Gorman, et al. v. SystemSoft Corporation, et al. 98-CV ...securities.stanford.edu/.../199832_f01c_98CV10367.pdf · - 4 V,r1{.= • - •• - - - UNITED STATES DISTRICT COURT ir'c,41,

$Page 1: Gorman, et al. v. SystemSoft Corporation, et al. 98-CV ...securities.stanford.edu/.../199832_f01c_98CV10367.pdf · - 4 V,r1{.= • - •• - - - UNITED STATES DISTRICT COURT ir'c,41,$
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V,r1{.=

• -

•• -

- -UNITED STATES DISTRICT COURT ir'c,41,

DISTRICT OF MASSACHUSETTS

c 7 FTHOMAS P. GORMAN, BARRETT HERRIOTT, ) No.

LYMAN, ALBERT HALEGOUA, RONALD )CFFNER and FRED COHEN, On Behalf of ) CLASS ACTION Themselves and All Others Similarly )Situated, )

) CLASS ACTION COMPLAINT FORPlaintiffs, ) VIOLATION OF THE FEDERAL

) SECURITIES LAWSvs.

SYSTEMSOFT CORPORATION, ROBERT F. )ANGELO, WILLIAM J. O'CONNELL, PAUL ) 7' MJ. PEDEVILLANC, ROBERT N. GOLDMAN, ) - -THOMAS W. HIGGINS, RUSSELL BLAIR, )JONATHAN L. JOSEPH, W. FRANK KING, )DAVID SOMMERS, DAVID J. McNEFF and )COOPERS & LYBRAND LLP, )

)Defendants. ) Plaintiffs Demand.A (.1;- ) Trial By Jury

-

-

TABLE OF CONTENTS

Page

INTRODUCTION AND OVERVIEW 1

JURISDICTION AND VENUE 20

THE PARTIES 20

SCIENTER ALLEGATIONS 32

Actual Knowledge 32

Motive And Opportunity ' 38

DEFENDANTS' FRAUDULENT SCHEME AND COURSE OF BUSINESS . . . 38

STATUTORY SAFE HARBOR 39

BACKGROUND TO THE CLASS PERIOD 40

FALSE AND MISLEADING STATEMENTS ISSUED DURING THE CLASSPERIOD 40

SYSTEMSOFT'S FALSE FINANCIAL REPORTING DURING THE CLASSPERIOD 86

Digital Equipment Revenue 87

Distributor Revenue Recognition 89

COOPERS & LYBRAND'S PARTICIPATION IN THE FRAUD 93

INSIDER SELLING 103

FIRST CLAIM FOR RELIEFFor Violation Of §10(b) Of The Exchange Act AndRule 10b-5 Against All Defendants 108

SECOND CLAIM FOR RELIEFFor Violation Of S20(a) Of The Exchange ActAgainst Defendants Angelo and SystemSoft 110

CLASS ACTION ALLEGATIONS 111

BASIS OF ALLEGATIONS 113

PRAYER FOR RELIEF 113

JURY DEMAND 114

_ _

INTRODUCTION AND OVERVIEW

1. This is an action on behalf of purchasers of the stock of

SystemSoft Corporation ("SystemSoft" or the "Company") between

1/25/96 and 3/3/97 (the "Class Period"), complaining of a

fraudulent scheme L and course of business that operated as a fraud

and deceit on purchasers of SystemSoft stock. The defendants are

SystemSoft and its top officers and directors (the "SystemSoft

Defendants") and SystemSoft's outside auditor and accounting firm

(collectively the "Defendants").

2. SystemSoft went public in 8/94 at $2.75 per share l with

annual revenues of only about $9-$10 million. However, after

SystemSoft went public, its stock was a poor performer, as the

Company sold only a few software products for use almost

exclusively in laptop computers, which limited the commercial

market for its products and its prospects for significant

profitable growth. Sy late 95, analysts became critical of

SystemSoft's growth rate and its failure to introduce new products.

SystemSoft's top insiders were upset over this criticism and

determined to overcome it by pushing SystemSoft's stock to much

higher prices so they could sell off large amounts of their

SystemSoft stock at much higher -- and more profitable -- prices.

Thus, in 1/96, SystemSoft, with great fanfare, announced the

development of a new "call-avoidance" software product called

SystemWizardm ("SystemWizard"), which would be used in both desktop

and laptop PCs and supposedly had the ability to quickly analyze

All per share amounts in this Complaint are adjusted forSystemSoft's 2-for-1 stock split effective 7/17/96, unlessotherwise stated.

-1-

and determine the cause of a PC malfunction and advise the user how

to remedy it -- thus avoiding for both PC users and PC

manufacturers the frustration and expense of calls to the PC

manufacturers' technical service centers. SystemSoft told

investors that this new SystemWizard product addressed a huge

potential market, because attempting to obtain help from the

technical assistance centers of PC manufacturers often required

frustrating and expensive telephone calls involving long periods

spent on "hold," as well as service charges of $30 per more per

call on which charge PC manufacturers still lost money. Thus,

reducing these service calls would benefit both PC users and

manufacturers.

3. In the event SystemWizard was unable to identify and

remedy the cause of the malfunction, SystemWizard also was to

enable the PC user to be connected quickly to the PC manufacturers'

technical service center with its analysis of the problem, thus

greatly facilitating the users' receipt of technical assistance.

According to SystemSoft, because its SystemWizard product would be

incorporated by major PC manufacturers into desktop PCs, as well as

laptops, this new product would access a huge market five times

larger than SvstemSoft's existing market, would be SystemSoft's

breakthrough/flagship product and would, in combination with

continued strong demand for SystemSoft's core product line, lead to

tremendous revenue and earnings per share ("EPS") growth for

systemSoft of 40%-60% over the next several years and specifically

a doubling of the size of the Company by the end of fiscal 97

("F97"), i.e., 1/31/97, with revenues and EPS of $90 million and

$.65, respectively.

-2-

4. When SystemWizard was announced, SystemSoft stated that

with the financial backing and marketing assistance of Digital

Equipment, SystemWizard would be ready for evaluation by PC OEMs by

mid-96, initial shipments would occur early in the 4th c of F96

ending 1/31/96, with volume shipments to begin in F97. SystemSoft

falsely represented in 1/96 that SystemWizard would reduce calls to

technical support by 30%, even though its internal research showed

only a 10% reduction in calls. SystemSoft also said it expected

most major PC Original Equipment Manufacturers ("OEMs") to license

and deploy SystemWizard. As SystemWizard was being developed in

F96, SystemSoft represented the "development effort . . . is

Yielding very strong support from its OEM customers," and that

SystemSoft would charge a royalty fee of at least $5 per unit.2

When SystemWizard was formally introduced in 6/96, SystemSoft

stated it had "firm commitments" from a number of PC CEMs for

"eight million units" in the next 12 months, which would generate

approximately $50 million in revenue. During the summer and fall

of 96, SystemSoft represented that in evaluations by major PC

manufacturers, SystemWizard got an "A+ from all," was "coming out

with flying colors," the product was "blowing SvstenSoft away," had

"tremendous upside" and this was the "best feeling that

[SystemSoft] ever had about a product." SystemSoft also told

investors that its new SystemWizard contracts translated into "many

millions of units" and "several million dollars of new revenue."

SystemSoft was also very positive about its new Universal Serial

Bus ("USB") product which it announced in 8196, stating that the

2 Here, as elsewhere, emphasis is has been added unlessotherwise noted.

- 3 -

product was doing very well, it had a number of companies that

would be ordering the product, and it expected the product to "take

the world by storm," generating significant F98 revenues. During

this period, SystemSoft continued to reassure investors that its

"base business is flourishing," where it was "getting faster growth

than expected" and, as a result, its PC card business would grow by

505-60% over the next two years. And, as SystemSoft reported

sequential revenue and EPS growth throughout the Class Period,

which results were audited and certified and/or reviewed and

approved by its accountants, it attributed its "record growth" and

"record results" to "customer acceptance of our products" and the

"continued accqptance of SvstemSoft's technologies by a growing

customer base." As a result of this barrage of extremely favorable

information about SystemSoft and its new SystemWizard and USB

products, SystemSoft's stock was a fantastic performer, rocketing

from $4-3/8 in mid-1/96 to a Class Period high of $36-1/2 in 9/96.

5. However, when SystemSoft reported slightly lower revenues

than anticipated for its 3rdQ F97, i.e., the three months ended

10/31/96, and announced a large contract for SystemWizard with

Packard Bell, but at lower per unit prices, SystemSoft's stock

declined. However, SystemSoft's stock continued to trade at

artificially inflated levels as the Company continued to forecast

strong F98 EPS ($.65) and unveiled a new product -- its USB

software suite, which it represented was a "huge market oppor-

tunity" for SystemSoft. Nevertheless, the decline accelerated in

12/96 and 1/97 when rumors circulated that SystemSoft's 4thQ F97

results would fall short of expectations, due to weakening demand

for SystemSoft's core products and delays in the deployment of

- 4 -

SystemWizard by major PC OEMs. Although SystemSoft denied that

there were any significant problems with the Company or delays with

its new SystemWizard product and insisted that the pricing of the

Packard Bell contract was misunderstood by analysts and not a

negative development and that major deployments of SystemWizard

would occur in the near future, SystemSoft's stock ultimately fell

to S17-5/8 on 3/3/97. Then, after the close of trading on 3/3/97,

SystemSoft shocked the market by revealing that SystemWizard was,

in fact, encountering significant delays in deployment, that

shipments of SystemSoft's core CardWizard product to IBM had been

delayed and, as a result, SystemSoft's revenue and EPS growth

during F98 would be significantly lower than earlier forecast.

SystemSoft's stock collapsed on this revelation, immediately

falling to $11-1/8 and then to $7-5/8 by 3/19/97, as the market

digested the implications of these adverse developments. The

3/4/97 one-day SystemSoft stock decline of 37% on volume of 6.1

million shares was the largest one-day price decline on the largest

one-day stock trading volume in SystemSoft's history as a public

company!

6. While SystemSoft's insiders continued to attempt to

support SystemSoft's stock during 97 by assuring investors and

analysts that SystemWizard was still making good progress with

major PC OEMs, and that SystemSoft would still achieve profitable

growth throughout F98 to end 1/31/90, in fact, SystemSoft's results

stagnated, due to slowing growth of SystemSott's core business and

a lack of significant revenues from SystemWizard or USB. It was

revealed that during the Class Period, Digital Equipment had

cancelled its SystemWizard contract with SystemSoft and as a

-5-

result, SystemSoft had to pay back approximately $7 million to

Digital Equipment. Promised announcements of major OEM adoption of

or deployment of SystemWizard were delayed or never occurred.

Rather than the strong growth forecast during the Class Period for

SystemSoft during F98, due to the success of SystemWizard and

continued strong demand for SystemSoft's core CardWizard products,

in fact, symSr-, ft suffered a hideous F98. SystemSoft achieved

revenues of only about $39-$40 million, while it suffered a large

loss. The "doubling" of the Company forecasted during the Class

Period for F98, i.e., revenue of $90 million and EPS of $.65, never

occurred.

7. In discussions with analysts on 2/6198, Robert F. Angelo

admitted to being in "mortal shock" over these "embarrassing"

developments, i.e., SystemSoft's large operating loss and multi-

million dollar write-offs, and said that SystemSoft had suspended

hiring indefinitely and would, at best, breakeven in following

quarters. Angelo also said "We're writing-off [$12-$14 million]

many, many things that just had no value." He admitted that the

USB business was being spun-off as "the cost of doing USB business

continues to outweigh the short-term benefits* and that SystemSoft

was receiving no payment for the business and was writing-off its

investment in it. As to systemWizard, Angelo admitted SystemSoft

did not even know what its "installed base" of that product was,

was no longer even tracking that, and that "SystemWizard revenue

continued to experience "very long" implementation cycles which

"pushes revenue out" and even "two new wins . . . unfortunately

didn't carry a lot of revenue with them." When Angelo admitted

that these huge losses wiped out all SystemSoft's retained earnings

-6-

and "obviously put that into a large loss," one analyst erupted,

saying "so . . . you guys have . . never made a nickel at the end

of the day when you add it all up," to which Angelo said, "I agree

with you." When asked if the current write-downs related to

questions raised about SystemSoft's accounting in a Forbes article

a year earlier, Paul J. Pedevillano said, "No, it wasn't related to

that article."

S. SystemSoft's stock has never recovered from the bungled

development and unsuccessful launch of the SysterWizard product,

the termination of the Digital Equipment/SystemWizard contract, and

softening in demand for its core products, including CardWizard.

As a result, SystemSoft's stock fell to as low as $3 per share in

F98. The USB product was spun-off and a charge recorded to reflect

non-recoverable costs associated with USB. Defendant Robert

Angelo, President, Chief Executive and Operating Officer and

Chairman of the Board, was ultimately removed from overseeing

SystemSeft's day-to-day operations. The Boston Business Journal

reported this change of leadership at SystemSoft:

Deborah Besemer, who was named president and chiefoperating officer, has taken over day-to-day operations at SystemSoft. .

The move is . . an attempt to stabilizeSystemSoft's stock price . . . . Analysts have beencritical about the company . . . since SystemWizard hasyet to generate its expected revenue. . .

Aaron Edelheit, an analyst with New York-basedIndividual Investment Group, said the main problem withSystemWizard has been a lack of support from the majorplayers in the computer industry, such as Dell computerCorp. of Austin, Texas, and Compaq Computer Corp. ofHouston.

Edelheit said prolonged product testing, andallowing computer makers to have the product for free,may continue to depress SystemWizard's revenue figures

-7--

into 1998. . . . "The problem is no one's paving for ISystemWizardl."

9. Analysts were furious about the deception practiced on

them, complaining, "The Company set expectations for SystemWizard

well above what reality suggested," they were "disappointed in

management's failure, after repeated conversations, to communicate

its feeling of unrealistic expectations for SystemWizard in fiscal

1998," that they "were caught by surprise by the magnitude of the

revenue shortfall," they "hardl lost confidence in the model," and

this "serious shortfall has damaged credibility significantly,"

while characterizing SystemSoft's F98 results as "shocking."

10. Public investors who invested based on SystemSoft's

representations about the successful development and launch of

SystemWizard, continuing strong demand for systemSoft's core

products and its forecasts of strong growth in 1'98-F99, and thus

paid as high as $36-1/2 per share for SystemSoft's stock during the

Class Period, have suffered millions in damages. However,

SystemSoft's insiders who knew the truth about the delays in the

development and deployment of SystemWizard and its limited

potential, the softening demand for SystemSoft's core products and

SystemSoft's serious problems with Digital Equipment and the

inevitable cancellation of that contract, did not fare nearly so

poorly. Before the startling revelations of 3/3/97 occurred, and

SystemSoft's stock price collapsed, SystemSoft insiders --

defendants Angelo, O'Connell, Pedevillano, Goldman, Higgins, Blair,

Joseph, King and McNeff unloaded 1,070,007 shares of their

SystemSoft stock at artificially inflated prices as high as $34-1/8

per share, pocketing over $21 million in illegal insider tradinq

-8-

proceeds! All told, three of the Individual Defendants sold

between 90% and 100% of the SystemSoft stock they owned, five

Individual Defendants sold between 64% and 82% of the SystemSoft

stock they owned and one of the Individual Defendants sold 46% of

the SystemSoft stock he owned. In the aggregate, these top

SystemSoft insiders, collectively unloaded 70% of the SystemSoft

stock they actually owned, while SysterSoft stock was selling at

artificially inflated levels because they were falsifying

SystemSoft's financial results and issuing very positive but false

statements about SystemSoft's business, financial results and its

prospects for continued EPS growth. Angelo's, O'Connell's,

Pedevillano's, Goldman's, Higgins', Blair's, Joseph's, King's and

McNeff's illegal insider selling during the Class Period is

summarized below:

of

Shares Holdings TotalDefendants Sold Sold Proceeds

Angelo 245,882 74% $3,904,930Joseph 113,000 69% $2,797,932O'Connell 195,000 90% $3,495,189Pedevillano 83,250 64% $1,747,540Eiggins :06,749 93% $2,843,338Blair 83,500 82% $1,869,965King 60,000 $1,588,60CGoldman 171,125 45" $2,598,433MeNeff 7,300 100% '4 166,980

Totals: 1,070,007 70s $21,015,907

This insider selling was unusual in timing and amount, as the graph

below shows:

//

//

//

//

//

1/

-9-

SystemSoft Corp.Defendants Stock Sales January 1995 - February 1998

Dollar Volume$10 $40

$B $30

aF

1$20

a $4

4Pmr $10$2 -

Iiiml I I 1 J FM AM ... J ASONDJ FMAMJ J ASO NDJ FMAMJJASONDJF

less 1E913 1897 199t3

11. During the Class Period inside SystemSoft things were far

different regarding SystemWizard than was publicly represented by

the SystemSoft Defendants, who intentionally concealed the true

adverse state of SystemSoft's business and the SystemWizard

product. For instance:

(a) The claimed firm commitments for eight million

SystemWizard units in the next 12 months was a bogus, falsified

figure which the SystemSoft Defendants had created by adding

together the multi-year tentative commitments of all of its OEMs,

which not only included SystemWizard product to be shipped in later

years, but also, SystemWizard orders that were tentative,

provisional or subject to cancellation.

- 10 -

(b) The technical service call centers of IBM, Hewlett-

Packard, Compaq and Digital Equipment were all profitable and these

OEMs had little, if any, interest in undercutting their existing

profitable technical service center business by a product like

SystemWizard. This was especially true with respect to Digital

Equipment which, through its Multi-Vendor Technical Services Unit,

provided technical service operations for itself and other large PC

OEMs (including Compaq) and which unit was a highly profitable part

of Digital Equipment's business.

(c) By the spring of 96, SystemSoft had been informed by

Dell and Toshiba that these PC OEMs saw no end-user demand for a

SystemWizard-type product and told SystemSoft that its proposed $5-

$6 per unit pricing was "obscene" and would not result in

deployment of the product with them.

(d) SystemSoft had been told by several PC OEMs,

including Dell, that configuring the necessary server operations at

the OEMs' technical service centers for SystemWizard to work was

far too expensive, complicated and time-consuming for them to

undertake. In order for SystemWizard to work it was necessary for

the PC OEMs to "build a case" for each potential PC malfunction, an

enormously time-consuming and expensive task which could not be

justified in light of the existing technical service centers'

capability to deal with these problems.

(e) That the attempt to deploy SystemWizard at Packard-

Bell was failing and suffering long delays because Packard-Bell's

technical service center was a cheap, skeletal operation where

Packard-Bell had not accumulated in useable form in data base of

prior customer complaints about its PCs and the solutions utilized

- 11 -

and thus, Packard-Bell found it impossible to create a "knowledge

base" of its PC products in its SystemWizard server which was

indispensable to the deployment of SystemWizard in a workable

fashion.

(f) SysterSoft had originally justified the development

and marketing of SystemWizard using an assumed $12 per unit price.

However, by the spring of 96, SystemSoft was aware that competitive

pressures meant that it would not be able to charge more than $5

per unit, which greatly reduced the profitability of the product

line. However, even this fragile pricing structure was destroyed

in mid-96, when a competitor named CyberMedia told PC OEMs of its

new product, known as "First Aid 95," which would perform the same

functions as SystemWizard and that CyberMedia was willing to give

First Aid 95 to OEMs for free and attempt to make money on the

product by selling it to end users. The SystemSoft Defendants knew

this marketing approach from CyberMedia for an equivalent product

doomed SystemWizard. As a result, by the fall of 96, SystemSoft

was reduced to telling OEMs that it would give the SystenWizard

product to them for lengthy free trials and that if the PC OEM

liked the product and saved money as a result of that, SystemSoft

would then try to negotiate a price for the product going forward.

However, PC OEMs, including Dell, refused even to accept that offer

from SystemSoft as that offer would still require the PC OEM to

invest large amounts to create the "knowledge base" necessary for

the SystemWizard server at the PC OEMs' technical service center to

perform its required functions, which investment PC OEMs were very

reluctant to make. Thus, by the fall of 96, SystemWizard had

- 12 -

become a product that SystemSoft literally could not even give

away!

(g) SystemSoft's relationship with Digital Equipment

regarding SystemWizard soured early on. While Digital Equipment

was originally interested in the SystemWizard technology, by the

spring of 96, SystemSoft was chronically delinquent in providing

Digital Equipment with engineering and other documentation Digital

Equipment demanded as necessary to monitor the development of

SystemWizard. This failure created increasing tension between

Digital Equipment and SystemSoft. The deterioration of the

relationship accelerated during 96, as a dispute between SystemSoft

and Digital Equipment over the type of SystemWizard server to be

created for Digital Equipment's Multi-Vendor Service Technical

Services Unit escalated. Because of the unique nature of its

Multi-Vendor Technical Services Unit, Digital Equipment demanded a

specialized type of SystemWizard server different from that

SystemSoft was designing and developing for other PC OEMs, which

specialized SystemWizard server SystemSoft declined to develop

because of the expense and complexity of doing so. SystemSoft's

conduct in this regard, combined with Digital Equipment's growing

realization that SystemWizard, if successful, could undermine its

highly profitable Multi-Vendor Technical Services Unit operation so

soured the SystemSoft/Digital Equipment relationship that, by the

fall of 96, the SystemSoft Defendants knew that Digital Equipment

would never deploy SystemWizard and would terminate its

SystemWizard contract with SystemSoft in the near future.

