filed united states district court 19 99ma y 14 pm ~...

F IL E D

UNITED STATES DISTRICT COURTWESTERN DISTRICT OF NORTH CAROLINA

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WILLIAM C . MORROW, On BehalfOf Himself And All Others SimilarlySituated,

Plaintiffs ,

- against -

ALYDAAR SOFTWARE CORPORATION,(d lbla Information ArchitectsCorporation) ROBERT F . GRUDER ,FRANK G . MILLIGAN andV . HOLLIS SCOTT ,

Defendants .

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19 99MA Y 14 P M ~_ 1 4

U .S . DISi RJC f COURTW. Dl57 OF N.C .

CIVIL ACTION N0 . J , `T (1 CA1 1 I 6

CLASS ACTION COMPLAINTFOR VIOLATIONS OF THEFEDERAL SECURITIES LA W

JURY TRIAL DEMANDED

Plaintiff, individually and on behalf of all other persons similarly situated, b y

his undersigned counsel, alleges upon personal knowledge as to his own acts and upon th e

investigation conducted by his counsel, which included, among other things, a review of th e

public announcements made by defendants, Securities and Exchange Commission ( "SEC")

filings, press releases and media reports regarding Alydaar Software Corporation d/b/ a

Information Architects Corporation ("Alydaar" or the "Company"), as follows :

NATURE OF THE CLAIMS

1 . This is a shareholders' class action on behalf of all persons and entities ,

other than defendants, who purchased or otherwise acquired Alydaar common stock betwee n

November 14, 1997 through April 1, 1999, inclusive (the "Class Period") . Defendants are

Alydaar and certain of the Company's present and former executive officers and directors .

2 . Alydaar describes itself as a worldwide developer of Enterpris e

Information Portals and a provider of Year 2000 computer services. These services include (i )

the correction and validation of existing mainframe computer software systems' ability t o

manage the Year 2040 problem and (ii) software conversion services, such as language

translation and migrations .

3 . The Class Period begins on November 14, 1997, the date on which

Alydaar (i) announced its results for the third quarter of 1997, ended September 3 0 , 1 997,

(ii) predicted a profitable fourth quarter in 1997, and (iii) confirmed its prior forecast o f

exceeding $50 million in sales in 1998 . The Class Period ends on April 1, 1999, the date o n

which the Company announced that (i) its previously reported results for the fourth quarter o f

1998 and 1998 fiscal year ended December 31, 1998, would be restated due to the materia l

overstatement of revenue and earnings ; and (ii) the Company's revenues in the first quarter o f

the 1999 fiscal year, ended March 31, 1999, would not be $7 million as previously

represented, but only approximately $5 million .

4. The April 1, 1999 announcement also disclosed that defendant Scott ,

Alydaar's Chief Financial Officer and a member of its Board of Directors and Audi t

Committee, had resigned, effective immediately, and that Richard J . Blumberg, a practicing

attorney specializing in securities matters, had been appointed to Alydaar's Board of Directors .

5 . On April 5, 1999, Alydaar made additional damaging disclosures . In it s

report on Form 10-K for the 1998 fiscal year, filed that day, Alydaar revealed that the

overstatement, in fact, was not limited to the fourth quarter of 1998 . According to the Form

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lp-K, revenue and earnings for the first, second and third quarters of 1998, ended March 31 ,

June 30 and September 30, 1998, respectively, also were overstated due to improper revenu e

recognition and understatement of expenses, In total, 1998 revenues were reduced by $ 2

million , with a corresponding decrease in net earn ings and earnings per share .

6 . Alydaar subsequently disclosed that the other two members of the Audit

Committee of the Board of Directors also had resigned .

7 . Defendants' misrepresentations caused Alydaar's stock price to b e

artificially inflated during the Class Period. Following defendants' disclosure that Alydaar

would be required to restate its financial results, Alydaar common stock closed at $3-9116 per

share on April 5, 1999, the first trading day after the April 1, 1999 disclosure, a drop of ove r

81 % from a high of $19 .375 per share during the Class Period . Alydaar's common stock price

has not yet recovered, and currently trades for less than $4 per share .

JURISDICTION AND VENUE

8 . This Court has jurisdiction over the subject matter of this action pursuan t

to 28 U.S .C . §§133I, 1337 and 1367 and Section 27 of the Exchange Act (15 U .S .C §78aa) .

9. This action arises under Sections 10(b) and 20(a) of the Exchange Act (] 5

U . S .C . §§78j(b) and 78t(a)) and Rule lOb -5 promulgated thereunder (17 C .F .R . §240, 10b -5) .

10. Venue is proper in this District pursuant to Section 27 of the Exchang e

Act (15 U.S.C . §78aa) and 28 U .S .C. §1391(b) and (c) . Substantial acts in furtherance of th e

alleged fraud and/or its effects have occurred within this District and Alydaar maintains it s

principal executive offices in this District .

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1 1 . In connection with the facts and omissions alleged in this Complaint ,

defendants, directly or indirectly, used the means and instrumentalities of interstate commerce ,

including, but not limited to, the mails, interstate telephone communications, and the facilitie s

of the national securities markets .

PARTIES

12. As detailed in the attached sworn Certification, plaintiff William C .

Morrow purchased shares of Alydaar common stock during the Class Period at artificiall y

inflated prices, and was damaged thereby .

