4 Second Consolidated Amended Class Action Complaint 01/25/2002

UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF MISSOURI

SOUTHERN DIVISION

IN RE DT INDUSTRIES, INC. SECURITIES LITIGATION

Civil Action No. 00-CV-3369-S-4-ECF

JURY TRIAL DEMANDED

SECOND CONSOLIDATED AMENDED CLASS ACTION COMPLAINT

Plaintiffs, individually and on behalf of all other persons similarly situated, by their

undersigned attorneys, allege upon personal knowledge as to themselves and their own acts, and upon

information and belief as to all other matters, based upon, inter alia, the investigation, as detailed in

paragraph 16 below, made by and through their attorneys, the following:

I. NATURE OF THE ACTION

1. Plaintiffs bring this action as a class action on behalf of all persons who purchased the

common stock of DT Industries (“DT” or the “Company”) on the open market during the period

September 29, 1997 through and including August 23, 2000 (the “Class Period”), to recover damages

caused by the Defendants’ violations of the federal securities laws.

2. During the Class Period, Defendants engaged in a common course of conduct that

operated as a fraud on the integrity of the market for DT common stock by intentionally and/or

recklessly issuing quarterly and yearly financial statements which materially overstated the Company’s

assets and revenue and caused its reported earnings to be artificially inflated. This fraud was achieved

by materially overstating inventory at two of its wholly-owned subsidiaries Kalish, Inc. (“Kalish”) and

Sencorp Systems, Inc. (“Sencorp”) and by prematurely or improperly recognizing revenue at

Sencorp. The Company’s fraudulent accounting practices, particularly with respect to inventory and

revenue recognition, violated Generally Accepted Accounting Principles (“GAAP”), as well as the

Company’s own stated accounting policies.

Case 6:00-cv-03369-GAF Document 108 Filed 01/25/2002 Page 1 of 62

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3. In particular, according to a former Controller and a former Administrative

Director/Marketing Manager for Sencorp, the CEO of DT controlled and manipulated revenue and

earnings at Sencorp by directing corporate management at Sencorp to: (i) take Sencorp shipments

that were scheduled for the first quarter of 1999 and book them as revenue in 1998 as if they had

been shipped that year; and (ii) consider machines that were only partially completed, to be completed

to a larger extent, thereby allowing recognition of a greater amount of revenue under the percentage

of completion method.

4. Moreover, according to a former sales engineer/extrusion manger at Sencorp and a

former manager of information technology at Sencorp, inappropriate revenue recognition took place

at Sencorp because Sencorp did not keep reserves for troubleshooting and correction of problems

that surfaced when a new system was installed in a customers’ plant. Instead, Sencorp would simply

give the customer a discount when it failed to meet specifications or when it provided defective

products.

5. In addition, according to a former executive administrative assistant at Sencorp, the

President of Sencorp would knowingly and fraudulently adjust upward the actual financial numbers

on the Monthly Operating reports and then send these reports to the defendants at DT headquarters.

The President would reprimand and threaten any employee who questioned the fraudulent numbers he

was submitting.

6. The reason for defendants intentional and/or reckless acts was simple. Because of the

tremendous pressure on companies to meet Wall Street expectations, an environment was created at

DT where the top priority was to meet Wall Street’s consensus estimates at any and all costs.

7. Through this inventory and revenue manipulation highlighted above and detailed

herein, Defendants were able to sufficiently “manage” the Company’s earnings, albeit through larger


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and larger fabrications as the Class Period wore on. In this regard, Defendants were able to

consistently satisfy Wall Street expectations before the Company’s independent auditors,

PricewaterhouseCoopers (“PWC”), pulled the plug on the scheme.

8. On August 23, 2000, DT shocked the market by revealing that PWC had requested

additional time in order to continue its investigation into an overstatement of certain asset accounts at

one of its subsidiaries and the impact of the discrepancies on DT’s financial results. The Company

further announced that the “discrepancies” could materially impact DT’s previously reported earnings

for fiscal years ended 1997, 1998 and 1999, and for each of the fiscal quarters during those years as

well as the first three quarters of fiscal year 2000.

9. As a result, the Company announced that (i) its previously-reported fiscal 1997, 1998

and 1999 financial statements should not be relied upon; (ii) the senior financial officer of Kalish, had

been placed on administrative leave; and (iii) Defendant Bruce P. Erdel, the Senior Vice President of

Finance and Administration of DT had resigned.

10. On August 23, 2000, NASDAQ immediately halted trading of DT until the Company

provided NASDAQ with additional information. At the time of the suspension, DT stock last traded

at $9.875 per share.

11. Ultimately, the Company admitted the falsity of its previously issued financials by

restating its financial results for almost a full four-year period. As reflected in this restatement, the

Company had materially overstated certain of its assets, including most significantly, inventory, as

well as materially overstating its net income and earnings per share throughout the Class Period.

12. DT issued restated financial results for fiscal years ended 1997, 1998 and 1999, and

the first, second and third quarters of fiscal year 2000. It is apparent that what started out as a

simple, but nonetheless fraudulent, “massaging” of results, turned into a massive fraud as evidenced


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by the increasing size of the restatement over the Class Period. In this regard, Defendants overstated

earnings per share by 6.3% in fiscal 1997, 12.5% in fiscal 1998, 200% in fiscal 1999 and by 159.4%

for the first nine months of 2000.

13. Rather than meeting or exceeding analyst expectations throughout the Class Period,

and thus, appearing to be a consistent performer, without the fraudulent and/or reckless accounting

practices which violated both GAAP and the Company’s publicly stated accounting policies, DT

would have missed Wall Street’s expectations by a material amount in almost every reporting

period during the Class Period.

14. Upon the resumption of trading three months later on November 22, 2000, DT’s

common stock opened at $3.50 per share, a $6.37 per share difference from the Company’s common

stock price when its trading was halted, representing a drop of almost 65%. The Company’s common

stock price has remained below $4.00 per share since November 2000.

15. Plaintiffs and the other members of the Class have suffered tremendous damages as a

result of defendants’ conduct.

II. PLAINTIFFS’ INVESTIGATION

16. The allegations set forth herein are based on a thorough investigation conducted by

and through Plaintiffs’ attorneys of all reasonable available sources of information, including, without

limitation, the following:

a. DT’s filings with the Securities and Exchange Committee (“SEC”), including,

but not limited to, the Company’s Annual Reports on Form 10-K for fiscal years 1997, 1998, 1999;

the Company’s Quarterly Reports on Form 10-Q filed during 1997, 1998, 1999; and the first, second

and third quarters of 2000, and any amendments thereto;


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b. Press releases and other publicly disseminated statements made by the

Company and/or the Individual Defendants;

c. Reports, articles, and discussions concerning the Company and the subject

matter of this Complaint contained in the print and electronic media and computer data bases;

d. Reports of securities analysts and investors’ advisory services concerning DT

and its subsidiaries and divisions; and

e. Information provided during interviews and consultations with numerous

confidential witnesses, including former employees of DT, Sencorp and/or Kalish, who are

knowledgeable about the Company’s business practices and reporting structure, and about the

industry and markets in which the Company operated during the Class Period.

17. Except as alleged in this Complaint, the underlying information relating to Defendants’

misconduct and the exact particulars thereof, are not available to Plaintiffs and the public as they lie

exclusively within the possession and control of Defendants and insiders of DT, Sencorp and Kalish,

thereby preventing Plaintiffs from further detailing Defendants’ misconduct at this time.


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III. JURISDICTION AND VENUE

18. The claims alleged herein arise under Sections 10(b) and 20(a) of the Securities

Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. §§ 78j(b) and 78t(a), and Rule 10b-5, 17

C.F.R. § 240.10b-5 promulgated thereunder by the SEC.

19. This Court has jurisdiction over the subject matter of this action pursuant to Section

27 of the Exchange Act, 15 U.S.C. § 78aa and 28 U.S.C. § 1331.

20. Venue is proper in this Judicial District pursuant to Section 27 of the Exchange Act

and 28 U.S.C. §1391(b). Many of the acts and transactions constituting the violations of law alleged

herein, including the preparation and dissemination to the investing public of false and misleading

information, occurred in substantial part in this Judicial District. DT’s corporate headquarters is

located in this District.

21. In connection with the acts, transactions and conduct alleged herein, Defendants,

directly and indirectly, used the means and instrumentalities of interstate commerce, including the

United States mails, interstate telephone communications and the facilities of the national securities

exchanges.

IV. THE PARTIES

22. Lead Plaintiff Watson Investment Partners purchased shares of DT common stock as

set forth in the previously filed Exhibit A to the Affidavit of Stuart L. Berman In Support of Motion

of Watson Investment Partners To Consolidate Actions, To Be Appointed Lead Plaintiff And For

Approval Of The Lead Plaintiff’s Selection of Lead Counsel And Liaison Counsel. By order of the


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Court, dated January 16, 2001, Plaintiff Watson Investment Partners (“Watson”) was appointed Lead

Plaintiff in this action.

23. Numerous additional plaintiffs, including Richard C. Bergman, Bill Bishop, and Mary

C. Gilles purchased DT common stock in the open market during the Class Period and were damaged

thereby. These plaintiffs have either filed their own complaint against certain defendants named

herein, have joined as movants in Watson’s Lead Plaintiff Motion, and/or are joining in the filing of

the instant complaint. In each such instance, these plaintiffs have each signed appropriate

certifications under the Private Securities Litigation Reform Act of 1995, which state their

willingness, if needed, to serve as Class representatives in this Action. The certifications of these

additional plaintiffs have been previously filed of record with the Court or are being attached hereto

as Exhibit A.

24. Defendant DT Industries is incorporated in the state of Delaware and maintains its

principal place of business at 1949 East Sunshine, Suite 2-300, in Springfield, Missouri. As of April

28, 2000, DT had approximately 10,107,274 shares of common stock outstanding. DT’s common

stock was actively traded on the NASDAQ National Market System under the ticker symbol “DTI”

during the Class Period. According to its SEC filings, the Company is a leading designer,

manufacturer and integrator of automated production equipment and systems used to manufacture,

assemble, test or package industrial and consumer products. During the Class Period, DT operated

under a fiscal year-end accounting period ending in the last week of June.

25. Defendant Kalish Inc. (“Kalish”) is a wholly-owned subsidiary of DT, incorporated in

Quebec, Canada, and based in Montreal, Canada. According to DT’s SEC filings, Kalish

manufactures unscrambling, cottoning, capping and labeling equipment, and acts as an agent for sales


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of electronic tablet-filling, liquid-filling, and tube-filling equipment, primarily serving the

pharmaceutical, cosmetics and food industries. DT acquired Kalish on or about August 29, 1995.

26. Defendant Sencorp Systems, Inc. (“Sencorp) is also a wholly-owned subsidiary of DT,

incorporated in Delaware, and based in Hyannis, Massachusetts. According to DT’s SEC filings,

Sencorp designs and manufactures plastic processing and packaging equipment, systems and related

parts, including roll-fed thermoformers, blister-packaging equipment and extruders for foam. DT

acquired Sencorp in August 1993.

27. Defendant Stephen J. Gore (“Gore”) was at all relevant times DT’s President and

Chief Executive Officer, as well as a member of its Board of Directors. Gore resigned as President

and Chief Executive Officer of DT on November 3, 2000. As alleged herein, Gore signed each of the

Company’s materially false and misleading annual reports filed on Forms 10-K for fiscal years 1997,

1998 and 1999.