12. Each of the positive statements about SystemSoft's

business during the Class Period was materially false and

- 13 -

misleading when issued. Defendants also failed to disclose, inter

alia, the following adverse information which was then known only

to Defendants due to their access to internal SystemSoft data and

disclosure of which was required to be made to make the statements

made not misleading:

(a) SystemSoft had hurried the announcement of

SvstemWizard t s development in early 96 in order to blunt criticisms

of its slow pace in developing new products and, at the time of

that announcement, in fact, SystemSoft had not completed sufficient

product development or market analysis to be able to state that

"the first products are scheduled to ship to system manufacturers

in the second quarter of 1996" or that SystemSoft would be able "to

rapidly bring this new category of call avoidance software to

market";

(b) Based upon communications with PC OEMs, the

SystemSoft Defendants knew that the market potential for

SystemWizard was nowhere near as large as represented and that most

of the large OEMs were satisfied with the status quo because

service calls gave them a chance to sell additional product to

users and were actually generating profits for them;

(c) Based upon communications with PC OEMs, the

SystemSoft Defendants knew that PC OEMs did not have anywhere near

the level of interest in deploying SystemWizard as SystemSoft was

representing and that the most important, major PC OEMs,

Compaq, Dell, Gateway and IBM, were extremely dubious about and

reluctant to license the product, and SystemSoft was only able to

service the OEM agreements it did have by agreeing to barter

transactions wherein SystemSoft would agree to accept old Pc

- 14 -

equipment in exchange for SystemWizard and by promising positions

at SystemSoft to OEM employees, including those at DEC, Hewlett-

Packard and Packard Bell;

(d) Based on marketing studies and other evaluations of

the SystemWizard product they had made, the SystemSoft Defendants

knew that there was no possibility that PC OEMs would ever pay $5

or $6 per SystemWizard unit in large volume transactions and thus

the revenue and profit potential of the SystemWizard product was

actually far less than SystemSoft was forecasting;

(e) SystemSoft did not have firm commitments from PC

OEMs to order eight million SystemWizard units in the next 12

months and, in fact, had agreed to provide millions of units to PC

OEMs for free to evaluate or test consumer reaction or on a

deferred pay basis;

(f) Due to the difficulties PC OEMs were encountering in

integrating SystemWizard into their PC products and establishing

necessary technical arrangements to accept and process service

calls from SystemWizard, the SystemSoft Defendants knew that volume

deployment of SystemWizard by PC OEMs would be materially delayed

even with those PC manufacturers that had agreed to utilize the

product. They knew that as a result SystemSoft's revenue from

SystemWizard during F98 would be far less than what was being

forecasted;

(g) None of the PC OEMs who had purportedly agreed to

utilize SystemWizard were actually firmly committed to purchase any

specific quantity of the product, but rather, only to accept

shipments for evaluation and, in fact, during such evaluation

process the OEMs were expressing considerable dissatisfaction with

- 15 -

the product, both in terms of its technical capabilities and its

cost benefit justification;

(h) Because SystemWizard was achieving extremely limited

success with PC OEMs, this product was not vastly expanding

SystemSoft's potential marketplace by opening up deskto p computers

to it. Defendants knew that, in fact, SystemSoft remained a

company dependent upon selling its products into the smaller and

slower-growing mobile or laptop part of the computer industry and

thus did not have the prospects for revenue and BPS growth being

represented;

(i) SystemSoft was not, in fact, achieving consistent

strong quarterly revenue and EPS growth as represented; but rather,

its revenues were stagnating and it was concealing the stagnation,

falsifying and manipulating its financial results by improperly

recording revenue from its Digital EguipmentiSystemWizard

development contract and from its Asian distributor and

restructuring its agreement with Intel to accelerate payments (and

revenue) from later quarters to show revenue and BPS growth during

the Class Period;

(j) SystemSoft's streak of record quarterly revenues and

BPS was not the result of the strong demand for or broad customer

acceptance of its core products as represented; but rather, was due

to the deliberate falsification of SystemSoft's financial results

by improperly recording revenue on its Digital Equipment/

SystemWizard contract and on shipments to its Asian distributor, as

detailed in T583-97;

(k) SystemSoft's revenues and EPS for the 4thQ F96 and

the lstQ, 2ndQ and 3rdQ F97 were each artificially inflated and

- 16 -

falsified due to the manipulation of SystemSoft's accounting by

improperly recording revenue on the Digital Equipment/SystemWizard

contract and on shipments to its Asian distributor, as detailed in

¶TB3-97;

(1) SystemSoft was having significant disagreements with

Digital Equipment about the development of and potential for

SvstemWizard and that product's commercial success and it was very

likely Digital Equipment would cancel its SystemWizard development

and marketing contract with SystemSoft, thus triggering a multi-

million dollar liability of SystemSoft to Digital Equipment;

(m) SystemSoft's USB software product was not ahead of

the competition, had created little, if any, customer interest and

virtually no sales, would produce little, if any, revenue in F98,

and would likely have to be sold or spun-off, creating a signifi-

cant write-down of SystemSoft's investment in that product;

(n) Demand for SystemSoft's core products, especially

CardWizard, was softening such that Defendants knew that the rate

of growth in sales of that product would decline dramatically in

the coming months in part because IBM would not order any

CardWizard products until well into F98;

(o) SystemSoft was improperly capitalizing development

costs for SystemWizard and its USE software, as it did not have any

adequate basis to believe, forecast or estimate that it would

recover those costs in the reasonably foreseeable future from sales

of the SystemWizard product at profitable prices; and

(p) As a result of the foregoing negative factors which

were negatively impacting SystemSoft's business, the SystemSoft

Defendants actually knew that the forecasts of strong revenue and

- 17 -

EPS growth during F98 due to continued strong growth and

SystemSoft's core product line, plus accelerating sales of

SystemWizard, were false when made as those forecasted results were

unachieveable.

13. The huge artificial inflation of SystemSoft's stock, the

SystemSoft Defendants' illegal insider trading during the Class

Period and the later collapse of SystemSoft's stock when the true

facts about the failure of SystemWizard to achieve commercial

success, the termination of the Digital Equipment research and

development contract, the slowing growth in sales of SystemSoft's

core products and SystemSoft's greatly diminished prospects for

future growth, are graphically displayed below:

System Soft Corp.

August 4,1994 - February 13, 1998

Daily Stock PricesClass Period Stock Sales

40 . Aug 27 - Sept 30, 1996Inas:Jars sefi 3%125 shamsfor S5,187.085

May 29 - July 3, 1096insiders selr 388,874 shame

30 — for S8,442,643

Dee 8, 190SInsider seas 4.005 sharesfor 58.3.886

Cl,

Jan 8 - 28, 1997

el- 20 Mar& 4-27 1£196r..........„.„.n ;noistmeloi070.000 shares

Insiders sell 317,008 .

shares Ter $2,378.778 y

0

10 —

• -40— ss Per bci

0 1'I 1 1 1 I' 1 1 :1 1 1 1 + 1 1 1 1 • 1 1

08/04/94 11/2/94 03/23/95 07/18/95 11/08/95 03/05/95 06/27/96 10/21/96 02113/97 06/10/97 10102197 01/28/98

09130194 01125195 05/19(95 09/13195 0108/96 05/01/96 08/23196 12/17/96 04/14/97 08106/97 11/28197

- 18 -

14. The chart below shows the price of SystemSoft stook while

Defendants were issuing their false and misleading statements about

the Company and the subsequent collapse as the previously concealed

adverse facts began to be disclosed. The chart also shows that

when compared to an index of similar stocks, SystemSoft's stock

price decline was largely due to company-specific events and not

market or industry forces:

SystemSoft Corporationvs. S&P Computer Software and Services Index

February 26 1996 - February 12,1998

600 600

SystemSoft

500 500

ao 400 400

a)6 300 300

S&P Computer Software Services Index.QC;

1) 200 200

100 100

1—S&P --SystemSol

0 0J J ASO NDJ FMA MJ J ASO ND J5

1997 1998

— 19 —

JURISDICTION AND VENUE

15. The claims asserted herein arise under §510(b) and 20(a)

of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C.

SS78j(b) and 78t(a), and Rule 10b-5, 17 C.F.R. S240.10b-5.

16. Jurisdiction is conferred by §27 of the Exchange Act, 15

U.S.C. 578aa, and 28 U.S.C. §1331.

17. Venue is proper in this District pursuant to §27 of the

Exchange Act, and 28 U.S.C. §1391(b). SystemSoft is headquartered

in this District. The false and misleading statements were made or

issued from this District and most of the Individual Defendants

live here. Thus, most of the acts and transactions giving rise to

the violations of law complained of occurred in this District.

THE PARTIES

18. (a) Plaintiff Thomas P. Gorman purchased 2,000 shares of

SystemSoft common stock on 5/3/96 at $27.67 per share, and was

damaged thereby.

(b) Plaintiff Barrett Herriott purchased 400 shares of

SystemSoft common stock on 12/23/96 at $14.94 per share, 100 shares

on 1/22/97 at $12.61 per share and 300 shares on 1/22/97 at $11.46

per share, and was damaged thereby.

(c) Plaintiff Lori Lyman purchased 300 shares of

SystemSoft common stock on 1/16/97 at $14.52 per share, and was

damaged thereby.

(d) Plaintiff Albert Halegoua purchased 6,000 shares of

SystemSoft common stock on 3/29/96 at $7.69 per share, 1,400 shares

on 6/19196 at $24.50 per share, 1,000 shares on 10/8/96 at 529.50

per share, 1,500 shares on 12/10/96 at $18-1/8 per share and 1,000

shares on 1/24/97 at $14-1/4 per share, and was damaged thereby.

- 20 -

(e) Plaintiff Ronald Offner purchased 300 shares of

SystemSoft common stock on 11/27/96 at $21 per share, and was

damaged thereby.

(f) Plaintiff Fred Cohen purchased 300 shares of

SystemSoft common stock on 12/6/96 at $17 per share, and was

damaged thereby.

19. Defendant SystemSoft maintains its headquarters

Natick, Middlesex County, Massachusetts. During the Class Period,

SystemSoft's common stock traded in an efficient market on the

NASDAQ National Market System.

20. (a) Defendant Robert F. Angelo ("Angelo") was, during

the Class Period, President, Chief Executive Officer, Chief

Operating Officer and Chairman of the Board of the Company.

Angelo, by reason of his stock ownership, management position, and

membership on SystemSoft's Board, was a controlling person of

SystemSoft and had the power and influence, and exercised the same,

to cause it to engage in the illegal conduct complained of herein.

During the Class Period and as part of the fraudulent scheme,

Angelo sold 248,882 shares of SystemSoft stock at prices as high as

$31-3/4 per share based on inside information, pocketing over $3.9

million. These sales constituted 74% of Angelo's holdings in

SystemSoft. Angelo was also given cheap stock options on 50,000

SystemSoft shares as a reward for helping to falsify SystemSoft's

F97 results and artificially inflating SystemSoft's stock during

F97. Angelo's stock sales during the Class Period were unusual in

timing and amount as set forth below:

- 21 -

SystemSoft Corp.Defendant R. Angelo Class Period Sales

$1400 $40

$1200

^$1000

$800

$3$2:21'6 $600

n_ $400 116 $10

$200

$0 $0FMAMJJASONDJFMAMJJA3ONCIJFMAMJJASONDJF

1995 is 197 1 NS

(b) Defendant Jonathan L. Joseph ("Joseph") was, at all

relevant times, Senior Vice President-P.C. Software Division of the

Company. During the Class Period and as part of the fraudulent

scheme, Joseph sold 113,000 shares of Systemsoft stock at prices as

high as $30-1/2 per share based on inside information, pocketing

over $2.7 million. These sales constituted 69% of Joseph's

holdings in SystemSoft. Joseph's stock sales during the Class

Period were unusual in timing and amount as set forth below;

//

I-

II

//

//

- 22 -

SystemSoft Corp.Defendant J. Joseph Class Period Sales

$1400 $40

$1200

$30$1000

0a"

hiss441‘[141j(if\v1 $20 -,vu

$800

1 J $400

lip.444N $1 0

•

$200

so .1 FMAMJ JASONDJ FMAMJJ ASONDJ FlulAMJ J ASO NO.IF

1995 19943 :997 1998

(c) Defendant William J. O'Connell ("O'Connell") was, at

all relevant times, Senior Vice President-Strategic Accounts and

Emerging Markets of the Company. During the Class Period and as

part of the fraudulent scheme, o'connell sold 196,000 shares of

SystemSoft stock at prices as high as $32-3/8 per share based on

inside information, pocketing over $3.4 million. These sales

constituted 90% of O'Connell's holdings in SystemSoft. O'Connell's

stock sales during the Class Period were unusual in timing and

amount as set forth below:

//

//

//

//

//

- 23 -

SystemSoft Corp.Defendant W. O'Connell Class Period Sales

12000 $40

$1500 $30

8

1-1

4141441P1 It'

a $1000 h $20

3

$500 $10

$0 $0JFMAMJJASONDJFMAMJJASONDJFMAMJ.,ASONDJF

10E+5 1g96 'S97 1998

(d) Defendant Paul J. Pedevillano ("Pedevillano") was

Vice President and Chief Financial Officer of SystemSoft from 4/93-

1/96 and was responsible for the accounting policies SystemSoft

used to account for its Digital Equipment contract. After 1/96, he

was Vice President-Business Development of the Company. During the

Class Period and as part of the fraudulent scheme, Pedevillano sold

83,250 shares of SystemSoft stock at prices as high as $32-1/2 per

share based on inside information, pocketing over $1.7 million.

These sales constituted 64% of Pedeviliano's holdings in

SystemSoft- Pedevillano's stock sales during the Class Period were

unusual in timing and amount as set forth below:

//

//

//

- 24 -

SystemSoft Corp.Defendant P. Pedevillano Class Period Sales

$1200 $40

$1000

$30

$1300

@ae $80u $20IL

$400 \i/11\t44(16411111A. $10$200 wir jp,"4/14,10,

$0 II $0JFMAMJ.,ASONDJFMAMJJASONDJFMAMJJASONDJF

199S 1998 t997 1998

(e) Defendant Thomas W. Higgins ("Higgins") was, at all

relevant times, Vice President-Worldwide Sales of the Company.

During the Class Period and as part of the fraudulent scheme,

Higgins sold 106,749 shares of SystemSoft stock at prices as high

as $33-1/8 per share based on inside information, pocketing over

$2.8 million. These sales constituted 93% of Higgins' holdings in

SystemSoft. Higgins' stock sales during the Class Period were


//

//

//

//

//

//

- 25 -

SystemSoft Corp.Defendant T. Higgins Class Period Sales

$2500 $40

$2000 I-$30

$1500 Crg_

TO

$202

$1000 ro

$10

$500 I — -

$0 $0,FMAMJ JA SON01 FPAAMJ J ASONDJ FMAMJ .1 A SONDJ F

1995 toe 1997 1999

(f) Defendant Russell Blair ("Blair") was, at all

relevant times, Vice President of the Company. During the Class

Period and as part of the fraudulent scheme, Blair sold 83,500

shares of SystemSoft stock at prices as high as S34-1/8 per share

based on inside information, pocketing over $1.8 million. These

sales constituted 82% of Blair's holdings in SystemSoft. Blair's

stock sales during the Class Period were unusual in timing and

amount as set forth below:

1/

//

//

I-

1/

//

- 26 -

SystemSoft Corp.Defendant R. Blair Class Period Sales

$6,00 $40

$500 -

$3C

$400

a

E $:300 - $20 T,

5$200

-11111 111111111,111411\vol S 10$100

L ..I FM AM.) JASONDJ FMANI,J .1 A SONDJ FMAMJJ ASONDJ F

1995 1996 1997 1L

(g) Defendant David Sommers ("Sommers") was, at all

relevant times, Vice President-Finance, Treasurer and Chief

Financial Officer of the Company. During the Class Period, Sommers

did not sell any shares of SystemSoft stock because he owned no

shares outright and during the Class Period had almost no vested

stock options he was able to exercise and sell. However, Sommers

was paid a cash bonus for helping to falsify SystemSoft's F97

results and artificially inflate its stock price.

(h) Defendant W. Frank King ("King") was, at all

relevant times, a director of the Company and a member of its Audit

Committee. During the Class Period and as part of the fraudulent

scheme, King sold 60,000 shares of SystemSoft stock at prices as

high as $29-1/4 per share based on inside information, pocketing

over $1.5 million. These sales constituted 76% of King's holdings

- 27 -

in SystemSoft. King's stock sales during the class Period were


SystemSoft Corp.Defendant F. King Class Period Sales

$1200 $40

$/000

$30

8 Um r

'4 3

E $600 $20 -0

$400 1- \\SI $10

$200

SD $0JFMAMJJASONDJFMAMJJASONDJFMAMJJASONDJF

1995 199e 1997 1998

(i) Defendant Robert N. Goldman ("Goldman") was, at all



scheme, Goldman sold 171,126 shares of SystemSoft stock at prices

as high as $24 per share based on inside information, pocketing

over $2.5 million. These sales constituted 46% of Goldman's

holdings in SystemSoft. Goldman's stock sales during the Class

Period were unusual in timing and amount as set forth below:

//

//

//

- 28 -

SystemSoft Corp.Defendant R. Goldman Class Period Sales

$3000 $40

$2500-

1111\kitseivakiNtill $30$2on 0

$15W $20 ;

$1000 L

$10

$500

$0 $0JFMAMJJASONJELIFMANIJJASONDJFMAMJIASONDJF

1995 19E6 1997

(j) Defendant David J. McNeff ("McNeff") was, at all



scheme, McNeff sold 7,500 shares of SystemSoft stock at prices as

high as $22.66 per share based on inside information, pocketing

over $166,900. These sales constituted 100% of MoNeff's holdings

in SystemSoft. McNeff's stock sales during the Class Period were


//

//

//

//

//

- 29 -

System Soft Corp.Defendant D. McNeff Class Period Sales

$200 $40

$150

_

$39I

a

$100 - 320 -0ti7

- $10

So sa.1 FMAMJ JA SONDJ FMAMJJASONDJFMAMJ JASONDJF

lase 19s7

21. The individuals named as defendants in 4:20(a)-(j) are

referred to herein as the "Individual Defendants." The Individual

Defendants are liable for the false statements pleaded herein at

11139, 43, 47, 49, 50, 54, 58, 65-66, 79 and 85, as those statements

were each "group-published" information, the result of the

collective action of the Individual Defendants.

22. Because of these Individual Defendants' positions with

the Company, they each had access to the adverse non-public

information about its business, finances, products, markets and

present and future business prospects via access to internal

corporate documents (including the Company's operating plans,

budgets and forecasts and reports of actual operations compared

thereto), conversations and connections with other corporate

— 30 —

officers and employees, attendance at management and/or Board of

Directors' meetings and committees thereof and via reports and

other information provided to them in connection therewith.

23. SystemSoft's Board had an Audit Committee which oversaw

the accounting and financial functions of the Company and consulted

with and reviewed the services provided by the Company's indepen-

dent auditors It met four times during 797. Goldman, King and

McNeff were the members of the Audit Committee.

24. The Individual Defendants, because of their positions

with the Company, controlled and/or possessed the power and autho-

rity to control the contents of its quarterly and annual reports,

press releases and presentations to securities analysts, which

information was conveyed through the analysts to the investing

public. Each of these defendants was provided with copies of the

Company's reports and press releases alleged herein to be mislead-

ing prior to or shortly after their issuance and had the ability

and opportunity to prevent their issuance or cause them to be

corrected. Because of their positions and access to material

non-public information each of these defendants knew that the

adverse facts specified herein had not been disclosed to and were

being concealed from the public and that the positive represen-

tations which were being made were then materially false and

misleading. Despite their duty not to sell their SystemSoft stock

under such circumstances, these defendants nonetheless did so.

