WOLF POPPER LLP
LESTER L. LEVY
PATRICIA I. AVERY
MICHAEL A. SCHWARTZ
845 Third Avenue
New York, NY 10022
Telephone: 212/759-4600

Co-Lead Counsel for Plaintiffs
 
 

1. Plaintiffs bring this action as a class action on behalf of a class consisting of plaintiffs and all other persons or entities who purchased the common stock of defendant ADAC Laboratories ("ADAC" or the "Company") during the period January 10, 1996 through December 28, 1998, inclusive ("Class Period") who were damaged by defendants' violations of the federal securities laws.

2. During the Class Period, defendants reported 16 consecutive quarters of record growth. Unbeknownst to the market, however, the Company's highly impressive results were the result of defendants' scheme and course of conduct whereby they caused the Company to report materially inflated revenues, operating income, net income, and earnings per share for fiscal 1996, 1997 and 1998, and every quarter therein, inflating, among other line items, net income (excluding special charges) by 233%, 59% and 64% in 1996, 1997 and 1998, respectively. The following table illustrates the extent of defendants' misstatements.

Restatement of Revenue and Net Income (excluding special charges) (in thousands):

Revenues:                                                                                           FY96

As reported                                                                                     240,785
As restated                                                                                      222,586
Difference                                                                                          18,199
% Overstated                                                                                          8%

Net income:

As reported                                                                                       16,637
As restated                                                                                          5,146
Difference                                                                                          11,491
% Overstated                                                                                      233%

Revenues:                1Q97          2Q97        3Q97         4Q97          FY97

As reported            68,365        69,976       71,510       72,480       282,331
As restated             63,079        61,555       65,256       73,997       263,887
Difference                 5,286          8,421         6,254       (1,517)        18,444
% Overstated               8%            14%           10%          N/A               7%

Net Income:

As reported               5,093         5,552         5,843         6,027         22,515
As restated                2,082         3,546         3,489         5,078         14,195
Difference                  3,011         2,006         2,354            949           8,320
% Overstated            145%           57%           67%           19%            59%

Revenues:                 1Q98         2Q98        3Q98        4Q98*       FY98*

As reported             75,523       77,378        83,521       86,941      323,363
As restated              67,438       74,522        69,756       88,812      300,528
Difference                  8,085         2,856        13,765        (1,871)      22,835
% Overstated              12%             4%            20%            N/A             8%

Net Income:

As reported               6,306         7,004          7,500          8,153       28,963
As restated                3,365         5,379          3,382          5,551       17,677
Difference                  2,941         1,625          4,118          2,602       11,286
% Overstated              87%           30%          122%            47%          64%

* As reported in ADAC's press release dated November 5, 1998.
 

Defendants' scheme was primarily carried out by improperly recognizing revenue that had not been earned on contingent sales, including recognizing revenue on products that had been shipped to warehouses, as opposed to purported customers of the Company -- and booking the revenues from such products, even though the Company was not entitled to payment from its customers and, further, had no expectations of getting paid unless and until the product was received and accepted by the customer.

3. As later admitted by the Company, as a result of the Company's accounting for these and other transactions in violation of Generally Accepted Accounting Principles ("GAAP"), the Company was required to restate its annual and quarterly financials for fiscal years 1996, 1997 and 1998. As a consequence of the restatement, the Company was compelled to, among other things, remove in excess of $59 million in revenue and over $21 million in net income from the Company's previously reported financial statements.

4. This action arises under §§10(b) and 20 of the Securities Exchange Act of 1934 (the "1934 Act"), 15 U.S.C. §§78j(b) and 78t, and the rules and regulations promulgated thereunder, including Securities and Exchange Commission ("SEC") Rule 10b-5, 17 C.F.R. §240.10b-5. Jurisdiction is based upon §27 of the 1934 Act, 15 U.S.C. §78aa, and 28 U.S.C. §1331.

5. Venue is proper in this District because many of the acts complained of, including the dissemination of materially false and misleading statements and reports, prepared by or with the participation, acquiescence, encouragement, cooperation or assistance of defendants, occurred, at least in part, in this District. Additionally, defendant ADAC maintains its principal executive offices within this District.

6. In connection with the acts and conduct complained of, defendants, directly or indirectly, used the means and instrumentalities of interstate commerce, including the mails, interstate telephone communications and the facilities of the national securities exchanges.

