Stanford University Law School - Securities Class Action Clearinghouse

 

MILBERG WEISS BERSHAD

HYNES & LERACH LLP

WILLIAM S. LERACH (68581)

JOY ANN BULL (138009)

600 West Broadway, Suite 1800

San Diego, CA 92101

Telephone: 619/231-1058

- and -

REED R. KATHREIN (139304)

JEFFREY W. LAWRENCE (166806)

DAVID R. STICKNEY (188574)

222 Kearny Street, 10th Floor

San Francisco, CA 94108

Telephone: 415/288-4545

Lead Counsel for Plaintiffs





UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA





In re RASTER GRAPHICS SECURITIES

LITIGATION

___________________________________

This Document Relates To:

ALL ACTIONS.

___________________________________

Master File No. C-98-0807-FMS

CLASS ACTION


DATE: February 19, 1999

TIME: 10:00 a.m.

COURTROOM: The Honorable Fern M. Smith



DECLARATION OF REED R. KATHREIN IN SUPPORT OF

PLAINTIFFS' APPLICATION FOR (1) APPROVAL OF SETTLEMENT,

(2) AN AWARD OF ATTORNEYS' FEES AND REIMBURSEMENT OF EXPENSES,

AND (3) APPROVAL OF PLAN OF ALLOCATION



TABLE OF CONTENTS

I. PRELIMINARY STATEMENT

II. FACTUAL BACKGROUND OF THE LITIGATION

III. PROCEDURAL BACKGROUND OF THE FEDERAL ACTION

IV. PROCEDURAL BACKGROUND OF THE STATE ACTION

V. NOTICE OF SETTLEMENT TO CLASS MEMBERS

VI. THE SETTLEMENT IS IN THE BEST INTERESTS OF THE CLASS AND WARRANTS APPROVAL

VII. THE PLAN OF ALLOCATION

VIII. PLAINTIFFS' COUNSEL'S APPLICATION FOR AN AWARD OF ATTORNEYS' FEES AND REIMBURSEMENT OF EXPENSES

IX. CONCLUSION



I, REED R. KATHREIN, declare:

1. I am a member of the law firm of Milberg Weiss Bershad Hynes & Lerach LLP ("Milberg Weiss"), court-appointed Lead Counsel for plaintiffs in this action (the "Federal Action"), and one of plaintiffs' counsel in the related action Ginter v. Raster Graphics, Inc., Case No. CV772401, pending in the Superior Court of the State of California, County of Santa Clara (the "State Action"). I am duly admitted to practice in the State of California and before this Court. I make this Declaration in support of plaintiffs' application to: (a) approve the global settlement (the "Settlement") reached with the defendants in the Federal Action and the State Action (collectively referred to herein as the "Litigation") as fair, reasonable and adequate; (b) award attorneys' fees and reimbursement of expenses; and (c) approve the proposed plan for allocating the settlement proceeds. I have personal knowledge of the facts asserted herein.

I. PRELIMINARY STATEMENT

2. The parties to the Litigation entered into a Stipulation of Settlement (the "Stipulation"), dated as of October 12, 1998. The Stipulation provides for payment by defendants of $4.5 million in cash, plus accrued interest from October 15, 1998. I submit that this Settlement is a fair, reasonable and adequate resolution of the claims asserted in the Litigation.

3. In evaluating the reasonableness of the Settlement, plaintiffs' counsel extensively researched the law applicable to plaintiffs' claims and thoroughly investigated the facts. Plaintiffs' counsel examined and analyzed 7,856 pages of internal corporate documents, as well as 521 pages of accounting documents produced by non-party Ernst & Young LLP ("E&Y"), Raster Graphics, Inc.'s ("Raster" or the "Company") outside accountant. In addition, plaintiffs' counsel located and interviewed numerous former employees to develop the facts and evidence. Based on this investigation and weighing the risks of further litigation against the substantial benefit that the Settlement immediately confers to the class, I conclude that the Settlement is fair, reasonable and adequate for the members of the Settlement Class.

4. Plaintiffs' counsel reached this favorable result only after effective litigation in both state and federal court. Set forth below is a summary of the major proceedings in the Litigation. The summary is not all-inclusive. Rather, the following description illustrates the nature of the case, the efforts expended in its prosecution and the reasons plaintiffs' counsel believe that settling the Litigation now, rather than expending additional resources, is in the best interests of the class.

5. I further submit that counsel should be awarded attorneys' fees of 25% of the Settlement Fund and receive reimbursement of their out-of-pocket expenses for their efforts in creating this benefit on behalf of the class.

II. FACTUAL BACKGROUND OF THE LITIGATION

6. Raster develops and sells large-format digital color printing systems. In August 1996, after the successful introduction of the DCS 5442, a printer capable of producing 54-inch-wide graphics, Raster began selling its stock to the public pursuant to an initial public offering.