25. Defendant Coopers & Lybrand LLP ("Coopers & Lybrand") is

a firm of certified public accountants. Coopers & Lybrand was

engaged by Systemsoft to provide independent accounting, business

consulting and auditing services to SystemSoft and gave SystemSoft

- 31 -

accounting advice and consultation regarding SystemSoft's annual

and quarterly reports which were filed with the SEC and publicly

distributed. Coopers & Lybrand consented to its unqualified

opinions on SystemSoft's F96 financial statements being included in

SystemSoft's F96 Report on Form 10-K and Annual Report to

Shareholders. Coopers & Lybrand directly participated in and

worked with SystemSoft to develop the bogus rationales for

SystemSoft's accounting practices for the Digital Equipment

contract, knowing that there was no reasonable basis for these

accounting practices. As a result, Coopers & Lybrand was not

independent with respect to auditing or reviewing SystemSoft's

financial statements or opining thereon, as Coopers & Lybrand was,

in effect, auditing its own work and had a stake in justifying the

correctness of accounting practices that enabled SystemSoft to

inflate its net income and EPS during the Class Period and its

underlying justifications that Coopers & Lybrand had helped create.

Coopers & Lybrand rendered false opinions on SystemSoft's F96

financial statements for the year ended 1/31/96. Coopers & Lybrand

also reviewed SystemSoft's financial results for each of the

interim quarters of F97, ended 4/31/96, 7/30/96 and 10/31/96 and

approved all these interim financial statements as filed with the

SEC and distributed to the public, knowing of their falsity.

SCIENTER ALLEGATIONS

Actual Knowledge

26. Angelo, Joseph, O'Connell, Pedevillano, Higgins, Blair

and Sommers were the top operating officers of SystemSoft. They

had daily contact with each other, as these individuals ran

SystemSoft's business on a daily basis as hands-on managers, having

- 32 -

constant contact with each other to discuss and deal with the most

important issues facing SystemSoft's business, i.e., the

development, marketing and sales of SystemWizard, SystemSoft's

Digital Equipment relationship and sales of its core products,

especially CardWizard.

27. Defendants King, Goldman and McNeff were each directors

and members of the Audit Committee of SystemSoft. These defendants

were much more involved in the management of SystemSoft than would

ordinarily have been the case with outside directors. SystemSoft

had a small Board of Directors which consisted only of these three

defendants, plus Angelo, and thus the Board was very small and

operated as a cohesive group. In addition, because SystemSoft's

business was small, these three directors were in a position to and

in fact did oversee its operations on an ongoing basis. As such,

these directors were intimately familiar with the details of the

Digital Equipment contract and the decision not to disclose the

complete terms of that contract to the public or file it as an

exhibit to SystemSoft's major SEC filings during the Class Period.

As members of the Audit Committee they also participated in the

deliberate decision which was made to misaccount for the Digital

Equipment contract by having SystemSoft recognize millions in

revenue from that contract during F96/F97, even though under the

terms of that contract, no such revenue could properly be

recognized. Similarly, these three defendants, as intimately

involved directors and members of the Audit Committee, were aware

of the problems that SystemSoft was having with its Asian

distributor and that termination of that distributor was inevitable

- 33 -

and would result in the delayed recognition of millions of dollars

of uncollectible accounts receivable.

28. Also, because of their active roles as members of the

small and intimately involved Board of Directors, these three

defendants were aware that the SystemWizard product had been

announced prematurely by the Company and that the product did not

have anywhere near the market potential the Company w as

representing it had. Further, they knew from reports they received

as directors that deployment of the product, even by those PC OEMs

that had ordered it, would be materially delayed and that it was

extremely unlikely that any of the major PC OEMs would ever order

the product in large volumes or deploy in on a full-scale basis.

29. Because of their top executive positions with SystemSoft

and involvement in the day-to-day management of its business,

defendants Angelo, Joseph, O'Connell, Pedevillano, Higgins, Blair,

King, Goldman, McNeff and Sommers each actually knew the adverse

non-public information about the delay in development and

deployment of SystemWizard, the Company's most important new

product, softening demand for its core products, including

CardWizard, the failure of the Digital Equipment partnership, the

falsifying of SystenSoft's financial results and its poor future

revenue and EPS prospects from internal corporate documents and

conversations with other corporate officers and employees and their

attendance at management and Board meetings.

30. Because vastly increased sales of SystemWizard and US8

products, continued strong growth in sales of CardWizard and

continuation of the Digital Equipment relationship were

indispensable to SystemSoft meeting its internally budgeted and

- 34 -

publicly forecast F97 revenue and EPS, each of the Individual

Defendants focused on and constantly monitored each of these key

factors affecting SystemSoft's business.

31. SystemSoft desperately needed to generate additional

revenue in order to keep its supposed streak of quarterly revenue

and EPS growth intact. However, demand for its core products was

softening and therefore the rate of growth in revenue of

products was not sufficient to enable SystemSoft to achieve revenue

and EPS growth on that basis alone. Moreover, any significant

revenue from SystemWizard was far oft in the future, due to the

delays in deployment of that product which were occurring with the

OEMs that had ordered it and the lack of significant revenue

prospects from major OEMs that were decidedly uninterested in the

product. Thus, in order to keep its apparent record of revenue and

EPS growth intact until it could try to supplement its revenues and

EPS with SystemWizard revenues, SystemSoft's insiders decided to

record and report as revenue payments made to SystemSoft by Digital

Equipment under the SystemSoft/Digital Equipment SystemWizard

contract. However, under the terms of the SystemSoft/Digital

Equipment contract, the payments being made by Digital Equipment

were, in effect, loans or advances to SystemSoft and not true

revenues which could be recorded or reported as such, as Digital

Equipment had the right to terminate the relationship and elect not

to utilize SystemWizard in its product line, in which case,

SystemSoft was obligated to repay all of the advances or loans that

Digital Equipment had made to it to date. Knowing that a detailed

analysis of the Digital Equipment/SystemSoft SystemWizard contract

would reveal these terns and the impropriety of SystemSoft's

- 35 -

accounting treatment for that contract, SystemSoft's directors and

officers decided not to include that contract as an exhibit with

SvstemSoft's SEC filings in F96 or E97, even though this was, as

SvstemSoft itself admitted, a material or important contract to

SystemSoft. Coopers & Lybrand, which was intimately involved in

this decision and approved of it, was aware that recognizing

revenue on this contract was improper and that it would be

necessary to conceal the true terms of this contract from the

public and the SEC in order to facilitate their misaccounting for

the contract.

32. The Digital Equipment/SystemSoft relationship was an

extremely important one to SystemSoft. While Intel Corporation had

also agreed to fund part of the development costs of SystemWizard,

Intel was a very large stockholder in SystemSoft and thus its

investment in developing that product was considered much less of

an endorsement of the technology and market potential of that

product than was the agreement of Digital Equipment to help fund

the development of the product, as Digital Equipment was an

independent entity, as well as a potentially large customer for the

product. The Digital Equipment relationship thus gave SystemSoft

not only a substantial public relations coup, but also provided for

it the opportunity to boost its reported revenues by including

Digital Equipment payments to it under the development contract as

current period revenue and also to boost the credibility of the

product when it was completed and ready to ship by ftaving a large

sophisticated computer OEM like Digital Equipment elect to purchase

the product and deploy it.

- 36 -

33. Thus, SystemSoft's corporate Board and top management was

extremely focused on the state of the relationship between

SystemSoft and Digital Equipment and the status of Digital

Equipment's attitude about committing to order and deploy the

SystemWizard product. This was a matter of constant attention and

frequent discussions among SystemSoft's corporate Board and top

managers. As a result, these individuals were kept apprised of the

current status of the Digital Equipment/SystemSoft relationship

throughout F96 and F97, and were aware of the serious deterioration

of that relationship during F97, and knew that it was most unlikely

that Digital Equipment would ever order SystemWizard in volume or

deploy the product and it was most likely that Digital Equipment

would terminate its relationship with SystemSoft in the near term.

Termination of the Digital Equipment/SystemSoft relationship would

be an extremely negative development for SystemSoft, as it would

require SystemSoft to repay some $7 million to Digital Equipment.

The repayment would have a material adverse impact on SystemSoft's

financial results going forward and the termination of the

relationship would indicate that Digital Equipment did not have

confidence in the commercial potential of the product and indeed

was not going to order or deploy it. SystemSoft's corporate Board

and managers determined to withhold this adverse information from

the marketplace, both to conceal from the securities markets this

very negative financial development for SystemSoft and to conceal

from the commercial or product market this very negative

development for the future of SystemWizard. As a result, even

after the Digital Equipment/SystemSoft relationship was formally

terminated in late 2/97, they deliberately concealed this

- 37 -

information. When they did disclose it several weeks later, they

buried the news in a footnote in SystemSoft's Management Discussion

and Analysis section of SystemSoft's F97 Annual Report, published

well after the Class Period ended.

Motive And Opportunity

34. In addition to having actual knowledge of the falsity of

their statements, each of the Defendants had the motive and the

opportunity to perpetrate the fraudulent scheme and course of

business described herein. During 94-95, SystemSoft was operating

in an industry in which smaller niche companies like SystemSoft

were at a competitive disadvantage and to survive SystemSoft was

attempting to grow rapidly. Rapid growth would create a larger

company, justify larger salaries to SystemSoft's corporate

management and push up its stock price, adding millions to their

wealth, based on their actual stock ownership and stock options.

35. Their motive to engage in this conduct included a desire

to attempt to continue SystemSoft's apparent record of sequential

quarterly revenue and EPS growth, to manipulate and artificially

inflate the price of SystemSoft's stock, to enhance the value of

their holdings of SystemSoft stock and/or options to purchase

SystemSoft stock, and permit SystemSoft's insiders to sell off

large portions of their SystemSoft stock at inflated prices.

DEFENDANTS' FRAUDULENT SCHEMEAND COURSE OF BUSINESS

36. Each of the Defendants is liable for making false state-

ments and as a participant in a fraudulent scheme and course of

business that operated as a fraud or deceit on purchasers of

SystemSoft stock, including the making of false and misleading

- 38 -

statements and/or concealing material, adverse facts. The

fraudulent scheme and course of business: (i) deceived the

investing public regarding SystemSoft's products and business; (ii)

deceived the commercial markets regarding SystemSoft's success with

its products; (iii) artificially inflated the price of SystemSoft

stock; (iv) caused plaintiffs and other members of the Class to

purchase SvstemSoft stock at inflated prices; and (v) permitted

certain defendants to dispose of 1,070,007 shares of SystemSoft

stock, pocketing over $21 million in illegal insider-trading

profits.

STATUTORY SAFE HARBOR

37. The statutory safe harbor provided for forward-looking

statements under certain circumstances does not apply to any of the

allegedly false forward-looking statements pleaded in this

Complaint because the statutory safe harbor does not apply to

SystemSoft's financial statements and because none of the

particular oral forward-looking statements pleaded herein were

identified as a "forward-looking statement" when made. None of the

written forward-looking statements made were identified as forward-

looking statements. Nor was it stated as to either type of

forward-looking statement that actual results "could differ

materially from those projected." Nor did meaningful cautionary

statements identifying important factors that could cause actual

results to differ materially from those in the forward-looking

statements accompany those forward-looking statenents. In any

event, each of the forward-looking statements alleged herein was

authorized by an executive officer of SystemSoft, and was actually

known by each of the Individual Defendants to be false when made.

- 39 -

BACKGROUND TO THE CLASS PERIOD

38. SystemSoft was a very small company that went public in

8/94 at $2.75 per share with annual revenues of only about $9-$10

million. After SystemSoft went public, its stock was only a modest

performer, as the Company sold only a few products for use almost

exclusively in laptop computers which limited its prospects for

significant profitable growth. By late 95, anal ysts were critical

of SystemSoft's rate of growth and its inability successfully to

develop and introduce new products. As D.F. Carey of Rodman &

Renshaw wrote on 11/29/95 in downgrading the stock after SystemSoft

reported disappointing 3rdQ F96 revenue growth:

rWle feel that revenue growth sequentially during Ql-O3 has not reflected the perceived potential of the company's products. . . [lit now appears that the company is struggling to meet estimates, and that revenue and earnings upside is doubtful. . . Revenues from newproducts are further off than expected. Much of the excitement about SystemSoft has been related to new products under development. However, it is now clear that we must relate our investment decisions to the current core products . . . .

SystemSoft's top insiders were upset over this negative perception

and were determined to overcome it and push SystemSoft's stock to

much higher prices. Thus, in early 96, SystemSoft announced the

development of a new product -- a new "call-avoidance" software

product called SystemWizard.

FALSE AND MISLEADING STATEMENTSISSUED DURING THE CLASS PERIOD

39. On 01/25/96, SystemSoft issued a press release entiticd

and stating:

SYSTEMSOFT TO RECEIVE FUNDING SUPPORT FROM INTEL ANDDIGITAL TO DEVELOP PRODUCTS THAT WILL AUTOMATICALLYIDENTIFY AND RESOLVE THE MOST COMMON PROBLEM FACED BYPERSONAL COMPUTER USERS; SYSTEM-WIDE PROBLEM RESOLU-

- 40 -

TION/CALL AVOIDANCE SOFTWARE WILL SIGNIFICANTLY REDUCECUSTOMER SUPPORT COSTS

* * *

Intel and Digital Equipment Corp. will provide SystemSoftwith up to several million dollars in funding,intellectual property and development assistance toaccelerate development of this new category of PCsoftware to be known as "Call Avoidance" products.SystemSoft will market and license products resultingfrom this alliance. It is estimated that productsresulting from this development effort could reduce thenumber of calls received by PC manufacturers' technicalsupport organizations by 30 percent, representing apotential annual industry-wide cost savings of more than$1 billion.

The first products are scheduled to ship to systemmanufacturers in the second quarter of 1996. The firstPCs to include problem resolution/call avoidance softwareare expected to be available during the fourth quarter ofthis year.

* * *

Digital's MCS Division which serves as the technicalsupport call center for a wide variety of OEMs includingMicrosoft, Compaq, Dell and NEC Technologies will providemarketing support for SystemSoft products developed underthis agreement. . . . To speed portions of SystemSoft'sdevelopment, Digital will also provide intellectualproperty and software associated with secure remotecommunications.

The release quoted Angelo as saying:

Digital [is] providing world-class resources that willenable SystemSoft to rapidly bring this new category ofcall avoidance software to market.

40. On 1/30/96, subsequent to the 1/25/96 press release,

SystemSoft held a conference call for securities analysts, money

and portfolio managers, institutional investors, large SystemSoft

shareholders, brokers and stock traders to discuss SystemSoft's new

SystemWizard product. During the call, Angelo made presentations

and answered questions. During the call -- and in follow-up

- 41 -

conversations with participants -- he directly disseminated

important information to the market by stating:

• SystemSoft's market research and evaluation revealed apotentially huge market for SystemWizard as this product wouldbe incorporated into desktop PCs as well as laptop computers,which would vastly expand SystemSoft's market penetration andprovide huge revenue growth for SystemSoft going forward.

• SystemSoft had determined that a royalty fee ofapproximately $5-$7 per SystemWizard unit was reasonable andcould be achieved.

• SystemSoft's development partnership with DigitalEquipment for SystemWizard would work very well and SystemSoftexpected that Digital Equipment would be utilizingSystemWizard.

• Because PC OEMs were losing significant amounts of moneyon the technical service calls being received by theirtechnical service centers, there was an enormous market demandfor SystemWizard with these PC manufacturers, as deployment ofSystemWizard would significantly reduce the number of servicecalls and thus provide a significant financial benefit to thePC OEMs.

41. On 1/31/96, Rodman & Renshaw issued a report on

SystemSoft, written by D.F. Carey, which was based on and repeated

information provided Carey in the 1/30/96 conference call and in

follow-up conversations with Angelo. The report stated:

SYSF held a mid-day conference call yesterday to furtheroutline the implications of its agreement with DEC andINTC to develop Call Avoidance software. This softwarerepresents potential cost savings of over $1 billion peryear to the PC industry.

Call Avoidance software would help PC manufacturersrecover technical support expenses. DEC provides techni-cal support to major OEMs such as Compaq, Microsoft,Dell, and NEC technologies through its MCS (MultiCustomer Support) Division. SystemSoft managementindicated a target of 20% cost reduction, which couldtranslate to $33 million in savings for Compaq.

* * *

SYSF expects revenues from the new product by 04fiscal 1997. When asked, management acknowledged plansto ship Call Avoidance software during third or fourthquarter of fiscal 1997 with revenues to follow.

- 42 -

42. On 2/27/96, systemSoft announced that its 4thQ F96

results would be better than expected. Angelo was interviewed by

Dow Jones and stated:

"Our base business is flourishing, getting faster growththan expected" . . Angelo told Dow Jones.

* * *

Angelo said the company this year will likely continue growing at the 50% to 60% rate, it has experienced over the last six years, based on itsexisting core businesses, which serve the mobile computer and hand-held devices market. Angelo further predictedthat SystemSoft's entry into the desktop PC market with a new product it is introducing this fall will bring additional revenue that would "double the company," in fiscal 1998.

43. On 2/28/96, SystemSoft reported 4thQ F96 revenues and EPS

of $7.3 million and $.06, respectively. The release was headlined

and stated:

SYSTEMSOFT ACHIEVES RECORD GROWTH FOR FOURTH QUARTER ANDYEAR END 1996

* * *

With the development of call avoidance software,SystemSoft will, for the first time, be marketing value-added products to desktop computer manufacturers. Thus, with call avoidance software, SystemSoft will begin to address a systems market that is five times the size of its current market.

* * *

During the fourth quarter, SystemSoft announced thecompletion of agreements with Intel Corporation andDigital Equipment to speed the development of CallAvoidance Software.

44. On 2/28/96, SystemSoft held a conference call for

securities analysts, money and portfolio managers, institutional

investors, large SystemSoft shareholders, brokers and stock traders

to discuss SystemSoft's business and its prospects. During the

call, Angelo made presentations and answered questions. During the

- 43 -

call -- and in follow-up conversations with participants -- Angelo

directly disseminated important information to the market by

stating:

• Demand for SystemSoft's core CardWizard productscontinued to be extremely strong and would continue so for theforeseeable future.

• SystemSoft was continuing to achieve increased marketpenetration with its core products and, as a result,SystemSoft expected extremely strong revenue growth of 50%-60%from its core product line during the next two fiscal years.

• SystemSoft was extremely pleased with its performance inthe most recent quarter and its increasing revenue and EPSreflected the continued strong demand for its core products inthe marketplace and broad customer acceptance of itstechnology.

• SystemSoft was making very good progress in developingSystemWizard and was "on track" to ship product later in F97and to achieve accelerated volume shipments in F98, whichwould generate millions in new revenue for SystemSoft.



• SystemSoft's partnership with Digital Equipment forSystemWizard was working very well and SystemSoft expectedthat Digital Equipment would be utilizing SystemWizard.

• SystemSoft was in negotiations with every major PCmanufacturer regarding the deployment of SystemWizard and,based upon the state of those negotiations, was confident thatin each quarter going forward it would be able to make anannouncement that one or two major OEMs had accepted and woulddeploy the SystemWizard product.

• SystemWizard was in evaluation at virtually every majorPC manufacturer and was receiving extremely good reviews fromevery PC OEM, which increased SystemSoft's confidence for thesuccess of the product.

• Based on discussions with PC OEMs, SystemSoft anticipatedinitial volume deployment of the SystemWizard product in 1/97or 2/97.

- 44 -

• Due to continuing strong demand for its core products, aswell as the favorable reaction of PC OEMs to SystemWizard,SystemSoft was forecasting 40%-60% growth for the next severalyears.

45. On 2/29/96, Rodman & Renshaw issued a report on

SystemScft written by Carey, which was based on and repeated

information provided in the 2/28/96 conference call and in follow-

up conversations with Angelo. The report stated:

-- Outlook on SYSF's upcoming Call Avoidance softwareproduct remains positive. In an agreement announcedJanuary 25, SYSF will receive $8 million from DigitalEquipment and Intel to develop Call Avoidance software.The company anticipates product announcements in April orMay, followed by delivery of product in July or August.During the conference call, management alluded to thepossibility of signing two OEM agreements with major PCmanufacturers at the end of Q1 or the beginning of Q2fiscal 1997. . .

Management was forthcoming with expected revenue growthfor their core business. The company anticipates PC Cardand system level software revenue growth of 50%-60% overthe next 1-2 years.

46. On 2/29/96, Hambrecht & Quist issued a report on

SystemSoft, written by Todd Bakar, which was based on and repeated

information provided in the 2/28/96 conference call and follow-up

conversations with Angelo. The report stated:

SystemWizard, the Largest Opportunity of the Future:

A Rapidly Growing Need: It is projected that more than200 million cans will be placed to technical supportcenters in 1996, costing the PC industry nearly $4billion. As a specific example, Compaq is believed tonow encounter more than 25,000 technical support callsper day at an average cost of approximately $25 per call.These figures would equate to more than $150 million inannual technical support costs for Compaq alone. Hence,while many problems will not be automatically fixed, evena 10% or 20% reduction in the number of calls wouldtranslate into significant cost savings even for acompany of Compaq's size. SystemSoft plans on charging these various OEMs a per unit royalty of $5 to $12 basedupon a number of considerations including volume. Given the potential cost savings, this royalty appears reasonable. .