13 . Defendant Alydaar is incorporated in the State of North Carolina an d

maintains its principal place of business in Charlotte, North Carolina . According to statement s

filed with the SEC, Alydaar describes itself as a worldwide developer of Enterpris e

Information Portals . In addition, the Company provides management consulting, design ,

development and the deployment of virtual information portal solutions and assist s

organizations in transforming their current computer systems architecture . Finally, the

Company offers Year 200{) services using its SmartCode technology . On February 22, 1999,

Alydaar announced a proposal to change its name to Information Architects Corporation .

Alydaar's shares trade on the NASDAQ National Market System under the symbol "ALYD . "

14. Defendant Robert F . Grader ("Grader"), during all relevant times, served

as Chief Executive Officer and Chairman of the Board of Directors of the Company . Grader

signed Alydaar's false and misleading reports on Form 10-Q for the first, second and third

quarters of 1998, ended March 31, June 30, and September 30, 1998, respectively, and

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frequently was quoted in press releases during the Class Period . Grader sold during the Clas s

Period at least 100,000 shares of Alydaar common stock at the artificially inflated price of $1 8

per share, for total proceeds of $1 .8 million .

15. Defendant Frank G . Milligan ("Milligan"), served as Alydaar's Chief

Operating Officer from December 1996 until May 18, 1998, when he was named President o f

the Company . Milligan became a Director of the Company on April 1, 1999 .

16. Defendant V . Hollis Scott ("Scott") during all relevant times served a s

Chief Financial Officer and a Director of the Company . Scott was also a member of the Audi t

Committee of the Board of Directors . Scott "resigned," effective immediately, as Chie f

Financial Officer and Director on April 1, 1999, when the restatement was announced . Scott

signed Alydaar's false and misleading reports on Form 10-Q for the first, second and third

quarters of 1998, ended March 31, June 30, and September 30, 1998, respectively, an d

frequently was quoted in press releases during the Class Period .

17 . Unless otherwise noted, the individuals named as defendants in ¶114-1 6

above shall hereinafter collectively be referred to as the "Individual Defendants . " The

Individual Defendants were officers and/or directors of Alydaar at the time the alleged fals e

and misleading statements and/or omissions were made and are liable as direct participants in

the wrongs complained of herein .

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CONTROL PERSON LIABILIT Y

18 . The Individual Defendants, by reason of their executive positions with

Alydaar, Board membership and/or representations, and/or their ownership of Alydaa r

common stock were controlling persons of the Company and had the power and influence, an d

exercised the same, to cause Alydaar to engage in the conduct complained of herein . Alydaar ,

in turn , controlled each of these defendants . Thus , the Individual Defendants controlled th e

public dissemination of the false and misleading information ,

SCIENTER

19. The Individual Defendants knew of, or recklessly disregarded, th e

adverse, non-public information about Alydaar's business and operations as well as it s

finances, markets, and present and future business prospects because their executive and/o r

directorial positions provided them with access to internal corporate documents and

information (including the Company's operating plans, budgets and forecasts, and reports of

actual operations compared thereto), and allowed them to have conversations and meetings

with other corporate officers and employees . The Individual Defendants attended management

and/or Board of Directors' meetings and committees thereof, and received internal reports and

other information in connection therewith .

20 . The Individual Defendants engaged in a scheme, common enterprise o r

common course of conduct to artificially inflate and/or maintain the price of Alydaar's stoc k

by, inter aria, issuing materially false and misleading statements, reports and press releases t o

the public regarding the Company's business, its investment portfolios, operations and futur e

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prospects . These statements and documents portrayed a false picture of the Company' s

business and operations and misrepresented and/or failed to disclose material, adverse fact s

concerning Alydaar's investment portfolios, business, revenues, earnings, management ,

financial condition and future prospects .

21 . The purpose, effect and motive of the Individual Defendants' actions wer e

to, inter olio : (a) deceive the investing public, including plaintiff and members of the Class ;

(b) artificially inflate and maintain the market price of Alydaar's common stock during th e

Class Period ; (c) cause plaintiffs and members of the Class to purchase Alydaar's commo n

stock at artificially inflated prices during the Class Period ; (d) permit Alydaar to acquire more

cheaply other companies using Alydaar's common stock ; (e) increase their compensation

because the Individual Defendants' Stock Options were directly tied to the financia l

performance of the Company and the value of its stock price ; and (f) protect their executiv e

positions at Alydaar and the substantial compensation and prestige they obtained thereby ,

Each Individual Defendant was a direct, necessary and substantial participant in the scheme

and common course of conduct complained of herein .

MATERIALLY FALSE AND MISLEADINGSTATEMENTS DURING THE CLASS PERIO D

22 . On November 14, 1997, defendants caused Alydaar to issue a pres s

release announcing Alydaar's results for the third quarter of 1997, ended September 30, 1997 .

The Company reported a net loss of $2 .17 million or $0.13 per share, which defendant s

attributed to "customers having difficulty packaging and shipping portions of computer

programs to Alydaar's factory in Charlotte, North Carolina for rewriting ." Commenting on

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the Company's projected results for the fourth quarter of 1997, which had only six weeks

remaining, defendant Scott stated that :

The Company has taken steps to accelerate the flow of code andits projections forecast that favorable results from those actionswill be reflected in fourth quarter results, when the Companyprojects revenues accelerating to $6-$8 million and a profitablefourth quarter .