7. Plaintiffs allege that the DCS 5442 could neither secure widespread market acceptance nor provide Raster with sufficient revenue growth for the Company to compete against its major competitors. Raster followed the DCS 5442 with a more affordable (but slower) printer, the PiezoPrint 1000. Plaintiffs allege that this product suffered marketing problems because competitors soon announced even faster inkjet printers.

8. According to plaintiffs, Raster responded in early 1997 by rushing its newest product, the PiezoPrint 5000, to market. The PiezoPrint 5000 was supposed to provide the Company with a competitive mid-range product between the very expensive DCS 5442 and the slow-but-affordable PiezoPrint 1000. Plaintiffs allege that, in Raster's haste to rush the PiezoPrint 5000 to market, the Company failed to complete the PiezoPrint 5000's development. In particular, Raster could not provide the enhanced media necessary to work with the PiezoPrint 5000's oil-based inks. This defect, plaintiffs allege, prevented the Company from generating final orders and caused customers to delay payment.

9. According to plaintiffs' allegations, defendants concealed the defects in the PiezoPrint 5000 while issuing false and misleading positive statements about the PiezoPrint 5000's introduction. Defendants touted the PiezoPrint 5000 as a huge success that would substantially increase the Company's revenues and income. Plaintiffs further allege that the Company issued false and misleading financial statements for the first three quarters of 1997. Both the federal and state complaints allege that, because of improper revenue recognition in violation of Generally Accepted Accounting Principles ("GAAP"), Raster's reported revenues were incorrect because Raster improperly recognized revenue and failed to accrue adequately for uncollectible accounts receivable and inventory. Plaintiffs assert that these misrepresentations caused artificial inflation in the price of Raster's stock. During the class periods, the stock traded as high as $8 per share.(1)

10. On February 3, 1998, Raster announced that it would restate its 3Q97 results to eliminate $1 million in revenue that it had previously booked. The Company disclosed that the results for that quarter were achieved by recognizing revenue on transactions involving sales where leased equipment had not yet been accepted by the customer or sales that had not been properly funded by the Company's leasing partners. The market also learned that the PiezoPrint 5000's inability to print oil-based inks on photo glossy surfaces had severely limited its market acceptance. With this news, Raster's stock price fell to $2.25 per share.

11. On April 3, 1998, the Company issued a press release. In that press release, the Company disclosed that a number of transactions did not meet the Company's revenue recognition policies. As a result, there would be a "reversal of revenues" in connection with the Company's 1997 year-end results. The Company expected to report a 1997 year-end loss "substantially in excess of" that which was earlier reported. With this news, Raster's stock price fell to $1.94 per share.

III. PROCEDURAL BACKGROUND OF THE FEDERAL ACTION

12. Plaintiffs commenced this action on March 2, 1998, filing Grimm v. Raster Graphics, Inc., No. C-98-0807-FMS. Two more cases followed: Dowgos v. Raster Graphics, Inc., No. C-98-0938-MJJ (March 10, 1998), and Moore v. Raster Graphics, Inc., No. C-98-1489-SBA (April 13, 1998). These actions each alleged violations of §§10(b) and 20(a) of the Securities Exchange Act of 1934 ("Exchange Act"), and Rule 10b-5 promulgated thereunder, on behalf of all persons who purchased Raster's common stock during the Federal Class Period, excluding defendants, members of their families and any entity in which a defendant has an interest.

13. The Federal Action alleges that Raster misrepresented the success of and demand for the Company's products during the Federal Class Period(2) and its projected and actual revenues, that as a result of improper revenue recognition in violation of GAAP, its revenues and net income for 3Q97 and 4Q97 had to be restated, and that these misrepresentations artificially inflated the price of Raster's stock causing damages to class members.

14. On May 21, 1998, defendants moved to dismiss the Grimm and Dowgos complaints. Defendants advanced a wide array of arguments, including that: (a) plaintiffs failed to allege that defendants' statements were false when made; (b) defendants are protected by the truth-on-the-market defense; (c) the complaints lacked facts that give rise to a strong inference of scienter; (d) the allegations based on "information and belief" fail to satisfy the requirements of the Private Securities Litigation Reform Act of 1995 ("PSLRA"); and (e) because plaintiffs failed to state causes of action under §10(b), plaintiffs' claims for control person liability under §20(a) must also fail.

15. The parties negotiated a stipulation and proposed order that took defendants' motion to dismiss off calendar, consolidated the three pending actions and set a date for plaintiffs to file the consolidated amended complaint. Plaintiffs' counsel continued to vigorously investigate plaintiffs' claims in order to amend the complaint and prove their claims. While plaintiffs were preparing to file the consolidated amended complaint, the parties were able to reach a settlement.