- 45 -

SystemWizard Will Roll out in 1996, but is a 1997 Oppor-tunity: . . . The company has already begun demon-strating the product to potential OEM partners includingsome of the major PC vendors. The company is targetingat least two large OEM customers by mid-year withdeliveries beginning in the July/August time frame. .[I]t remains difficult to forecast the actual revenuecontribution in fiscal 1998 (calendar 1997). At thistime, we are conservatively adding approximately $10million to our revenue forecast for SystemWizard.However, it is important to highlight that a successfullaunch and adoption of this technology could translateinto revenues dramatically larger . . than we areinitially projecting.

47. In 3/96, SystemSoft issued its F96 Annual Report which

included a letter signed by Angelo, that stated:

SystemSoft -- with the backing of Intel and DigitalEquipment -- is developing SystemWizard, our call-avoidance product that builds on the previous success ofour CardWizard product. SystemWizard uses expert systemtechnology to automatically diagnose and fix the most common problems that plagpe PC users so they do not need to pick up the phone to call for support.

* * *

SystemSoft has grown 50-60 percent annually byfocusing solely on the mobile computer market. With thedevelopment of S ystemWizard, SystemSoft will, for thefirst time, dramatically expand its market, offering thisadvanced product to the broader desktop computer market.Unit shipments in the desktop PC market are expected to exceed 50 million in 1996 -- a market that is five times larger than the mobile PC market that SystemSoft currently addresses.

48. On 4/30/96 SystemSoft's CEO Angelo appeared at the

Hambrecht & Quist Technology Conference in San Francisco. In a

formal presentation and in break-out sessions, he told the

assembled security analysts, money and portfolio managers,

institutional investors, brokers and stock traders:


• SystemSoft was continuing to achieve increased marketpenetration with its core products and, as a result,

- 46 -

SystemSoft expected extremely strong revenue growth of 5096-60%from its core product line during the next two fiscal years.


• SystemSoft's market research and evaluation revealed apotentially huge market for SystemWizard as this product wouldbe incorporated into desktop PCs as well as laptop computers,which would vastly expand SystemSoft's market penetration andprovide huge revenue growth for SystemSoft going forward-


• SystemSoft's development partnership with DigitalEquipment for SystemWizard was working very well andSystemSoft expected that Digital Equipment would be utilizingSystemWizard.

• SystemSoft was in negotiations with several major PCmanufacturers regarding the deployment of SystemWizard and,based upon the state of those negotiations, was confident thatmajor OEMs would deploy the SystemWizard product.

• SystemWizard was in evaluation at several major PCmanufacturers and was receiving extremely good reviews, whichincreased SystemSoft's confidence for the success of theproduct.

• Because PC OEMs were losing significant amounts of moneyon the technical service calls being received by theirtechnical service centers, there was an enormous market demandfor SystemWizard with these PC manufacturers, as deployment ofSystemWizard would significantly reduce the number of servicecalls and thus provide a significant financial benefit to thePC OEMs.


• As a result of the SystemWizard product and the extremelypositive reaction of PC OEMs to it, SystemSoft expected todouble the Company's revenues and profits in 198.

• Due to continuing strong demand for its core products, aswell as the favorable reaction of PC OEMs to SystemWizard,SystemSoft was forecasting 40%-50% growth for the next severalyears.

- 47 -

• SystemSoft was forecasting strong F98 revenue and EPSgrowth.

49. On 5/21/96, SystemSoft issued a release headlined and

stating:

IBM Thinkpad To Include Latest Generation Of PC CardSoftware From SystemSoft; SystemSoft Customers NowInclude The Top Five Notebook PC Manufacturers In TheWorld

SystemSoft Corporation . . . today announced thatInternational Business Machines Corp. has signed alicensing agreement to include the latest versions ofSystemSoft i s CardWizard and OardWorks software productsin its widely acclaimed ThinkPad series of notebookcomputers.

* * *

"Our partnership with IBM clearly solidifies ourposition as the undisputed global leader in the PC Cardmarket," said Robert F. Angelo, president, CEO, andchairman of SystemSoft Corporation.

50. On 5/23/96, SystemSoft reported lstQ F97 revenues, net

income and EPS of $8.1 million, $1.3 million and $.06,

respectively, via a release headlined and stating:

SYSTEMSOFT CORPORATION ANNOUNCES RECORD FIRST QUARTEREARNINGS WITH REVENUES EXCEEDING $8 MILLION

* * *

"SystemSoft has enjoyed 50 percent or greatercomparable quarterly revenue growth in every quartersince our initial public offering," stated Bob Angelo,Chairman, CEO and President of SystemSoft Corporation."Today I am delighted to report that the streak continues. In this, our eighth quarter since becoming apublicly held company, we have not only increased revenueby 55 percent, but for the first time in our historyrevenues exceeded $8 million."

"Our product family continues to grow as our OEMcustomers increasingly turn to us for advanced system level software products."

* *

- 48 -

The tremendous development effort that SystemSoft has placed on call avoidance software products is yield-ing very strong support from its OEM customers.




to discuss SystemSoft business and its prospects. During the call,

Angelo made presentations and answered questions and -- in follow-

up conversations with participants -- directly disseminated

important information to the market by stating:








• SystemSoft was in negotiations with several major PCmanufacturers regarding the deployment of SystemWizard and

- 49 -

confident that major OEMs would deploy the SystenWizardproduct.

• SystemWizard was in evaluation at several major PC OEMsand was receiving extremely good reviews from every PC OEM,which increased SystemSoft's confidence for the success of theproduct.

• Based on discussions with PC OEMs, SystenSoft anticipatedinitial volume deployment of the SystenWizard product in 1/97or 2/97.

• IBM's commitment to order SystemSoft's CardWizard productduring F97 or early F98 was a substantial indicator of theunderlying strong, and indeed growing, demand for thatproduct.

• As a result of the SystemWizard product and the extremelypositive reaction of PC OEMs to it, SystenSoft expected todouble the Company's revenues and profits in F98.

• Due to continuing strong demand for its core products, aswell as the favorable reaction of PC OEMs to SystemWizard,SystenSoft was forecasting 40%-50% growth for the next severalyears.

• SystemSoft was forecasting F98 revenues of at least $60million with EPS of at least $.40.

52. On 5/24/96, Hanbrecht & Quist issued a report on

SystemSoft written by Bakar, which was based on and repeated

information provided in the conference call and follow-up

conversations with Angelo. The report forecast F98 revenues and

EPS of $61 million and $.41, respectively. The report also stated:

SystenWizard to be formally introduced on June 19th. . . .

- Strong revenue and EPS growth should continue for foreseeable future fueled by core businesses and newopportunities such as SystenWizard.

* * *

A Rapidly Growing Need: It is projected that more than200 million calls will be placed to technical supportcenters in 1996, costing the PC industry nearly $4billion. . . . SystenSoft plans on chargLng thesevarious OEMs a per unit royalty of $5 to $12 based upona number of considerations including volume (although wehave conservatively forecasted a slightly lower range in

- 50 -

our own estimates). Given the potential cost savings,this royalty appears reasonable.

* * *

Strong Growth Will Likely Continue: As mentionedearlier, SystemSoft has consistently achieved 50%-plusyear-over-year revenue growth, a trend that we projectwill continue throughout the remainder of fiscal 1997 andinto fiscal 1998. eased upon stable operating margins inthe 23-24% range, earnings should also likely realizedvery attractive year-over-year growth. We are currentlyforecasting EPS of . . $0.81 [$,41, post-split] infiscal 1998. Importantly, we view our fiscal 1998 EPSestimate as potentially quite conservative given asignificantly larger contribution from SystemWizard.

53. Each of the positive statements about systemSoft between

1/25/96 and 5/24/97, as set forth in ![139-52, was materially false

and misleading when issued, and failed to disclose, inter alia, the

following adverse information which was then known only to

Defendants due to their access to internal SystemSoft data:

(a) SystemSoft had hurried the announcement of

SystemWizard's development in early 96 in order to blunt criticisms

of its slow pace in developing new products and, at the time of

that announcement, in fact, SystemSoft had not completed sufficient

product development or market analysis to be able to state that

"the first products are scheduled to ship to system manufacturers

in the second quarter of 1996" or that SystemSoft would be able "to

rapidly bring this new category of call avoidance software to

market";





- 51 -



(a) Based upon communications with PC OEMs, the



representing and that the most important major PC OEMs, i.e.,


reluctant to license the product;

(d) Based an marketing studies and other evaluations of






(e) Because SystemWizard was achieving extremely limited

success with PC OEMs, this product was not vastly expanding

SystemSoft's potential marketplace by opening up desktop computers

to it and thus, in fact, SystemSoft remained a company dependent

upon selling its products into the smaller and slower-growing

mobile or laptop part of the computer industry and thus did not

have the prospects for revenue and EPS growth being represented;

(f) SystemSoft was not, in fact, achieving consistent


in fact, its revenues were stagnating and it was not achieving EPS

growth which it was concealing by falsifying and manipulating its

financial results by improperly recording revenue from its Digital

Eguipment/SystemWizard development contract and from its Asian

distributor and by restructuring its agreement with Intel to

- 52 -

accelerate payments (and revenue) from later quarters to show

revenue and EPS growth during the Class Period;

(g) SystemSoft's streak of record quarterly revenues and

EPS was not the result of the strong demand for or broad customer



by improperly recordin g revenue on its Digital Equipment/

SysterWizard contract and on shipments to its Asian distributor, as

detailed in IT83-97;

(h) SystemSoft's revenues and EPS for the 4thQ F96 and

the lstQ F97 were each artificially inflated and falsified due to

the manipulation of SystemSoft's accounting procedures to

improperly record revenue on the Digital Equipment/SystemWizard

contract and on shipments to its Asian distributor, as detailed in

¶183-97;

(i) SystemSoft was having significant disagreements with


SystemWizard and that product's commercial success and it was very

likely Digital Equipment would cancel its SystemWizard contract

with SystemSoft, thus triggering a multi-million dollar liability

of SystemSoft to Digital Equipment;

(j) Demand for SystemSoft's core products, especially





(k) SystemSoft was improperly capitalizing development

costs for SystemWizard, as it did not have any adequate basis to

- 53 -

believe, forecast or estimate that it would recover those costs in

the reasonably foreseeable future from sales of the SystemWizard

product at profitable prices; and

(1) As a result of the foregoing negative factors which

were negatively impacting SystemSoft's business, Defendants

actually knew that the forecasts of strong revenue and EPS growth

during F98 due to continued strong growth and systemSoft's core

product line, plus accelerating sales of SystemWizard, were false

when made as those forecasted results were unachieveable.

54. On 6/19/96, SysterSoft issued a release announcing the

introduction of SystemWizard, which was headlined and stated:

SYSTEMSOFT'm LAUNCHES SYSTEMWIZARD T''; A BREAKTHROUGHSOFTWARE SOLUTION FOR AUTOMATIC DETECTION, DIAGNOSIS, ANDRESOLUTION OF COMPUTER SUPPORT PROBLEMS

Simplifies PC Usage, Increases Customer Satisfaction, andPotentially Reduces Technical Support Costs by Hundredsof Millions of Dollars

Company Discloses Customer Commitments for More Than 8 Million Units in First Year of Shipment

SystemSoft Corp. . . . today unveiled SysterWizard' m , acomprehensive software solution that addresses the PCindustry's escalating customer support crisis. Withparticipation from key industry leaders and majorcustomers, SystemSoft outlined and demonstrated acomplete, expert system-based software family thatsignificantly increases user satisfaction anddramatically reduces technical support calls to computerand software manufacturers.

The company also announced AST Research, DigitalEquipment Corporation, and Wang have entered intoagreements to license SystemWizard for use in theirproducts and services. In addition, the company has commitments from other unannounced manufacturers . . . .

* *

"Technical support has become the new cost frontierfor the PC industry," said Robert F. Angelo, Chairman,CEO, and President of SystemSoft. "It is one of the lastareas where OEMs can improve both their profit margins

- 54 -

and their customer satisfaction. They are extremelyenthusiastic about SystemWizard and have expressed thatsupport for us in the strongest possible way -- withsignificant license agreements for the product. . . .

. . With firm commitments for more than eightmillion units in its first year, SystemWizard is well onits way to revolutionizing the computer technical supportprocess."

55. On 6/19/96, Pedevillano was interviewed by Bloomberg

about SystemWizard. Bloomberg reported the results of that

interview late on 6/19/96:

SystemSoft already has commitments to sell 8 millionunits of its new SystemWizard software at an averageprice of $5 a unit, said Paul Pedevillano, vice presidentof strategic sales, in an interview.

Customers include computer makers AST Research Inc.,Digital Equipment Corp. and Wang Laboratories Inc., whichhave agreed to license SystemWizard in their products andservices. The software will begin shipping in July andbears a price of $4 to $12 a copy.

Most of the revenue from the new product will begenerated in fiscal 1998, which begins next February,Pedevillano said. Sales "will begin ramping up in thefiscal fourth quarter of the current year," however, - headded.

* * *

Licensing Accords

Under its agreements, AST Research and DigitalEquipment will begin shipping PCs preloaded withSystemWizard by the fourth quarter of this year, saidPedevillano. Service divisions of Digital and WangLaboratories Inc. -- which handle help-desk questions formajor computer makers -- will integrate SystemWizard intotheir service packages, he said.

SystemSoft has signed agreements with AST Researchand Wang, and it has a letter of intent with Digital,which it expects to complete by the end of the month, hesaid.

In addition, the company has letters of intent withtwo other large companies, and an oral agreement with athird company, he said, declining to name the concerns.

- 55 -

56. On 6/19196, The Boston Globe published a story on

SystemSoft after interviewing Angelo, which stated:

SystemSoft Corp. has lined up commitments for 8 million units of its new software product to be launchedtoday, a pipeline of business that will more than double the company's business next year, according to senior executives.

The new System Wizard software, to be unveiled inBoston, could generate revenues next year of $40 millionto $50 million, they said.

* * *

But sizing up the effect of System Wizard has beenno easy task for analysts. Todd Bakar of Hambrecht &Quist last month estimated the new product could generate$10 million in revenue by the company's 1998 fiscal year,which begins next January. But he cautioned the actualsales could turn out much higher.

Apparently that will be the case. Sales already in the pipeline for the software -- which will generate revenue of $4 to $12 per unit -- should outstrip that forecast by fourfold or fivefold, according to SystemSoft President Robert Angelo.

57, On 6/19/96, The Boston Globe ran another article on

SystemSoft, which stated:

Angelo said several other major computer firms have also committed to the product. He also predicted thatthe first PCs with SystemWizard would go on sale thisfall and that 8 million would be sold in the next 12 months.

58. On 8/22/96, SystemSoft reported 2ndQ F97 revenue,

net income and BPS of $9.3 million, $1.5 million and $.06,

respectively, via a release that stated:

SystemSoft Corporation today announced recordrevenues and record net income for the second quarter offiscal year 1997

* * *

First $9 Million Quarter In Company History

"I'm very pleased to report that SystemSoft has completed another record quarter of revenue and

- 56 -

earnings," said Robert F. Angelo, chairman, CEO, andpresident of SystemSoft. "Our outstanding first-half results have been driven by broad customer acceptance of our products and our continuing leadership in developingan expanded range of new technologies. These factorshelped us complete a $9 million revenue quarter for thefirst time in company history. We're excited about both our first half results . . . ."

SystemSoft's expanding product family has been a keyfactor in its revenue growth. The company's newestproduct, SystemWizard, was announced at a widely coveredpress conference following the company's annual meetingon June 19. SystemWizard is quickly becoming the company's flagship product . . . .

"What's important to note about our introduction ofSystemWizard," Angelo said, "is that it is accompanied bysubstantial unit volume commitments and knowledge-sharingpartnerships with leading OEMs such as AST Computer,Lotus Development, Wang, Ziff-Davis, and Digital Equip-ment. We've already shipped our first release for finalevaluation to our existing customer base . .





call, Angelo (the CEO) and Andy Keenan (SystemSoft's controller)

made presentations and answered questions. During the call -- and

in follow-up conversations with participants -- they directly

disseminated important information to the market by stating:

• This was SystemSoft's ninth successive quarter of greaterthan 50% growth. SystemSoft had had a really good quarter.SystemSoft was growing at a rate that would keep going -- 55%all through next year.

• In the SystemWizard OEM marketplace evaluations had beencompleted with six of the ten major desktop players. Thegreat news was that SystemWizard received an A plus from all.SystemWizard continued right on track and was going throughall the evaluation processes and coming out with flyingcolors. The product was very well-positioned.

• There were millions of units committed, out of the box, to just one customer.

- 57 -

• SystemWizard had tremendous upside. SystemWizard wasjust blowing SystemSoft away. The OEMs' reviews of theproduct were just outstanding. It was the best feeling thatSystemSoft ever had about a product. SystemSoft was veryclose to closing SystemWizard deals with major OEMs.

• Volpe and H&Q were close to the Company and knew what washappening with SystemSoft, so people should read theirreports.

• SystemSoft had always grown the Company -- 27 consecutivequarters of 50% or greater revenue growth. As SystemSoft hitthe end of next year it would see a pretty dramatic increase.

• Due to the continued strong demand of its core productsand the success of its SystemWizard product, SystemSoft wasincreasing its F98 forecast to approximately $90 million inrevenue and EPS of about $.65.

During the conference call, Angelo also discussed SystemSoft's

recently announced USB product. He stated:

• USB was announced last quarter. SystemSoft was well outin front of the competition here. SystemSoft was actuallyable to sell new USB products and SystemSoft had a group ofsignificant agreements with companies that it would beannouncing, which would launch SystemSoft heavily into thatmarketplace.

• SystemSoft's USB product was doing very well and was wellpositioned. Intel and Microsoft were giving SystemSoft a lotof support and referrals for USB because SystemSoft was somuch earlier than everybody else in the marketplace.SystemSoft was going to have several companies demonstratingits product at Comdex and it would take the world by storm.

• SystemSoft was having a pleasant experience with USEpricing. SystemSoft had anticipated six months earlier thatthe price would be in the $1 range. SystemSoft thought it wasgoing to be able to tell analysts today about a commitmentwith a very very large printer company, but it did not getpermission to announce it. The software in that deal will bein the $2.50 or so range, per unit, due to the increasedcomplexity of the product.

• SystemSoft expected pretty significant revenues from USBin F98.


SystemSoft, written by Baker, which was based on and repeated

information from the 8/22/96 conference call and follow-up

- 58 -

conversations with Angelo and Keenan. The report forecast F98

revenue and EPS of $90 million and $.65, respectively. The report

also stated:

Demand in the core business remains strong . . . .

• The company continues to aggressively move forwardwith SystemWizard . . . .

* * *

• SystemSoft is about to embark on a major new productcycle (SystemWizard) which we believe will create furtherupside appreciation from current price levels.

61. On 9/1/96, an article appeared in Nation's Business about

SystemSoft's new SystemWizard product that stated:

[T]he company in June began shipping Systemwizard . .

* * *

Systemwizard builds on PC card software technology, but the desktop market is five times bigger than the portable business, according to industry analysts. Paul Bloom, an analyst with Volpe, Welty SL Co., an investmentbank in San Francisco, says that Systemsoft's new thrust could boost its earnings by 50 to 100 percent annually "for the next several years."

Bloom, who was with Volpe, got the information about SystemSoft's

EPS growth from Angelo. On 9/10/96, SystemSoft held a luncheon at

the Boston Harbor Hotel for securities analysts, money and

portfolio managers and institutional investors. Angelo announced

that he was not going to read the "Forward-Looking Statement

Disclaimer" that his lawyers gave him and discarded it, throwing it

on the floor. During the presentation, the Company made several

false representations. First, Angelo stated that SystemWizard

would sell for $5-$7 per unit going forward, when he knew such

prices could never be obtained. Second, Angelo stated that there

was "no direct competition," even though he knew CyberMedia not

- 59 -

only had a competitive product "First Aid 95," but was offering to

give it free to PC OEMs. Third, SystemSoft's V.P., Paul Sereiko,

gave a demonstration of how SystemWizard worked. During the

demonstration, the product appeared to quickly detect and correct

several PC set-up problems and to be ready for shipment. However,

this demonstration was bogus, the result of a pre-arranged set-up

where SystemWizard could not fail and was not at all indicative of

SystemWizard's real world actual performance capabilities at that

time.

62. On 11/19/96, SystemSoft's CEO Angelo appeared at the

Comdex/Fall 96 convention in Las Vegas. In a formal presentation

and in a break-out session, he told to the assembled security

analysts, money and portfolio managers, institutional investors,

brokers and stock traders that:

• Demand for SystemSoft's core CardWizard productscontinued to be extremely strong and would continue so for theforeseeable future,


• SystemSoft was making very good progress in developingSystemWizard and was "on track" to ship product later in F97and to achieve accelerated volume shipments in F98, whichwould generate some $50 million in new revenue in F98 forSystemSoft.