28. Defendant Bruce P. Erdel (“Erdel”) was at all relevant times DT’s Senior Vice

President of Finance and Administration, until resigning from his position on or about August 23,

2000. As alleged herein, Erdel signed each of the Company’s materially false and misleading annual

reports filed on Form 10-K for fiscal years 1997, 1998 and 1999, as well as the materially false and

misleading quarterly reports filed on Forms 10-Q during those fiscal years and the first three quarterly

reports of fiscal year 2000.

29. Defendant Graham L. Lewis (“Lewis”) was at all relevant times the President of DT’s

Packaging Machinery Group and a Director of DT until August 25, 2000, when DT placed Lewis on

administrative leave. DT terminated Lewis’s employment with the Company on October 5, 2000 and

sought his immediate resignation from the Board. Prior to the acquisition of Kalish by DT, Lewis

was Kalish’s president and controlling shareholder. As alleged herein, Lewis signed the Company’s


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materially false and misleading annual reports filed on Forms 10-K for fiscal years ended 1997, 1998

and 1999.

30. Defendant Louis Pallay (“Pallay”) was at all relevant times the President of Kalish,

until August 25, 2000, when the Company placed Pallay on administrative leave. DT subsequently

terminated Pallay’s employment on October 5, 2000.

31. Defendant Sam Patrai (“Patrai”) was President of Sencorp during the Class Period and

was directly involved in the fraudulent reporting of Sencorp’s revenues and inventory.

32. Defendants Gore, Erdel, Lewis, Pallay and Patrai are sometimes collectively referred

to herein as the “Individual Defendants.”

33. In addition to specific allegations of actual knowledge or reckless disregard further

detailed herein, by reason of their positions with the Company, the Individual Defendants had access

to internal documents of the Company and its subsidiaries, reports and other information, including

the adverse non-public information concerning the Company’s true financial condition and future

prospects, and attended management and/or board of directors meetings. As a result of the

foregoing, they were responsible for the truthfulness and accuracy of the Company’s public reports

and releases described herein.

34. The Individual Defendants, as officers and directors of a publicly-held company or its

subsidiaries, had a duty to promptly disseminate truthful and accurate information with respect to DT,

including its subsidiaries or divisions, and DT’s business, and to promptly correct any public

statements issued by or on behalf of the Company which had become false or misleading.

35. Each of the defendants knew or recklessly disregarded that the misleading statements

and omissions complained of herein would adversely affect the integrity of the market for the

Company's common stock and would cause the price of the Company’s common stock to become


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artificially inflated. Each of the defendants acted knowingly or in such a reckless manner as to

constitute a fraud and deceit upon plaintiffs and the other members of the Class.

36. Defendants are each liable as a direct participant in the wrongs complained of herein.

V. BACKGROUND

Business Description

37. DT is an engineering-driven designer, manufacturer and integrator of automated

production equipment and systems used to manufacture, test or package a variety of industrial and

consumer products. The Company is the largest manufacturer of integrated assembly and test

systems for discrete parts, as well as integrated tablet processing packaging systems in North

America.

38. The Company operates in two business segments, Special Machines and Components.

The Special Machines segment consists of two core business groups: DT Automation and DT

Packaging, where the fraud alleged herein took place during the Class Period.

39. As is stated in the Company’s 1997 Form 10-K filed on September 29, 1997 (the

“1997 10-K”):

The DT Packaging group designs and builds proprietary machines and integrated systems which are marketed under individual brand names and manufactured for specific industrial applications using designs owned or licensed by the Company. Although these machines are generally cataloged as specific models, they are usually modified for specific customer requirements and often combined with other machines into integrated systems. Many customers also requests additional accessories and features which typically generate higher revenues and enhanced profit opportunities.

40. As a result, the business of the DT Packing Group, which includes Kalish and Sencorp,

largely involves the manufacturing and sale of customized machines, which have limited application

for anyone other than the customer. Thus, any cancellation of orders or production of excess

customized machines, would necessarily result in inventory which would be obsolete if it is not sold.


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41. In this regard, Dean Hatmaker (“Hatmaker”), the former controller at Sencorp,

advised that Sencorp’s three largest product lines consist of Thermoformers, Blister Packs and

Extrusion Lines. Hatmaker estimated that Sencorp would typically sell between 3 and 4

Thermoformers (at prices in excess of $250,000 per machine), 10 Blister Packs and 3 to 5 Extrusion

Lines per year (at prices in excess of $1 million per line). Hatmaker, as controller, was privy to the

financial and business records at Sencorp, and therefore, has the knowledge and information

concerning Sencorp’s product lines.

42. Hatmaker and other former employees of Sencorp, including a former cost accountant

with Sencorp (“cost accountant”) have confirmed to plaintiffs’ counsel that excess inventory was not

treated in accordance with GAAP or the Company’s publicly stated accounting policies as stated in

greater detail herein. Both Hatmaker and the cost accountant had access to this excess inventory

information from reviewing the financial and business records during the course of performing their

job duties in the financial departments at Sencorp.

DT’s Acquisition Strategy

43. DT was formed through a series of acquisitions in 1992. The specialized nature of

DT’s business, and thus, the Company’s financial health, depended heavily on its acquisition strategy.

Since its initial public offering in 1993, DT had entered into 14 acquisitions up until the beginning of

the Class Period. According to a Stephens Inc., May 2, 1997 analyst report, since its IPO, the

Company had derived 50% of its growth from acquisitions.

44. In the 1997 10-K, the Company acknowledged the importance of its acquisition

strategy as follows:

Acquisitions. The assembly, testing and packaging equipment markets are highly fragmented. Special machines, for example, are characterized by a number of industry niches in which few manufacturers compete. The Special Machines segment has established its presence in particular through acquisitions, and the Company intends to


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pursue additional acquisitions, or strategic alliances, with companies which are established technical and market leaders. . . . Additionally, the Company will continue to pursue acquisitions, or strategic alliances, with companies which provide significant potential for cross-selling among the various product lines and cost savings through more efficient utilization of manufacturing and engineering capacity.

Through acquisitions, product license arrangements and strategic alliances, the Company has increased and plans to continue to increase, its engineering capabilities and product offering.

45. DT’s aggressive acquisition strategy was necessary, in part, because DT depended

upon a very limited number of customers to generate a significant portion of its revenue. This high

concentration of revenue in the hands of few customers placed DT at great risk. Expansion through

acquisitions was one method of obtaining new customers and decreasing the risk.

46. DT’s acquisition strategy had a quantitative effect on DT’s bottom line. Specifically,

the acquisitions improved the Company’s operating condition by increasing DT’s reported net sales

and backlog.

47. A backlog represents an accumulation of unfilled orders. As such, a large backlog

signifies that revenue will be recognized in future periods for those orders. Thus, an increasing

backlog provides a sense of security for investors in that it is representative of the Company’s

potential future revenue.

48. DT’s growth in backlog through acquisitions was well-known by the market, and well-

praised by analysts. For example, according to a November 13, 1997, Morgan Stanley Dean Witter

report, in the 1997 second fiscal quarter DT reported:

another strong quarter . . . [with] . . . an increase of net income of 34% on a 40% increase in sales due mostly to acquisitions. In particular, the Special Machines segment, which includes the Automation and the Packaging Groups, posted a 43% increase in first quarter sales, to $103.7 million. Sales from two acquisitions composed $27.4 million, while only 5.3% or $3.8 million was due to core sales growth. Including backlog from acquisitions, the Company’s first quarter backlog was up 35% at $241 million from $179 million a year ago. Excluding acquisitions, the first quarter backlog was down $19 million or 11%.


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49. The Morgan Stanley report also noted that the Company’s backlog increase of $62

million over the first quarter of 1997 was “due entirely to acquisitions.”

50. As the Class Period began, however, the Company had slowed its acquisition pace

substantially. No longer would the Company be making between two and three acquisitions per year

as the public had come to expect. Simply put, according to a former Administrative Director and

Marketing Manager for Sencorp (“Administrative Director”), the Company was running out of money

to continue with this strategy.

51. As a result, it became necessary for DT to improve its internal results as external

acquisitions were no longer going to boost the bottom line. It is against this backdrop that

Defendants began fabricating the Company’s results in order to meet Wall Street expectations.

52. Initially, the Company was not far off from Wall Street expectations with its legitimate

results and thus, the manipulations of revenue and inventory, although fraudulent, were not nearly as

large as they would soon become. As Defendants increased the Company’s pattern of “borrowing”

sales from subsequent quarters, Defendants dug a deeper and deeper hole and DT’s true results fell

further and further behind Wall Street expectations. As a result, Defendants caused the Company to

commit ever increasing fabrications of revenue and overvaluations of inventory in violation of GAAP

and the Company’s own publicly stated accounting policies.

SCIENTER ALLEGATIONS

53. As alleged herein, Defendants acted with scienter in that they knew or recklessly

disregarded that the public documents and statements issued or disseminated in the name of the

Company were materially false and misleading; knew or recklessly disregarded that such statements


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or documents would be issued or disseminated to the investing public; and knowingly participated in

the issuance or dissemination of such statements or documents as primary violations of the Federal

securities laws.

54. SEC Regulation S-X requires that financial statements filed with the SEC conform

with GAAP. Financial statements filed with the SEC that are not prepared in conformity with GAAP

are presumed misleading. 17 C.F.R. § 210.401(a)(1); Accounting Series Release (“ASR”) 4, codified

at ASR 34.

55. Defendants filed financial statements during the Class Period that were materially

misleading, which defendants knew or recklessly disregarded were not in conformity with GAAP.

How Defendants Knew or Recklessly Disregarded the Evolving Fraud

56. As set forth herein, the Individual Defendants, by virtue of their receipt of information

reflecting the true facts regarding DT, Sencorp or Kalish and/or their control over these entities,

which made them privy to confidential proprietary information, participated in the fraudulent scheme

alleged herein.

57. In order to maintain tight control over its subsidiaries, including Kalish and Sencorp,

Defendants Gore and Erdel implemented strict reporting hierarchies among top officers of these

subsidiaries and required each subsidiary to generate and submit monthly financial statements and

reporting packages to DT headquarters. Defendants Pallay, Lewis and Patrai, and their predecessors

followed these reporting structures and kept their superiors, the remaining Individual Defendants,

constantly informed concerning the true status of operations at Kalish and Sencorp.

58. With respect to Sencorp, monthly reporting packages were assembled from

information prepared by Human Resources, Research & Development, Project Management and


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Operations. The information was then consolidated at Sencorp prior to being passed on to

Defendants Gore, Erdel and/or others at DT headquarters.

59. At all relevant times, these reports included not only financial results of Sencorp, but

also sufficient information concerning inventory and percentage of completion being recognized as

revenue to allow the executives at DT, including Defendants Gore and Erdel, to ascertain whether

there was a sufficient reporting basis for this information. This monthly reporting package also

included (i) detail on various products ordered from Sencorp and the deposit amounts necessary for

those particular contracts; (ii) various financial analyses, including budgeted and actual results; (iii) a

list of Sencorp’s top ten customers; and (iv) an “Obsolete Inventory Report.” Sencorp was also

required to include in its monthly reports a list of Sencorp shipments for the year which enabled DT,

Defendant Gore and Defendant Erdel to know what Sencorp had in the pipeline for future projects.

60. In addition to the monthly reports, Defendant Gore held tele-conference meetings

every quarter or he would have people fly to St. Louis to meet with him in person to report on

meeting consensus estimates. The people in attendance at these meetings were the presidents and the

financial personnel at all of DT’s subsidiaries and divisions.