7. (a) In accordance with the Court's April 5, 1999 Order, the following plaintiffs are designated as Lead Plaintiffs. Each purchased common stock issued by ADAC at artificially inflated prices during the Class Period and were damaged as a result thereof: (i) Joel Cavazos, (ii) Erwin Groner, (iii) Michael Page, (iv) Arturo Maimoni, and (v) Boris Rimensberger.

(b) Additionally, the following class members have either filed initial complaints or have joined in the motion for Lead Plaintiff: E & L Ballan, Trustees, Marie L. Barca, William C. Biggs, Robert W. Caravan, Michelle Coady, Ross W. Conner, Charles E. Cosky, Alan B. Crane, Arthur Davidson, T.B. Doe III, E.B. Everett Jr., Justin Fernandez, Joel Field, Kenneth M. Grundfast, Jeffrey P. Guido, George Ingersoll, Jerry Kurtyka, Marty Loewe, J. Philip Max, Steven Moccio III, Park East, Inc., Mike Polk, Ronald J. & Nancy A. Pope, Jeff Raleigh, Frank Richardson, Robert Schllimgen, Diana C. Scott, Mark Scott, Mark Sherman, Leroy Tombaugh, Roy Uden, Wendel Vantine, Francisco J. Vasquez Desideri and Eric Weinheimer.

8. Defendant ADAC is a California corporation with its principal offices located at 540 Alder Drive, Milpitas, California 95035. The Company purports to design, develop, manufacture, sell and service medical imaging and health care information systems used in hospitals and clinics worldwide.

9. Defendant David L. Lowe ("Lowe") was Chairman of the ADAC Board of Directors from May 1996 through April 1999. Lowe served as Chief Executive Officer of the Company from November 1994 to August 1997, as Co-Chief Executive Officer from March 1994 to November 1994 and as President of the Company from February 1992 to November 1994. Lowe joined the Company in April 1988 and, from that time until February 1992, served in a variety of senior management positions, including Chief Operating Officer. Lowe was a member of the Company's Board of Directors from August 1992 until his resignation on May 28, 1999.

10. Defendant R. Andrew Eckert ("Eckert") is, and has been since August 1997, the Chief Executive Officer of the Company; on April 27, 1999, he was appointed Chairman of the Board of Directors. From March to August 1997, Eckert served as the President and Chief Operating Officer of the Company. From November 1994 to March 1997, Eckert served as President and General Manager of ADAC Medical Systems, and from February 1992 to November 1994, he served as Executive Vice-President and General Manager of the Company's nuclear medicine business. Eckert joined the Company in February 1990, and from that date until February 1992 held several other senior management positions with the Company. Eckert was elected a director of the Company in April 1996.

11. Defendant P. Andre Simone ("Simone") was the Company's Chief Financial Officer from June 1996 to May 1999. He had been ADAC's Treasurer since 1994. As Chief Financial Officer, Simone was responsible for the representations and financial information in the SEC filings. In 1975, the SEC issued new instructions for Form 10-Q quarterly reports, requiring Forms 10-Q to be signed by the chief financial officers or chief accounting officers of companies to emphasize their responsibility for the financial data included therein. Simone signed each of the false and misleading 10-Qs during the Class Period. From October 1995 to June 1996, Simone served as Vice President, Finance of the Company.

12. Defendants Eckert, Lowe and Simone are sometimes hereinafter referred to as the "Individual Defendants."

13. As senior officers of ADAC, the Individual Defendants were controlling persons of ADAC. As such, each of the Individual Defendants had a duty to disseminate accurate and truthful information regarding ADAC and to correct any previously issued statements that had become untrue so that the market price of ADAC common stock would be based upon truthful and accurate information.

14. ADAC designs, develops, manufactures, sells and services medical imaging and healthcare information systems used in hospitals and clinics worldwide. The Company conducts its business through two principal business units, Medical Systems and Healthcare Information Systems ("HCIS"). The Company's Medical Systems products, which accounted for over 90% of the Company's revenues during the Class Period, include nuclear medicine systems, used primarily for scanning for cancer and heart disease, and radiation therapy planning systems for oncology, as well as refurbished ADAC and third-party nuclear medicine systems. Such systems are large, weighing thousands of pounds, and require expert installation. The Company's HCIS products include radiology, cardiology and laboratory information systems.