• SystemSoft's market research and evaluation revealed apotentially huge market for SystemWizard as this product wouldbe incorporated into desktop PCs as well as laptop computers,which would vastly expand SystemSoft's market penetration andprovide huge revenue growth for SystemSott going forward.

• SystemSoft had determined that a royalty fee ofapproximately $5-$7 per SystemWizard unit was reasonable andcould be achieved and thus expected SystemWizard to generatea minimum of $50 million in revenues during F98.

- 60 -

• SystemSoft already had firm commitments from a number ofPC OEMs to purchase eight million units of SystemWizard bymid-97.

• SystemSoft was in negotiations with every major PCmanufacturer regarding the deployment of SystemWizard and,based upon the state of those negotiations, was confident thatin each quarter going forward it would he able to make anannouncement that one or two major OEMs had accepted and woulddeploy the SystemWizard product.


• The action of certain smaller PC OEMs in agreeing topurchase SystemWizard validated this technology and showed itstremendous commercial promise.


• Due to continuing strong demand for its core products, aswell as the favorable reaction of PC 0EMs to SystemWizard,SystemSoft was forecasting 40%-50% growth for the next severalyears and expected F98 revenues of at least $90 million withEPS of at least $.65.

63. On 11/22/96, the Boston Business Journal published an

article on SystemSoft which stated:

SystemSoft Corp. signed three major contracts thisweek that will boost sales of its SystemWizard, asoftware that cuts down on customers' calls to technicalsupport lines.

The deals will help rocket the Natick-based firm's sales to $96 million next year, up from this year's estimated $41.1 million, according to one industryanalyst.

U.S. Robotics Inc. of Skokie, Ill., MicronElectronics Inc. of Nampa, Ind., and AST Computer Inc. ofIrvine, Calif., all have agreed to bundle theSystemWizard software with their products.

The contracts, announced by SystemSoft at the Comdexcomputer trade show in Las Vegas this week, will bring inupwards of $10 million in sales for SystemSoft in 1997.

Earlier this year, systemSoft announced similardeals with Maynard-based Digital Equipment Corp.,

- 61 -

Cambridge-based Lotus Development corp. and WangLaboratories Inc. of Lowell.

"These deals will give us exposure to millions ofusers," said Paul Sereiko, vice president of marketing atSystemSoft.

* * *

The largest contract signed was with U.S. Robotics,one of the top manufacturers of modems. U.S. Roboticswill bundle SystemWizard with its Sportster modems at thestart of the year.

SystemSoft officials estimate that the U.S. Roboticsdeal will result in the sale of between 5 million and 10million units of the software.

* * *

"These are all extremely good deals," said FrankWalsh, an analyst with Volpe, Welty & Co. in SanFrancisco. "It validates the technology."

The SystemWizard now accounts for less than 10percent of SystemSoft's overall sales, but next yearabout half of all the company's sales will be derivedfrom SystemWizard, Walsh predicted.

The information in this article was provided by Sereiko.


business during the Class Period between 6/19/96 and 11/22/96, as

set forth in 11 ,5154-63, was materially false and misleading when

issued, and failed to disclose, inter alia, the following adverse

information which was then known only to Defendants due to their

access to internal SystemSoft data:







- 62 -






reluctant to license the product, and SystemSoft was only able to

service the OEM agreements it did have by agreeing to barter

transactions wherein SystemSoft would agree to accept old PC

equipment in exchange for SystemWizard and by promising positions

at SystemSoft to OEM employees, including those at DEC, Hewlett-

Packard and Packard Bell;

(c) Based on marketing studies and other evaluations of






(d) SystemSoft did not have firm commitments from PC

OEMs to order eight million SystemWizard units in the next 12

months and, in fact, had agreed to provide million of units to PC

OEMs for free to evaluate or test consumer reaction or on a

deferred pay basis;

(e) Most of the PC OEMs who had purportedly agreed to

utilize SystemWizard were not actually firmly committed to purchase

any specific quantity of the product, but rather, only to accept



- 63 -



(f) Due to the difficulties PC OEMs were encountering in

integrating SystemWizard into their PC products and establishing

necessary technical arrangements to accept and process service

calls from SystemWizard, the SystemSoft Defendants knew that volume

deployment of SystemWizard by PC OEMs would be materially delayed

even with those PC manufacturers that had agreed to utilize the

product, and thus SystemSoft's revenue from SystemWizard during F98

would be far less than what was being forecasted;

(g) SystemSoft was not, in fact, achieving consistent





Equipment/SystemWizard development contract and from its Asian

distributor, and by restructuring its agreement with Intel to



(h) SystemSoft's streak of record quarterly revenues and






detailed in ¶1183-97;

(1) SystemSoft's revenues and EPS for the 2ndQ F97 were

artificially inflated and falsified due to the manipulation of

- 64 -

SystemSoft's accounting procedures to improperly record revenue on

the Digital Eguipment/SystemWizard contract and on shipments to its

Asian distributor, as detailed in 11S83-97;

(j) SystemSoft was having significant disagreements with


SystemWizard and that product's commercial success and it was very

likely Digital Equipment would cancel its systemWizard contract

with SystemSoft, thus triggering a multi-million dollar liability

of SystemSoft to Digital Equipment;

(k) SystemSoft's USE software product was not ahead of





(1) Demand for SystemSoft's core products, especially




CardWizard products until well into F98; and

(m) As a result of the foregoing negative factors which

were negatively impacting Systemsoft's business, Defendants


during F98 due to continued strong growth and SystemSoft's core



65. On 11/26/96, SystemSoft issued a release which reported

3rdQ F97 revenues of $10.3 million, slightly below forecasted

- 65 -

levels, and net income and EPS of $1.7 million and $.07,

respectively. The release was headlined and stated:

SYSTEMSOFT CORPORATION ANNOUNCES RECORD THIRD-QUARTERREVENUES

Revenue growth exceeds 50 percent for ninth consecutivequarter since 1994 IPO

* * *

Total revenues for the quarter ending Oct. 31, 1996were $10.3 million, an increase of 67 percent over $6.2million in the corresponding quarter in fiscal 1996. Netincome for the quarter was $1.7 million on $.07 pershare, compared to $826,000 or $.04 per share for thesame period last year, an increase of 106 percent. . . .

For the first nine months of fiscal year 1997,revenues were $27.6 million, an increase of 60 percentfrom the $17.3 million in the comparable period lastyear. Net income for the first nine months of fiscal1997 was $4.5 million, an increase of 91 percent from$2.3 million last year. Earnings per share for the firstnine months increased to $.18 versus $.10 in fiscal 1996.

FIRST $10 MILLION QUARTER IN COMPANY HISTORY

"I'm very pleased to report that SystemSoftcontinued to enjoy strong revenue and earnings growth,"said Robert F. Angelo, chairman, CEO and president ofSystemSoft. "Our outstanding results through the first nine months of our fiscal year reflect the continuingadoption of SystemSoft technologies by a growing customer base. For the first time in company history, we exceeded$10 million in quarterly revenue, and our net incomegrowth has been extremely strong. Already, this has beenthe most successful year in SystemSoft history . . . ."

Earlier this month, SystemSoft also announcedadditional agreements with OEMs, peripheral manufac-turers, and knowledge partners for its SystemWizard call-avoidance software family. "We've just completed aseries of announcements of partnerships with leadingcomputer and peripheral manufacturers," said Angelo."Our impressive and growing roster of partners --bundling agreements with companies such as U.S. Robotics,Micron Electronics, Packard Bell, AST, and Digital MCS --plus knowledge agreements with Lotus Development,Netscape Communications, PictureTel, BugNet, WesternDigital, and Hayes Microcomputer -- translate into manymillions of units, several million dollars of new revenueover the next 12 months . . . . No other call-avoidance

- 66 -

player has achieved this momentum and pre-eminent position in the market."

In the third quarter, SystemSoft also announced itsnewest product, the Universal Serial Bus Software Suite,which includes firmware and software to enable desktopperipheral manufacturers and PC OEMs to support the USBstandard.

"Our USB software is important because it primarilytargets desktop peripheral-device manufacturers, whichare a new class of customers for SystemSoft," saidAngelo, "Our launch was accompanied by design winsannounced earlier with Canon, Inc. for printers; DaewooElectronics Co. for monitors; and development agreementswith Lucent Technologies Microelectronics Group and NECSemiconductor."

66. On 11/26/96, SystemSoft issued a release headlined and

stating:

SystemSoft Corp. Announces Pact With Packard Bell NEC,Inc. To License SystemWizard Call-Avoidance Software

Largest Manufacturer Of Consumer PCs Will ShipSystemWizardm Client on Packard Sell Systems

SystemSoft Corp. today announced that Packard BellNEC, Inc. -- the second-largest PC vendor in the U.S.according to International Data Corp. -- has agreed tolicense its SystemWizard call-avoidance software family.

* * *

"Our agreement with Packard Bell NEC is tremendouslyexciting to SystemSoft," said Robert F. Angelo, chairman,CEO, and president of SystemSoft. . .





call, Angelo (the CEO) made presentations and answered questions.

During the call -- and in follow-up conversations with participants

-- he directly disseminated important information to the market by

stating:

- 67 -

• Demand for SysterSoft's core CardWizard productscontinued to be extremely strong and would continue so for theforeseeable future.



• SysterSoft already had commitments from a number of PCOEMs to purchase 6 million units of SystemWizard by mid-97.Now, in addition, Packard Bell had committed to the product inthe biggest deal to date, which would be worth $16-$20million.

• SystemSoft was "on track" to ship product later in F97and to achieve accelerated volume shipments in F98, whichwould generate millions in new revenue for SystemSoft.

• SystemSoft had agreed to a lower royalty fee forSystemWizard from Packard Bell but, due to increased volumes,SystemSoft still expected SystemWizard to generate a minimumof $40-$50 million in revenues during F98.


• SystemSoft was in negotiations with every major PCmanufacturer regarding the deployment of SystemSoft and, basedupon the state of those negotiations, was confident that ineach quarter going forward it would be able to make anannouncement that one or two major OEMs had accepted and woulddeploy the SystemWizard product.


• The slight price concessions provided to Packard Bell inorder to induce it to commit to utilize SystemSoft was notinconsistent with SystemSoft's business plan and SystemSoftwas certain that the increased volumes of SystemSoft to beshipped as a result of the Packard Bell deal and deals thatwould flow from it would result in increased SystemSoftrevenues going forward.

- 68 -

• Based on discussions with PC OEMs and the DigitalEquipment contract, SystemSoft anticipated initial volumedeployment of the SystemWizard product in 1/97 or 2/97.

• IBM's commitment to order SystemSoft's CardWizard productduring F97 or early F98 was a substantial indicator of theunderlying strong and indeed growing demand for that product.

• SystemSoft was well out in front of the competition withits USB product and had a group of significant agreements withcompanies to take volume shipments of USE products.

• SystemSoft expected significant revenues from USB in F983as royalties on this product line kicked in earlier thanexpected.

• Due to continuing strong demand for its core products, aswell as the favorable reaction of PC OEMs to SystemWizard,SystemSoft was forecasting at least 40%-50% growth for thenext several years.

• SystemSoft was forecasting F98 revenues of at least $90million with EPS of at least $.65.

68. On 11/27/96, Oppenheimer issued a report on SystemSoft

written by Poyner, which was based on and repeated information

provided in the 11/26/96 conference call and in follow-up conversa-

tions with Angelo and Sommers. The report forecast F98 EPS of $.65

and the following quarterly EPS:

1Qtr. 2Otr. 3Otr. 40tr. Year

FY 1998E Current $0.10E $0.14E $0.18E $0.23E $0.65E

The report stated:

SystemSoft . . . reported October third-quarter resultsof $0.07 on revenue of $10.3 million . . . the revenuewas about out $500,000 lower than our model . . .

* * *

Perhaps more important than the earnings release wasan additional announcement that the company had signed upPackard Bell, the largest U.S. consumer PC vendor, tobundle SystemWizard for three years on its entire productline. Phase-in of the software is to begin in Januaryand is expected to be up to full implementation by May. . . SystemSoft management estimated that the worth of the three-year deal would amount to a total of between $16 million to $20 million, the biggest deal to date for

- 69 -

SystemWizard. However, the company did concede that toland such a high-volume customer the unit pricing wasdiscounted heavily to somewhere in the area of $2-$3 perunit versus our overall average forecast of about $5 perunit in the fiscal 1998 forecast based on five millionunits. However, the import of the deal goes beyond thevolume . . . .

* * *

To date, we estimate that SystemSoft has lined up PCvendors and PC service providers that should bundleSystemWizard on at least six million units in f4=,-A1 1998, perhaps more, with the expectation of further agreements to be announced at the rate of one or two per quarter going forward. Even with a lower average royaltyrate than $5, we think the revenue visibility for this product line is looking exciting now. . . . SystemSofthas many ways to skin its revenue cat in the next fewfiscal years.


SystemWizard written by Bakar, which was based on and repeated

information provided in the conference call and in follow-up

conversations with Angelo and Sommers. The report forecast F98

revenues and EPS of $90 million and $.65 respectively, and the

following quarterly F98 revenue and EPS:

EPS Revenue QI$0.11E $17 millionQ2 $0.14E $20 millionQ3$0.18E $24 millionQ4 $0.22E $29 millionYear $0.65E $90.0E

The report also stated:

• Demand in the core business remains very strongdriven by accelerating revenues from recently-addedcustomers and ramping revenue contributions from therecently-introduced CardWizard NT products.

• Partnership agreements with U.S. Robotics, MicroElectronics, and, most importantly, Packard Bell forSystemWizard will enable SystemSoft to enloy acceleratingrevenue and earnings growth in F98.

• We expect SystemSoft to continue aggressivelypursuing OEM opportunities for its SystemWizardtechnology with major PC vendors in Q4 and F98.

- 70 -

* * *

. Given the number of large customers signedduring the course of fiscal 1997 (IBM, Toshiba, Apple,Texas Instruments), a broadening product line (whichshould translate into increasing per unit royalties), andthe very healthy unit shipments trends projected in thenotebook computer market in 1997, we believe thatSystemSoft will enjoy at least 40%-50% growth in the core business for the foreseeable future.

* * *

. . Most importantly, however! SystemSoftyesterday announced that Packard Bell has adopted itsSystemWizard technology for Packard Bell's entireconsumer PC line. Specifically, Packard Bell has signeda three-year agreement with SystemSoft worthapproximately $16-$20 million over the life of thecontract. Given that Packard Bell is expected to shipPCs including SystemWizard in January, we expect revenue contributions to be minimal in the fourth quarter, followed by revenues from SystemWizard of approximately85 million in fiscal 1998. All of these agreements overthe past month are clearly establishing SystemSoft as one of the leading software providers in the huge and rapidly growing technical support market. . . . In fact, we remain quite confident in the company's ability to announce at least one OEM partnership agreement for its SystemWizard technology in each and every quarter over the course of fiscal 1998.

* * *

Maintaining Estimates and Rating. As mentionedearlier ! SystemSoft has consistently achieved 50%-plusyear-over-year revenue growth in each quarter over thepast several years, a trend that we project will continue in the fourth quarter and, in fact, will accelerate in fiscal 1998. Moreover, we anticipate that demand in the core PC Card software business will remain very strongentering fiscal 1998 and will likely continue for the foreseeable future. We continue to believe thatSystemSoft will enjoy at least 40%-50% revenue growth inthis business in fiscal 1996. Most importantly, with thelaunch of its SystemWizard technology during the fourthquarter, we believe the company will enicy acceleratingrevenue and earnings momentum in each and every quarter in fiscal 1998. The company remains extremely well positioned to take advantage of the rapidly growing call avoidance market opportunity which should become quite significant beginning in calendar 1997. . . SystemSoft's fundamentals remain quite sound with the SystemWizard pay off beginning in the first quarter of fiscal 1998.

- 71 -

70. Because of concerns over SystemSoft's 3rdQ F97 revenue

shortfall and the price discount given Packard Bell on its

SystemWizard contract, SystemSoft i s stock declined to as low as

$17-3/4 on 11/27/96.

71. On 11/29/96, Oppenheimer issued a report on SystemWizard

written by Poyner. This report was written after Poyner had

extensive discussions with Angelo and was based on and repeated

information provided by him. The report forecast F98 EPS of $0.65

and the following quarterly F98 results:

10tr. 2ctr. 3Qtr. 40tr. Year

FY 1998E Current $0.10E $0.14E $0.18E $0.23E $0.65E


What should have been a major piece of positivenews, the announcement of SystemWizard pact with PackardBell lasting three years that could generate $16 millionor more over the contract life, instead turned into aselloff for the stock Wednesday. Why? Investors wereconcerned that the deeply discounted price of about $2 per unit versus the more typical $4-$6 range the company had been using for earlier contracts signaled a collapsein the pricing strategy, thereby creating the potentialfor revenue disappointment in fiscal 1998. While ourforecast for fiscal 1998 had incorporated an assumptionof about five million units of SystemWizard beingdistributed by OEMs at an average of $5 a unit to yield$25 million, the Packard Bell deal does not necessarily mean that is unachievable . . . . fW]e continue to feelcomfortable at this point with our revenue assumption forthe product. But . . . the core business based on thenotebook software offerings and now software associatedwith Universal Serial Bus implementation is seeingimproved visibility and potential upside relative to ourforecast as well. And we think it is worth by itself inthe $15-$20 range without stretching relative valuation.

Thus the SystemWizard business is basically "free,"or being deemed a zero-revenue business, in our opinion.No investor, however concerned he may be about thepricing issue, should conclude that SystemWizard has zerorevenue potential. In fact, a higher-unit, lower-pricemodel is precisely the approach Microsoft . . . used sobrilliantly a few years ago when it dropped the price ofits applications Excel, Word and PowerPoint, selling them

- 72 -

in the now-famous Office suite for a three-for-the-price-of-one strategy. Investors didn't dump Microsoft becausethey figured out that unit volume would rise; competitionwould be crushed; and, most importantly, a much largerupgrade-revenue potential would be established.SystemSoft is behaving no differently in trying toestablish with lightning speed critical mass forSystemWizard that will increase unit penetration, cutcompetition off at the pass, and establish a user baseripe for further upgrades.

72. On 12/31/96, Investor's Business Daily published an

article about SystemSoft's SystemWizard product, which interviewed

O'Connell and stated:

O'Connell: I was at Dell Computer Corp. (of Austin,Texas) last week, and they get over90,000 phone calls a week. They believethat will grow to over 20 million phonecalls a year by '98. And each call costs$22 on average.

Dell management sees technical support asthe biggest issue they have to address inthe next two or three years. And this istrue for all the major manufacturers ofdesktop computers.

* *

TVD: How big is the market for SystemWizare"?

O'Connell: It's a billion dollar market.

73. On 1/13/97, SystemSoft's V.P., Sereiko, and Sommers,

SystemSoft's CFO, appeared at the Wall Street Forum-Institutional

Investors Conference at the Marriott East Side Hotel in New York

City. In a formal presentation and in a later break-out session,

Sereiko and Sommers told the assembled security analysts, money and

portfolio managers, institutional investors, brokers and stock

traders:

The SystemWizard server . . has been shipping, shippedin June and is being integrated into call centers atcompanies like AST and Packard Bell and Microntoday. . . So the bottom line is there is a sicfnificant revenue opportunity here . . Call-

- 73 -

avoidance software represents a dramatic expansion of ouraddressable marketplace.

* * *

. . The Systemwizard server, which shipped to OEMcustomers in July of this year and is being integrated atAST, at Packard Bell, Micron, I've said these a few timesnow, these customers will all start shipping SystemWizard desktops . . . either the end of, targets range from theend of this month to the end of February.

* * *

. . And, last, our favorite chart. This chartrepresents, from the time the company has gone public,our steady revenue growth, and it's really a chart withwhich we're very proud. It is an indicator not only of the predictability of our performance as a company but of the stability of our earnings, revenue and earnings arowth and our, the strength, we believe, of our product development and management policies. We hit last quarter our first 10-million-dollar auarter, and that represents more than a 50 percent growth year over year. We expect that growth . . . to continue and accelerate in the future. . . .

74. On 1/14/97, Paul Sereiko, SystemSoft's V.P.-Marketing,

was interviewed at the Wall Street Forum-Institutional Investors

Conference by the NBC Private Financial Network and said:

Sereikc: [W]e use events like the Wall Street, youknow, like the Wall Street Forum and someof the other conferences that we go toperiodically to address large groups ofpeople with a very consistent message sothat everybody's hearing the same story and hopefully so we can manage against these inflated expectations that sometimes afflict high-tech companies.