61. With respect to the reporting structure, at the beginning of the Class Period, Anthony

Giovannone was President of Sencorp. His officers were Louis Giovannone, Vice President of

Operations and Bob Mozian, Vice President of Sales. In his role as Vice President of Operations,

Louis Giovannone was in charge of various project managers for Sencorp. Sencorp’s CFO was Ken

Van Cisen who reported directly to Defendant Gore.

62. According to Hatmaker and the Administrative Director, Defendant Gore was the

driving force behind the improper inventory and revenue recognition practices that took place during

the Class Period at Sencorp and Kalish because he controlled their projections for the year and


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consistently provided directives to Sencorp and Kalish to meet his earnings estimates. If Defendant

Gore received figures that did not match the expectations, he would require the subsidiaries to come

up with new numbers. Hatmaker and the Administrative Director because of their positions with

Sencorp reviewed internal corporate memos and documents and spoke, on a number of occasions,

directly with senior management at DT and Sencorp, and therefore, acquired the knowledge and

information described above.

63. The Administrative Director elaborated for plaintiffs’ counsel an example of how

Defendant Gore controlled revenue and earnings at Sencorp. Specifically, for the year ended June 30,

1998, Sencorp submitted to DT, financial results which did not live up to Defendant Gore’s

expectations. As a result, it was suggested that revenue figures be manipulated in two discrete ways:

(i) take Sencorp shipments that were scheduled for the first quarter of 1999 and book them as

revenue in 1998 as if they had been shipped that year; and (ii) consider machines that were only

partially completed, to be completed to a larger extent, thereby allowing recognition of a greater

amount of revenue under the percentage of completion method. The Administrative Director further

claimed that through Defendant Gore, DT actually advised Sencorp what it should take for

percentage of completion, thereby dictating when products were being moved and shipped.

64. Although this did not sit well with the individuals at Sencorp, they had little choice in

the matter as Defendant Gore ran DT, in the words of the Administrative Director, like a “dynasty.”

According to the Administrative Director, employees at Sencorp had realized that due to the fact that

it sells large ticket items, pushing later sales into an earlier reporting period virtually guaranteed that

Sencorp would miss numbers in the following quarter. As a result, they viewed Defendant Gore’s

solution as a temporary fix that would lead to bigger problems in the future. This is exactly what

happened as Sencorp fell well short of expectations in the First Quarter of Fiscal 1999.


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65. Complicating the problem at Sencorp in the 1999 Fiscal First Quarter, was the fact

that in July of 1998, DT began converting Sencorp’s operating system. Prior to July of 1998,

Sencorp had used a widely-known system known as “Visibility.” Now, under the direction of Gene

Haffley, DT’s Vice President of Operations, DT required Sencorp to change to a new operating

system known as “Manufact.” The conversion and implementation of the new system was a disaster.

66. According to a former project manager of Tandem Foam Extrusion Systems at

Sencorp during the Class Period (“project manager”), Haffley, along with Stan Burd, DT’s corporate

controller and other DT personnel headed up DT’s “Millenium” team in order to oversee the change

from the old operating system to Manufact. The project manager was intimately familiar with the

operating systems because use of the systems were integral to performing his job duties and

responsibilities.

67. According to the project manager, under the previous Visibility system, each part at

Sencorp (i.e. wrenches, nuts, screws) had a part number of approximately six to eight digits. Some

Sencorp employees had part numbers committed to memory. The inventory list was kept on a report

entitled “Bills and Materials” (otherwise known as a part list). The Bills and Materials report could

be inputted into Visibility. As inventory and parts were used, the change was reflected on the Bills

and Materials list. In this way, Sencorp employees could identify which parts were being used and

where those parts were located within Sencorp. Each part was routed by work orders to go to

different work centers. The work orders were driven by the completion times inputted into Visibility.

The end result was tied to accounting. Production specialists oversaw the process.

68. Under Manufact, the part numbers were converted from a six to eight digit part

number to a 16-digit part number and thus, could not be memorized. The old programming language

was obsolete and DT had to train people. When it came time to convert the old part numbers to the


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new 16 digit part numbers, the system crashed and could not convert the part numbers. As a result,

Sencorp became incapable of generating work orders. The project manager personally observed and

confirmed that, in spite of Louis Giovannone’s express warnings (which included “screaming”

sessions) to DT management about the lack of a parallel system , DT failed to run a parallel scenario

in case the system crashed.

69. DT also implemented the system in the face of express warnings from Manufact

personnel, the individuals installing the system, who informed DT that Sencorp was not prepared for

the change. Sencorp was the first DT subsidiary to implement the Manufact system.

70. According to the project manager, as predicted, the process was very difficult and

rendered Sencorp incapable of keeping track of its inventory or generating work orders. Between

July 1998 and December 1998, because the system could not generate work orders, project managers

were forced to rely on paper work orders and visit the various shops in order to ensure that

employees were completing projects on time. If the Manufact operating system had worked properly,

the completed machines would have been sent to the project managers directly.

71. The project manager further confirmed that from July 1998 through December 1,1998,

Sencorp employees did not post labor costs to any specific projects, which resulted in approximately

$2 million in unassigned labor. In addition, Hatmaker, through his access to the financial records of

Sencorp, corroborated the project manager’s assertions that approximately $2 to $3 million of labor

was unassigned between July-December 1998. Hatmaker further advised that Sencorp was incurring

significant overhead during this time period (manufacturing costs other than costs of materials and

direct labor). Simply put, Sencorp had no idea what the overhead rate was and since this is a

component of inventory, inaccurate overhead rates resulted in an inaccurate inventory valuation.


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72. Hatmaker confirmed that between August and December 1998, Sencorp failed to

generate any financial reports. In addition, Sencorp failed to generate an obsolete inventory report

from July 1, 1998 through, at the earliest, May of 2000. Obsolete inventory reports had previously

been part of the monthly reporting package that Sencorp sent to DT. According to Hatmaker,

Manufact lost Sencorp’s obsolescence information upon its implementation because it valued

Sencorp’s inventory as new. As a result, the failure to generate such material portions of the

monthly reporting package constituted a red flag to DT and Sencorp executives reviewing the

reports, such as Defendants Gore, Erdel and Patrai. Hatmaker confirmed that these reports were sent

to and reviewed by Defendants Gore, Erdel and Patrai.

73. According to the Administrative Director, many Sencorp employees complained about

Manufact’s inefficiency to Haffley at DT, who was overseeing the conversion process and who

reported directly to Defendant Gore. The Administrative Director confirmed through personal

observation and conversations with senior management that problems with the new system were

consistently brought to the attention of Haffley and Gore by, among others, Louis Giovannone, Vice-

President of Operations and Ken Van Cisen, Sencorp’s CFO. In fact, these individuals had frequent

screaming matches over the change in systems. According to the Administrative Director, anyone

who spoke out against Manufact found their days “were numbered.” This is evident by the fact that

both Louis Giovannone and Ken Van Cisen were terminated.

74. Defendant Sam Patrai joined Sencorp in September 1998, whereupon he technically

reported to Anthony Giovannone. However, virtually everyone who worked at Sencorp at that time

knew that Patrai only took orders from Defendant Gore. Only one month later, Anthony Giovannone

had been “promoted” to head up DT’s new Plastics Division and defendant Patrai became President

of Sencorp.


20

75. The computer fiasco resulted in Sencorp “losing their shirts” in the 1999 First Quarter.

However, Defendant Patrai, who would not blame the problems on the new system that DT had put

in place, found several scapegoats to take the fall for the lousy quarter. By December of 1998, Patrai

had fired Louis Giovannone, Sencorp’s Vice President of Operations and Ken Van Cisen, Sencorp’s

CFO. Patrai advised other employees at Sencorp that Giovannone was abusing the percentage of

completion method as he had purportedly booked an excessive amount of revenue on projects in June

of 1998, when they should have been shipped in July or August. As set forth above, the activities

which took place at the end of fiscal 1998, were done under the direction of Defendant Gore who had

insisted on Sencorp coming up with better numbers.

76. The project manager further advised that even though project managers were highly

skilled at estimating percentage of completions, these figures were not always used by Defendant

Patrai in preparing the reports sent to Defendants Gore, Erdel and/or others at DT headquarters. The

project manager provided the following examples: (1) a project manager would deem an extrusion

line 20% complete and suggest the booking of revenue of $200,000 on the $1 million machine,

however, Defendant Patrai would completely disregard the estimate and conclude on his own that the

machine was 50% complete and book $500,000 in revenue; (2) the project manager would still be

hounding the engineers to finish a machine on time, only to learn that the cost accountants had

booked all revenue on the machine as if it had been completed two months prior at the direction of

Sencorp management. As a result, Defendant Patrai was doing exactly what he had accused Louis

Giovannone and Van Cisen of doing -- manipulating figures using percentage of completion.

77. Defendant Patrai took great pains to separate Sencorp’s financial people, such as

CFOs, controllers and accountants, from Sencorp’s project managers. In this regard, Patrai would

meet with the project managers himself and advise the financial personal of the percentage of


21

completion on their projects. As a result, the number crunchers were unable to question the project

managers on the true percentage of completion of various machines being accounted for during the

Class Period and had to go with Patrai’s word.

78. According to a former executive administrative assistant at Sencorp (“executive

assistant”), Defendant Patrai would prepare Monthly Operating reports with information from Human

Resources, Research & Development, Project Management and Operations. The information was

then consolidated at Sencorp prior to being passed on to Defendants Gore, Erdel and/or others at DT

headquarters. In the course of preparing these reports, Defendant Patrai would adjust the actual

numbers to make Sencorp look good. The executive assistant was privy to this information because

the job duties of an executive assistant consisted of typing the Monthly Operational Reports for

Defendant Patrai and sending these reports to the defendants at DT headquarters. According to the

executive assistant, on at least one or two occasions, Patrai included in the reports, as work-in-

progress, projects that were known to be canceled or still “up in the air.” Such an example was

provided with respect to the Mexican Extrusion Order described below in connection with the

allegations of improper revenue recognition. The executive assistant reported that when Defendant

Patrai was questioned by employees at Sencorp about blatantly changing the figures on the Monthly

Operational Reports, Defendant Patrai would dismiss the inquiries and would tell the individual not to

question him.

79. Despite the fact that Defendant Patrai was manipulating the percentage of completion

figures prior to reporting the figures to headquarters, Defendants Gore and Erdel knew of or

recklessly disregarded the manipulation due to the fact that the reports did not include inventory

obsolescence reports. In addition, from the reports they received from Gene Haffley, DT’s Vice

President of Operations, regarding Sencorp employees’ unwillingness to use the new inventory


22

system, they knew or recklessly disregarded that Patrai’s numbers had no basis in reality. In addition,

Defendant Patrai, Defendant Gore and Gene Haffley were friends, who often socialized together on

Sencorp’s expense account.

80. In the Company’s Fourth Amended and Restated Credit Facilities Agreement, which

was signed by Defendant Erdel and made effective July 21, 1997, DT covenanted to provide financial

statements, comprised of information from each subsidiary, directly to the lenders on a quarterly and

annual basis. Credit Agreement, Section 13.13. During the Class Period, the Company agreed to a

4th Amendment to the Credit Agreement, effective September 24, 1999, under which DT covenanted

to submit monthly financial statements of such information directly to the lenders. Section 13.13.3.

By virtue of these requirements, Defendants were required to and did review the results of its

subsidiaries, including without limitation, Sencorp and Kalish, on a monthly basis and knew or

recklessly disregarded the fact that these entities were materially overstating their inventory during the

Class Period.