15. Defendants, as detailed below, reported artificially inflated quarterly and year-end financial results for fiscal 1996, 1997 and 1998 by, among other things, recognizing revenue for transactions in which defendants caused the Company to ship Medical Systems products to ADAC's offsite centralized warehouse facilities -- as opposed to purported customers of the Company -- and improperly booking the revenues from such purported sales even though the Company was not entitled to payment from its alleged customers until the product had been delivered and accepted by the customers. No payment obligation arose when the goods were "sold" and stored by ADAC in warehouses, since ADAC retained specific performance obligations by agreeing to deliver and install the products to the satisfaction of ADAC's customers. Moreover, ADAC paid the storage and insurance fees on the warehoused products.

16. As discussed herein, the Company's accounting for these and other transactions was in violation of GAAP, which necessitated the restatement of ADAC's quarterly and annual financials for fiscal years 1996, 1997 and 1998. As a result, the Company was compelled to, among other things, remove in excess of $59 million in revenue and over $21 million in net income from the Company's previously reported financial statements for this three-year period. In other words, revenue was inflated materially and net income was inflated by over 118% during the Class Period.

17. Beginning at a time unknown,⁽¹⁾ but at least by the beginning of the Class Period, Lowe, Eckert and Simone were determined to ensure that ADAC reported consistent revenue and earnings gains quarter after quarter. Indeed, throughout the Class Period, defendants consistently reported "record revenue and income gains." As shown in the restatement, however, revenue and income were not consistently growing. In order to achieve the desired results, defendants engaged in a scheme and wrongful course of business that revolved around manipulating ADAC's revenue and income through fraudulent accounting.

18. During the Class Period, in order to compensate for revenue shortfalls between what ADAC's senior management had publicly forecast and ADAC's actual sales, the Company implemented a series of "plans," or methods to falsify revenue and income. The "plans" would generally be executed, as needed, until defendants were satisfied that the results and revenue goals were met or exceeded:

(a) "Slow truck." This plan used a series of slow downs in the shipping process to stretch the delivery time to as much as 30 days. This "plan" was used by ADAC to ship systems at the end of a quarter and report the shipped system as revenue, although the customer was unable or unwilling to accept immediate delivery.

(b) "Ship and store - order received." (Ship and Store/Real) When ADAC received an order requesting delivery more than 30 days beyond the end of the quarter, it approached customers and induced them to sign "ship and store" agreements that allowed ADAC to ship the system to a storage facility and invoice the customer as if the customer had received the system. ADAC's territory manager and regional sales manager approached customers with the proposition that in substance, stated:

ADAC is a publicly traded company and we are accountable to our stockholders each quarter. We can only report to our stockholders orders that can be shipped and invoiced. In order for us to maximize our sales figures this quarter, we need your help. If you would be willing to issue a purchase order or sign a quotation with no contingencies and request a delivery date this quarter, we will ship your system to a storage facility and keep it until you are ready to take delivery. ADAC will pay all shipping and storage charges.

(c) "Ship and store - no order received." (Ship and Store/Phantom) Where ADAC did not have orders to make its revenue goals, the regional sales managers were authorized to approach customers who recognized ADAC as a vendor of choice but did not have board approval or for some other reason could not issue a purchase order to ADAC during the quarter. The territory manager and regional sales manager would approach the customer and offer a side letter, which was an agreement signed by the customer and the territory manager or regional sales manager, the substance of which was dictated and approved by senior management. Two types of side letters were the "board approval" and "acceptable financing" letters. The "board approval" side letter stated, in substance:

The Board of Directors of [Customer] has not approved the purchase and should they not approve the purchase, [Customer] retains the right to cancel the order without recourse. Any and all monies paid to ADAC will be refunded.

[Customer] does not have "acceptable financing" for the project and should acceptable financing not be obtained the order maybe canceled without recourse.

(d) At ADAC there was usually a mixture of real, Ship-and-Store/Real and Ship-and-Store/Phantom orders. ADAC would fill the real orders first, Ship-and-Store/Real second and the Phantom orders only if there were not enough complete systems available. If there were not enough complete systems ADAC would ship partial systems to storage or do what is called a "SHIP IN PLACE." A SHIP IN PLACE occurred when it recorded the unit as revenue but the actual system was not complete.

19. Defendants' scheme to recognize revenue that had not been earned often combined the "plans." For example:

(a) In January 1997, the Texoma Medical Center ordered a $450,000 Vertex camera. ADAC needed to record the revenue in the second quarter of fiscal 1998 "to make their numbers" so they convinced the medical center to enter a "ship and store" agreement with a side agreement that the sale was subject to "board approval." The revenue was recognized in the second quarter. While Texoma ultimately took delivery of the camera, it did so much later than the second quarter of fiscal 1998. Thus, nearly half a million dollars was improperly recognized.