Schacknow: I don't recall that there have been anyhad news announcements since Comdex,Upbeat earnings reports, a number ofmajor agreements, which we'll talk aboutin a moment. What do you think has beenthe problem? The stock has dropped quitea bit since the time we spoke at Comdex.. . [And probably not related to the performance of the company.

Sereiko: Yeah. Yeah, we have announced a lot of really great news since then. . .

- 74 -

[Sjhortly after Comdex we announced ourthird quarter earnings, which were inline with expectations. We were verypleased to do that. Around the same time, we announced some significant, you know, some significant agreements, SystemWizard agreements, with one of the largest manufacturers in the world, Packard Bell, for example.

* *

You know, frankly, the news has all been very good, and we're very excited about, You know, about all the things that we've been doing, and our business has beenright on target. I think that a coupleof things, you know, a couple of thingshave happened that might have causedsome, you know, somewhat of a negativeeffect on the stock price, and one ofthem is being, you know, some miscommuni-cations about the Packard Bell contract.That contract in fact is one of the largest ones and the most significantones that this company has ever done. Wedescribed the valuation of the contracton our conference call, and it wassomehow extrapolated into a per-unitprice that was somewhat less than themarket apparently was looking for.

* * *

The fact is it's a very importantcontract for us. Packard Bell is one of the largest shippers of computers in the world . . . but I don't think that thecontract was received very well on WallStreet simply because of some, you know,erroneous math, basically.

Schacknow: Do you feel you made progress incorrecting that perception today and inother appearance like this?

Sereiko: [A]bsolutely, and . . . we've taken a lotof calls, both individually, our CEO, BobAngelo, has taken a lot of calls over thepast couple of weeks, and we've beendealing with investors as they, you know,as they call us, and I think we did make some progress this week. And, you know,one of the messages that I was trying toget across at the conference today is,

- 75 -

and one of the things that's veryinteresting about SystemSoft, is we havedelivered a very consistent, verypredictable performance over the ten-plus quarters since we've been public, and, you know, consistency and predictabilityare two of the hallmarks of things that you want to see in well-performing companies.

* *

Schacknow: SystemWizard hit the market with somegreat previews, and nice things have beensaid about it since then. How is thatparticular program going versus originalexpectations?

Sereiko: Well, you know, to tell the truth, we'vebeen on target with our expectations for the business. . We're very pleasedwith the progress . . . .

* * *

Schacknow: Okay. So tell me about plans forSystemWizard just for 1997 . . . .

* * *

Sereiko: AST, Micron, and Packard Bell are allscheduled to ship their firstSystemWizard desktop sometime before,somewhere either the end of January orearly February, that time frame, we'reexpecting to see the first shipmentsstart coming our from those OEMs.

75. On 1/22/97, Oppenheimer issued a report on SystemSoft,


extensive discussions with Angelo and was based on and repeated

information Angelo provided him. Angelo reviewed this report

before it was issued and assured Poyner it was substantially

accurate knowing it would be publicly issued and affect the total

mix of information impacting SystemSoft's stock price. The re'oort

forecast F98 EPS of $.65 and the following F98 quarterly results:

- 76 -

QI $.10EQ2 $.14EO3 $.18EQ4 $.23EYear $.65E


SystemSoft continues to stagger under selling pressuredue most recently to concerns about the January fourthquarter's earnings performance, which We expect to bereleased in late February or early March. However, we believe the concerns are misplaced . . . .

. . . We do not, however, expect SystemWizard to bea large royalty contributor in the quarter because thelargest PC OEM signed to date, Packard Bell, is notexpected to begin deployment of the software on its PCsuntil mid February, about two weeks later than originally estimated . . . .

76. On 2/14/97, Oppenheimer issued a report on SystemSoft,


discussions with Angelo and Sommers and was based on and repeated

information provided him by them, and stated:

Micron Electronics announced Thursday that it isstarting to ship SystemSoft's new technical-supportsoftware, SystemWizard, with all of its Home MPC andMillennia desktops . . . . We expect the largestlicensee to date, Packard Bell, to follow suit as soon asthis month as well.

In view of the tremendous investor attention giventhe SystemWizard rollout, this announcement is a positive in that it demonstrates that SystemSoft now has a production-ready on-line system that will begin to provide some empirical data with regard to saving a PC OEM money in delivering technical support.

77. In late 2/97, the Individual Investor's Special

Situations Report issued a report on SystemSoft. This report was

written after the author had extensive discussions with Angelo and

Sommers and was based on and repeated information provided him by

them. Angelo and Sommers reviewed this report before it was issued

and assured the author it was substantially accurate knowing it

- 77 -

would be publicly issued and affect the total mix of information

impacting SystemSoft's stock price. The report stated:

SystemSoft has lost more than half its value overthe last five months, which has created a company that ismisunderstood and an excellent buying opportunity.

The downward spiral started in October 1996, whenBarron's placed SystemSoft on a list of overvaluedtechnology stocks. Subsequent bad news included lower-than-expected third quarter revenues for the period endedOctober and a report from the Center for FinancialResearch and Analysis that questioned two of thecompany's accounting policies.

Yet SSR believes that both stories have combined toforce SystemSoft into an undervalued situation.SystemSoft is growing its core business over 50% with anexciting new product about to be released . . Itsnew "call avoidance" software could not come at a bettertime

* *

[T]he market seems overly concerned about the discountedprices announced in SystemSoft's deal with Packard Bellwhich could generate $16 to $20 million in revenue. Theprice per unit was less than the more typical $4 to $6range the company used for earlier contracts.

Investors took this as a sign of collapsing pricingand the potential for a revenue shortfall. What themarket did not account for is that in most businessmodels, companies discount their product for earlyadopters to increase brand awareness. This in turn willhelp SystemSoft license SystemWizard to other potentialOEMs at a higher price. SystemSoft expects to announceone or two OEM agreements in each quarter during fiscal1998. The company is currently in negotiations with all the top 10 PC manufacturers in the world.

* * *

In fiscal 1998, look for sales growth of 122% to $91million, and earnings growth of 157% to $0.67 per share

SystemWizard, which will contribute minimal revenuein fiscal 1997, should contribute about $46 million to fiscal 1998 revenue. This comprises revenue fromSystemWizard server/engineering and royalties. Thenumber of units shipped should be between eight and ninemillion, with a price from $3 to $5. The core notebookrevenue should grow by 40%, a reasonable number based on

- 78 -

industry growth and SystemSoft's past ability to grow thecore business at greater than 50%.


business between 11/26/96-2/97, as detailed in 1165-77, were

materially false and misleading when issued. They also failed to

disclose, inter alia, the following adverse information which was

then known only to Defendants due to their access to internal

SystemSoft data and disclosure of which was required to be made to

make the statements made not misleading:












reluctant to license the product;

(c) Based on their discussions with PC OEMs, the

SystemSoft Defendants knew that there was no possibility that major

PC OEMs would pay for SystemWizard units in large volume in the

near term and thus the revenue and profit potential of the

SystemWizard product was actually far less than SystemSoft was

forecasting;

- 79 -

(d) Due to difficulties PC OEMs were encountering in

integrating systemWizard into their PC products and establishing

necessary technical arrangements to accept service calls from

SystemWizard, the SystemSoft Defendants knew that volume deployment

of SystemWizard by PC OEMs would be materially dela yed, even with

those PC manufacturers that had agreed to utilize the product and

thus SystemSoft's revenue from SystemWizard during F98 would be far

less than what was being forecasted;

(e) SystemSoft did not have firm commitments from PC

OEMs to pay for six million SystemWizard units and, in fact, had

agreed with several PC OEMs that they did not have to pay for the

product, but rather, could ship it on a test basis to test customer

reaction;

(f) Few of the PC OEMs who had purportedly agreed to

utilize SystemWizard were actually firmly committed to purchase any

specific quantity of the product, but rather, only to accept





(g) Because SystemWizard was achieving extremely limited

success with PC OEMs, it was not true that this product was vastly

expanding SystemSoft's potential marketplace by opening up desktop

computers to it and thus, in fact, SystemSoft remained a company

dependent upon selling its products into the smaller and slower-

growing mobile or laptop computer industry and thus did not have

the prospects for revenue and EPS growth being represented;

- 80 -

(h) SystemSoft was not, in fact, achieving consistent





Equipment/SystemWizard development contract and from its Asian

distributor and by restructuring its agreement with Intel to



(i) SystemSoft's streak of record quarterly revenues and






detailed in VI83-97;

(j) SystemSoft's revenues and EPS for the 3rdQ F97 were

artificially inflated and falsified due to the manipulation of

SystemSoft's accounting procedures to record revenue improperly on

the Digital Equipment/SystemWizard contract and revenues on

shipments to its Asian distributor, as detailed in TT83-97;

(k) SystemSoft's USB software product was not ahead of





(1) Demand for SystemSoft's core products, especially


- 81 -




(m) SystemSoft had been advised by Digital Equipment

that Digital Equipment was going to cancel its SystemWizard

development contract with SystemSoft, which triggered a multi-

million dollar liability of SystemSoft to Digital Equipment; and

(n) As a result of the foregoing negative factors which

were negatively impacting SystemSoft's business, Defendants


during P98, due to continued strong growth and SystemSoft's core



79. On 3/3/97, SystemSoft's stock traded as high as $17-5/8.

After the close of trading on 3/3/97, SystemSoft reported its 4thQ

F97 results, which were in line with expectations, due to

SystemSoft's continuing its financial and accounting manipulations.

However, SystemSoft also revealed that the implementation of

SystemWizard was taking longer than expected and it would obtain

much less revenue from SystemWizard in the first half of F98 than

it had earlier forecasted! In addition, the Company had suffered

a delay in shipments of its CardWizard product by IBM, indicating

weakening demand for its core product line. As a result, analysts

slashed their F98 revenue and EPS forecasts for SystemSoft and its

stock collapsed from $17-5/8 on 3/3/97 to as low as $11-1/8 on

3/4/97 -- a 37% one-day decline on volume of 6.1 million shares --

by far the largest one-day price decline and the largest one-day

trading volume in SystemSoft's history as a public company!

- 82 -

80. During 97, i.e., SystemSoft's F98, SystemSoft

consistently reported disappointing results with stagnant revenues

and EPS far below the levels earlier forecast, as the rollout of

SystemWizard was delayed again and again, few if any large PC GEMs

adopted the product, and the revenues from the product were way

below earlier expectations. In 5/97, SystemSoft's 10-K for the

year ended 1131/97, revealed for the first time that Digital

Equipment had cancelled its research and development contract for

SystemWizard with SystemSoft in 2/97 -- during the Class Period --

resulting in a $6.7 million liability of SystemSoft to Digital

Equipment. Ultimately, SystemSoft revealed major accounting write-

offs which would result in a large loss for F98 -- not the

substantial increase in EPS to $.65 forecast durInd the Class

Period, on revenues of only about $43 million -- less than half the

$90 million forecast during the Class Period.

81. In discussions with analysts on 2/6/98, Angelo admitted

to being in "mortal shock" over these "embarrassing" developments,

i.e., SystemSoft's large operating loss and multi-million dollar

write-offs, and said that SystemSoft had suspended hiring

indefinitely and would, at best, breakeven in following quarters.

Angelo also said "We're writing-off [$12-$14 million] many, many

things that just had no value." He admitted that the USB business

was being spun-off as "the cost of doing USB business continues to

outweigh the short-term benefits," that SystemSoft was receiving no

payment for the business and was writing-off its investment in it.

As to SystemWizard, Angelo admitted SystemSoft did not even know

what its "installed base" of that product was, was no longer even

tracking that, and that "SystemWizard revenue continued to

- 83 -

experience "very long" implementation cycles which "pushes revenue

out" and even "two new wins . . unfortunately didn't carry a lot

of revenue with them." When Angelo admitted that these huge losses

wiped out all SystemSoft's retained earnings and "obviously put

that into a large loss," one analyst erupted, saying "So . . . you

guys have . . . never made a nickel at the end of the day when you

add it all up," to which Angelo said, "I agree with you." When

asked if the current write-downs related to questions raised about

SystemSoft's accounting in a Forbes article a year earlier,

Pedevillano said "No, it wasn't related to that article."

82. Angelo was ultimately removed from overseeing the day-to-

day operations. The Boston Business Journal reported on this

change of leadership at SystemSoft:

Deborah Besemer, who was named president and chiefoperating officer, has taken over day-to-day operations at SystemSoft. . .

The move is seen as an attempt to stabilizeSystemSoft's stock price and bolster the company'sefforts at marketing its latest product, SystemWizard. . .

Analysts have been critical about the company forseveral months, since SystemWizard has yet to generateits expected revenue.

* * *

Aaron Edelheit, an analyst with New York-basedIndividual Investment Group, said the main problem withSystemWizard has been a lack of support from the majorplayers in the computer industry, such as Dell ComputerCorp. of Austin, Texas, and Compaq Computer Corp. ofHouston.

Edelheit said prolonged product testing, andallowing computer makers to have the product for free,may continue to depress SystemWizard's revenue figuresinto 1998.

. . "The problem is no one's paying for it[SystemWizard]."

- 84 -

Analysts were furious -- Hambrect & Quist's Bakar complained, "The

Company set expectations for SystemWizard well above what reality

suggested." The Special Situations Report stated it was "dis-

appointed in management' s failure, after repeated conversations, to

communicate its feeling of unrealistic expectations for System-

Wizard in fiscal 1998." Poymer complained that "we were caught by

surprise by the magnitude of the revenue shortfall," "we have lost

confidence in the model," and this "serious shortfall has damaged

credibility significantly," while Bloom of Volpe characterized

SystemSoft's F98 results as "shocking." SystemSoft's apparent

Profitable growth in F96 and F97 -- due to Defendants' manipula-

tions and falsification of SystemSoft's financial statements -- and

its horrible F98 results when the Digital Equipment contract was

cancelled, demand for its core products declined and its

SystemWizard product failed to achieve significant sales, is set

forth below:

SystemSoft CorporationQuarterLy Revenues & Earnings

(in thousands, except E?S)

F1996

4/30/95 7/30/95 10/31/95 1/31/96 Year

Revenues $ 5,181 $ 5,898 $ 6,189 $ 7,321 $ 24,589Net income $ 645 $ 868 $ 826 $ 1,253 $ 3,591EPS $.03 $.04 $.04 $.06 $.16

F1997

4/30/96 7/30/96 10/31/96 1/31/97 Year

Revenues $ 8,060 $ 9,291 $10,308 $12,019 $ 39,688Net income $ 1,278 $ 1,489 $ 1,702 $ 1,950 $ 6,419EPS $.06 $.06 $.07 $.os* $.26*

Excludes effects of $46.5 million write-oft for in-process R&D from anacquisition.

P1998

4/30/97 7/30/97 10/31/97 1/31198 (Estimated byManagement)

Revenues $12,477 $12.905 $13,233 $ 4,000 -$ 5,000

Net income (loss($ 2,019 $ 749 $ 944 $15,800Y-($113,000)EPS (loss) $.08 $.03 $.04 ($ 68)-($,73(

- 85 -

SYSTEMSOFT'S FALSE FINANCIALREPORTING DURING THE CLASS PERIOD

83. In order to inflate the price of SystemSoft's stock,

SystemSoft falsely manipulated and falsified its reported results

for the 4thQ of F96 and lstQ, 2ndQ and 3rdQ of F97 through improper

revenue recognition on research and development advances from

Digital Equipment and also pursuant to distribution agreement

through the Company's Asian subsidiary, thereby materially

overstating its revenue, net income and EPS in each of 4th F96, and

IstQ, 2ndQ and 3rdQ F97. Ultimately, when its research and

development agreement with Digital Equipment was terminated,

SystemSoft had to repay Digital Equipment $6.75 million. The Asian

distribution agreement was also terminated and SystemSoft had to

take a $4 million charge to reflect the pay-off to those

distributors.

84. SystemSoft reported the following quarterly results

during the Class Period:

4thQF96 1stQF97 2ndQF97 3rdQF971/31/96 4/30/96 7/31/96 10/31/96

Revenue $7.32 M $8.05 M $9.29 M $10.31 MNet Income $1.25 M $1.28 M $1.49 M $1.70 MEPS $ 0.06 $ 0.06 $ 0.06 $ 0.07

85. SystemSoft included its 4thQ F96 results in its Form 10-K

filed with the SEC. which 10-K was signed by An gelo, Sommers,

Goldman, King and McNeff and represented that SystemSoft's F96

results were fairly presented in accordance with GAAP.

SystemSoft's lstQ, 2ndQ and 3rdQ F97 results were included in

SystemSoft's Form 10-Q's filed with the SEC. The Form 10-Q's were

signed by Angelo and Sommers. They each represented that the

- 86 -

financial statements included "all adjustments . . . necessary for

a fair presentation."

86. These representations were false and misleading when

made. SystemSoft's financial statements for 4thQ F96 and istQ,

2ndQ and 3rdQ F97 were not fair presentations of SystemSoft's

results and were presented in violation of GAAP and SEC rules.

87. GAAP are those principles recognized by the accounting

profession as the conventions, rules and procedures necessary to

define accepted accounting practice at a particular time. SEC

Regulation S-X (17 C.F.R. 5210.4-01(a)(1)) states that the

financial statements filed with the SEC which are not prepared in

compliance with GAAP are presumed to be misleading and inaccurate,

despite footnote or other disclosure. Regulation S-X requires that

interim financial statements must also comply with GAAP, with the

exception that interim financial statements need not include

disclosure which would be duplicative of disclosures accompanying

annual financial statements. 17 C.F.R. 5210.10-01(a).

Digital Equipment Revenue

88. The Defendants caused SystemSoft to falsify its reported

financial results through its improper revenue recognition on

SystemSoft's development agreements with Digital Equipment.

Pursuant to GAP, SystemSoft should have recorded funds provided

pursuant to these agreements as liabilities (advances) rather than

as income. Contrary to GAAP, SystemSoft recorded those funds as

income, thereby materially overstating the Company's reported

revenues, net income and EPS during the Class Period.

89. GAAP, as set forth in FASB Statement of Accounting

Standard ("SFAS") No. 68, Research and Development Arrangements,

- 87 -

requires that an entity should record a liability for any advances

it is obligated to repay regardless of the outcome of the research

and development project. SFAS No. 68, 4,1T5-6 state:

5. If the enterprise is obligated to repay any of thefunds provided by the other parties regardless of theoutcome of the research and development, the enterpriseshall estimate and recognize that liability. Thisrequirement applies whether the enterprise may settle theliability by paying cash, by issuing securities, or bysome other means.

6. To conclude that a liability does not exist, thetransfer of the financial risk involved with research anddevelopment from the enterprise to the other parties mustbe substantive and genuine. To the extent that theenterprise is committed to repay any of the fundsprovided by the other parties regardless of the outcomeof the research and development, all or part of the riskhas not been transferred. The following are someexamples in which the enterprise is committed to repay:

a. The enterprise guarantees, or has acontractual commitment that assures, repayment ofthe funds provided by the other parties regardlessof the outcome of the research and development.

b. The other parties can require the enterpriseto purchase their interest in the research anddevelopment regardless of the outcome.

c. The other parties automatically will receivedebt or equity securities of the enterprise upontermination or completion of the research anddevelopment regardless of the outcome.

90. SystemSoft's agreement with Digital Equipment did not

transfer financial risk with regard to the development of call-

avoidance software from SystemSoft to Digital Equipment because the

agreement required the Company to effectively repay Digital

Equipment for the engineering advances regardless of the outcome,

either through royalties or repayment. In fact, when the agreement

with Digital Equipment was terminated in 2/97, SystemSoft was

required to pay Digital Equipment $6.5 million. In its F96 Annual

Report and 4/30/97 Form 10-Q, SystemSoft for the first time

- 88 -

revealed that the agreement had been terminated in 2/97, and that

the Company would be paying Digital Equipment $5.5 million in

installments running through 10/97 and would be not receiving a

$1.25 million receivable from Digital Equipment which was

eliminated in the quarter ended 4/30/97.

Distributor Revenue Recognition

91. During F96, SystemSoft established an Asia-Pacific office

in Taipai, Taiwan and a subsidiary (SystemSoft K.K.) in Japan. In

order to report strong and increasing software license fee revenue

during the Class Period, SystemSoft improperly recognized revenue

on distribution agreements through its Asian subsidiary and office,

which agreements provided that sales to the distributors were

contingent on resale.

92. GAP, as set forth in AICPA Statement of Position ("SOP")

91-1, Software Revenue Recognition, states that revenue from

software licenses should only be recognized where certain

conditions are met, including that the software has been

unconditionally accepted. SOP 91-1 states:

If, after delivery, there is significant uncertaintyabout customer acceptance of the software, licenserevenue should not be recognized until the uncertaintybecomes insignificant.