16. On May 4, 1998, the Raster Graphics Plaintiff Group timely moved, pursuant to §21(D)(a)(3)(B) of the Exchange Act, to be appointed Lead Plaintiffs and for approval of the Raster Graphics Plaintiff Group's choice of Lead Counsel for the class. The Raster Graphics Plaintiff Group consists of plaintiffs John Bowers, Steven Jay Colton and 29 other members of the plaintiff class. The group moved for approval of Milberg Weiss as Lead Counsel for the class, with Kaufman, Malchman, Kirby & Squire LLP, Kaplan, Kilsheimer & Fox LLP and Wolf Popper LLP serving as Plaintiffs' Executive Committee.

17. Also on May 4, 1998, another group of plaintiffs, the Grimm Group, filed a competing motion for appointment as Lead Plaintiff and for approval of its choice of counsel. The Raster Graphics Plaintiff Group thoroughly researched the Grimm Group's motion and filed papers in opposition. Prior to the hearing date, the Grimm Group withdrew its motion and joined in the motion of the Raster Graphics Plaintiff Group.

18. Counsel appeared before the Court on June 5, 1998, for a hearing on the Raster Graphics Plaintiff Group's motion for appointment of Lead Plaintiff. The Court appointed the Raster Graphics Plaintiff Group as Lead Plaintiff and approved Milberg Weiss as Lead Counsel for the class.

19. Under the PSLRA, discovery is stayed during the pendency of a motion to dismiss. Because defendants filed a motion to dismiss the Grimm and Dowgos complaints on May 21, 1998, a discovery stay prevented plaintiffs from conducting any formal discovery in the Federal Action. Nevertheless, plaintiffs' counsel vigorously investigated plaintiffs' claims outside of formal discovery -- including a review of Raster's SEC filings, securities analysts' reports and advisories about the Company, press releases issued by the Company and media reports about the Company. Plaintiffs' counsel also identified, contacted and interviewed former employees of Raster. The information derived from these interviews was important because these witnesses possessed personal knowledge concerning the internal operations of Raster during the relevant time period.

20. On January 8, 1999, defendants produced documents on an informal basis in connection with the Settlement. In total, defendants produced thousands of pages of internal corporate documents. Among other documents, defendants produced board minutes, correspondence with Raster's customers, sales documentation, organizational charts, insider sales policies and various documents relating to the development and introduction of Raster's PiezoPrint 5000.

21. Plaintiffs' counsel established a system to review and identify pertinent documents and assess the strengths and weaknesses of plaintiffs' claims. Some of the documents supported plaintiffs' claims; others tended to refute some of plaintiffs' allegations. Following that review, plaintiffs' counsel interviewed, in the presence of defense counsel, defendant Rakesh Kumar -- Raster's President, Chief Executive Officer and Chairman of the Board -- to explore issues raised by the internal documents produced and to confirm the adequacy of the Settlement. According to Mr. Kumar, while the hindsight view might be that Raster introduced the PiezoPrint 5000 too early, management believed at the time that the new product was ready to be launched. Likewise, Mr. Kumar offered explanations to cast doubt on plaintiffs' allegations of accounting fraud -- such as the unanticipated impact of the "Asian Flu" on Raster's 4Q97. Although plaintiffs' counsel believe that they have compelling support for their allegations, a jury might accept defendants' version. In light of this risk, plaintiffs' counsel strongly believe that the $4.5 million fund is a substantial and favorable recovery for the class.

IV. PROCEDURAL BACKGROUND OF THE STATE ACTION

22. On March 4, 1998, plaintiffs filed an action entitled Ginter v. Raster Graphics, Inc., Case No. CV772401, in the Superior Court of California, County of Santa Clara, alleging violations of Cal. Corp. Code §§25400 and 25500, Cal. Civ. Code §§1709-1710, Cal. Bus. & Prof. Code §17200, et seq., and Cal. Corp. Code §1507. Plaintiffs brought this action on behalf of all persons who purchased the common stock of Raster from April 24, 1997 through February 3, 1998, excluding defendants, members of their families and any entity in which a defendant has an interest.

23. On April 14, 1998, another plaintiff filed Beshear v. Raster Graphics, Inc., Case No. CV773294, in the Superior Court of California, County of Santa Clara. The Beshear action asserted violations of Cal. Corp. Code §§25400 and 25500 on behalf of purchasers of Raster stock from October 20, 1997 through April 3, 1998. By stipulated order, the Court consolidated Ginter and Beshear on June 18, 1998.

24. The State Action alleged that Raster misrepresented the sales of and demand for its products and disseminated false and misleading statements regarding its revenues and earnings during the State Class Period. These misrepresentation caused artificial inflation in the price of Raster's common stock.