At the same time, Scott confirmed projections previously made during investor conference s

that Alydaar confidently would exceed its sales goal of $50 million in 1998 .

23 . Defendant Scott's statements that Alydaar would have a profitable fourth quarte r

and that Alydaar would exceed its sales goal of $5 0 million in revenues in 1998 were false and

misleading when made because defendants knew, or recklessly disregarded, that Alydaar

already was experiencing a material decline in revenues and that in order to meet th e

aggressive growth expectations defendants had created for the fourth quarter, defendants woul d

have to pull in to the fourth quarter of 1997, all of the revenues defendants previously ha d

forecast for the first half of the first quarter of 1998 . Defendants knew that by doing so ,

Alydaar would not be able to meet its aggressive sales goal for 1998 and that in order t o

project the image of continuing growth, Alydaar would have to improperly recognize revenu e

and engage in other accounting improprieties .

24. On December 1, 1997, Alydaar issued a press release announcing that effectiv e

December 4, 1997, Alydaar had been approved to trade on NASDAQ's national marke t

system. Prior to December 4, 1997, Alydaar had traded on NASDAQ's bulletin board .

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25 . On February 1, 1998, defendant Grader sold 100,000 shares of Alydaa r

common stock for $18 a share for total proceeds of $1 .8 million .

26. On February 6, 1998, defendants caused Alydaar to issue a press release

announcing its preliminary results for the fourth quarter and year ended December 31, 1997 .

The Company reported fourth quarter revenues of $6 .5 million and that the Company expected

to report an operating profit for its domestic operations and a small loss for its Europea n

subsidiary, Alydaar International, PLC . The release further stated that :

These results are in line with management's expectations .Management anticipates both operations will realize considerablesales increase and operating profits for 1998 .

27 . The statement in the February 6, 1998 press release that the "results are i n

line with management's expectations" was false and misleading when made because defendant s

knew, or recklessly disregarded, that Alydaar was experiencing a material decline in revenue s

and that in order to meet the aggressive growth expectations defendants had created for the

fourth quarter, Alydaar would have to pull into the fourth quarter of 1997 all of the revenue s

defendants previously had forecast for the first half of the first quarter of 1998 . The statement

that "management anticipates both operations will realize considerable sales increase an d

operating profits for 1998 was false and misleading when made because defendants knew, o r

recklessly disregarded, that Alydaar was experiencing a material decline in revenues which

would prevent it from meeting the aggressive sales goal for 1988 and that by pulling revenu e

from the first quarter of 1998 into the fourth quarter of 1997 in order to meet fourth quarte r

revenue and earnings expectations, defendants had made it impossible for Alydaar to meet its

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aggressive sales growth for 1998 without improperly recognizing revenue and understatin g

expenses .

28 . On April 29, 1998, defendants caused Alydaar to issue a press releas e

announcing the Company's results for the first quarter of 1998, ended March 31, 1998 . The

Company reported revenues of $8 .4 million and earnings of $1 .7 million, or $0,09 per share .

Commenting on the results, defendant Scott stated :

We are very pleased with the operating results for first quarter,1998. We believe that current contract activity validates our'factory' approach versus the 'tools vendors' approach toremediating code . . . . We believe that the Company's prospectsfor continued growth in revenues and earning are excellent .

These financial results were repeated in the Company's report on Form 10-Q for the quarter

ended March 31, 1998, which was filed with the SEC on or about May 12, 1998, and signed

by defendants Gruder and Scott .

29. Alydaar's first quarter 1998 reported financial results were false ,

materially overstated and in violation of GAAP because, among other things, Alydaa r

improperly recognized revenue, failed to properly record and classify demonstration expenses,

and failed to record capitalized software costs as research and development expenditures . In

particular, defendants materially overstated Alydaar's revenues and related earnings in

violation of SEC regulations and GAAP during the quarter by improperly overstating the

Company's percentage of completion on contracts during the quarter . Defendants also

materially understated the Company's expenses during the quarter by improperly deferrin g

costs not related to contracts and by improperly capitalizing software costs that should hav e

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been expensed as research and development costs . As a result of defendants' imprope r

accounting practices, Alydaar's revenues for the first quarter of 1998 were overstated by a t

least $1 .2 million, and its net income was overstated by at least $1 .2 million, an overstatement

of earnings per share of $0 .07 .

30 . On May 13, 1998, defendants caused Alydaar to issue a press releas e

stating that the management of Alydaar was not aware of any changes in the Company' s

business outlook which would have caused the price of Alydaar's common stock to drop i n

early May, 1998 . In the release, defendant Gruder stated :

Based on our first quarter results our business continues to growat double-digit rates as well as our profitability . We are not onlyexperiencing strong revenue growth in our year 2000 services,but we have recently be awarded contracts for non-year 2000work, as well .

31 . Defendant Grader's statement in the May 13, 1998 press release tha t

Alydaar's business was growing at a double digit rates and that Alydaar was experiencin g

strong revenue growth was false and misleading when made because defendants knew, o r

recklessly disregarded, that Alydaar's first quarter results were materially overstated i n

violation of GAAP and as a result, Alydaar was not, in fact, growing at double digit rates an d

was not experiencing the strong revenue growth represented .