81. In addition to Sencorp’s inability to track inventory, and the knowledge of this fact by

Defendants Gore, Erdel and Patrai, under Patrai’s control, Sencorp also fabricated earnings during the

Class Period on several occasions using a variety of devices.

82. For example, a former Vice President at Sencorp (“Vice President”) advised that in

fiscal 1999, an order was taken from a Mexican Company known as Thermoenvase Expandables, for

an extrusion machine worth approximately one million dollars. No deposit was received. However,

the Vice President learned that the Mexican Company had decided to use a competitor, Gloucester

Engineering, and had canceled the order. The Vice President then advised defendant Patrai and

others including Paul Kofton, a controller at Sencorp, that the order had been canceled, but it was still

being carried on the books as revenue. According to the Vice President, although he was advised that


23

the problem would be taken care of, the order remained on the books for some time thereafter despite

the fact that Sencorp never even began work on the project. The order was also carried on the books

as backlog for Sencorp.

83. A former sales engineer and extrusion manger at Sencorp (“sales engineer”) and a

former manager of information technology at Sencorp (“IT manager”),who both had personal

knowledge of how inappropriate revenue recognition took place at Sencorp during the Class Period,

elaborated as follows:

a. Sencorp did not keep reserves for troubleshooting and correction of problems

that surfaced when the system was installed in the customers’ plants. Instead, Sencorp would simply

give the customer a discount when it failed to meet specifications or when it provided defective

products. For instance, a dye manufactured for Freeflow of Kentucky did not work and Sencorp did

not keep a reserve for this project which ultimately resulted in a full credit for the customer;

b. When Sencorp could not get the winders to work, Republic Plastics was

provided with a large discount. The winders remained at Sencorp for many months thereafter and a

receivable was kept on the books from Republic Plastics; and

c. An order from Belgium was canceled when the customer discovered that

Sencorp had not built the system with European specifications. Nevertheless, the order was kept on

Sencorp’s books to show a backlog of orders.

84. Sencorp has recently had to settle with Freeflow of Kentucky and Republic Plastics

and thus, a record of the credits extended and the settlements should still be in Sencorp’s accounts

receivable files. Likewise, the records for the canceled order from the Mexican Company being kept

as an open receivable for almost a year should also be in the accounts receivable files.


24

85. In more general terms, Hatmaker advised plaintiffs’ counsel that Sencorp had a

practice of recording orders and putting the orders into backlog before a deposit was received.

Hatmaker estimated that this happened between 20-25% of the time. If the customer did not pay or

refused acceptance, the backlog would have to be reversed. Other times, Sencorp would begin to

build an order with an inadequate deposit or no deposit. Hatmaker further advised plaintiffs’ counsel

that Sencorp had a practice of building more machines than it could sell and the useless machines

would just sit in inventory. Because the machines were custom-made, however, the extras were of no

value. Similarly, when a product design changed, the products which were already in inventory

would be considered obsolete, but Sencorp would not write them off. As a result, Sencorp’s

inventory continually grew throughout the Class Period, yet the reserve balance was always kept the

same at approximately $500,000 - 750,000. As reserves were to be established for inventory not used

within a year, Sencorp would typically move obsolete inventory around just to show some activity. It

would be issued out to a job for no reason and then received back into inventory.

86. As a result of the above allegations, each of the Individual Defendants had knowledge

of, directly participated in and/or recklessly disregarded the fraud that was taking place at Sencorp

with respect to inventory and revenue recognition throughout the Class Period.

Motive - Earnings Management

87. In addition to the allegations of actual knowledge and/or reckless disregard set forth in

the preceding section, all of the Defendants had motive and opportunity to commit the fraud alleged

herein. Whereas defendants Pallay, Lewis and Patrai were motivated to commit fraud to maintain

their jobs, as they were taking orders from their superiors, Defendants Gore and Erdel were trying to

satisfy the voracious appetite of Wall Street.


25

88. In the last several years, it has become commonplace that companies whose securities

are publicly traded are overly rewarded and unduly penalized for making or missing Wall Street's

earnings expectations. The tremendous pressure on companies to meet Wall Street expectations has

created an environment where "earnings management" has become a frequent means to achieve that

goal.

89. In a speech before the New York University Center for Law and Business on

September 28, 1998, Arthur Levitt, Chairman of the SEC, condemned what has become a widespread

practice, known as "earnings management":

This process [earnings management] has evolved over the years into what can best be characterized as a game among market participants. A game that, if not addressed soon, will have adverse consequences for America's financial reporting system. A game that runs counter to the very principles behind our market's strength and success.

Increasingly I have become concerned that the motivation to meet Wall Street earnings expectations may be overriding common sense business practices. Too many corporate managers, auditors, and analysts are participants in a game of nods and winks. In the zeal to satisfy consensus earnings estimates and project a smooth earnings path, wishful thinking may be winning the day over faithful representation.

As a result, I fear that we are witnessing an erosion in the quality of earnings, and therefore, the quality of financial reporting. Managing may be giving way to manipulation; integrity may be losing out to illusion.

* * *

If a company fails to provide meaningful disclosure to investors about where it has been, where it is and where it is going, a damaging pattern ensues. The bond between shareholders and the company is shaken; investors grow anxious; prices fluctuate for no discernible reasons; and the trust that is the bedrock of our capital markets is severely treated.

90. As set forth herein, Defendants had strong motive to manage DT’s earnings to create the

illusion that DT was meeting the declared expectations of Wall Street analysts during the Class Period. As

discussed above, through the overstatement of assets, and understatement of expenses, Defendants were able


26

to fraudulently report earnings per share that were materially overstated in order to meet or exceed the

analysts’ consensus throughout the Class Period.

91. Defendants engaged in these fraudulent practices in part because they knew that it was

important to meet Wall Street analysts' earnings expectations. The failure to meet such expectations would

have resulted in a drastic decline in stock price.

92. The following chart illustrates how the restatement resulted in a significant reduction in EPS in

all of the financial periods in the Class Period as follows:

Wall Street Reported EPS Restated Consensus EPS Per Wall Street EPS

FYE 1997 $ 2.41 $ 2.42 $2.23 1Q 1998 $ 0.53 $ 0.53 $0.47 2Q 1998 $ 0.65 $ 0.66 $0.59 3Q 1998 $ 0.68 $ 0.68 $0.60 FYE 1998 $ 2.56 $ 2.55 $2.10 1Q 1999 $ 0.39 $ 0.37 $0.31 2Q 1999 $ 0.11 $ 0.11 $0.06 3Q 1999 $ 0.05 $ 0.05 $0.01 FYE 1999 $ 0.64 $ 0.64 $(0.51) 1Q 2000 $(0.07) $(0.03) $(0.21) 2Q 2000 $ 0.03 $ 0.09 $(0.09) 3Q 2000 $ 0.22 $ 0.27 $0.11 93. With the exception of two reporting periods, the EPS originally reported by the

Company either exactly met or exceeded the Wall Street consensus. In fact, even in the two reporting

periods in which the Company’s originally reported results missed expectations, the Company

reported results which were essentially in line with expectations.

94. However, a comparison between the restated EPS figures and the Wall Street

consensus estimates, reveals that DT would have fallen significantly below Wall Street's projections in

every single reporting period described above .


27

95. The following chart illustrates how far below expectations, DT’s true results fell

throughout the Class Period:

Wall Street Restated % Difference in Consensus EPS EPS EPS vs. Wall Street

FYE 1997 $ 2.41 $ 2.23 7.46% 1Q 1998 $ 0.53 $ 0.47 11.32% 2Q 1998 $ 0.65 $ 0.59 9.23% 3Q 1998 $ 0.68 $ 0.60 11.76% FYE 1998 $ 2.56 $ 2.10 17.96% 1Q 1999 $ 0.39 $ 0.31 20.51% 2Q 1999 $ 0.11 $ 0.06 45.45% 3Q 1999 $ 0.05 $ 0.01 80.00% FYE 1999 $ 0.64 $(0.51) 179.68% 1Q 2000 $(0.07) $(0.21) 200.00% 2Q 2000 $ 0.03 $(0.09) 400.00% 3Q 2000 $ 0.22 $ 0.11 50.00% 96. This conscious decision to manipulate earnings, in ever increasing amounts, by

violating the Company's own stated accounting policies, as well as GAAP, serves in part, to

demonstrate defendants' scienter in committing the wrongs complained of herein.

VI. FALSE AND MISLEADING STATEMENTS

ISSUED DURING THE CLASS PERIOD

97. Unbeknownst to Class Members, between fiscal 1997 and the close of the Class

Period, Defendants continually overstated inventory at Kalish and Sencorp, and overstated revenue at

Sencorp, which resulted in artificially inflating DT’s consolidated income and reported earnings. As a

result of the Company’s fraudulent accounting practices, the following statements and financial results

issued by Defendants during the Class Period were all materially false and misleading when made.

A. The 1997 Financial Results

98. On September 29, 1997, the Company filed its 1997 10-K, which contained the

Company’s financial results for the fourth quarter and year ended June 29, 1997. The financial results


28

appearing in the 1997 10-K included the materially false and misleading results of Kalish and Sencorp.

The Company originally reported “primary” earnings per share of $2.39 for the 1997 year end. In

accordance with FASB Statement of Financial Accounting Standards No. 128 and as set forth in the

Notes to Financials section of the 1997 10-K, DT would have reported diluted EPS of $2.41 per

share based upon weighted average diluted shares outstanding of 11,022,080 for the year ended June

29, 1997. According to First Call Reports, Wall Street had been expecting $2.41 per share and

deemed the Company’s results to come in at $2.42 per share.

99. In Note 2 - “Summary of Significant Accounting Policies,” of the Company’s 1997

Form 10-K filed September 29, 1997 (the “1997 10-K”), DT’s revenue recognition policy is

described as follows:

The percentage of completion method of accounting is used by the Company’s Special Machines segment to recognize revenues and related costs. Under the percentage of completion method, revenues for customer contracts are measured based on the ratio of engineering and manufacturing labor hours incurred to date comparted to total estimated engineering and manufacturing labor hours or, for certain customer contracts, the ration of total costs incurred to date to total estimated costs. Any revisions in the estimated total costs or values of the contracts during the course of the work are reflected when the facts that require the revisions become known. . . . Costs and related expenses to manufacture the products are recorded as cost of sales when the related revenue is recognized. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined.

100. In the 1997 10-K, DT’s inventory valuation policy is described as follows:

Domestic Inventories are stated at the lower of cost, determined using the last-in,

first-out (LIFO) method, or market, with the exception of raw material inventories

and the material component of work in process inventories at certain subsidiaries

totaling approximately $16,030[,000] which are accounted for using the first-in, first-

out method (FIFO). For various tax and statutory reasons, inventories of the

Company’s foreign subsidiaries are stated at FIFO costs. The effects on financial


29

position and results from operations from applying the FIFO method for such material

inventories and inventories of foreign subsidiaries are immaterial. For other

inventories maintained on a LIFO basis, cost under the LIFO method approximates

the FIFO method. Inventories include the cost of materials, direct labor and

manufacturing overhead. Obsolete or unsalable inventories are reflected at their

estimated realizable values.

101. In addition, Defendants also represented in the 1997 10-K that:

The Financial Statements are complete and correct in all material respects, have been prepared in accordance with GAAP, and fairly reflect the financial condition, results of operations and cash flows of the Persons covered thereby as of the dates and for the periods stated therein.