25. Defendants, after successfully applying to the Court for permission to exceed the statutorily set page limit, demurred to plaintiffs' complaint in the Ginter action. Their demurrer asserted that the complaint should be dismissed on numerous grounds. With respect to plaintiffs' Cal. Corp. Code §§25400/25500 claims, defendants contended that: (a) plaintiffs failed to allege fraud with sufficient particularity; (b) defendants' statements were not misleading because defendants fully disclosed to the market the problems with the PiezoPrint 5000; (c) plaintiffs failed to allege that certain defendants issued false statements; (d) plaintiffs failed to allege that certain defendants engaged in "market activity"; (e) plaintiffs failed to allege that any statement was "willfully false"; and (f) plaintiffs lacked standing to seek redress under the Cal. Corp. Code because the plaintiffs were "out-of-state" purchasers. As for plaintiffs' Cal. Civ. Code §§1709-1710 and Cal. Corp. Code §1507 claims, defendants argued that: (a) plaintiffs failed to allege actual reliance; (b)  plaintiffs failed to plead fraud with specificity; and (c) Raster, as a foreign corporation, cannot be liable under Cal. Civ. Code §1507. As for plaintiffs' Cal. Civ. Code §§17200 and 17500 claims, which afford a remedy for unfair business practices, defendants argued that these sections do not apply to securities fraud.

26. Plaintiffs' counsel extensively researched and prepared opposition papers to defendants' demurrers. Before plaintiffs' counsel submitted opposing papers to the Court, the parties stipulated to taking the demurrers off calendar. This stipulation also set a schedule for the filing of a consolidated complaint and a briefing schedule, if defendants elected to demur to the consolidated complaint.

27. Prior to the filing of the consolidated complaint, the parties undertook settlement negotiations and reached settlement. In connection with the settlement, plaintiffs' counsel submitted, for in camera review, a Settlement Statement to the Honorable Richard C. Turrone of the Santa Clara County Superior Court. That memorandum set forth, inter alia, plaintiffs' counsels' position on the issues of liability and damages.

28. From the outset, plaintiffs' counsel pursued a discovery program in the State Action. As set forth below, through this discovery, plaintiffs uncovered evidence supporting their allegations. On May 4, 1998, plaintiffs served defendants with extensive document requests, focusing on the crucial issues in the State Action. Defendants resisted plaintiffs' requests. In written responses, defendants asserted a number of objections, including, among other things, that the document requests were vague and ambiguous, that the time period designated by plaintiffs was overly broad and unduly burdensome, that the requests sought documents containing confidential business information and that any document production would require a "wall" to prevent use of the discovery in the Federal Action.

29. The parties were continuing meet-and-confer discussions concerning defendants' objections when this Settlement was reached.

30. Plaintiffs also served discovery on non-party E&Y, seeking documents created in connection with E&Y's audit of Raster for fiscal year 1997. Plaintiffs' counsel met and conferred with counsel for E&Y on different occasions to arrange the document production. As a result of the meet-and-confer process, E&Y agreed to produce the workpapers as they became available.

31. Defendants, however, initially objected to E&Y's producing documents to plaintiffs because of the absence of a protective order to protect Raster's confidential business information. Defendants also asserted that a "wall" should be imposed to prevent the use of discovery obtained in the State Action in prosecuting the Federal Action. To avoid delay and needless motion practice, plaintiffs' counsel agreed to view the documents on an "attorneys' eyes only" basis until entry of an order governing confidential information. Plaintiffs' counsel also drafted and circulated a proposed stipulation for the treatment of confidential information in this case. That proposal provided defendants and non-parties protection from public disclosure of confidential information to the extent necessary, while providing plaintiffs with sufficient flexibility to use the information gathered. In addition, plaintiffs' counsel agreed to limit temporarily the use of the documents to the State Action until the lifting of the statutorily imposed discovery stay in federal court or until the state court ruled on the propriety of defendants' requested "discovery wall."

32. With these restrictions in place, E&Y produced its quarterly workpapers to plaintiffs. In total, E&Y produced 521 pages of documents. Plaintiffs' counsel thoroughly examined these documents and, in their opinion, found strong support for plaintiffs' allegations of accounting fraud.

V. NOTICE OF SETTLEMENT TO CLASS MEMBERS

33. The Court entered an Order Preliminarily Approving Settlement and Approving the Form and Manner of Notice on December 11, 1998. In that Order the Court directed that the Notice of Pendency and Proposed Settlement of Class Actions ("Notice") be mailed to all members of the Settlement Class who could be identified with reasonable effort. On December 18, 1998, plaintiffs' counsel caused the Notice approved by the Court to be mailed to such class members. Approximately 2,500 Notices were mailed together with a Proof of Claim form. In addition, in accordance with the Court's Order, a Summary Notice of the proposed Settlement was published in Investor's Business Daily on December 22, 1998.

34. Pursuant to requirements of the PSLRA, the Notice provided information about the average recovery per damaged share and the average per share cost of plaintiffs' counsel's requested attorneys' fees and expenses. Thus, class members were fully informed as to the economic substance of the proposed Settlement.