32 . On May 18, 1998, defendants caused Alydaar to issue a press releas e

announcing that defendant Milligan had been named President of the Company . The press

release quoted defendant Grader stating :

As Chief Operating Officer, Frank Milligan has done anoutstanding job managing the explosive growth of Alydaar' s

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factory-based year 2000 remediation business . As we lookforward to equally dramatic growth over the next 18 months, Iam confident that Frank Milligan's proven talents in managingcomplex, large scale projects will benefit clients and shareholdersalike.

33 . Defendant Grader's statement in the May 18, 1998 press release tha t

defendants looked forward to equally dramatic growth over the next eighteen months was fals e

and misleading because defendants knew, or recklessly disregarded, that Alydaar was not

growing as fast as represented and that the growth reported in the first quarter of 1998 wa s

primarily the result of Alydaar's improper accounting practices . Defendants knew that without

continuing these practices in subsequent quarters, defendants would not be able to project the

image of continued growth they had created .

34. On July 30, 1998, defendants caused Alydaar to issue a press releas e

announcing the Company's results for the second quarter of 1998, ended June 30, 1998 . The

Company reported revenues of $9 . 6 million and earnings of $2 .8 million, or $0 .16 per share .


We are very pleased with our second quarter and 6 monthsresults . Our net income grew 67% sequentially from first quarterto second quarter, 1998 . All revenues grew 14% . Our resultsalso reflect the leveraging of our relatively fixed cost structurewith net income at 30% of revenues up from our result of netincome of 20% of revenues for first quarter, 1998 . We expect tocontinue to deliver double-digit, quarter to quarter growth inearnings and revenues over each of the next six quarters .

These financial results were repeated in the Company's report on Form 1 0-Q for the quarter

ended June 30, 1998, which was filed with the SEC on or about August 17, 1998, and signed

by defendants Grader and Scott .

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35 . Alydaar's second quarter 1998 reported financial results were false ,

materially overstated and in violation of GAAP because among other things, Alydaar

improperly recognized revenue, failed to properly record and classify demonstration expenses ,


particular, defendants materially overstated Alydaar's revenues and related earnings i n

violation of SEC regulations and GAAP during the quarter by improperly overstating th e



costs not related to contracts and by improperly capitalizing software costs that should hav e

been expensed as research and development costs . As a result of defendants' improper

accounting practices, Alydaar's revenues for the second quarter of 1998 were overstated by a t

least $230,000, and its net income was overstated by at least $230,000 an overstatement o f

earnings per share of $0.01 .

36. On August 17, 1998, defendants caused Alydaar to issue a press releas e

announcing that defendant Grader intended to purchase shares of Alydaar common stock in the

market from time to time . The release quoted defendant Grader stating ;

Our business continues to grow at double-digit rates, as well as,our profitability . We enjoyed an excellent second quarter and themarket did not reward the Alydaar shareholders accordingly .Therefore, I see this time as opportunity to acquire Alydaar formy personal holdings .

37 . Defendant Grader's statements in the August 17, 1998 press release tha t

Alydaar's business continued to grow at double digit rates and that Alydaar had had a n

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excellent second quarter were false and misleading when made because defendants knew, o r

recklessly disregarded, that Alydaar's business was not growing at double digit rates and tha t

Alydaar had not had an excellent second quarter . In fact, Alydaar's reported revenues and

earnings for the first and second quarters of 1998 were materially overstated in violation o f

GAAP. Defendants knew that as a result of the foregoing, Alydaar's common stock was no t

undervalued but, in fact, overvalued .

38 . On October 30, 1998, defendants caused Alydaar to issue a press release

announcing its financial results for the third quarter of 1998, ended September 30, 1998 . The

Company reported revenues of $8,8 million and earnings at $1 .7 million, or $0 .10 per share .


We are pleased with our 20 percent net income result for the thirdquarter, 1998. During the third quarter 1998, the company wasawarded 13 new contracts . The individual contract awards werefor amounts ranging from $400,000 to an estimated $4,500,000 .The company has experienced a surge in contract awards duringOctober and has signed nine new contracts .

These financial results were repeated in the Company's report on Form 10-Q for the quarte r

ended September 30, 1998, which was filed with the SEC on or about November 16, 1998 ,

and signed by defendants Grader and Scott .

39 . Alydaar ' s third quarter 1998 reported financial result s were false ,





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violation of SEC regulations and GAAP during the quarter by improperly overstating th e



costs not related to contracts and by improperly capitalizing software costs that should have


accounting practices, Alydaar's revenues for the third quarter of 1998 were overstated by at

least $280,000, and its net income was overstated by at least $280,000, an overstatement o f

earnings per share of $0.02 .

40 . On February 1, 1999, Alydaar issued a press release announcing that

Alydaar had signed a definitive agreement to acquire Data Systems Network Corporation .

According to the press release, the acquisition would be financed by 1 .6 million shares of

Alydaar common stock . The overall estimated value of the acquisition was approximately

$17.5 million .

41 . On February 16, 1999, Alydaar acquired Metaphoria from Pencom

Systems Inc . in exchange for $750,0{}0 of Alydaar common stock and the assumption of certain

Pencom obligations .

42 . On March 9, 1999, Alydaar issued a press release announcing the

completion of a private placement of up to $10 million in original principal amount o f

convertible exchangeable debentures .