* * *

Revenue from cancelable licenses should not berecognized until the cancellation privileges lapse.Revenue from licenses with cancellation privilegesexpiring ratably over the license period should berecognized ratably over the license period as thecancellation privileges lapse. That is consistent withcustomer obligations to pay only one monthly or periodicpayment at a time. In applying the provisions of thisparagraph, warranties that are routine, short-term, andrelatively minor and short-term rights of return, such asthirty-day, money-back guarantees, should not beconsidered cancellation privileges; they should be

- 89 -

accounted for in conformity with FASB Statement No. 5,Accounting for Contingencies, and FASB Statement No. 48,Revenue Recognition When Right of Return Exists.

As part of their standard sales terms or as mattersof practice, vendors may grant resellers rights toexchange unsold software for other software. Suchexchanges, including those referred to as "stockbalancing arrangements", are returns and should beaccounted for in conformity with FASB Statement No. 48,even if the vendors require the resellers to purchaseadditional software to exercise the exchange rights.

SOP 91-1.36, .53-.54 (footnoted added).

93. In violation of CRAP, SystemSoft improperly recognized

revenue on software licenses purportedly sold through Asian

distributors, thereby materially overstating its business and

earnings.

94. Ultimately, these distribution agreements were rescinded

when the Asian distributors could not successfully resell the

Company's products. SystemSoft was forced to take a $4 million

charge in connection with the rescission and repay the distributors

for amounts they had paid SystemSoft. SystemSoft timed the

announcement of this write-off and repayment with an announcement

of the acquisition of Radish Communications Systems, Inc. in 12/96

to minimize its actual adverse impact.

95. Due to the Company's improper revenue recognition, its

revenues, net income and EPS were overstated by at least the

following amounts:

SFAS No. 48 requires that where the buyer's obligation to paythe seller is contingent on resale of the product, recognition ofrevenue should not occur until the product is resold or the rightto return expires. SFAS No. 48, ¶56 -7.

- 90 -

44 F96 01 F97 02 F97 03 F97Reported Revenue $7.32 M $8.05 M $9.29 M $10.31 MActual Revenue $4.81 M $6.62 M $6.83 M $ 9.00 M% Overstated 52.2% 21.6% 36.1% 159s

Reported Net Income $1.25 M $1.28 M $1.49 M $ 1.70 MActual Net Inc(loss) ($.22 M) $0.58 M $0.29 M $ 1.23 M% Overstated 100% 120% 410% 36%

Reported EPS $ 0.06 $ 0.06 $0.06 $ 0.07Actual EPS ($0.01) $ 0.02 $0.01 $ 0.05% Overstated 100% 200% 500% 40%

96. Due to these accounting improprieties, the Company

presented its financial results and statements in a manner which

violated GAAP, including the following fundamental accounting

principles:

(a) The principle that interim financial reporting

should be based upon the same accounting principles and practices

used to prepare annual financial statements (APB No. 28, 110);

(b) The principle that financial reporting should

provide information that is useful to present and potential

investors and creditors and other users in making rational

investment, credit and similar decisions was violated (PASS

Statement of Concepts No. 1, 134);

(c) The principle that financial reporting should

provide information about the economic resources of an enterprise,

the claims to those resources, and effects of transactions, events

and circumstances that change resources and claims to those

resources was violated (FASB Statement of Concepts No. 1, 140);

(d) The principle that financial reporting should

provide information about how management of an enterprise has

discharged its stewardshi p responsibility to owners (stockholders)

for the use of enterprise resources entrusted to it was violated.

- 91 -

To the extent that management offers securities of the enterprise

to the public, it voluntarily accepts wider responsibilities for

accountability to prospective investors and to the public in

general (FASB Statement of Concepts No. 1, ¶50);

(e) The principle that financial reporting should

provide information about an enterprise's financial performance

during a period was violated. Investors and creditors often use

information about the past to help in assessing the prospects of an

enterprise. Thus, although investment and credit decisions reflect

investors' expectations about future enterprise performance, those

expectations are commonly based at least partly on evaluations of

past enterprise performance (FASB Statement of Concepts No. 1,

¶42);

(f) The principle that financial reporting should be

reliable in that it represents what it purports to represent was

violated. That information should be reliable as well as relevant

is a notion that is central to accounting (FASB Statement of

Concepts No. 2, ¶158-59);

(g) The principle of completeness, which means that

nothing is left out of the information that may be necessary to

insure that it validly represents underlying events and conditions

was violated (FASB Statement of Concepts No. 2, 1179); and

(h) The principle that conservatism be used as a prudent

reaction to uncertainty to try to ensure that uncertainties and

risks inherent in business situations are adequately considered was

violated. The best way to avoid injury to investors is to try to

ensure that what is reported represents what it purports to

represent (FASB Statement of Concepts No. 2, 1!195, 97).

- 92 -

97. Further, the undisclosed adverse information concealed by

Defendants during the Class Period is the type of'Information

which, because of SEC regulations, regulations of the national

stock exchanges and customary business practice, is expected by

investors and securities analysts to be disclosed and is known by

corporate officials and their legal and financial advisors to be

the type of information which is expected to be and must be

disclosed.

COOPERS & LYBRAND'S PARTICIPATION IN THE FRAUD

98. Coopers & Lybrand, a firm of certified public accoun-

tants, was engaged by SystemSoft to provide independent auditing,

accounting and consulting services throughout the class Period.

Coopers & Lybrand examined and certified the financial statements

of SystemSoft for F96, ended 1731/96 and reviewed its interim

financial statements during the year ended 1/31/97. Coopers &

Lybrand represented in SystemSoft's F96 Form 10-K and Annual Report

that the financial statements of SystemSoft therein fairly

presented its financial condition and results of operation in

conformity with GAAP and had been audited in accordance with

Generally Accepted Auditing Standards ("GAAS").

99. As SystemSoft grew rapidly it became an increasingly

important client of Coopers & Lybrand's Boston office. The incomes

of the Coopers & Lybrand partners responsible for this account

benefited from this and they were determined to keep SystemSoft as

a client for the firm, so that they would continue to benefit

economically. Coopers & Lybrand participated in the wrongdoing

alleged herein in order to maintain its competitive position as to

other large accounting firms by retaining SystemSoft as a client,

- 93 -

protect and enhance the substantial fees which it received from

SystemSoft, maintain and increase its market share for auditing,

accounting and consulting services to be performed by its Boston

office, and increase the income received by the Coopers & Lybrand

partners responsible for the SystemSoft engagement, since their

income was directly tied to retaining accounting and auditing

clients in the Boston market.

100. In addition, Coopers & Lybrand was not independent of

SystemSoft with respect to its audit of SystemSoft's accounting for

its relationship with Digital Equipment. This was because Coopers

& Lybrand actually helped develo p SystemSoft's accounting practices

for its research and development arrangement with Digital

Equipment. Since Coopers & Lybrand was in effect so intimately

involved in developing this accountin g practice and its purported

rationale, Coopers & Lybrand was then auditing or reviewing its own

work and thus was not independent.

101. As a result of the services rendered to SystemSoft,

Coopers & Lybrand's personnel were present at SystemSoft's

corporate headquarters frequently throughout each year and had

continual access to, and knowledge of, SystemSoft's private and

confidential corporate, financial and business information and thus

knew of the true facts as alleged herein concerning SystemSoft's

actual financial condition and business problems which were

concealed from the investing public.

102. (a) Defendant Coopers & Lybrand conducted audit

examinations and participated in investigations into the business

operations, financial, accounting and management control systems of

SystemSoft. Coopers & Lybrand reviewed the company's quarterly

- 94 -

financial reports and unqualifiedly certified that SystemSoft's F96

financial statements fairly presented the Company's financial

position and results from operations in conformity with GAAP and

that said statements had been examined in accordance with GAAS. At

the time Coopers & Lybrand issued its unqualified opinion as to

SystemSoft's F96 financial statements, it knew or recklessly

disregarded the facts set forth in T1183-97. Among other things,

Coopers & Lybrand knew that SystemSoft's reported revenues, net

income and EPS were grossly overstated, because, inter alia, the

Company was improperly reporting revenues from its R&D arrangement

with Digital Equipment.

(b) Coopers & Lybrand helped further the fraud

complained of herein by permitting SystemSoft to continue to

circulate copies of SystemSoft's financial statements, which

Coopers & Lybrand had certified, even though Coopers & Lybrand knew

or recklessly disregarded the fact that they had not been prepared

in conformity with GAAP or audited in accordance with GAAS.

(c) Coopers & Lybrand reviewed SystemScft's interim

financial statements for the quarters ended 4/30/96, 7/31/96 and

10/31/96 and knew of the material falsity of the quarterly reports

filed with the SEC reporting those results and containing those

financial statements.

103. Coopers & Lybrand knew that SystemSoft's audited

financial statements for F96 and the quarterly reports issued

during F97, which Coopers & Lybrand reviewed, were presented in a

manner which violated GAAP, as described in 111183-97.

104. In connection with the work it performed for SystemSoft,

Coopers & Lybrand:

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(a) Examined, reviewed and/or participated in reviews,

investigations and audit procedures regarding SystemSoft's

financial condition and operations. In the course of performing

such services, Coopers & Lybrand either obtained, or recklessly

disregarded, evidential matter revealing the adverse facts about

SystemSoft's business and finances described at 1![83-97, and

improperly failed to require, or make disclosure of such facts. As

a result of its reviews and audit work, Coopers & Lybrand knew that

the SystemSoft reports and financial statements described in this

Complaint were materially misleading or recklessly disregarded

facts which showed that such statements were materially misleading;

(b) Knew or recklessly disregarded facts which indicated

that it should have (i) qualified its opinion on SystemSoft's

financial statements for the F96 year ended 1131/96, or (ii)

withdrawn, corrected or modified its opinion to recognize

SystemSoft's improper accounting practices for its contract with

Digital Equipment on SystemSoft's F96 financial statements, or

(iii) not have given an opinion in light of the potentially

materially adverse effects of the undisclosed facts concerning

SystemSoft's operating income, net income, EPS and shareholders'

equity. The failure to make such a qualification, correction,

modification and/or withdrawal was a violation of GAAS, including

the Fourth Standard of Reporting; and

(c) Failed to require Systemsoft to disclose material

facts and allowed SystemSoft to make material misrepresentations

regarding the Company to its shareholders and to the investing

public during the Class Period.

- 96 -

105. In certifying SystemSoft's F96 financial statements,

Coopers & Lybrand represented that its examinations were made "in

accordance with Generally Accepted Auditing Standards." This

statement was false and misleading in that the audit conducted by

Coopers & Lybrand was deliberately or recklessly not performed in

accordance with GAAS in the following respects:

(a) Coopers & Lybrand violated GAAS General Standard No.

3 that requires that due professional care must be exercised by the

auditor in the Performance of the audit and the preDaration of the

report;

(b) Coopers & Lybrand violated GAAS Standard of Field

Work No. 2, that requires the auditor to make a proper study of

existing internal controls, including accounting, financial and

managerial controls, to determine whether reliance thereon was

justified, and if such controls are not reliable, to expand the

nature and scope of the auditing procedures to be applied. Coopers

& Lybrand, knowing that the internal controls were insufficient,

failed to expand its auditing procedures;

(c) Coopers & Lybrand violated GAAS Standard of

Reporting No. 1 that requires the audit report to state whether the

financial statements are presented in accordance with GAAP.

Coopers & Lybrand's opinion inappropriately represented that

SystemSoft's financial statements complied with GAAP, when they did

not for the reasons herein alleged;

(d) Coopers & Lybrand also violated GAAS Standard of

Reporting No. 3 that requires informative disclosures in the

financial statements to be regarded as reasonably adequate unless

otherwise stated in the audit report. Here, the disclosures were

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not adequate. The Notes to the financial statements failed to set

forth appropriate principles of accounting relating to SystemSoft's

relationship with Digital Equipment and its liability to poten-

tially repay Digital Equipment funds advanced to the Company. The

disclosures were further inadequate with respect to the over-

statement of SystemSoft's revenues and earnings. The audit report

of Coopers & Lybrand failed to disclose that such disclosures or

omissions of material information, as heretofore alleged, rendered

the respective financial statements false and misleading;

(e) Coopers & Lybrand violated GAAS Standard of

Reporting No. 4 that requires, when an opinion on the financial

statements as a whole cannot be expressed, that the reasons

therefore be stated. Coopers & Lybrand should have stated that no

opinion could be issued by it on SystemSoft's financial statements

or issued an adverse opinion stating that the financial statements

were not fairly presented;

(f) Coopers & Lybrand violated GAAS Standard of Field

Work No. 1 and the standards set forth in AICPA Auditing Standard

("AU") SS310, 320 and 327 by, among other things, failing to

adequately plan its audit and properly supervise the work of

assistants so as to establish and carry out procedures reasonably

designed to search for and detect the existence of errors and

irregularities which would have a material effect upon the

financial statements;

(g) Coopers & Lybrand violated Auditing Standard AU

S316.16, in that Coopers & Lybrand failed to plan and perform its

examination with an attitude of professional skepticism in

connection with the year-end F96 audits;

- 98 -

(h) Coopers & Lybrand violated Auditing standard AU

5316A.25 which sets forth the steps an auditor should take upon

suspecting accounting irregularities. AU 5316A.25 states:

If the auditor has determined that an auditadjustment is or may be, an irregularity and has eitherdetermined that the effect could be material or has beenunable to evaluate potential materiality, the auditorshould --

a. Consider the implications for other aspects ofthe audit.

b. Discuss the matter and the approach to furtherinvestigation with an appropriate level of managementthat is at least one level above those involved.

c. Attempt to obtain sufficient competent eviden-tial matter to determine whether, in fact, materialirregularities exist and, if so, their effect.

(i) Coopers & Lybrand violated Auditing Standard AU

5,316A.28 which requires auditors communicate reportable

irregularities (intentional misstatement) to the audit committee of

a company, when Coopers & Lybrand became aware of irregularities

and failed to communicate these to the audit committee:

(i) AU §316A.28 states that irregularities

involving senior management should be reported directly to the

audit committee; and

(ii) Coopers & Lybrand knew, or should have known,

that SystemSoft had improperly recognized revenue arising from

advances from Digital Equipment. Coopers & Lybrand knew that this

revenue recognition was inappropriate and forbidden under SEC

rules. Coopers & Lybrand, however, failed to fully communicate

these matters to the audit committee in violation of GAAS;

( j ) Moreover, Coopers & Lybrand violated Auditing

Standard AU 5722 which requires that auditors assure that the audit

- 99 -

committee be made aware of, and respond appropriately to, any

irregularities (intentional misstatements) the auditor discovers as

part of a review of interim financial information to be filed with

a regulatory agency, such as the SEC:

(i) AU §722.21-22 states:

.21 If, in the accountant's judgment, management doesnot respond appropriately to the accountant'scommunication within a reasonable period of time, theaccountant should inform the audit committee, or otherswith equivalent authority and responsibility (hereafterreferred to as the audit committee), of the matters assoon as practicable. This communication may be oral orwritten. If information is communicated orally, theaccountant should document the communication in appro-priate memoranda or notations in the working papers.

.22 If, in the accountant's judgment, the auditcommittee does not respond appropriately to theaccountant's communication within a reasonable period oftime, the accountant should evaluate (a) whether toresign from the engagement related to the interimfinancial information, and (b) whether to remain as theentity's auditor or stand for reelection to audit theentity's financial statements. The accountant may wishto consult with his or her attorney when making theseevaluations.

(ii) Coopers & Lybrand knew at the time it reviewed

SystemSoft's F97 interim financial statements, that they did not

reflect SystemSoft's true financial condition but failed to assure

itself that the audit committee responded appropriately; and

(k) Coopers & Lybrand violated the Second General

Auditing Standard which requires the auditor maintain independence

in mental attitude in all matters related to an assignment. AU

5220.01. Coopers & Lybrand actually helped to develop SystemSoft's

accounting practices for reporting revenue from advances under the

Digital Equipment agreement, including helping SystemSoft to

develop the rationales and projections it used to justify those

accounting practices. As a result, Coopers & Lybrand was not

- 100 -

independent with respect to auditing or reviewing SystemSoft's

financial statements or °Dining thereon, as Coopers & Lybrand was,

in effect, auditing its own work and had a stake in justifying the

correctness of an accounting practice, and its underlying

justifications, it had helped create. Coopers & Lybrand rendered

materially false opinions on SystemSoft's F96 financial statements.

Coopers & Lybrand also participated in making false statements

about SystemSoft's financial results for each of the interim

quarters of F97 by reviewing the interim financial statements

contained therein, knowing of or recklessly disregarding their

falsity. Alternatively Coopers & Lybrand over-relied on management

representations as to its relationship with Digital Equipment.

106. Coopers & Lybrand's opinion which represented that

SystemSoft's financial statements were presented in conformity with

GAAP was false and misleading because Coopers & Lybrand knew or was

reckless in not knowing that SystemSoft's financial statements

violated the principles for fair reporting and GAAP. Coopers &

Lybrand knew that GAAP, as set forth in SPAS No. 68, requires that

to conclude the advances were not a liability, the transfer of risk

to Digital Equipment must be substantive and genuine. Coopers

failed to obtain sufficient evidence of such a genuine transfer of

financial risk, thereby failing to comply with GAAS (Standard of

Field Work No. 37), causing its opinion to be false.

107. In violation of these principles, Coopers & Lybrand

certified systemSoft's financial statements even though Coopers &

Lybrand was aware that during F96 and F97, SystemSoft was

recognizing revenue from advances from Digital Equipment which

were, in fact, liabilities and that the Company's practice of

- 101 -

recognizing revenue that . violated GAAP caused SystemSoft's

financial statements not to accurately reflect its results of

operations nor its assets and liabilities and owner's equity.

108. In the course of rendering its unqualified audit

certifications on the F96 financial statements of SystemSoft,

Coopers & Lybrand knew it was required to adhere to each of the

herein-described standards and principles of GAAS, including the

requirement that the financial statements comply in all material

respects with GAAP. Coopers & Lybrand, in issuing its unqualified

opinion, knew that by doing so it was engaging in gross departures

from GAAS, thus making its opinions false, and issued such

certification with reckless disregard of whether or not GAAS was

being complied with.

109. As a result of its failure to accurately report on

SystemSoft's financial statements, Coopers & Lybrand failed in its

role as an auditor as defined by the SEC and GAAS. SEC Accounting

Series Release No. 2961 states in part:

Moreover, the capital formation process depends inlarge part on the confidence of investors in financialreporting. An investor's willingness to commit hiscapital to an impersonal market is dependent on theavailability of accurate, material and timely informationregarding the corporations in which he has invested orproposes to invest. The quality of information dissemi-nated in the securities markets and the continuingconviction of individual investors that such informationis reliable are thus key to the formation and effectiveallocation of capital. Accordingly, the audit functionmust be meaningfully performed and the accountants'independence not compromised. The auditor must be freeto decide questions against his client's interests if hisindependent professional judgment compels that result.

1981 SEC LEXIS 858, at *8-*9 (8/20/81).

- 102 -

INSIDER SELLING

110. While SystemSoft's top insiders were issuing favorable

statements about SystemSoft, the individual Defendants sold

1,070,007 shares of SystemSoft stock, for more than $21 million --

over 70% of their collective holdings of SystemSoft stock -- to

personally profit from the artificial inflation in SystemSoft's

stock price which their fraudulent scheme had created.