35. The Notice stated that any objections to any aspect of the Settlement were to be filed with the Court and received by certain counsel for the parties no later than February 1, 1999. To date, plaintiffs' counsel are aware of no objections to any aspect of the Settlement or to counsel's request for attorneys' fees and reimbursement of out-of-pocket expenses. Plaintiffs' counsel believe that this lack of objection is significant as the class includes sophisticated institutions who have large stakes and by way of their legal counsel could have come forward to object if in their view it was appropriate to do so.

VI. THE SETTLEMENT IS IN THE BEST INTERESTS OF THE CLASS AND WARRANTS APPROVAL

36. Settlement negotiations took place at arm's length at all times. Neither side conceded its position with respect to the underlying merits. The settlement discussions were conducted by senior lawyers from both sides of the case, experienced in negotiating settlement of complex cases. Each side had a thorough understanding of the allegations made, the facts supporting the allegations and the facts supporting the defenses. Both plaintiffs and defendants recognized that the facts at issue were subject to contradictory interpretations and allowed for both sides to advocate varying views of potential liability and recoverable damages. As a result of these negotiations an agreement in principle was reached to settle the case for $4.5 million.

37. Apart from the arm's-length negotiations, another factor counsel considered in assessing the merits of settlement is whether serious questions of law and fact exist, placing the ultimate outcome of the litigation in doubt. Uncertain questions of law and fact support the conclusion that the Settlement is fair, reasonable and adequate to the class.

38. Throughout the course of the Litigation, defendants asserted that they possessed strong defenses to the claims alleged by plaintiffs. Plaintiffs' counsel continue to believe that plaintiffs would have prevailed had there been a trial. However, as defendants' counsel's aggressive attacks against the pleadings in both the State and Federal Actions make obvious, defendants' counsel indisputably would have employed every imaginable argument to avoid liability had there not been a settlement.

39. In addition, as to the §10(b) claim, plaintiffs faced the burden of establishing that defendants acted with scienter. Establishing scienter has always been a significant challenge for plaintiffs. However, with the enactment of the PSLRA, sufficiently pleading scienter has become more of a hurdle. Defendants have vigorously asserted that the PSLRA has imposed a stricter pleading standard. The law in this circuit is not yet settled as to what is required in order to satisfy the pleading standard.

40. In assessing the merits of the Settlement, plaintiffs' counsel considered the Litigation's hotly disputed factual and legal questions. Plaintiffs' counsel understand that many of the defenses already asserted by defendants had some possibility of success. This uncertainty makes evaluating the ultimate outcome problematic, especially when weighed against the tangible benefits conferred by the Settlement.

41. Plaintiffs also considered the potential recovery the class would have received if the case had gone to trial and plaintiffs prevailed on each of their claims and the jury accepted plaintiffs' methodology of computing damages compared with the significant costs and delay to be incurred during the discovery and pleading process leading up to trial. The value of the present Settlement, which represents an immediate recovery of $4.5 million, is an excellent result in view of the significant hurdles that plaintiffs faced and the considerable amount of time it would take to prosecute the litigation through trial and subsequent appeals.

42. If the parties had not reached settlement and if plaintiffs had succeeded at trial and on appeal, Raster's ability to pay a large judgment is extremely doubtful. Raster has been de-listed from NASDAQ, meaning that Raster's stock no longer trades on NASDAQ -- it trades in the Pink Sheets. Following the announcement of the 3Q97 and 4Q97 restatements, bankruptcy was a very real possibility. Raster averted bankruptcy by signing, in October 1998, a merger agreement with a subsidiary of Gretag Imaging. I have been informed that the merger is contingent on the completion of the Settlement.

43. Moreover, plaintiffs obtained $4.5 million of the $7.5 million in available insurance coverage. The insurance coverage is a wasting asset. If this case went to trial, defense costs would have substantially depleted the available coverage. The $4.5 million is a very significant recovery, considering the poor financial condition of Raster and its questionable ability to fund any judgment.

44. An important factor, when considering whether to approve class action settlements, is the judgment of the parties' counsel that the settlement is fair and reasonable. As outlined in detail above, experienced counsel drafted the Stipulation only after arm's-length negotiations.

45. Plaintiffs' Lead Counsel strongly believe that the Settlement represents the best possible resolution. As outlined above, the Settlement is fair, reasonable and adequate in all respects and should be approved by the Court.

VII. THE PLAN OF ALLOCATION

46. As set forth in the Notice, all class members who wish to participate in the distribution of the Settlement Fund must submit a valid Proof of Claim form postmarked on or before March 18, 1999. As provided in the Stipulation, after deducting all appropriate taxes, administrative costs, attorneys' fees and reimbursement of expenses, the net Settlement Fund will be distributed according to a Plan of Allocation.

47. If approved, the Plan of Allocation will govern how the proceeds of the Settlement will be distributed among class members who submit appropriate Proof of Claim forms.