43 . On March 17, 1999, defendants caused Alydaar to issue a press releas e

announcing its financial results for the fourth quarter and year ended December 31, 1998 . For

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the 1998 fiscal year, the Company reported revenues of $29 .7 million and earnings of

$3 .3 million, or $0 . 19 per share . For the fourth quarter of 1998 , the Company reported

revenues of $2 .98 million and a net loss of $2 .96 million, or $0 .17 per share . Commenting on

the results, defendant Scott stated :

We are happy to report the full year turn around results of $3 .3million profit for 1998 versus a loss of $7 .8 million for 1997 .Our disappointing fourth quarter revenue results were impactedby the following factors : sales pipeline disruption caused by amajor restructuring of the sales and marketing departments duringthird and early fourth quarters ; a significant change in the mix ofwork to a higher percentage of audit work versus remediationwork, resulting in a steep decline in the average price per line ofcode processed; and, an audit adjustment reclassifying $1 .5million of sales to offset against demonstration expenses . Also,contributing to the loss, the fourth quarter's expenses includeapproximately $600,000 of acquisition and new businessexpenses .

We are pleased to report, Mr . Scott continued, that our firstquarter 1999 sales appear to be on track to reach $7 million .

44. Alydaar's fourth quarter 1998 reported financial results were false ,





violation of SEC regulations and GAAP during the quarter by improperly overstating tha t

company's percentage of completion on contracts during the quarter . Defendants also


costs not related to contracts and by improperly capitalizing software costs that should have

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accounting practices, Alydaar's revenues for the fourth quarter of 1998 were overstated by a t

least $260,000, and its loss was understated by at least $920,000 . For the 1998 fiscal year ,

revenues were overstated by at least $2 million and earnings were overstated by at least $1 .9

million, an overstatement of at least $0 .11 per share .

45 . Defendant Scott's statement in the March 17, 1999 press release tha t

Alydaar's first quarter 1999 sales appeared to be on track to reach $7 million was false and

misleading when made because defendants knew, or recklessly disregarded, that Alydaar' s

improper revenue recognition practices during the 1998 fiscal year were having a materially

negative impact on the Company's results going forward and that as a result of the foregoing ,

Alydaar would not be able to reach $7 million in sales and instead would report sales o f

approximately $5 million .

THE TRUTH REVEALE D

46 . On April 1, 1999, after the close of the market, Alydaar shocked the

market with its announcement that the previously reported fourth quarter and year ended

December 31, 1998 results were materially overstated . The Company announced that it woul d

be restating its results for the fourth quarter and year ended December 31, 1998 to decrease

earnings from $3 .3 million to $1 .4 million and revenues from $29.7 million to $27.7 million .

The Company also announced that defendant Scott had resigned from the Company, effectiv e

immediately . Finally, the Company announced that the previous forecast of $7 million i n

revenues for the first quarter of 1999, made just two weeks earlier, was incorrect and tha t

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revenues would be approximately $5 million instead .

47 . On April 5, 1999, Alydaar filed its report on Form 10-K for its 199 8

fiscal year . In that Form 10-K, defendants revealed that restatement disclosed just days earlie r

was not limited to the fourth quarter of 1998 . In fact, all of the quarters from Alydaar's 1998

fiscal year were materially overstated, and, thus, adjusted due to improper revenue recognitio n

practices and the understatement of expenses .

48, On April 5, 1999, the first day of trading after the shocking April 1, 1999

disclosure, the price of Alydaar common stock fell from $5-5/16 per share to $3-9/16 per

share, a decline of approximately 33 % in one day's trading. Alydaar's common stock pric e

has not recovered, and currently trades for less than $4 per share .

49 . On April 30, 1999, Alydaar revealed in its Proxy Statement that the

remaining members of the Audit Committee of the Board of Directors, Alex McMillan and

John McCarthy, had resigned . Including the earlier resignation of defendant Scott, al l

members of the Audit Committee during the relevant period have now resigned .

ALYDAAR 'S FALSE FINANCIAL STATEMENT S

50 . Alydaar's financial statements for the quarters ended March 31, June 30 ,

September 30 and December 31, 1998, were jointly prepared by the Individual Defendants an d

approved by each of them. Alydaar's reports on Forms 10-Q were filed with the SEC and

signed by defendants Grader and S cott . Regulation S -X (17 CFR 210 .4-0 1 (a)( 1 )) states that

financial statements filed with the SEC which are not prepared in compliance with GAAP ar e

presumed to be misleading and inaccurate, des ite footnote or other disclosure . GAAP are

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those principles recognized by the accounting profession as the conventions, rules and

procedures necessary to define accepted accounting practice at the particular time . Each of

those Forms 10-Q also represented, for the subject quarter, that Alydaar's financial statement s

"reflect all adjustments which are, in the opinion of management, necessary to a fair statemen t

of the results for the interim periods presented. All adjustments were of a normal recurring

nature ."

51 . These representations were false as the Individual Defendants falsifie d

Alydaar's financial statements for the periods ended March 31, June 30, September 30 an d

December 31, 1998 by improperly recognizing revenue, failing to properly record and classif y

demonstration expenses, and failing to record capitalized software costs as research and

development expenditures .