102. In fact, as Defendants would admit at the end of the Class Period, the statements

regarding DT’s accounting policies for revenue recognition and inventory were materially false and

misleading. As set forth in great detail above, Sencorp and Kalish were recording obsolete inventory

at inflated values and Sencorp was taking advantage of the percentage of completion method for

recognizing revenue thereby artificially inflating the Company’s EPS throughout the Class Period.

103. As Defendants later acknowledged through the restatement, the Company’s financial

results contained in the Company’s 1997 10-K were materially false and misleading when issued.

104. In fact, GAAP requires the restatement of previously issued financial statements for

the correction of a material error in the financial statements of a prior period. "Errors in financial

statements result from mathematical mistakes, mistakes in the application of accounting principles, or

oversight or misuse of facts that existed at the time the financial statements were prepared." APB

No. 20. (Emphasis Added). As a result, the restatement itself is an admission that facts existed at the

time the financial statements were prepared that contradicted the facts utilized in preparing the

financial statements. As set forth above, Defendants knew and/or recklessly disregarded these facts.


30

105. Reflecting the overall importance of meeting estimates, in a report dated August 15,

1997, analysts Scott Alaniz (“Alaniz”) and Stuart Bogard (“Bogard”) of Stephens Inc. rated DT a

“strong buy” and stated that DT’s reported 1997 4Q EPS exceeded “both our and consensus

expectations.” In particular, the analysts opined:

The shares of DT Industries are undervalued, in our opinion. The Company achieved EPS growth of 60% in each of the last two years. While we are forecasting fully diluted EPS to conservatively grow 12% in FY98 to $2.71, this estimate does not include any future acquisitions.

B. The 1998 Financial Results

106. On November 12, 1997, DT filed with the SEC its unaudited quarterly report Form

10-Q for the quarter ended September 28, 1997 (The “1998 First Quarter 10-Q”). The 1998 First

Quarter 10-Q financial results incorporated the materially false and misleading results of Kalish and

Sencorp. The Company reported net income of $5.3 million after taking into account an

extraordinary loss of ($1.2 million). The Company also reported $0.53 per diluted share prior to

taking into account the extraordinary loss of ($0.09) per share.

107. As the investing public would learn at the end of the Class Period, the Company’s true

net income was $4.4 million after taking into account the extraordinary loss and its diluted EPS was

$0.47 per share without taking into account the extraordinary loss. With the extraordinary loss,

restated EPS would have been $0.38 per share.

108. Once again, confirming the obvious importance of hitting Wall Street expectations, on

November 7, 1997, Stephens Inc. noted that “DT Industries reported 1Q98 EPS in line with

consensus expectations.” As a result, Stephens Inc. reiterated its buy rating on DT because of

“[DT]’s earnings power and the prospects for acquisitions . . . .”


31

109. Similarly, in a report dated November 13, 1997, analyst J.E. McGinty of Credit Suisse

First Boston Corporation noted that “DT Industries’ fiscal first quarter 1998 earnings per share were

right in line with expectations at $0.53 versus $0.52 a year ago” and reiterated their “Buy” rating.

110. On November 21, 1997, Furman Selz announced that it initiated coverage of DT

Industries and added the stock to its “Recommended List.”

111. On February 10, 1998, DT filed with the SEC its unaudited quarterly report Form 10-

Q for the quarter ended December 28, 1997 (The “1998 Second Quarter 10-Q”). The financial

results appearing in the 1998 Second Quarter 10-Q incorporated the materially false and misleading

financial results of Kalish and Sencorp. The Company reported net income of $82 million and diluted

EPS of $0.66.

112. As the investing public would learn at the end of the Class Period, however, the

Company’s true net income was $73 million and its diluted EPS was $0.59 for the 1998 Second

Quarter. As a result, the reported figures were overstated by 12.32% and 11.86%, respectively.

113. In a report dated February 12, 1998, Stephens Inc. noted that “DT Industries’ 2Q98

results were essentially in line with our expectations.”

114. On May 12, 1998, DT filed with the SEC its unaudited quarterly report Form 10-Q for

the quarter ended March 29, 1998 (The “1998 Third Quarter10-Q”). The 1998 Third Quarter 10-Q

incorporated the materially false and misleading financial results of Kalish and other subsidiaries. The

Company reported net income of $7.7 million or $0.68 diluted EPS (which included $0.06 per share

before DT’s accounting for a non-recurring charge).

115. On May 11, 1998, Stephens, Inc. commented on DT’s results as follows: “DT

Industries reported 3Q98 EPS of $0.68, up 18% over last year and in line with our expectations.”


32

116. Similarly, on May 15, 1998, Furman Selz acknowledged that the Company’s third

quarter earnings had met the street’s consensus estimate, but fell below Furman Selz’ estimate of

$0.69 per share.


Company’s true net income was $6.6 million and its diluted EPS was $0.60 (which included $0.06 per

share before DT’s accounting for a non-recurring charge for the 1998 Third Quarter). Thus, the

originally reported figures were overstated by 16.66% and 13.33%, respectively.

118. On August 6, 1998, Defendants issued a press release announcing DT’s results for the

quarter and year ended June 28, 1998. In the August 6th Press Release, Defendant Gore described the

Company’s expectations for its earnings in fiscal year 1999 as follows:

[W]e expect significantly increased activity in the last two quarters of the 1999 fiscal

year, which should result in our achieving targeted earnings growth of 15 percent for

the second half of the year compared with the same period a year earlier. Currently,

we believe full-year diluted earnings per share will be about equivalent to fiscal 1998

before the extraordinary and non-recurring operating charges related to that year.

119. This statement was materially false and misleading at the time it was made as

Defendants knew that Sencorp’s revenue and inventory figures had been manipulated to achieve the

reported results and that the only way DT could achieve the projected results would be through

further manipulations.

120. On September 25, 1998, DT filed its annual report for the year ended June 28, 1998

on the Form 10-K with the SEC (“1998 10-K”). In addition to repeating the identical materially false

and misleading descriptions of the Company’s purported use of the percentage of completion method

of accounting and the manner in which DT purported to account for inventory, the 1998 10-K also


33

incorporated the materially false and misleading financial results of Kalish and Sencorp. As of June

28, 1998, the Company reported $49 million in inventory. For the year-ended June 28, 1998, the

Company reported net income of $29.7 million and $2.40 per diluted share, after taking into account

extraordinary losses. Without such extraordinary items, DT reported that it would have earned $30.9

million in net income and $2.49 per diluted share. Pursuant to Wall Street’s calculations, as

evidenced by First Call Reports, the Company had earned $2.55 per share, just $0.01 shy of

expectations.






122. The Company also reported in the MD&A section of the 1998 10-K that “foam

extrusion equipment sales have grown significantly, led by a strong international market.” As set

forth above, foam extrusion sales were up because Sencorp was manipulating its revenue recognition

method, thereby rendering this statement materially false and misleading.

123. Completely missing from the 1998 10-K was any meaningful disclosure regarding the

material fact that Sencorp’s operating system was being converted to a new system, despite the fact

that the change had already been underway for at least two or three months prior to the filing of this

document with the SEC.

124. As the investing public would learn at the end of the Class Period, the Company’s true

figures were as follows for fiscal year end 1998: net income - $25.7 million; and diluted EPS - $2.10.

As a result, reported income and EPS were overstated by 15.56% and 14.28%, respectively.


34

C. The 1999 Financial Results

125. On November 10, 1998, DT filed with the SEC its unaudited quarterly report on Form

10-Q for the quarter ended September 27, 1998 (The “1999 First Quarter 10-Q”). The 1999 First

Quarter 10-Q incorporated the materially false financial results of Kalish and Sencorp. The Company

reported net income of $3.8 million or $0.37 per diluted share.


Company’s true figures were as follows for the first quarter of fiscal 1999: net income - $3.1 million;

and diluted EPS - $0.31. In this quarter, Defendants had overstated DT’s income and EPS by 22.5%

and 19.35%, respectively.

127. On February 10, 1999 the Company filed with the SEC its unaudited quarterly report

on Form 10-Q for the second quarter of 1999 ended December 27, 1998 (The “1999 Second Quarter

10-Q”). The 1999 Second Quarter 10-Q incorporated the materially false and misleading financial

results at Kalish and Sencorp. The Company reported net income of $1.1 million or $0.11 per diluted

share.


Company’s true figures were as follows for the second quarter of fiscal 1999: net income - $0.6

million; and diluted EPS - $0.06. This was approximately half of what was publicly represented.

129. On May 7, 1999, DT filed with the SEC its unaudited quarterly report on Form 10-Q

reporting its financial results for the third quarter of 1999 ended March 28, 1999 (The “1999 Third

Quarter 10-Q”). The 1999 Third Quarter 10-Q incorporated the materially false and misleading

financial results of Kalish and Sencorp. The Company reported net income of $492,000 or $0.05 per

diluted share.



35

Company’s true figures were as follows for the third quarter of fiscal 1999: net income - $143,000;

and diluted EPS - $0.01.

131. According to a Stephens Inc. report dated May 7, 1999, one of the key developments

in the third quarter was the improved profitability at Sencorp. Analysts Alaniz and Barry McCarver

noted that the cost overruns at Sencorp in past quarters had a significant impact on DT. Since then,

DT replaced management and “the company has set record margins and improved other productivity

metrics such as on-time shipping.” Alaniz and McCarver upgraded their rating from “Neutral” to

“Buy.”

132. On September 27, 1999, the Company filed its annual report on the Form 10-K with

the SEC for the year ended June 28, 1999 (“1999 10-K”). In addition to the false and misleading

repetition of DT’s purported revenue recognition and inventory policies, the 1999 10-K incorporated

the materially false and misleading financial results of Kalish and Sencorp. As of June 27, 1999, the

Company reported a net loss of approximately ($1.8 million) or ($0.17) per diluted share.







Company’s true figures were as follows for fiscal year end 1999: net loss - ($5.1 million); and diluted

EPS - ($0.51).

135. In the Section entitled “Business Strategy,” under the subheading “Operational

Improvements,” Defendants include the following disclosure in the 1999 Form 10-K:


36

The Company is focused on improving operational performance through greater use of risk assessment techniques on custom build opportunities, higher quality and more detailed project proposals, a strengthening of the skill set in applications engineering and project management as well as an increased focus on working capital management. A “Best of Practices Methodology” has been initiated to address most of the performance objectives. Management and employees are being evaluated on the basis of the improvement of identified financial and operational benchmarks, both internally and against industry competitors.

136. This statement was materially false and misleading at the time it was made as

Defendants spoke directly towards operational performance without even mentioning the difficulty

that Sencorp was having with the conversion of its operating system to a new system. In fact,

Defendants never even disclosed in the 1999 Form 10-K that Sencorp was undertaking such an

endeavor.

137. The 1999 Form 10-K also reported that “Backlog for the Packaging segment increased

$3.4 million, or 9.6% to $38.1 million due primarily to an increase in the backlog of plastics

processing equipment.” In fact, as set forth above, the Packaging segment, which included Sencorp,

was counting canceled orders among its backlog.

138. The 1999 Form 10-K also advised that in November 1998, DT made an additional

payment to the sellers of Kalish as determined by formulae based on the earnings of Kalish in the

amount of $3 million. In addition to the allegations that these defendants had actual knowledge of the

fact that Kalish did not even have a system to determine costs associated with its sales, this additional

payment serves as motive with respect to defendants Kalish, Lewis and Pallay to commit fraud.