48. Plaintiffs' counsel, in consultation with their damages consultant, have developed a formula for recovery under the Plan of Allocation. The Plan of Allocation reflects the maximum damages, in plaintiffs' view, that could have been recovered if plaintiffs were successful in establishing liability on all claims.

49. Claims will be calculated as follows:

VIII. PLAINTIFFS' COUNSEL'S APPLICATION FOR AN AWARD OF ATTORNEYS' FEES AND REIMBURSEMENT OF EXPENSES

50. Plaintiffs' counsel seek an aggregate award of 25% of the settlement proceeds established for the benefit of the Settlement Class as legal fees for services rendered on a wholly contingent basis and reimbursement of their out-of-pocket expenses reasonably incurred in the prosecution of the Litigation, plus interest on the fees and expenses at the same rate as that earned on the Settlement Fund.

51. The Notice sent to Settlement Class Members informed them of plaintiffs' counsel's intention to file a fee petition for 25% of the Settlement Fund. As discussed in the accompanying Memorandum in Support of Plaintiffs' Application for Attorneys' Fees and Reimbursement of Expenses ("Fee Brief"), an award of 25% of the benefits achieved for the class is well within the range of fees commonly awarded as a percentage of the recovery in cases of this type; it is a percentage at or below percentages which have been previously approved by this Court and numerous courts in this Circuit; it is warranted based on the quality of counsel's work and the substantial benefit obtained for the class; and it would further support the policy of encouraging lawyers to resolve actions without protracted litigation when such resolutions will benefit those on whose behalf the cases are brought.

52. The expertise and experience of plaintiffs' counsel is described in each of the declarations of plaintiffs' law firms submitted herewith in support of the application for fees and expenses ("Fee Declarations"). Plaintiffs' counsel are among the most experienced and skilled practitioners in the securities litigation field. They are responsible for significant settlements, as well as legal decisions that enable effective private enforcement of our nation's securities laws.

53. Plaintiffs' counsel undertook this litigation on a wholly contingent basis. From the outset, plaintiffs' counsel understood that they were embarking on a complex, expensive and lengthy litigation with no guarantee of ever being compensated for the enormous investment of time and money that the case would require. In undertaking that responsibility, plaintiffs' counsel were obligated to assure that sufficient resources of attorneys were dedicated to the prosecution of this litigation and that funds were available to compensate staff and the considerable out-of-pocket costs that a case such as this entails. Moreover, in committing to fully prosecute this case, plaintiffs' counsel did not work on other potentially profitable matters.

54. Because of the nature of a contingent practice where cases are predominantly "big cases" lasting several years, not only do contingent litigation firms have to pay regular overhead, they also have to advance the expenses of the litigation. With an average lag time of three to four years for these cases to conclude, the financial burden on contingent counsel is far greater than on a firm that is paid on an ongoing basis.

55. The above does not even take into consideration the possibility of no recovery. It is wrong to assume that a law firm handling complex contingent litigation always wins. Tens of thousands of hours have been expended in losing efforts. The factor labeled by the courts as "the risks of litigation" is not an empty phrase.

56. There are numerous cases where plaintiffs' counsel in contingent cases such as this, after the expenditure of thousands of hours, have received no compensation. It is unfortunate, but true, that plaintiffs' counsel who litigate cases in good faith and receive no fees are often the most diligent members of the plaintiffs' bar. It is only the knowledge by defendants and their counsel that the leading members of the plaintiffs' securities bar are actually prepared to, and will, force a resolution on the merits and go to trial that permits meaningful settlements in actions such as this.

57. I am aware of many hard-fought lawsuits where, because of the discovery of facts unknown when the case was commenced, changes in the law during the pendency of the case or a decision of a judge or jury following a trial on the merits, excellent professional efforts of members of the plaintiffs' bar produced no fee for counsel.

58. There has, for example, been a recent trend toward dismissal of actions with prejudice at the pleading or summary judgment stage. Indeed, recent federal appellate reports are filled with opinions affirming dismissals with prejudice in securities cases. E.g., Suna v. Bailey Corp., 107 F.3d 64 (1st Cir. 1997); Chill v. General Electric Corp., 101 F.3d 263 (2d Cir. 1996); In re Syntex Corp. Sec. Litig., 95 F.3d 922 (9th Cir. 1996); Gross v. Summa Four, 93 F.3d 987 (1st Cir. 1996); Glassman v. Computervision Corp., 90 F.3d 617 (1st Cir. 1996); In re Stac Elecs. Sec. Litig., 89 F.3d 1399 (9th Cir. 1996), cert. denied, 520 U.S. 1103 (1997); Epstein v. Washington Energy Co., 83 F.3d 1136 (9th Cir. 1996); Lovelace v. Software Spectrum, 78 F.3d 1015 (5th Cir. 1996); San Leandro Emergency Medical Group Profit Sharing Plan v. Philip Morris Cos., 75 F.3d 801 (2d Cir. 1996); Acito v. IMCERA Group, 47 F.3d 47 (2d Cir. 1995); Hillson Partners Ltd. Partnership v. Adage, Inc., 42 F.3d 204 (4th Cir. 1994); Melder v. Morris, 27 F.3d 1097 (5th Cir. 1994); Shields v. Citytrust Bancorp, 25 F.3d 1124 (2d Cir. 1994); Kowal v. MCI Communications Corp., 16 F.3d 1271, 1273 (D.C. Cir. 1994); Tuchman v. DSC Communications Corp., 14 F.3d 1061 (5th Cir. 1994); Mills v. Polar Molecular Corp., 12 F.3d 1170 (2d Cir. 1993); In re VeriFone Sec. Litig., 11 F.3d 865 (9th Cir. 1993); In re Donald J. Trump Casino Sec. Litig., 7 F.3d 357 (3d Cir. 1993); Neubronner v. Milken, 6 F.3d 666 (9th Cir. 1993); Raab v. General Physics Corp., 4 F.3d 286 (4th Cir. 1993); Arazie v. Mullane, 2 F.3d 1456 (7th Cir. 1993).