52 . GAAP is clear that the correction of a material error in previously issue d

financial statements is to be handled by restating the financial statements of the affected prio r

period (Financial Accounting Standards Board ("FASB") No . 16 "Prior Period Adjustments, "

141) . This concept is critical in reviewing Alydaar's disclosures regarding the substantia l

revision of its previously released results of operations for the first three quarters of 1998, a s

well as its earnings release for December 31, 1998 . Alydaar, subsequent to publicly releasing

its earnings for the fourth quarter of 1998, disclosed on April 1, 1999 that Alydaar would b e

restating its revenue and earnings for the four quarters of 1998 due to the improper recognition

of revenue on contracts . Accounting Principles Board Opinion ("APB") No . 20 "Accounting

Changes," ¶13 states :

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Reporting a correction of an error in previously issued financialstatements concerns factors similar to those relating to reportingan accounting change and is therefore discussed in this Opinion .Errors in financial statements result from mathematical mistakes,mistakes in the application of accounting principles, or oversightor misuse of facts that existed at the time the financial statementswere prepared . In contrast, a change in accounting estimateresults from new information or subsequent developments andaccordingly from better insight or improved judgement . Thus, anerror is distinguishable from a change in estimate . [Emphasisadded, footnotes excluded . ]

53 . Furthermore, APB No . 20 states : "A change in an estimate should not b e

accounted for by restating amounts reported in financial statements of prior periods or b y

reporting pro forma amounts for prior periods . . . . The Board concludes that correction of an

error in the financial statements of a prior period discovered subsequent to their issuanc e

should be reported as a prior period adjustment ." (Emphasis added) . Additionally, FASB No .

16, 141 states : "A major distinguishing feature of a correction of an error is that the financia l

statements of the affected prior period, when originally issued, should have reflected the

adjustment," and "[t]he provisions of this Statement need not be applied to immaterial items . "

54 . Therefore, under GAAP, the fact that Alydaar did restate previousl y

reported financial information is an admission that a material error did occur in its publicl y

disseminated financial information, and that the error was not an error in estimation o r

judgment. The facts and circumstances giving rise to the restatement must have existed at the

time revenue was improperly recorded and at the time when the financial results were publicly

disclosed. If this were not the case, GAAP would not have mandated the correction an d

restatement of Alydaar's previously disclosed financial results. The financial restatement wa s

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required because all of the necessary information to accurately record revenue was available t o

defendants at the time Alydaar previously recorded and disclosed the revenue .

55 . Defendants violated, among others, the following accounting principles :

(a) AAPB Opinion No . 28, "Interim Financial Reporting" require s

that an enterprise prepare its interim financial statements based on the accounting principle s

and practices used in the preparation of its latest financial statements, unless it discloses a

change in an accounting policy or practice . APB Opinion No. 28, paragraph 9 states :

Interim financial information is essential to provide investors andothers with timely information as to the progress of theenterprise . The usefulness of such information rests on therelationship that it has to the annual results of operations .Accordingly, the Board has concluded that each interim periodshould be viewed primarily as an integral part of an annualperiod .

(b) Statement of Position No . 97-2, "Software Revenue Recognition" require s

that when an arrangement to deliver software that requires significant production ,

modification, or customization of software does not meet certain criteria for separate

accounting, the entire arrangement should be accounted for as long-term contracts . Defendants

violated SOP 97-2 by improperly overstating the percentage complete on contracts and b y

understating contract costs .

(c) Defendants violated APB No . 45, "Long-Term Construction-Type

Contracts," by improperly overstating percentage of completion on contracts, failing t o

accurately record contract costs and revenues, and failure to timely record losses on contracts .

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APPLICABILITY OF PRESUMPTION OF RELIANCE:FRAUD-ON-THE-MARKET DOCTRINE

56. At all relevant times, the market for Alydaar common stock was a n

efficient market for the following reasons, among others :

(a) Alydaar's common stock met the requirements for public listing, and wa s

listed and actively traded on the NASDAQ National Market System, a highly efficient market ;

(b) As a regulated issuer, Alydaar filed periodic public reports with the SEC ;

(c) Alydaar's stock was followed by securities analysts employed by majo r

brokerage firms who wrote reports which were distributed to the sales force and certai n

customers of their respective brokerage firms . Each of the reports was publicly available and

entered the public marketplace .

(d) Alydaar regularly issued press releases which were carried by nationa l

news wires . Each of these releases was publicly available and entered the public marketplace .

57 . As a result, the market for Alydaar securities promptly digested curren t

information with respect to Alydaar from all publicly-available sources and reflected suc h

information in Alydaar's stock price . Under these circumstances, all purchasers of Alydaar

common stock during the Class Period suffered similar injury through their purchase of stoc k

at artificially inflated prices and a presumption of reliance applies .

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NO SAFE HARBOR

58 . The statutory safe harbor provided for forward-looking statements under

certain circumstances does not apply to any of the allegedly false statements pleaded in thi s

Complaint . The vast majority of the specific statements pleaded herein were not "forward-

looking statements" but were "hard" statements of financial results . To the extent that were

any forward-looking statements, there were no meaningful cautionary statements identifyin g

important factors that could cause actual results to differ materially from those in the

purportedly forward-looking statements . Alternatively, to the extent that the statutory safe

harbor does apply to any forward-looking statements pleaded herein, defendants are liable fo r

those false forward-looking statement because at the time each of those forward-looking wa s

made the particular speaker knew that the particular forward-looking statement was false ,

and/or the forward-looking statement was authorized and/or approved by an executive office r

of Alydaar who knew that those statements were false when made .

CLASS ACTION ALLEGATION S

59 . Plaintiff brings this action on his behalf and as a class action pursuant t o

Rule 23 of the Federal Rules of Civil Procedure, on behalf of a class consisting of all persons

and entities (other than defendants and the members of their immediately families, their heirs ,

successors and assigns) who purchased or acquired Alydaar common stock during the period

between November 17, 1997 through April 1, 1999, inclusive .