(b) In June 1997 (third quarter fiscal 1998), ADAC had a "sale" of a $500,000 Vertex camera to Diagnostic Health Services ("DHS"), Dallas, Texas, which in turn would contract the camera to private physicians. Before DHS would buy the camera, it required the doctor to sign a contract for its use. By the end of the third quarter, the doctor had not signed the contract; however, ADAC needed the sale as revenue to make the numbers, so they persuaded DHS to agree to purchase the camera subject to an "acceptable financing" side letter that ADAC personnel typed on DHS' letterhead, which provided that, if the contract was not signed by June 30, 1997, the order "may be cancelled without penalty." The contract with the doctor was never finalized, and thus DHS never paid nor was obligated to pay for the camera. Despite this contingency and the fact that ADAC was never paid, the Company improperly recorded the revenue and income from this sale in the third quarter of fiscal 1998.

20. The transactions described above were typical of the transactions engaged in throughout the Class Period in order to artificially inflate ADAC's revenue and income in order to meet or exceed Wall Street analyst expectations and, to make it appear that ADAC was constantly growing. Defendants' improper revenue recognition was not due to a failure to understand or the erroneous application of accounting rules, but rather was a deliberate circumvention of accounting controls and an overstatement of reported sales and income by ADAC.

21. Defendants' accounting manipulations had the desired effect: ADAC was able to report ever-increasing revenues and net income. In fact these results were artificially inflated as the following charts reflect:

22. Defendants Lowe, Eckert and Simone knew of and, indeed, directed this accounting manipulation. Lowe and Eckert were very "hands-on" and would visit ADAC field offices several times a quarter. Their focus was always on the sales and revenues. If revenue was not going to be recognized when needed (i.e., to "make the numbers") Lowe would often ask the salespeople, in substance, "[c]an't we do a 'ship and store' to meet revenue?" "Have you approached the customer about a ship and store?" "Do you want me to call them?"

23. Lowe worked with salespeople on some of the "ship and store" side-letter deals. He made the presentations concerning the various "deals" that ADAC would offer (e.g., the ship and store and financing arrangements); Lowe told the sales force that he and Eckert were "always available to close the deal."

The SPIN Planner

24. SPIN stands for "Situation, Problems, Implication and Needs," and essentially is a blueprint of how the sales force would identify customers, focus on their needs and sell ADAC products. Every salesperson in the Company had to keep a "SPIN Planner," which was a log of every contact they had with particular customers, including the deals that were made. The deals, including side letters, etc., were documented. These SPIN Planners were copied and given to upper management, including the Individual Defendants who reviewed them before the quarterly Dash meetings (described below). In fact, Lowe and Eckert would not even talk to the managers at the quarterly Dash meetings without a SPIN Planner for that salesperson.

The Quarterly Dash Meetings

25. At approximately the fifth week of every quarter ADAC conducted Company-wide total quality management meetings known as "Dash" meetings.⁽²⁾ The Dash meetings took place over several days and were held at Company headquarters in Milpitas, California with a video link to the Company worldwide. Defendants Lowe, Eckert, Simone and other members of senior management sat at a dais with regional managers seated behind them.

26. The purpose of the Dash meeting was to review the status of the Company, department by department, with an emphasis on "where the particular unit had been" (i.e., had they met last quarter's goals), "where they were" (i.e., current status) and "where they expected to be" (i.e., would they meet sales revenues and orders for the quarter). In preparation for the Dash meeting, defendants and senior management were provided with each salesperson's SPIN Planner and had binders from prior Dash meetings available. At the meetings, defendants Eckert and Lowe questioned the presenters concerning the revenue and sales forecasts and whether the units' stated goals were being met.

27. In fiscal 1996, the Company improperly booked in excess of $17.8 million in revenues from fraudulent transactions involving Medical Systems products. Defendant Eckert served as President and General Manager of ADAC Medical Systems from November 1994 to March 1997 and was the individual "with direct responsibility for the Company's [Medical Systems] business units" (The Wall Street Transcript, Company Report, ADAC Laboratories), in 1996 and the first half of fiscal 1997 when the fraud was implemented. As a result of his position, control and participation at the Company, defendant Eckert had actual knowledge of or recklessly disregarded the manner in which Medical Systems products were shipped and revenue improperly recognized.