Notwithstanding their access to confidential information as a

result of their status as directors, officers and/or insiders of

the Company, and their corresponding duty to disclose adverse

material facts before trading in SystemSoft stock, the Individual

Defendants sold significant amounts of SystemSoft shares at arti-

ficially inflated prices in order to profit from the fraud, and did

so while in possession of material non-public information. The

Individual Defendants' insider selling during the Class Period is

detailed below:

PRICE SHARESDATE SHARES PER PROCEEDS OBTAINED BY

NAME SOLD SOLD SHARE FROM SALE OPTION PRICE

Ange._10 03/05/96 30,000 $ 6.975 $ 206,25003/13/96 16,000 $ 7.442 119,04003/14/96 14,000 $ 7.440 104,16003/22/96 20,000 $ 6.290 163,80003/27/96 5,682 $ 7.625 44,85006/27/96 4,000 $21.155 84,62006/27/96 20,000 521.720 217,20006/27/96 13,000 $21470 279,11006/27/96 6,000 021.120 126,75006/27/96 10,000 521.595 215,95006/27/96 20,000 $21_000 420,00006/27/96 4,000 $ .43506/27/96 6,000 $ .43506/27/96 13,000 $ .43506/27/96 40,000 $ .43509/01/96 57,40 $1.1008/01/96 18,750 $1.98008/30/96 10,000 $31.750 317,50008/30/96 20,000 $31_500 630,00008/20/96 10,000 $1.31008/30/95 20,000 $1.31012/02/96 4,440 $5.83001/06/97 10,000 $13.630 138,30001/09/97 20,000 $14.000 260,00001/09/97 20,000 $1.880

— 103 -

01/10/97 10.000 $13.750 137,50001/13/97 2,500 $14.200 35,0000:113/97 5,000 $13.010 68,15001/13/97 5,000 $13.500 67,50001/14/97 10,000 $14.250 142,50001/11/97 2,500 $13.500 33,75001/14/97 10,000 $1.88001/14/97 5,000 015.000 75,00001/15/97 $ 5,000 $1.880

Totals: 248 882 $3,904,930 208,640 Percent of shares -.5.c'y owned sold: 74%-

Blair 03/07/96 20,000 01.87503/19/96 20,000 $ 6.625 $ 172,50003/19/96 20,0M5 $1.87505/28/96 4,000 522.250 89,00006/10/96 10,000 $25.345 253,45006/10/96 2,500 $1.87506/10/96 5,000 $1.97506/10/96 2,500 04.31506/28/96 10,000 $21.970 219,70006/28/96 20,000 $1.87508/27/96 9,500 $28.000 266,00008/27/96 500 028.000 14,00008/27/96 8,000 $28.130 225,04008/27/96 500 $4.31008/27/96 8,000 $1.8800E/27/96 9,500 $1.88009/08/96 15,000 032.130 481,95009/08/96 15,000 $1.88009/30/96 2,500 $34.130 85,32512/02/56 4,440 05.63012/06/96 4,000 $16.760 $ 63,000

Totals: 83,500 $1,869,965 •97,440 Percent of shares actually owned sold: 827-,

Goldman 03/14/96 63,000 $ 7.443 $ 469,03503/14/96 15,000 $ 7.445 111,67503/14/96 13,126 $ 7.445 97,72303/14/96 63,000 $ .43503/14/96 15,000 $1.31003/14/96 13,126 $1.87503/14/96 80,000 $48.000 $1,920.000 91 126

Totals; 171,126 $2,598,433 Percen!= of shares actualry owned sold: 466

Higgins 03/18/96 3,750 $ 8.250 $ 30,93803/18/96 2,250 $ 8.250 18,58303/18/96 3,750 $3.12505/29/96 6,000 $22.000 132,00005/29/96 4,000 $23.500 94,00005/29/96 6,000 $4.37505/29/96 4,000 $4.37506/28/96 1,874 •$21.720 40,70306/28/96 7,503 021.720 162.90006/28/96 7,500 $4.37506/28/96 1,874 03.12508127/96 3,750 $28.190 105,71308/27/96 5,200 $29.060 145,00008/27/96 6,752 $28,130 189,87808/27/96 3,750 $29.440 110,40008/27/96 20,002 $28.500 570,00008/27/96 3,750 $29.250 109,68808/27/96 10,000 028.000 280,00008/27/96 7,505 $4.69008/27/96 3,750 $4.69008/27/96 5,000 $4.69008/27/96 10,000 $4-69008/27/96 6,750 $4.690

— 104 —

08/27/96 20,000 $4.59008/28/96 375 330.750 11,53106/26/96 6,000 330.000 180,00003/28/96 5,000 $29.380 146,90008/28/96 1,500 $30.380 45,57003/26/96 1,650 $30.500 50,32505/28/96 2,350 $30.380 71,39305/22/96 4,500 $30.250 136,12508/2E/96 2,500 i',;20.000 72,50008/26/96 2,500 $29.250 73,12506/26/96 2,350 $4.38008/28/96 1,650 $4.38008/28/96 10,000 $4.69008/28/96 6,000 94.69008/28/96 1,500 $4.69008/28/96 375 34.38308/28/96 4,500 $4.69009/09/96 551 $33.130 18,23509/09/96 123 $33.130 4,01509/09/96 1,325 $33.000 43,72509/09/96 1 333.130 3309/09/96 551 33.13005/09/96 1,325 $3.13009/09/96 0 $4.38012/02/96 $ 4,440 $5.630

Totals: 105,749 32,843,338 108,816 Percent of shares af.17=77 owned sold: , 93S

Joseph 05/29/96 16,000 $21.750 $ 348,00005/29/96 10,000 $21.345 213,45006/24/96 5,914 322.970 135,84506/24/96 1,000 $22.970 22,97006/24/96 4,066 $22.970 93,95506/24/96 1,000 31.67506/24/96 4,086 $4.31506/24/96 5,914 $4.31506/26/96 4,626 322.220 102,79006/28/96 3,106 $22.220 69,01506/28/96 5,000 322.220 112,35006/28/96 6,300 $22_595 135,57005/28/96 3,266 322.220 72,61506/28/96 6,000 $2.87536/28/96 5,000 $1.87506/28/96 3,106 $1.87506/28/96 4,626 31.87506/28/96 3,268 31.87506/28/96 5,394 $21.970 125,49106/28/96 4,106 $21_97C 90,20906/28/96 1,000 321.845 21,84306/28/96 5,894 31.87506/29/96 1,000 31.67506/28/96 4,106 $1.87508/27/96 5,500 $28.000 140,00008/27/96 3,750 329.440 110,40006/27/96 6,750 $28.130 199,67008/27/96 3,750 $29.250 109,65808/27/96 3,750 $29.180 105,71508/28/96 1,700 $30.500 51,65008/28/96 2,500 $29.250 73,12508/28/96 5,000 $29.380 146,93006/28/96 2,500 $29.000 72,50038/28/96 6,000 $30.000 1E0,00008/28/96 2,300 $30.330 69,87412/02/96 $ 4,440 35.630

Totals: 113,000 32,797,932 48,440 Percent of shares actually ow=ed sold: 896

King 07/03/96 40,000 $25.090 $1,003,6.0007/03/96 40,000 $ .880

— 105 —

08/28/96 20,000 $25.250 565,00005/28/96 8 20,000 $ .880

Totals; 60,030 $1,588,600 69O00 Percent of shares actually owned sold: 76%:

McNeff 07/01/96 3,000 '.'p'22.660 $ 07,98007/01/96 4,500 622.000 99,00007/01/96 4,520 $7.25007/01/96 $ 3,000 $7.250

ToLals: 7,500 $ 166,980 7,600Percent of shares .actually owned old: 100%-

O'Connell 03/04/96 13,000 $ 6.815 $ 88,59503/04/96 13,000 $1.31003/05/96 17,000 6 6.875 116,87503/11/96 17,000 $ 6.875 116,87503/11/96 17,000 $1.31003/13/96 20,000 $ 7.375 147,50003/13/96 20,000 $1.31003/15/96 10,00C $ 7.875 78,75003/15/96 10,000 $1.31003/20/96 10,000 $ 8.875 88,75005/29/96 9,030 $21.500 193,50005/29/96 6,000 $22.250 133,50005/29/96 5,020 622.500 112,50005/29/96 10,000 $22.125 221,25005/29/96 20,000 $1.87505/29/96 5,000 $1.31005/29/96 5,000 81.57506/05/36 10,000 $24.250 242,50006/28/96 10,000 $21.970 219,70006/28/96 10,000 $1.87508/27/96 10,000 $28.000 280,00008/27/96 6,750 $28.130 189,97808/27/96 750 $23.440 22,0E008/27/95 3,750 $28_190 205,71308/27/96 3,750 $29.250 109,68808/27/96 10,000 $1.88008/27/96 750 $1.88008/27/96 6,750 $1.88008/27/96 7,500 $1.88008/28/96 3,500 $30.250 105,87508/28/96 3,775 $30.380 114,58508/28/96 2,500 $29.300 72,50008/28/96 6,00C $30,000 180,00008/28/96 5,000 $29.350 146,90008/25/96 795 $30.500 24,24808/28/96 855 $30.500 29,07808/28/96 75 $30.380 2,27905/25/96 3,000 $30.380 91,14008/28/96 2,500 $29.250 73,12508/28/96 75 $4.31008/28/96 3,500 $1.88008/28/96 795 $4,31008/28/96 ' 5,003 81.31008/29/96 ' 3,775 $1.88005/28/96 6,000 $4.31005/28/96 855 $4.31008/28/96 5,000 $1.88008/30/96 1,000 $32.250 32,25008/30/90 1,600 $32,380 51,80808/30/96 3,400 $32.250 109,65008/30/96 1,600 $4.31008/30/90 3,400 84.31012/32/96 4,440 $5.63001/28/97 8,350 $1 880

- 106 -

01/28/97 2,500 51.880

01/28/97 5,000 $1.310

01/28/97 s 400 $4.310Totals: 196,000 $3,498,109 175,670 Percent of shares 5F.717777y owned sold: 90%

Pedevillano 03/11/96 10,000 $ 6.875 $ 68,750

03/11/96 10,000 51.310

03/14/96 10,000 $ 7.440 74,400

03/14/96 10,000 $1.313

03/19/96 7,700 $ 8.250 57,750

03/19/96 7,000 $1.310

05/28/96 5,000 $21.250 116,250

05/28/96 5,000 621.750 108,750

05/28/96 10,000 51.310

08/05/96 3,000 $24_125 72,375

06/05/96 2,000 $24_125 48,250

06/05/96 2,000 61.875

06/05/96 3,000 51.310

08/01/96 6,000 61.880

08/01/96 12,500 51.310

08/01/36 14,150 61.860

08/27/96 500 528.190 14,095

08/27/96 6,750 $28.130 189,678

08427/96 3,250 529.440 95,680

08/27/96 500 529.440 14,720

08/27/96 10,000 528.000 280,000

08/27/96 3,250 $28.190 91,618

08/27/96 503 $4.310

08/27/96 10,000 $1.800

08/27/96 500 $1.880

08/27/96 3,250 51.860

05/27/96 6,500 $1.880

09/27/96 6,750 61.880

08/27/96 3,750 51.880

08/28/96 2,000 $30.000 60,000

08/29/96 2,500 $29.000 72,500

08/28/96 2,500 $29.253 73,125

08/28/96 5,000 $29.380 146,900

08/23/96 2000, $4.310

08/28/96 10,000 $4.310

09/05/96 5,000 $1.830

09/09/96 5,000 $32.500 162,500

12/02/96 $ 4,440 $5.633Tota15: 93,250 51,747,540 127,340 Percent of shares actually owned sold: 643.:

TOTALS: 1 070 L 00 7521,015,907 924,992

111. Defendants' massive insider selling during the Class

Period is summarized below:

% of

Shares Holdings TotalDefendants. Sold Sold Droceds

Angelo 248,982 74% 53,904,930Joseph 113,000 69,' $2,797,932O'Connell 196,000 90%. $3,498,189Pedevillano 83,250 64% $1,747,540Hi ggins 106,749 93% $2,843,338Blair 83,500 62- $1,869,965King 50,000 76%. $1,588,600Ooldman 171,126 46=6' $2,593,433McNeff 7,500 100% $ 166,980

Totals: 1,070,007 70% $21,025,907

- 107 -

FIRST CLAIM FOR RELIEF

For Violation Of §10(b) Of TheExchange Act And Rule 10b-5 Against All Defendants

112, Plaintiffs incorporate V11-111 by reference.

113. Each of the defendants: (a) knew the material, adverse,

non-public information about SystomSoft's financial results and

then-existing business conditions, which was not disclosed; and

(b) participated in drafting, reviewing, and/or approving the

misleading statements, releases, reports, and other public

representations of and about SystemSoft.

114. During the Class Period, Defendants disseminated or

apnroved the false statements specified above, which they knew were

misleading in that they contained misrepresentations and failed to

disclose material facts necessary in order to make the statements

made, in light of the circumstances under which they were made, not

misleading.

115. Defendants violated §10(b) of the Exchange Act and Rule

10b-5 in that they:

(a) Employed devices, schemes, and artifices to defraud;

(b) Made untrue statements of material facts or omitted

to state material facts necessary in order to make statements made,

in light of the circumstances under which they were made, not

misleading; or

(c) Engaged in acts, practices, and a course of business

that operated as a fraud or deceit upon plaintiffs and others

similarly situated in connection with their purchases of SystemSoft

common stock during the Class Period.

- 108 -

116. The undisclosed adverse information concealed by

Defendants during the Class Period is the type of information

which, because of SEC regulations, regulations of the national

stock exchanges and customary business practice, is expected by

investors and securities analysts to be disclosed and is known by

corporate officials and their legal and financial advisors to be

the type of information which is expected to he and must be

disclosed. For example:

(a) Under Item 303 of Regulation S-K, promulgated by the

SEC under the Exchange Act, there is a duty to disclose in periodic

reports filed with the SEC "known trends or any known demands,

commitments, events or uncertainties" that are reasonably likely to

have a material impact on a company's sales revenues, income or

liquidity, or cause previously reported financial information not

to be indicative of future operating results. 17 C.F.R.

§229.303(a)(1)-(3) and Instruction 3. In addition to the periodic

reports required under the Exchange Act, management of a public

company has a duty promptly "to make full and prompt announcements

of material facts regarding the company's financial condition."

SEC Release No. 34-8995, 3 Fed. Sec. L. Rep. (CCH) ly,23,120A, at

17,095, 17 C.F.R. §241.8995 (10/15/70). The SEC has repeatedly

stated that the anti-fraud provisions of the federal securities

laws, which are intended to ensure that the investing public is

provided with "complete and accurate information about companies

whose securities are publicly traded," apply to all public state-

ments by persons speaking on behalf of publicly traded companies

"that can reasonably be expected to reach investors and the trading

markets, whoever the intended primary audience." SEC Release No.

- 109 -

33-6504, 3 Fed. Sec. L. Rep. (CCH) ¶23,120B, at 17,096, 17 C.F.R.

S241.20560 (1/13/84). The SEC has emphasized that "[i]nvestors

have legitimate expectations that public companies are making, and

will continue to make, prompt disclosure of significant corporate

developments." Sharon Steel Corp., SEC Release No. 18271,

[1981-1982 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶83,049, at

84,618 (11/19/81); and

(b) Schedule D of the National Association of Securities

Dealers ("NASD") Manual, which governs companies whose securities

are included in the NASDAQ requires a NASDAQ company to "make

prompt disclosure to the public through the press of any material

information that may affect the value of its securities or influ-

ence investors' decisions." NASD Manual, Schedule D, Part II,

§1(c) (13) [¶1803(c) (13)j.

117. Plaintiffs and the Class have suffered damages in that,

in reliance on the integrity of the market, they paid artificially

inflated prices for SystemSoft stock. Plaintiffs and the Class

would not have purchased SystemSoft stock at the prices they paid,

or at all, if they had been aware that the market prices had been

artificially and falsely inflated by Defendants' misleading

statements.

SECOND CLAIM FOR RELIEF

For Violation Of 520(a) Of The Exchange ActAgainst Defendants Angelo and SystemSoft

118. Plaintiffs incorporate ¶¶1-117 by reference.

119. Defendant Angelo acted as a controlling person of

SystemSoft within the meaning of S20(a) of the Exchange Act. By

reason of his position as a director and/or officer of SystemSoft

- 110 -

he had the power and authority to cause SystemSoft to engage in the

wrongful conduct complained of herein. SystemSoft controlled each

of the Individual Defendants and all of its employees.

120. By reason of such wrongful conduct, SystemSoft and Angelo

are liable pursuant to 20(a) of the Exchange Act. As a direct and

proximate result of these defendants' wrongful conduct, plaintiffs

and the other members of the Class suffered damages in connection

with their purchases of SystemSoft common stock during the Class

Period.

CLASS ACTION ALLEGATIONS

121. Plaintiffs bring this action as a class action pursuant

to Federal Rule of Civil Procedure 23(a) and (b)(3) on behalf of

all persons who purchased SystemSoft stock (the "Class") on the

open market during the Class Period. Excluded from the Class are

the Defendants herein, members of their immediate families, any

entity in which a Defendant has a controlling interest, and the

legal representatives, heirs, successors-in-interest, or assigns of

any excluded party.

122. The members of the Class are so numerous that joinder of

all members is impracticable. The disposition of their claims in

a class action will provide substantial benefits to the parties and

the Court. During the Class Period, SystemSoft had more than 22

million shares of stock outstanding, owned by hundreds of

shareholders.

123. There is a well-defined commonality of interest in the

questions of law and fact involved in this case. The questions of

law and fact common to the members of the Class which predominate

- 111 -

over questions which may affect individual Class members include

the following:

(a) Whether the federal securities laws were violated by

Defendants;

(b) Whether Defendants omitted and/or misrepresented

material facts;

(c) Whether Defendants' statements omitted material

facts necessary to make the statements made, in light of the

circumstances under which they were made, not misleading;

(d) Whether Defendants knew or had reasonable grounds to

believe that their statements were false and misleading;

(e) Whether the price of SystemSoft stock was

artificially inflated during the Class Period; and

(f) The extent of damage sustained by Class members and

the appropriate measure of damages.

124. Plaintiffs' claims are typical of those of the Class

because plaintiffs and the Class sustained damages from Defendants'

wrongful conduct.

125. Plaintiffs will adequately protect the interests of the

Class and have retained counsel who are experienced in class action

securities litigation. Plaintiffs have no interests which conflict

with those of the Class.

126. A class action is superior to other available methods for

the fair and efficient adjudication of this controversy.

127. The prosecution of separate actions by individual Class

members would create a risk of inconsistent and varying

adjudications.

- 112 -

BASIS OF ALLEGATIONS

128. Because the PSLRA, §21D(c) of the Exchange Act [15 U.S.C.

§78u-4(c)], requires complaints to be pleaded in conformance with

Federal Rule of Civil Procedure 11, plaintiffs have alleged the

foregoing based upon the investigation of their counsel, which

included a review of SystemSoft's SEC filings, securities analysts'

reports and advisories about the Company, press releases issued by

the Company, media reports about the Company, private investi-

gations and discussions with former employees and consultants, and,

pursuant to Rule 11(b)(3), believe that after reasonable

opportunity for discovery, substantial evidentiary support will

likely exist for the allegations set forth at Ilf1 26-33, 53, 61, 64,

78, 86, 88, 90-91, 93, 95-96, 100 and 102-108.

PRAYER FOR RELIEF

WHEREFORE, plaintiffs pray for judgment as follows:

1. Declaring this action to be a proper class action

pursuant to Rule 23(a) and (b)(3) of the Federal Rules of Civil

Procedure on behalf of the Class defined herein;

2. Awarding plaintiffs and the members of the Class compen-

satory damages, including rescissory damages, where applicable;

3. Awarding plaintiffs and the members of the Class

pre-judgment and post-judgment interest, as well as reasonable

attorneys' fees, expert witness fees, and other costs;

4. Awarding extraordinary, equitable, and/or injunctive

relief as permitted by law, equity, and federal statutory provi-

sions sued hereunder, including rescission, the imposition of a

constructive trust upon the proceeds of the Individual Defendants'

- 113 -

insider trading, pursuant to Rules 64, 65, and any appropriate

state law remedies; and

5. Awarding such other relief as this Court may deem just

and proper.

JURY DEMAND

Plaintiffs demand a trial by jury.

DATED: Pelimmulaiy 2, 1998MOULTON & CANS, LLPSTEPHEN MOULTON, BBO#358480NANCY FREEMAN CANS, BBO#184540

4r:CY FREEMAN CANS

125 Summer Street, Sixth FloorBoston, MA 02110Telephone: 617/261-4600

BARRACK, RODOS & BACINEDAVID L. KELSTON, BBO#267310

er''t 'WILT 4rr,.._ (a...A])

DAVID L. KEL TON

90 Canal Street, Fifth FloorBoston, MA 02114Telephone: 617/367-1040

- and -LEONARD BARRACKDANIEL E. BACINE3300 Two Commerce Square2001 Market StreetPhiladelphia, PA 19103Telephone: 215/963-0600

MILBERG WEISS BERSHADHYNES & LERACH LLP

WILLIAM S. LERACHALAN SCHULMAN600 West Broadway, Suite 1800San Diego, CA 92101Telephone: 619/231-1058

- 114 -

LAW OFFICES OF CHRISTOPHER E.GILDEA

CHRISTOPHER E. GILDEA14322 Powderhorn RoadFort Wayne, IN 46804Telephone: 219/672-9405

LAW OFFICES OF ALFRED G.YATES, J.

ALFRED G. YATES, JR.519 Allegheny building429 Forbes AvenuePittsburgh, PA 15219Telephone: 412/391-5164

SCHIFFRIN CRAIG &BARROWAY, LLP

RICHARD S. SCHIFFRINANDREW L. BARROWAYThree Bala Plaza EastSuite 400Bala Cynwyd, PA 19004Telephone: 610/667-7706

LAW OFFICES OF DANIEL H.KELLEHER

DANIEL H. KELLEHER50 Congress StreetBoston, MA 02108Telephone: 617/227-0611

Attorneys for Plaintiffs

COMPLNTS\SYSTMSFT CPT

- 115 -

Documents

Gorman, et al. v. SystemSoft Corporation, et al. 98-CV ...securities.stanford.edu/.../199832_f01c_98CV10367.pdf · - 4 V,r1{.= • - •• - - - UNITED STATES DISTRICT COURT ir'c,41,