139. In a section entitled “Year 2000 Compliance,” the 1999 Form 10-K includes the

following disclosure:

The Company has established and is implementing a plan, primarily using internal resources, to assess the potential impact of the year 2000 on the Company’s systems and operations and to implement solutions to address the issue. The Company has completed the assessment and remediation phases of its year 2000 plan, including a combination of repair and replacement of affected systems. The Company is presently


37

developing contingency plans for various aspects of operations. For substantially all of the Company’s internal systems, this remediation was an incidental consequence of the ongoing implementation of a new integrated core business system. The testing phase is in process and should be completed by October 1, 1999. Critical systems have been tested to be compliant.

140. These statements were materially false and misleading when made for a variety of

reasons. First and foremost, even though the new system at Sencorp was being implemented for Y2K

purposes, the problems already being experienced had nothing to do with the change in years. As

described above, even if a reasonable person could somehow surmise that DT was talking about the

new system being implemented at Sencorp, the problems experienced already, could hardly be termed

“incidental.” As outlined by the numerous witnesses specifically identified herein, the problems were

monumental and ultimately contributed to Sencorp losing track of the true value of its inventory, the

very problem that necessitated the restatement.

D. The 2000 Financial Results

141. On November 11, 1999, DT filed with the SEC its unaudited quarterly report on Form 10-Q

for the quarter ended September 26, 1999 (The “2000 First Quarter 10-Q”). The 2000 First Quarter

10-Q incorporated the materially false and misleading financial results of Kalish and Sencorp. The

Company reported a net loss of ($338,000) or ($0.03) per diluted share.

142. As the investing public would learn at the end of the Class Period, however, the Company

actually incurred a net loss of ($2.1 million) and had diluted EPS of ($0.21). Thus, the originally

reported figures of income and EPS were overstated by a staggering 521% and 600% respectively.

143. On February 9, 2000, DT filed with the SEC its unaudited quarterly report on Form 10-Q for

the quarter ended December 26, 1999 (The “2000 Second Quarter 10-Q”). The 2000 Second

Quarter 10-Q incorporated the materially false and misleading financial results of Kalish and Sencorp.

The Company reported net income of $873,000 or $0.09 per diluted share.


38

144. As the investing public would learn at the end of the Class Period, however, the Company’s

true figures were as follows for the 2000 second quarter: net loss - ($0.09 million); and diluted EPS -

($0.09). These numbers are hardly comparable to the originally reported figures as the fraudulent

activities turned a gain into a loss.

145. On May 9, 2000, DT filed with the SEC its unaudited quarterly report on Form 10-Q for the

quarter ended March 26, 2000 (The “2000 Third Quarter 10-Q”). The 2000 Third Quarter 10-Q

incorporated the materially false and misleading financial results of Kalish and Sencorp. The Company

reported net income of $2.7 million or $0.27 per diluted share.

146. As the investing public would learn at the end of the Class Period, however, the Company’s

true figures were as follows for the 2000 third quarter: net income - $1.1 million; and diluted EPS -

$0.11.

147. In addition to the false and misleading financial figures appearing in each of the Forms 10-Q

filed by the Company during the Class Period, as referenced above, the reports also contained the

following materially false and misleading statements:

The accompanying unaudited consolidated financial statements of DT Industries, Inc. (DT or the Company) have been prepared in accordance with the instructions for Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, in the opinion of management, such information includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of operations for the periods presented.

148. Each of the Forms 10-Q filed by the Company during the Class Period was signed by

Defendant Erdel.

149. In addition to the false and misleading statements and financial figures appearing in

each of the Forms 10-K filed by the Company during the Class Period, as referenced above, the

reports also contained the following materially false and misleading statements:


39

The Financial Statements are complete and correct in all material respects, have been prepared in accordance with GAAP, and fairly reflect the financial condition, results of operations and cash flows of the Persons covered thereby as of the dates and for the periods stated therein.

* * * * *

Management has established and maintains a system of internal control designed to provide reasonable assurance that assets are safeguarded and that the financial records reflect the authorized transactions of the Company. The system of internal control includes widely communicated statements of policies and business practices that are designed to require all employees to maintain high ethical standards in the conduct of Company affairs. The internal controls are augmented by organizational arrangements that provide for appropriate delegation of authority and division of responsibility.

150. Each of the Forms 10-K filed by the Company during the Class Period was signed by

Defendants Erdel, Gore, and Lewis.

151. The financial results reported in all SEC filings for fiscal 1997-1999 and the first three quarters

of 2000 were all materially false and misleading. Defendants knew and/or recklessly disregarded that the

Company’s reported total assets, gross profits, net income and earnings per share were artificially inflated due

to the overstatement of inventory at Kalish and Sencorp, as well as the manipulation of revenue at Sencorp

was in violation of GAAP as well as the Company’s own publicly stated accounting practices.

152. Specifically, the Company reported income and earnings per share that were partially

attributable to the improper overstatement of asset accounts at Kalish and Sencorp and the overstatement of

revenue at Sencorp throughout the Class Period. The above-referenced statements were also false and

misleading because:

(a) Defendants failed to comply with GAAP in the preparation and issuance of its

financial statements;

(b) Defendants failed to disclose that the Company’s internal controls were allowing

inadequate and improper accounting for certain accounts, including accounts

receivables, inventory and prepaid expenses;


40

(c) Defendants failed to write off obsolete inventory in accordance with GAAP. Rather

than reflecting obsolete or unsalable inventory “at their estimated values,” Defendants

routinely maintained outdated inventory at its full level even when product design

changes occurred and when the products had remained dormant for over one year;

(d) Defendants failed to write off inventory that was custom-ordered for a

particular client even when Defendants knew that custom-ordered items such

as an extrusion machine could not be recyclable and sold to another customer;

(e) Defendants failed to properly account for all costs of goods sold during the

Class Period. Rather, Defendants, in violation of GAAP, would maintain

portions of costs and expenses in inventory even after the related products

were sold;

(f) Defendants failed to establish adequate reserves to cover the Company’s ever

growing inventory.

THE TRUTH EMERGES

153. On August 23, 2000, the Company announced that additional time was needed before

releasing its financial results for the fiscal year ended June 25, 2000. Specifically, the Company’s

independent auditors, PWC, had requested additional time in order to continue its investigation into a

purported overstatement of assets at Kalish. The Company also announced that DT’s Board of

Directors authorized the Audit and Finance Committee “to take all appropriate action to identify the

causes of these discrepancies and to make appropriate recommendations to ensure that similar issues

do not recur in the future.”

154. In the August 23rd press release, the Company revealed that:

The discrepancies are likely to be material and could impact previously reported earnings for the 1997, 1998 and 1999 fiscal years, and for the fiscal quarters during


41

those years and during fiscal year 2000. As a result, the company does not expect to release its financial statements for the fiscal year just ended until the amounts have been quantified and any necessary restatements have been made. Pending completion of the audit, the company warned its fiscal 1997, 1998 and 1999 financial statements should not be relied upon. (emphasis added).

155. The Company further announced in the August 23rd press release that Defendant Erdel

had resigned and that it placed the senior financial officer of Kalish on administrative leave. Two days

later, DT revealed that it had placed Louis Pallay, the president of Kalish, and Graham Lewis, the

president of DT’s packaging machinery group, on leave pending results of the investigation.

156. As a result of the Company’s August 23, 2000 revelation, NASDAQ immediately

halted trading of the DT’s stock pending receipt of additional information from the Company. The

halt lasted for approximately three months. Prior to the suspension of trading, the price of DT

common stock had closed at $9-7/8 per share.

157. On September 19, 2000, the Company issued a press release updating the market on

its accounting investigation. The Company disclosed that PWC, in the course of its audit, had

discovered a similar issue of overstated asset accounts at Sencorp, as had previously been revealed

regarding Kalish.

158. As a result of PWC’s discovery, DT placed Sencorp’s senior financial officer on

administrative leave.

159. On October 4, 2000, a meeting of DT’s Audit and Finance Committee was held where

special investigator, the law firm of Bryan Cave, reported on the results of his investigation. Later

that day, the Audit and Finance Committee presented its findings and recommendations to the full

Board of Directors. As a result of the findings of the special investigator and the Audit and Finance

Committee, the Board of Directors immediately terminated Lewis and Pallay, as well as Kalish’s


42

senior financial officer. Additionally, the Board requested that Lewis resign from the Board of

Directors.

160. On October 16, 2000, the Company issued a press release which announced the

restatement of almost four full years of financial results. In all, the Company had to restate financials

for the first three quarters of 2000, as well as for every quarter and year end for fiscal years 1997

through 1999. The Company also stated: “[e]ach of the individuals previously placed on

administrative leave has been terminated as a result of our investigation.”

161. On October 16, 2000, DT filed three Form 10-Q/As with the SEC which contained its

restated results for the first three quarters of fiscal 2000 (quarters ended September 26, 1999,

December 26, 1999, and March 26, 2000).

162. On November 3, 2000, the Company announced the resignation of Defendant Gore as

President and Chief Operating Officer of DT.

163. On November 8, 2000, the Company issued a press release announcing its results for

the first quarter ended September 24, 2000. In that release, the Company announced that Lewis had

resigned from the Company’s Board of Directors.

164. Upon resumption of trading on November 22, 2000, DT opened at $3.50 substantially

below its last closing price of $9.875 per share when trading was halted.

165. On December 8, 2000, DT filed a Form 10-K/A with the SEC which contained its

restated results for the fiscal year ended June 27, 1999. This filing also contained the Company’s

restated results for fiscal years ended June 29, 1997 and June 28, 1998.

166. The difference between the originally reported results and the true results is simply

astounding. The effect is particularly glaring when comparing the Company’s reported versus actual

net inventory and earnings per share. The sheer magnitude of the misstatement in the Company’s


43

financial statements for 1997, 1998, 1999 and the first nine months of fiscal 2000 is sufficient to imply

that Defendants acted with the requisite scienter.

167. The following chart illustrates the differences between reported and actual net

inventory as reported on balance sheets (figures in thousands except percentages) throughout the

Class Period:

Reported

Restated

$ Diff.

% Overstated

Q3 00

65,330

50,257

15,073

30%

Q2 00

63,682

52,628

11,054

21%

Q1 00

64,990

55,143

9,847

17.8%

FY 99

56,876

49,377

7,499

15.2%

FY 98

48,755

41,193

7,562

18.4%

FY 97

42,198

40,428

1,770

4.4%

168. The artificially inflated inventory amounts were largely attributable to an

overstatement of “work in progress” inventory at Kalish and Sencorp. For example, as of March 26,

2000, the Company had reported $31,451,000 in work in progress inventory, when the actual amount


44

was $16,378,000; an overstatement of $15,073,000 or 92%. Similarly, as of June 27, 1999, the

Company reported $25,418,000 in work in progress inventory, when the actual amount totaled only

$17,919,000, a difference of $7,499,000 or 41.8%. This further supports plaintiffs’ allegations that

the Company’s publicly-represented accounting policies were being abused.


45

169. The following chart illustrates the differences (in thousands, except for percentages)

between DT’s reported and actual income/loss during the Class Period:

Net Income

Reported

Net

Income Restated

Diff.

% Overstated

9 Months Ended 3/26/00

3,268

(1,921)

5,189

159%

Fiscal Year 1999

(1,763)

(5,135)

3,372

191%

Fiscal Year 1998

29,684

25,685 3,999

13.5%

Fiscal Year 1997

26,057

24,412

1,645

6.3%

VIOLATIONS OF GAAP

170. The financial statements issued by the Company during the Class Period which are identified

above, were materially false and misleading when issued by virtue of the overstatement of inventory, assets,

and net income. These overstatements ultimately required the Company to restate its financial results for

fiscal years 1997, 1998 and 1999, as well as the first three quarters of fiscal year 2000.

