investing public and supporting the artificially inflated price of its stock .
As demonstrated by their overstatements and misstatements of the Company's financial condition
and performance throughout the Class Period, the Individual Defendants, if they did not have actual
knowledge of the misrepresentations and omissions alleged, were reckless in failing to obtain suc h
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knowledge by deliberately refraining from taking those steps necessary to discover whether those
statements were false or misleading.
218 . As a result of the dissemination of the materially false and misleading information
and failure to disclose material facts, as set forth above, the market price of Concord's common
stock was artificially inflated during the Class Period . In ignorance of the fact that the market price
of Concord's shares was artificially inflated, and relying directly or indirectly on the false and
misleading statements made by defendants, or upon the integrity of the market in which the securities
trade, and/or on the absence of material adverse information that was known to or recklessly
disregarded by defendants but not disclosed in public statements by defendants during the Class
Period, plaintiff and the other members of the Class acquired Concord common stock during the
Class Period at artificially inflated high prices and were damaged thereby .
219. At the time of said misrepresentations and omissions, plaintiff and other members o f
the Class were ignorant of their falsity, and believed them to be true . Had plaintiff and the other
members of the Class and the marketplace known of the true performance, business practices, future
prospects and intrinsic value of Concord, which were not disclosed by defendants, plaintiff and other
members of the Class would not have purchased or otherwise acquired their Concord securities
during the Class Period, or, if they had acquired such securities during the Class Period, they would
not have done so at the artificially inflated prices which they paid .
220. By virtue of the foregoing, Concord and each of the Individual Defendants violated
Section 10(b) of the Exchange Act and Rule I Ob-5 promulgated thereunder .
221 . As a direct and proximate result of defendants' wrongful conduct, plaintiff and the
other members of the Class suffered damages in connection with their purchases of the Company's
securities during the Class Period .
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COUNT I I
For Violations Of Section 20(a) Of The1934 Act Against Individual Defendant s
222 . Plaintiff repeats and realleges the allegations set forth above as if set forth fully
herein. This claim is asserted against Individual Defendants .
223 . The Individual Defendants were and acted as controlling persons of Concord within
the meaning of Section 20(a) of the Exchange Act as alleged herein . By virtue of their high-level
positions with the Company, participation in and/or awareness of the Company's operations and or
intimate knowledge of the Company's actual performance, Lampert, Press, Finkbeiner and King had
the power to influence and control and did influence and control, directly or indirectly, the decision-
making of the Company, including the content and dissemination of the various statements which
plaintiff contends are false and misleading . Lampert, Press, Finkbeiner and King were provided 'ti ith
or had unlimited access to copies of the Company's reports, press releases, public filings and other
statements alleged by plaintiff to be misleading prior to and/or shortly after these statements were
issued and had the ability to prevent the issuance of the statements or cause the statements to be
corrected .
224. In addition, Lampert, Press, Finkbeiner and King had direct involvement in the day-
to-day operations of the Company and, therefore, are presumed to have had the power to control or
influence the particular transactions giving rise to the securities violations as alleged herein, and
exercised the same .
225 . As set forth above, Concord, Lampert, Press, Finkbeiner and King each violate d
Section 10(b) and Rule I Ob-5 by their acts and omissions as alleged in this Complaint . By virtue of
their controlling positions, Lampert, Press, Finkbeiner and King are liable pursuant to Section 20(a)
of the Exchange Act . Asa direct and proximate result of defendants' wrongful conduct, plaintiff and
other members of the Class suffered damages in connection with their purchases of the Company's
securities during the Class Period .
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PRAYER FOR RELIE F
WHEREFORE, Lead Plaintiff, on his own behalf and on behalf of the Class, prays fo r
judgment as follows :
(a) Declaring this action to be a class action pursuant to Rule 23(a) and (b)(3) of the
Federal Rules of Civil Procedure on behalf of the Class de fined herein;
(b) Awarding Lead Plaintiff and the other members of the Class damages in an amoun t
which may be proven at trial, together with interest thereon ;
(c) Awarding Lead Plaintiff and the members of the Class pre-judgment and post-
judgment interest, as well as their reasonable attorneys' and experts' witness fees and other costs ;
and
(d) Such other relief as this Court deems appropriate .
JURY DEMAN D
Lead Plaintiff demands a trial by jury.
Dated : August 31, 2005
VIANALE & VIAN
By :'Kenneth J . ianale✓Fla. Bar N . O1 668Julie Prag ianaleFla. Bar No. 0184977
2499 Glades Road, Suite 112Boca Raton , FL 3343 1Tel : (561 ) 392-4750Fax: (561 ) 392-4775
Liaison Counsel for Lead Plaintiff
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BER ER & MONT G E P.C.
B 1 kTvSherrie R . S vets
Robin Switzenbaurn Gv -4tcx1622 Locust Street ,,,s~Philadelphia , PA 19103Tel: (215) 875-3000Fax : (215) 875-460 4
Lead Counsel for Lead Plaintiff
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CERTIFICATE OF SERVIC E
I HEREBY CERTIFY that a true and correct copy of the foregoing has been furnished viaU.S. First Class Mail, this 31" day of August, 2005, to the following :
STEEL HECTOR & DAVISAlvin B . Davi sWendy S . Leavitt200 S . Biscayne Blvd ., 41 " FloorMiami, FL 3313 1Tel : 305-577-7000Fax: 305-577-700 1
Attorneys for Defendants
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