28. As Chief Financial Officer of ADAC, defendant Simone, in conjunction with his direct supervisors, defendants Eckert and Lowe, was responsible for the preparation of ADAC's financial statements and for ensuring that the periodic reports filed with the SEC containing such financial statements complied fully with the disclosure requirements of the federal securities laws. Defendant Simone signed, and the Individual Defendants all reviewed, ADAC's Form 10-Qs for 1996, 1997 and 1998, and all of the Individual Defendants reviewed and signed the annual reports on Forms 10-K for 1996 and 1997. Because the recognition of revenue by defendants on bill-and-hold transactions is a departure from the general rule of revenue recognition (see FASB Statement of Concepts No. 5, ¶¶83-84), the Individual Defendants -- persons responsible for preparation and filing of ADAC's financial statements -- had the responsibility to verify underlying facts of any such transaction prior to the recognition of revenue. In addition, given the pervasiveness of the accounting irregularities acknowledged by the Company -- virtually every income statement line item was affected by the restatement -- defendant Simone, as the Chief Financial Officer of the Company, and defendants Eckert and Lowe, as the senior officers of the Company, knew of, approved or recklessly ignored the improper conduct complained of herein.

29. In addition, defendants also had strong financial motives to disseminate false and misleading financial information, had opportunities because of their positions with the Company to act on those motives, and did indeed act to take advantage of such opportunities.

30. While defendants were issuing false and misleading statements about ADAC, the Individual Defendants sold 376,352 shares of ADAC common stock during the Class Period at artificially inflated prices at a significant profit: (a) defendant Eckert sold 174,501 shares, 58% of his entire holdings of ADAC common stock and vested options, for total proceeds of $3,739,843; (b) defendant Lowe sold 190,601 shares, 67% of his entire holdings of ADAC common stock and vested options, for total proceeds of $4,035,250; and (c) defendant Simone sold 11,250 shares, 21% of his entire holdings of ADAC common stock and vested options, for total proceeds of $237,263.

31. The Individual Defendants were further motivated to undertake or recklessly ignore the acts complained of herein because during the Class Period the Individual Defendants' compensation was "closely tied to the Company's financial performance and operations." ADAC Proxy Statement (Jan. 20, 1997). Under the Company's management incentive program, "[i]n order for an executive to achieve his or her maximum bonus under such Program, he or she must accomplish most or all of the individual objectives and the Company must achieve its targeted level of revenue and earnings for a particular fiscal year." Id. Defendant Eckert has acknowledged that "[o]ur management team is compensated to a great degree on our ability to provide superior results." The Wall Street Transcript, Company Report, ADAC. As a result, the Individual Defendants received compensation based on their misconduct, as opposed to the true financial performance of the Company:

1996

(a) Defendant Lowe's annual base salary for fiscal 1996 was $400,000, and he was eligible to receive a bonus of up to 50% of his base salary based upon quarterly and annual operating results and the accomplishment of certain goals. On the basis of the Company's achievement of the set goals in fiscal 1996, Lowe was awarded a bonus of $120,000. Id. In addition, due to, among other things, "the doubling of the value of the Company's Common Stock over the year, the improved gross margins in the Company's Medical Systems business and the results of certain other key strategic initiatives, the Board of Directors awarded Lowe a one-time, additional bonus of $50,000." Id.

(b) In 1996, defendant Eckert earned a base salary of $199,992 and an incentive-based bonus under ADAC's management incentive program of $225,000. Id.

1997

(c) Defendant Lowe served as the Company's Chief Executive Officer during the first ten months of fiscal 1997 and served as Chairman for all of fiscal 1997. Lowe's annual base salary for fiscal 1997 was $500,000. Lowe was eligible to receive a bonus of up to 50% of his base salary based upon the Company's and his achievement of certain goals. Of defendant Lowe's maximum bonus for fiscal 1997 of $250,000, $125,000 was based on the Company's achievement of its financial plan, including revenues, earnings per share and bookings targets, and $125,000 was tied to the Company's and his development and implementation of certain strategic plans for future fiscal periods. These plans included the development of the Company's service business and the attainment of certain goals in the Company's two primary business units, Medical Systems and HCIS, including specified sales goals for particular products, the timely development of certain key products and the establishment of longer term strategic plans for certain of the Company's businesses. Based on the level of achievement of these objectives, Lowe was awarded $185,000, or 74% of his total bonus. ADAC Proxy Statement (Jan. 28, 1998).