171. GAAP incorporates the consensus among accountants at a particular time concerning the

economic resources and obligations that should be recorded as assets and liabilities, which changes in them

should be recorded, when these changes should be recorded, how the recorded assets and liabilities and

changes in them should be measured, what information should be reported, how it should be disclosed, and

which financial statements should be prepared.

172. Section 13 of the 1934 Act requires that DT:

(B) devise and maintain a system of internal accounting controls sufficient to provide reasonable assurance that –


46

* * * (ii) transactions are recorded as necessary (I) to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and (II) to maintain accountability for assets;

173. As described herein, Defendants knowingly failed to devise a sufficient internal control system.

174. The SEC requires that publicly-traded companies present their financial statements in

accordance with GAAP. 17 C.F.R. § 210.4-01(a)(1). Financial statements filed with the SEC that

are not prepared in accordance with GAAP “will be presumed to be misleading or inaccurate, despite

footnote or other disclosures, unless the Commission has otherwise provided.” 17 C.F.R. § 210.4-

01(a)(1). Although Defendants stated in the Company’s financial statements issued during the Class

Period that such statements were prepared in accordance with GAAP, Defendants deviated from

GAAP in material and significant ways.

175. The fact that DT restated its financial statements for fiscal years 1997, 1998 and 1999,

as well as the first three quarters of 2000, constitutes an admission that the financial statements

originally issued were false at the time they were issued and that the overstatement of inventory and

earnings is material. GAAP requires that a company restate financial results when there is a need to

correct a material error. APB No. 20, ¶¶7-14. Thus, the restatement is an admission by DT that its

previously issued financial results and its public statements regarding those results were false and

misleading.

176. GAAP includes the following principles, among others, which were violated by

Defendants as described below:

a. the principle that a conservative approach be taken providing early recognition of unfavorable events and minimizing the amount of income reported. (See Statement No. 4 of the Accounting Principles Board (“APB Nos.”) at ¶¶ 30, 37, 168);

b. the principle that the financial information presented should be

complete. (See APB No. 4, ¶¶ 30, 37, 168);


47

c. the principle of fair presentation (“presents fairly”). (See APB

No. 4, ¶¶ 106, 135, 185); d. the principle of adequacy and fairness of disclosure. (See

APB No. 4, ¶¶ 79, 103, 185, 195); e. the principle of materiality concerning information that is

significant enough to affect evaluations or decisions. (See APB No. 4, ¶¶ 27, 125);

f. the principle that the substance of transactions rather than

form should be reflected. (See APB No. 4, ¶¶ 27, 37, 124); g. the principles that informed judgment based on background

and knowledge should be applied. (See APB No. 4, ¶¶ 27, 37, 121, 170, 171);

h. the principle that items included in the financial statements be

reliably corroborated by outside evidence (verifiability). (See APB No. 4, ¶¶ 25, 37, 87);

i. the principle that the financial statements contain and disclose

relevant, understandable, and timely information for the economic decisions of the user. (See APB No. 4, ¶¶ 25, 85, 86, 89); and

j. the principle that the financial statements provide reliable

financial information about the enterprise for the economic decisions of the user. (See APB No. 4, ¶¶ 75, 76, 104, 105).

177. GAAP also requires that inventories should be priced at lower of cost or market and a

loss representing the decline in the utility of the goods should be recognized in the period in which the

impairment occurs. Specifically, “[w]here there is evidence that the utility of goods, in their disposal

in the ordinary course of business, will be less than cost, whether due to physical deterioration,

obsolescence, changes in price levels, or other causes, the difference should be recognized as a loss of

the current period.” (See ARB 43, Chapter 4 Statement 5). Indeed, a “major objective of accounting

for inventories is the proper determination of income through the process of matching appropriate

costs against revenues.” (See ARB 43, Chapter 4 Statement 2). “As used in the phrase lower of cost


48

or market the term market means current replacement costs (by purchase or by reproduction, as the

case may be) expected that: (1) Market should not exceed the net realizable value (i.e., estimated

selling price in the ordinary course of business less reasonably predictable costs of completion and

disposal); and (2) Market should not be less than net realizable value reduced by an allowance for an

approximately normal profit margin.” (ARB 43, Chapter 4 Statement 6). In addition, in each of the

1997-1999 Form 10-K’s, the Company specifically proclaimed that “[o]bsolete or unsalable

inventories are reflected at their estimated realizable values.” Thus, in addition to violating GAAP,

the Company violated its own stated accounting policy.

178. GAAP also provides that for purposes of financial statement presentation, asset

valuation allowances for losses shall be deducted from the assets to which the allowance relate. (See

Current Text Accounting Standards, Section V18.102; APB Opinion No. 12).

179. During the Class Period, DT materially misled the investing public thereby inflating the

price of DT’s securities by publicly issuing false and misleading statements and failing to disclose

material facts necessary to make DT’s statements, as set forth herein, not false and misleading. These

statements and omissions were materially false and misleading in that they failed to disclose material

adverse information and misrepresented the truth about the Company, its financial performance,

accounting, reporting and condition, including, inter alia:

(a) During the Class Period, the Company reported inventory and net income/loss

that were materially overstated;

(b) The Company’s financial statements did not present, in all material respects,

the Company's true financial conditions, and did not reflect all adjustments

which were necessary for a fair statement of the interim and full year periods

presented; and


49

(c) The Company’s internal controls were inadequate and, as a result, the

Company improperly overstated inventory and net income.

180. Contrary to the requirements of GAAP and SEC rules, DT failed to implement and

maintain an adequate internal accounting control system. AICPA Professional Standards states: “An

important management responsibility is to establish and maintain internal control.” [AICPA

Professional Standards AU §319.37]. “Internal control is a process - effected by an entity’s board of

directors, management, and other personnel - designed to provide reasonable assurance regarding the

achievement of objectives in the following categories: (a) reliability of financial reporting, (b)

effectiveness and efficiency of operations, and (c) compliance with applicable laws and regulations.”

[AU §319.07] Since fiscal year 1997, the Company knowingly tolerated the existence of inadequate

internal controls and/or recklessly disregarded its obligation to implement adequate controls to ensure

that its financial statements were recorded in compliance with GAAP.

181. Further, the implementation of the new internal operating system wreaked havoc at

Sencorp. After the “implementation” of the new operating system, in July of 1998, Sencorp was

unable to generate monthly financial reports, including inventory reports which were required to be

submitted to DT headquarters as part of the monthly report package for a period of over five months.

In addition, from July 1998 until October or November 1998, Sencorp never completed activity

reports which were necessary to estimate costs to complete projects. According to Hatmaker, rather

than correcting these known problems, DT headquarters issued a directive to Sencorp to forgo

estimating costs. As Sencorp accounted for its revenue using a percentage of completion method,

however, estimating costs was vital to presenting fairly Sencorp’s financial position.


50

182. Without the availability of cost estimates, DT and the Individual Defendants, along

with Sencorp itself, knew or recklessly disregarded that Sencorp should not have accounted for

revenue using the percentage of completion method, and in so doing, violated GAAP.

183. Moreover, by overstating inventory, and thereby understating expenses, the Company

could report larger net income (or a smaller net loss). This overstatement of inventory enabled the

defendants to inflate earnings and meet or exceed analyst expectations.

184. Defendants knowingly or recklessly violated GAAP in overstating inventory in four

main ways:

a. Producing Excess Inventory. The Company, and in particular Sencorp, had a

practice of building more machines than it could sell during the Class Period. Additionally, Sencorp

would often begin to build an order with an inadequate deposit or no deposit, prior to the deal being

finalized with the customer. Any extra, unused and useless machine, partial or complete, would be

improperly fully-valued as inventory.

b. Maintaining Obsolete Inventory. DT, and in particular Sencorp, maintained

obsolete inventory after a product design had changed during the Class Period. At Sencorp, once a

product design changed, any old products which were already being counted in inventory would be

considered obsolete, but Sencorp did not write them off.

c. Failure to Account Properly for Costs. Sencorp was not accounting for all the

costs within the appropriate month and quarter. Cost of goods sold (“COGS”) is the sum of all the

direct and indirect expenditures incurred in producing the products sold. At Sencorp, if a person in

the accounting department was not sure of whether a particular expense actually related to the

revenue that was being booked, that expense would not be taken to COGS for that month. Rather,

that amount would remain in inventory, unless and until the issue was resolved.


51

d. Failure to Reserve. As a result of the above-listed practices, throughout the Class

Period, DT was carrying inventory on its books that was overstated because the inventory was

obsolete. First, the Company violated GAAP by recording obsolete inventory. Second, the Company

violated GAAP by failing to establish adequate reserves for the portions of inventory that became

impaired during the Class Period. According to Hatmaker, the former Sencorp controller, Sencorp’s

inventory reserves remained at between $500,000 to $750,000 throughout the Class Period despite

the fact that inventory grew from 42,198,000 in the fiscal year ended 1997 to 56,876,000 in the fiscal

year ended 1999. Hatmaker further indicated that Sencorp’s failure to increase reserves to take a

charge for obsolete inventory dated as far back as December 1997 thereby implicating reserves for the

entire Class Period. Hatmaker was privy to this information because he had been controller at

Sencorp on and off since 1994, and as part of his job responsibilities, had access to and knowledge of

the financial records of Sencorp before and during the Class Period.

NO STATUTORY SAFE HARBOR

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

circumstances does not apply to any of the false statements pleaded in this complaint, because none of

the statements pleaded herein are “forward-looking” statements nor were they identified as “forward-

looking statements” when made. Nor did meaningful cautionary statements identifying important

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

those statements. To the extent that the statutory safe harbor does apply to any statements pleaded

herein which are deemed to be forward-looking, the defendants are liable for those false forward-

looking statements, because at the time each of those statements were made the speaker actually

knew the forward-looking statement was false and/or the statement was authorized and/or approved


52

by an executive officer of the Company, who actually knew that those statements were false when

made.

CLASS ACTION ALLEGATIONS

186. Plaintiffs bring this action as a class action pursuant to Federal Rules of Civil

Procedure 23(a) and (b)(3) on behalf of a class consisting of all persons who purchased DT common

stock on the open market during the Class Period, and who suffered damages thereby. Excluded are

the Defendants, any entity in which the Defendants have a controlling interest or is a parent or

subsidiary of or is controlled by the Company, and the officers, directors, employees, affiliates, legal

representatives, heirs, predecessors, successors and assigns of the Defendants.

187. The market for the Company's common stock was open, well-developed and efficient

at all relevant times. As a result of these materially false and misleading statements and failure to

disclose, the Company's stock traded at artificially inflated prices during the Class Period. Plaintiffs

and the other members of the class have suffered damages as a result of Defendants’ fraudulent

conduct alleged herein.

188. The members of the Class are so numerous that joinder of all members is

impracticable. While the exact number of Class members is unknown to Plaintiffs at this time and can

only be ascertained through appropriate discovery, Plaintiffs believe there are, at a minimum,

thousands of members of the Class who traded during the Class Period. The Company had in excess

of 10 million shares of its common stock outstanding as of April 28, 2000.