59. The many recent appellate decisions affirming summary judgments and directed verdicts for defendants show that surviving a motion to dismiss is no guaranty of recovery in the 1990s. E.g., Silver v. H&R Block, 105 F.3d 394 (8th Cir. 1997); In re Worlds of Wonder Sec. Litig., 35 F.3d 1407 (9th Cir. 1994); Donohoe v. Consolidated Operating & Prod. Corp., 30 F.3d 907 (7th Cir. 1994); Sailor v. Northern States Power Co., 4 F.3d 610 (8th Cir. 1993); McGonigle v. Combs, 968 F.2d 810 (9th Cir. 1992); Moorhead v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 949 F.2d 243 (8th Cir. 1991); In re Convergent Technologies Sec. Litig., 948 F.2d 507 (9th Cir. 1991). Even plaintiffs who succeed at trial may find their judgment overturned on appeal. E.g., Anixter v. Home-Stake Prod. Co., 77 F.3d 1215 (10th Cir. 1996) (overturning plaintiffs' verdict obtained after two decades of litigation); Backman v. Polaroid Corp., 910 F.2d 10 (1st Cir. 1990) (reversing plaintiffs' verdict for securities fraud and ordering entry of judgment for defendants); Ward v. Succession of Freeman, 854 F.2d 780 (5th Cir. 1988) (reversing plaintiffs' jury verdict for securities fraud).

60. Moreover, subsequent to the passage of the PSLRA, many cases in this District have been dismissed (with or without prejudice) at the pleading stage in response to defendants' arguments that the complaints do not meet the PSLRA's heightened pleading standards. See, e.g., Goldberg v. Storm Technology, Inc., Nos. C-97-21101-JF, C-98-20186-JF (N.D. Cal. Nov. 3, 1998); In re Read-Rite Corp. Sec. Litig., No. C-98-20434 (N.D. Cal. Aug. 12, 1998; In re Yes! Entertainment Corp. Sec. Litig., No. C-97-01388 CRB (N.D. Cal. May 14, 1998); Ronconi v. Larkin, [Current Binder] Fed. Sec. L. Rep. (CCH) ¶90,212 (N.D. Cal. May 1, 1998); Howard Gunty Profit Sharing v. Quantum Corp., No. C 96 20711 SW (N.D. Cal. Apr. 6, 1998); Wenger v. Lumisys, Inc., 2 F. Supp. 2d 1231 (N.D. Cal. 1998); In re Fritz Cos. Sec. Litig., No. C 96-2712 MHP (N.D. Cal. Mar. 5, 1998); Head v. Netmanage, Inc., No. C 97-4385 CRB (N.D. Cal. Feb. 23, 1998); Molinari v. Symantec Corp., No. C-97-20021-JW (N.D. Cal. Feb. 17, 1998); Genna v. Digital Link Corp., No. C-96-20867 RMW (N.D. Cal. Sept. 11, 1997); Howard Gunty Profit Sharing v. Quantum Corp., No. 96-20711-SW, 1997 WL 514993 (N.D. Cal. Aug. 14, 1997); In re Oak Tech. Sec. Litig., No. C-96-20552-SW(PVT), 1997 U.S. Dist. LEXIS 18503 (N.D. Cal. Aug. 1, 1997); Zeid v. Kimberley, 973 F. Supp. 910 (N.D. Cal. 1997); Kane v. Madge Networks N.V., No. C 96-20652 RMW(PVT) (N.D. Cal. June 3, 1997); In re Silicon Graphics Sec. Litig., 970 F. Supp. 746 (N.D. Cal. 1997); Hockey v. Medhekar, [1997 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶99,465 (N.D. Cal. Apr. 14, 1997).