64 . Members of the Class are so numerous that joinder of all members i s

impracticable .

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(a) As of February 24, 1999, there were over 17 .5 million shares of Alydaa r

common stock held by more than seven thousand holders of record ;

(b) Alydaar is listed and actively traded on the NASDAQ National Marke t

System, an efficient and developed securities market . While the exact number of Clas s

members is unknown to the plaintiffs at this time and can only be ascertained through

appropriate discovery, plaintiffs believe that there are hundreds, if not thousands, of Clas s

members who purchased Alydaar securities in the open market at artificially inflated price s

during the Class Period .

61 . Plaintiff's claims are typical of the claims of the other members of th e

Class . Plaintiff and the other members of the Class have sustained damages because o f

defendants' unlawful activities alleged herein . Plaintiff has retained counsel competent and

experienced in class and securities litigation and intends to prosecute this action vigorously .

The interests of the Class will be fairly and adequately protected by plaintiff . Plaintiff has no

interests which are contrary to or in conflict with those of the Class which plaintiff seeks t o

represent .

62 . A class action is superior to all other available methods for the fair an d

efficient adjudication of this controversy . Plaintiff knows of no difficulty to be encountered i n

the management of this action that would preclude its maintenance as a class action .

63 . Common questions of law and fact exist as to all members of the Class

and predominate over any questions solely affecting individual members of the Class . Among

the questions of law and fact common to the Class are :

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(a) whether defendants violated Sections 10(b) and 20(a) of the Exchange Act ,

and SEC Rule lOb-5 promulgated thereunder .

(b) whether defendants participated in and pursued the common course o f

conduct complained of herein ;

(c) whether documents, filings, releases and statements disseminated to th e

investing public omitted and/or misrepresented material facts abou t

Alydaar ;

(d) whether the market price of Alydaar's securities was artificially inflate d

throughout the Class Period due to the nondisclosures and/o r

misrepresentations complained of herein;

(e) whether defendants acted knowingly, willfully, or recklessly in omitting t o

state and/or misrepresenting material facts ; and

(fl whether the members of the Class have sustained damages as a result o f

defendants' misconduct and, if so, the proper measure of such damages .

COUNT I

AGAINST ALL DEFENDANTS FORVIOLATIONS OF SECTION 10 (h} OF

THE EXCHANGE ACT AND RULE 10b-5

64 . Plaintiff repeats and realleges each and every allegation contained in th e

above paragraphs, as if fully set forth herein . This claim is asserted against all defendants .

bS . The defendants, and each of them, carried out a plan, scheme and cours e

of conduct which was intended to and did : (a) deceive the investing public, including plaintiffs

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and other Class members, as alleged herein; (b) artificially inflate and maintain the market

price of Alydaar common stock ; and (c) cause members of the Class to acquire Alydaa r

common stock at artificially inflated prices . In furtherance of this unlawful scheme, plan and

course of conduct, defendants, and each of them, took the actions set forth herein .

66 . Defendants (a) employed devices, schemes, and artifices to defraud ; (b)

made untrue statements of material fact and/or omitted to state material facts necessary to mak e

the statements made not misleading ; and (c) engaged in acts, practices and a course of busines s

which operated as a fraud and deceit upon the acquirers of Alydaar common stock in an effor t

to maintain artificially high market prices for AIydaar's common stock in violation of Section

10(b) of the Exchange Act and Rule lOb-5 . A ll defendants are sued either as primar y

participants in the wrongful and illegal conduct charged herein and/or as controlling persons a s

alleged below,

67. In addition to the duties of full disclosure imposed an defendants as a

result of their making of affirmative statements and reports, or participation in the making o f

affirmative statements and reports to the investing public, the defendants had a duty to

promptly disseminate truthful information that would be material to investors in complianc e

with the integrated disclosure provisions of the SEC as embodied in SEC Regulation S-X (1 7

C . F . R . §210.01 et se . and S -K (17 C . F . R . §229 . 10 et se g .) and other SEC regulat ions ,

including accurate and truthful information with respect to the Company's operations and

performance so that the market prices of the Company's publicly traded securities would b e

based on truthful, complete and accurate information .

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68. Alydaar and the Individual Defendants, individually and in concert ,

directly and indirectly, by the use of means and instrumentalities of interstate commerce and/o r

of the mails, engaged and participated in a continuous course of conduct to conceal adverse ,

material information about the Company's financial results, business, operations, and futur e

outlook as specified herein. Alydaar and the Individual Defendants employed devices ,

schemes and artifices to defraud, while in possession of material, adverse, non-publi c

information and engaged in acts, practices, and a course of conduct as alleged herein in a n

effort to assure open market purchasers of Alydaar common stock concerning the value an d

performance and continued substantial growth of Alydaar, which included the making of, o r

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 the Company's financia l

and business operations in the light of the circumstances under which they were made, no t

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 market for Alydaar common

stock .