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

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

questions of law and fact common to the Class are:

i) whether the federal securities laws were violated by Defendants’ acts as alleged herein;


53

ii) whether the Company issued false and misleading financial statements during the Class Period;

iii) whether Defendants acted knowingly or recklessly in issuing false and misleading financial statements;

iv) whether the market prices of the Company’s securities during the Class Period were artificially inflated because of Defendants’ conduct complained of herein; and

v) whether the members of the Class have sustained damages and, if so, what is the proper measure of damages.

190. Plaintiffs’ claims are typical of the claims of the members of the Class as Plaintiffs and

members of the Class sustained damages arising out of Defendants’ wrongful conduct in violation of

federal law as complained of herein.

191. Plaintiffs will fairly and adequately protect the interests of the members of the Class

and have retained counsel competent and experienced in class actions and securities litigation.

Plaintiffs have no interests antagonistic to or in conflict with those of the Class.

192. A class action is superior to other available methods for the fair and efficient

adjudication of the controversy since joinder of all members of the Class is impracticable.

Furthermore, because the damages suffered by the individual Class members may be relatively small,

the expense and burden of individual litigation make it impossible for the Class members individually

to redress the wrongs done to them. There will be no difficulty in the management of this action as a

class action.

FRAUD ON THE MARKET PRESUMPTION

193. Plaintiffs will rely, in part, upon the presumption of reliance established by the fraud-

on-the-market doctrine, which assumes the existence of an efficient market for DT securities. In that

connection, brokers nationwide have immediate access to press releases and trading information

about DT through computer and news wires systems. These systems display, within minutes of the


54

release or transaction taking place, pertinent information and the most recent trades and prices.

Among the analysts that followed the Company during the Class Period were: Morgan Stanley Dean

Witter, Credit Suisse First Boston, Stephens, Inc.; Furman Selz; and Stifel Nicolaus & Co.

Incorporated.

194. Plaintiffs are entitled to the presumption of reliance established by the fraud-on-the-

market doctrine in this action in that:

i) Defendants made public misrepresentations or failed to disclose material facts during the Class Period;

ii) the omissions and misrepresentations were material;

iii) the Company’s common stock traded in an efficient market;

iv) the misrepresentations and omissions alleged would tend to induce a reasonable investor to misjudge the value of the Company's common stock; and

v) Plaintiffs and members of the Class purchased their DT common stock between the time Defendants failed to disclose or misrepresented material facts and the time the true facts were disclosed, without knowledge of the omitted or misrepresented facts.

195. Based upon the foregoing, Plaintiffs and members of the Class are entitled to a

presumption of reliance upon the integrity of the market.

COUNT I VIOLATION OF SECTION 10(b) OF THE EXCHANGE ACT AND

RULE 10b-5 OF THE SECURITIES AND EXCHANGE COMMISSION 196. Plaintiffs repeat and reallege each and every allegation contained in the foregoing

paragraphs as if fully set forth herein.

197. This Count is asserted against all defendants and is based upon violations of Section

10(b) of the 1934 Act, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder.


55

198. During the Class Period, Defendants directly engaged in a common plan, scheme, and

unlawful course of conduct, pursuant to which it knowingly or recklessly engaged in acts,

transactions, practices, and courses of business which operated as a fraud and deceit upon Plaintiffs

and the other members of the Class, and made various deceptive and untrue statements of material

facts and omitted to state material facts in order to make the statements made, in light of the

circumstances under which they were made, not misleading to Plaintiffs and the other members of the

Class. The purpose and effect of the scheme, plan, and unlawful course of conduct was, among other

things, to induce Plaintiffs and the other members of the Class to purchase DT common stock during

the Class Period at artificially inflated prices.

199. During the Class Period, Defendants, pursuant to said scheme, plan, and unlawful

course of conduct, knowingly and recklessly issued, caused to be issued, participated in the issuance

of, the preparation and issuance of deceptive and materially false and misleading statements to the

investing public as particularized above.

200. As a result of the dissemination of the false and misleading statements set forth above,

the market price of DT common stock was artificially inflated during the Class Period. In ignorance

of the false and misleading nature of the statements described above and the deceptive and

manipulative devices and contrivances employed by the defendants, Plaintiffs and the other members

of the Class relied, to their detriment, on the integrity of the market price of the stock in purchasing

DT common stock. Had Plaintiffs and the other members of the Class known the truth, they would

not have purchased DT shares or would not have purchased them at the inflated prices that were paid.

201. Plaintiffs and the other members of the Class have suffered substantial damages as a

result of the wrongs herein alleged in an amount to be proved at trial.


56

202. By reason of the foregoing, Defendants directly violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder in that they: (a) employed devices, schemes, and artifices to defraud; (b) made untrue statements of material facts or omitted to state material facts in order to make the 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 which operated as a fraud and deceit upon plaintiffs and the other members of the Class in connection with their purchases of DT common stock during the Class Period.

COUNT II

VIOLATION OF SECTION 20(a) OF THE EXCHANGE ACT

201. Plaintiffs repeat and reallege each and every allegation contained in each of the

foregoing paragraphs as if set forth fully herein.

202. This Count is asserted against all Defendants and is based upon violations of Section

20(a) of the 1934 Act, 15 U.S.C. § 78t(a).

203. Defendants Pallay and Lewis, by virtue of their positions were, at the time of the

wrongs alleged herein, controlling persons of Kalish within the meaning of Section 20(a) of the 1934

Act.

204. Defendant Patrai, by virtue of his position as President, was a controlling person of

Sencorp, at the time of the wrongs alleged herein, within the meaning of Section 20(a) of the 1934

Act.

205. Defendants Gore and Erdel, by virtue of their positions at DT and their domination

over the operations of Sencorp and Kalish and their officers, defendants Patrai, Pallay and Lewis, at

the time of the wrongs alleged herein, within the meaning of Section 20(a) of the 1934 Act.

206. DT had the power and influence to control the conduct of Kalish and Sencorp as a

result of DT’s ownership of these wholly-owned subsidiaries at the time of the wrongs alleged herein,

within the meaning of Section 20(a) of the 1934 Act..


57

207. By reason of the conduct alleged in Count I of the Complaint, Defendant Patrai is

liable for the aforesaid wrongful conduct of Sencorp and Sencorp is liable for the aforesaid wrongful

conduct of Patrai.

208. By reason of the conduct alleged in Count I of the Complaint, Defendants Pallay and

Lewis are liable for the aforesaid wrongful conduct of Kalish and each other and Kalish is liable for

the aforesaid wrongful conduct of Pallay and Lewis.

209. By reason of the conduct alleged in Count I of the Complaint, DT is liable for the

aforesaid wrongful conduct of Sencorp and Kalish, as well as their principals, defendants Patrai,

Pallay and Lewis. In addition, DT is liable for the aforesaid wrongful conduct of defendants Gore and

Erdel.

210. By reason of the conduct alleged in Count I of the Complaint, Defendants Gore and

Erdel are liable for the aforesaid wrongful conduct of Sencorp and Kalish, as well as their principals,

defendants Patrai, Pallay and Lewis. In addition, Defendants Gore and Erdel are liable for the

aforesaid wrongful conduct of DT and each other.

211. As a result, Defendants are liable to Plaintiffs and to the other members of the Class

for the substantial damages which they suffered in connection with their purchases of DT common

stock during the Class Period.

PRAYER FOR RELIEF

WHEREFORE, Plaintiffs, on their own behalf and on behalf of the Class, pray for judgment as

follows:

A. Declaring this action to be a proper class action and certifying Plaintiffs as class

representatives under Rule 23 of the Federal Rules of Civil Procedure;


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B. Awarding compensatory damages in favor of Plaintiffs and the other members

of the Class against Defendants for the damages sustained as a result of the wrongdoings of

Defendants, together with interest thereon;

C. Awarding Plaintiffs the fees and expenses incurred in this action, including

reasonable allowance of fees for Plaintiffs’ attorneys and experts;

D. Granting such other and further relief as the Court may deem just

and proper.

JURY DEMAND

Plaintiffs demand a trial by jury.

Dated: January 25, 2002


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Respectfully submitted,

FOLAND & WICKENS, P.C.

By /s/ W. James Foland

W. JAMES FOLAND #25022

ABBIGALE NORTHCRAFT #47879

911 Main Street, 29th Floor

Kansas City, MO 64105

Tel No: (816) 472-7474/Fax No: (816) 472-6262 Plaintiffs’ Liaison Counsel

SCHIFFRIN & BARROWAY, LLP

David Kessler

Michael K. Yarnoff

Three Bala Plaza East

Suite 400

Bala Cynwyd, PA 19004

Tel No: (610) 667-7706

Fax No: (610) 667-7056 Plaintiffs’ Lead Counsel


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CERTIFICATE OF SERVICE

I hereby certify that on this 25th day of January, 2002, I electronically filed the foregoing with the Clerk of the Court using the CM/ECF system which sent notification of such filing to the following: Michael Thompson, J. Christian Word, Esq., Jill Morris, Esq., and Russell S. Jones, Jr., Esq. and I hereby certify that I have mailed by United States Postal Service, first class, postage prepaid the foregoing to the following non CM/ECF participants:

Pamela Smith

KATTEN MUCHIN ZAVIS

525 W. Monroe Street, Suite 1600

Chicago, IL 60661

Attorneys for DT Industries, Inc., Kalish, Inc., Sencorp Systems, Inc., Bruce Erdel, Sam Patrai

Peter Q. Bassett, Esq.

ALSTON & BIRD, L.L.P.

One Atlantic Center

1201 West Peachtree Street

Atlanta, GA 30309

Attorneys for Louis Pallay BERMAN DeVALERIO & PEASE, LLP Norman Berman

Alicia M. Duff

One Liberty Square

Boston, MA 02109 Tel No: (617) 542 8300

Fax No: (617) 542 1194

CAULEY GELLER BOWMAN & COATES, LLP

Paul J. Geller

One Boca Place

2255 Glades Road, Suite 421A

Boca Raton, FL 33431

Tel No: (561) 750-3000

Fax No: (561) 750-3364


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LAW OFFICES OF CHARLES J. PIVEN, P.A.

Charles J. Piven

The World Trade Center - Baltimore

Suite 2525

401 East Pratt Street

Baltimore, MD 21202

Tel No: (410) 332-0030

BERGER & MONTAGUE, P.C.

Todd S. Collins

Jacob A. Goldberg

Douglas M. Risen

1622 Locust Street

Philadelphia, PA 19103

Tel: (215) 875-3000

Fax: (215) 875-4604

WEINSTEIN KITCHENOFF SCARLATO

& GOLDMAN LTD.

Paul J. Scarlato

1608 Walnut Street, Suite 1400

Philadelphia, PA 19103

Tel: (215) 545-7200

Fax: (215) 545-6535

LAW OFFICE OF MARK MCNAIR

Mark McNair

1819 H Street N.W.

Suite 550

Washington DC 20006

Tel: (202) 872-4717


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WOLF HALDENSTEIN ADLER FREEMAN

& HERZ LLP

Fred Taylor Isquith

Gregory M. Nespole

270 Madison Avenue

New York, NY 10016

Tel: (212) 545-4600

BRODSKY & SMITH

Evan Smith

11 Bala Avenue, Suite 39

Bala Cynwyd, PA 19004

Tel No: (610) 668-7957

Fax No: (610) 660-0450

LAW OFFICES OF BRUCE G. MURPHY

Bruce G. Murphy

265 Llwyds Lane

Vero Beach, FL 32953

Tel No.: (561) 231-4202

Additional Plaintiffs’ Counsel /s/ W. James Foland

LIASION COUNSEL FOR PLAINTIFFS


Documents

4 Second Consolidated Amended Class Action Complaint 01/25/2002