61. The foregoing refutes the oft-heard rhetoric that merely filing a class action guarantees a settlement and a large fee. The course of this litigation demonstrates the fact that the mere filing of an action does not ensure that there will be any settlement or fee. It takes hard and diligent work by skilled counsel to develop facts and theories which will persuade defendants to enter into serious settlement negotiations. If defendants believe they will prevail, experience shows that they will litigate to the end. The risk factor is real.

62. Losses such as those described above are exceedingly expensive and can often threaten the survival of a law firm. Onlookers often focus on the gross fees awarded but fail to take into consideration that those fees are used to cover enormous overhead expenses incurred during the course of the litigation, are taxed by federal, state and local authorities and, when reduced to a bottom line, are far less imposing to each individual involved than the gross fee awarded appears. Lawyers who specialize in contingent matters live in a world of uncertainty. Unlike the defense bar, contingent plaintiffs' counsel normally have no steady flow of income. Changes in the law through legislation or judicial decree can be catastrophic, frequently affecting contingent counsel's entire caseload. These are real threats.

63. Courts have repeatedly held that it is in the public interest to have experienced and able counsel enforce the securities laws and regulations pertaining to the duties of officers and directors of public companies. Vigorous private enforcement of the federal securities laws and state corporation laws can only occur if private plaintiffs can obtain parity in representation with that available to large, institutional interests. If this important public policy is to be carried out, the courts must award fees that will adequately compensate private plaintiffs' counsel, taking into account the enormous risks undertaken with a clear view of the economics of a securities class action.

64. When we undertook to act for plaintiffs in this matter, it was with the knowledge that we would spend many hours of hard work against some of the best defense lawyers in the United States with no assurance of ever obtaining any compensation for our efforts, or even for the overhead of our offices, which is an increasingly substantial consideration. We were aware that the only way we would be compensated would be to achieve a successful result.

65. Plaintiffs' counsel also set forth in their declarations the categories and amounts of all expenses incurred in this Litigation. Plaintiffs' counsel have incurred reimbursable expenses in the amount of $117,019.42 during the prosecution of the Litigation. I believe the expenses were reasonably incurred, are reasonable in amount, and should be reimbursed from the settlement proceeds.

IX. CONCLUSION

66. The Settlement was arrived at after substantial investigation, research, discovery and arm's-length negotiation. Based on an understanding of, among other things, the facts and circumstances concerning the subject matter of the Litigation, the applicable principles of law and the relative risks of continuing litigation, plaintiffs' counsel believe that this Settlement represents an extremely favorable result for the Settlement Class and that the proposed Plan of Allocation will fairly apportion the Net Settlement proceeds among Settlement Class Members who file valid and timely proof of claim forms and that both should be approved by the Court. Plaintiffs' counsel also respectfully request that the application by plaintiffs' counsel for attorneys' fees and reimbursement of expenses be granted.

I declare under penalty of perjury under the laws of the State of California that the foregoing is true and correct. If called as a witness, I could and would competently testify thereto. Executed this 10th day of February, 1999, at San Francisco, California.



___________________________________

REED R. KATHREIN



RASTER-G\DRD02191.DEC

DECLARATION OF SERVICE BY MAIL

PURSUANT TO NORTHERN DISTRICT LOCAL RULE 23-2(c)(2)

I, the undersigned, declare:

1. That declarant is and was, at all times herein mentioned, a citizen of the United States and a resident of the County of San Diego, over the age of 18 years, and not a party to or interested in the within action; that declarant's business address is 600 West Broadway, Suite 1800, San Diego, California 92101.

2. That on February 11, 1999, declarant served the DECLARATION OF REED R. KATHREIN IN SUPPORT OF PLAINTIFFS' APPLICATION FOR (1) APPROVAL OF SETTLEMENT, (2) AN AWARD OF ATTORNEYS' FEES AND REIMBURSEMENT OF EXPENSES, AND (3) APPROVAL OF PLAN OF ALLOCATION by depositing a true copy thereof in a United States mailbox at San Diego, California in a sealed envelope with postage thereon fully prepaid and addressed to the parties listed on the attached Service List and that this document was forwarded to the following designated Internet site at:

http://securities.milberg.com

3. That there is a regular communication by mail between the place of mailing and the places so addressed.

I declare under penalty of perjury that the foregoing is true and correct. Executed this 11th day of February, 1999, at San Diego, California.



______________________________

SUSAN L. HAMILTON

1. In the State Action, the class period is April 24, 1997 through February 3, 1998 (the "State Class Period"). In the Federal Action, the class period is October 20, 1997, through April 3, 1998 (the "Federal Class Period"). As discussed below, the parties reached settlement before plaintiffs filed a consolidated amended complaint. That complaint, if filed, would have designated a Federal Class Period co-extensive with that of the State Class Period.

2. The Grimm and Dowgos actions allege a slightly shorter class period. This minor discrepancy would have been eliminated with the filing of the consolidated amended complaint.