69 . The Individual Defendants' primary liability arises from the followin g

facts : (a) the Individual Defendants were high-level executives at the Company and wer e

members of the Company's management team, or were members of the Board of Directors ; (b )

the Individual Defendants, by virtue of their responsibilities and activities as senior officers o r

directors of the Company, were privy to and participated in the drafting, reviewing and/o r

approving the misleading statements, releases, reports and other public representations of an d

-27-

about Alydaar, and/or signed the Company's public filings with the SEC, which public filing s

contained the allegedly materially misleading statements ; (c) the Individual Defendants knew o r

had access to the material adverse non-public information about Alydaar's financial results ,

business, operations and future outlook, which were not disclosed ; and (d) the Individual

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 .

70 . The defendants had actual knowledge of the misrepresentations an d

omissions of material facts set forth herein, or acted with reckless disregard for the truth i n

that they failed to ascertain and to disclose such facts, even though such facts were available to

them . Such defendants' material misrepresentations and/or omissions were done knowingly or

recklessly and for the purpose and effect of concealing Alydaar's operations and busines s

affairs from the investing public and supporting the artificially inflated price of its securities .

If they did not have actual knowledge of the misrepresentations and omissions alleged ,

defendants were reckless in failing to obtain such knowledge by deliberately refraining fro m

taking those steps necessary to discover whether those statements were false or misleading .

71 . 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 o f

Alydaar's common stock was artificially inflated throughout the Class Period . In ignorance of

the fact that the market price of Alydaar common stock were artificially inflated, and relyin g

directly or indirectly on the false and misleading statements made by defendants, or upon th e

integrity of the market in which the securities trade, and the truth of any representations mad e

-28-

to appropriate agencies and to the investing public, at the times at which any statements wer e

made, and/or on the absence of material adverse information that was known or recklessl y

disregarded by defendants but not disclosed in public statements by defendants, plaintiff an d

the other members of the Class purchased or acquired Alydaar common stock at artificially

high prices and were damaged thereby .

72 . At the time of said misrepresentations and omissions, plaintiffs and the

other members of 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 nature o f

the operations of the Company and the noncompliance with federal law, which were no t

disclosed by defendants, plaintiffs and the other members of the Class would not have

purchased or acquired their Alydaar common stock or, if they had purchased or acquired suc h

securities, they would not have done so at the artificially inflated prices which they paid .

73 . By virtue of the foregoing, defendants have violated Section 10(b) of the

Exchange Act , and Rule 10b -5 promulgated thereunder .

74. As a direct and proximate result of defendants' wrongful conduct, plaintif f

and the other members of the Class suffered damages in connection with their acquisition o f

Alydaar common stock .

-29-

COUNT II

AGAINST THE INDIVIDUAL DEFENDANT SFOR VIOLATION OF SECTION 20(a) OF THE EXCHANGE AC T

75 . Plaintiff repeats and realleges each and every allegation contained in th e

above paragraphs, as if fully set forth herein . This claim is asserted against the Individua l

Defendants .

76. The Individual Defendants acted as controlling persons of Alydaar withi n

the meaning of Section 20(a) of the Exchange Act as alleged herein . By virtue of their

executive positions, Board membership and/or stock ownership, as alleged above, thes e

defendants had the power to influence and control and did influence and control, directly o r

indirectly, the decision-making of the Company, including the content and dissemination of the

various statements which plaintiffs contend are false and misleading . The Individual

Defendants were provided with or had unlimited access to copies of the Company's interna l

reports, press releases, public filings and other statements alleged by plaintiffs to be misleadin g

prior to and/or shortly after these statements were issued and had the ability to prevent th e

issuance of the statements or cause the statements to be corrected .

77 . In particular, the Individual Defendants had direct involvement in the day-

to-day operations of the Company and therefore, are presumed to have had the power t o

control or influence the particular transactions giving rise to the securities violations as alleged

herein, and exercised the same .

78 . As set forth above, Alydaar violated Section 10(b) and Rule lOh-5 by it s

acts and omissions as alleged in this Complaint, By virtue of their positions as controllin g

- 30 -

persons of Alydaar, the Individual Defendants are liable pursuant to Section 20(a) of th e

Exchange Act. As a direct and proximate result of defendants' wrongful conduct, plaintiffs

and the other members of the Class suffered damages in connection with their acquisition o f

Alydaar common stock .

PRAYER FOR RELIE F

(a) Determining that this action is a proper Class action, designating plaintif f

as Lead Plaintiff and certifying plaintiffs as Class representative under Rule 23 of the Federa l

Rules of Civil Procedure and his counsel as Lead Counsel ;

(b) Awarding compensatory damages in favor of plaintiff and the other Clas s

members against all defendants for all damages sustained as a result of defendants '

wrongdoing, in an amount to be proven at trial, including interest thereon ;

(c) Awarding plaintiff and the Class their reasonable costs and expense s

incurred in this Action, including counsel fees and expert fees ; and

(d) Such other and further relief as the Court may deem just and proper .

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PLAINTIFF DEMANDS A TRIAL BY JURY

Dated : May 14, 1999

CLARK, BLOSS & MCIVER PLLCDavid M . ClarkJohn F. BlossSuite 600125 South Elm StreetGreensboro, NC 27401Tel : 336/275-7275

KAPLAN, KILSHEIMER & FOX LLPFrederic S . FoxJonathan K . Levine685 Third Avenue, 26th FloorNew York, NY 10017Tel : 212/687-1980

LAW OFFICES OF BRUCE G . MURPHYBruce G . Murphy265 Llwyds LaneVero Beach, FL 32963-3252Tel : 561/231-4202

Plaintiffs ' Counsel

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filed united states district court 19 99ma y 14 pm ~...

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