(d) Defendant Eckert succeeded Lowe as the Company's Chief Executive Officer in August 1997 and served in that capacity for the last two months of fiscal 1997. Eckert's annual base salary for fiscal 1997 was $325,000. Eckert was eligible to receive a bonus of up to 85% of his base salary, based upon the Company's and his achievement of certain goals. Of Eckert's maximum bonus for fiscal 1997 of $275,000, $96,250 was based on the Company's achievement of its financial plan and $178,750 based on the Company's and Eckert's achievement of specified operating goals. These goals related to the achievement of specified operating objectives by one of the Company's business units, ADAC Radiology Services, and of certain strategic objectives in the Company's Medical Systems business. These goals included specific sales, product development and other objectives. Based on the degree of achievement of these goals, Eckert was awarded $155,437, or 57% of his total bonus. Id.

1998

(e) Defendant Eckert's overall compensation in fiscal 1998 was based in part on the Company's performance. Eckert's base salary for fiscal 1998 was $450,000. He was also eligible to receive a bonus of up to $300,000. ADAC Proxy Statement (Apr. 6, 1999). "A maximum of $120,000 of this bonus amount was payable quarterly based on the Company financial results, and a maximum of the remaining $180,000 was payable at year-end based on his achievement of operating and strategic goals, including management development and pursuit of growth opportunities in certain business segments. Based on his level of achievement of these goals, Mr. Eckert was awarded a $240,000 total bonus." Id.

(f) From October 1997 through January 1998, defendant Lowe was employed by the Company and received $238,000 in compensation. Beginning in February 1998, Mr. Lowe entered into a consulting arrangement with the Company pursuant to which the Company paid Mr. Lowe $258,000. Id.

32. The Individual Defendants, by reason of their executive positions and conduct at ADAC, were controlling persons of ADAC and had the power and influence, and exercised the same, to cause ADAC to engage in the conduct complained of herein. The Individual Defendants controlled the contents of ADAC's SEC filings, corporate reports and press releases. Each of the Individual Defendants participated in writing or reviewing ADAC's corporate reports, press releases and SEC filings alleged to be misleading and thus had the ability and opportunity to prevent their issuance or cause them to be corrected. As a result, each of the Individual Defendants is responsible for the accuracy of the public reports and releases detailed herein as "group-published" information and is therefore responsible and liable for the representations contained therein.

33. Defendants acted with scienter in that they knew or recklessly disregarded that the public documents and statements issued or disseminated by them or in the name of the Company were materially false and misleading, knew or recklessly disregarded that such statements or documents would be issued or disseminated to the investing public and knowingly or recklessly and substantially participated or acquiesced in the issuance or dissemination of such statements or documents as primary violations of the federal securities laws. As set forth herein, defendants acted with a knowing or conscious disregard for the falsity of ADAC's financial statements. In addition, defendants had motives and opportunities to defraud plaintiffs and the Class and acted on those opportunities.

34. Defendants' statements regarding the Company's quarterly and annual 1996, 1997 and 1998 financial results were materially false and misleading because defendants knew that the Company's record results and growth were attributable to the improper recognition of revenue in violation of GAAP (FASB Statement of Concepts No. 5, ¶83).

35. The facts surrounding the extensive restatement show that defendants acted with knowledge or reckless disregard that their actions resulted in the publication of false and misleading financial statements. More than 45% of the net income (before charges) reported by ADAC over three fiscal years was false and the result of accounting manipulations.

36. On January 10, 1996, defendants caused the Company to issue a press release announcing that it would "achieve a record $71 million in bookings for the first quarter [of fiscal 1996] ending December 31, 1995." According to this press release:

This bookings attainment represents a 61 percent increase over the $44 million for the prior year's first quarter. Nuclear medicine equipment bookings, anticipated to be $48 million, will be the highest in the Company's history and represent a 78 percent increase from the $27 million for this division in the previous first quarter.

First quarter revenues are expected to be in the range of $54 to $55 million -- approximately a 24 percent increase from the prior year's first quarter revenues of $44 million. Earnings per share are expected to be approximately 20 cents versus 15 cents in the first quarter of 1995. The Company expects to report complete financial information for the first quarter in mid January.

David L. Lowe, Chief Executive Officer, stated, "A major factor for the bookings increase is the continued strong interest in Molecular Coincidence Detection (MCD™) which received FDA 510k clearance in November. This breakthrough technology is designed to enable ADAC's dual head nuclear imaging systems to perform both single photon emission computed tomography (SPECT) and coincidence imaging using the same nuclear gamma camera. In our HealthCare Information Systems business, we booked a record $9 million. We are particularly pleased to have received our first order for our new client/server laboratory information system, LabStat™.

37. After the foregoing press release was issued, the price per share of ADAC common stock soared, closing 19% higher following the announcement.

38. On January 18, 1996, defendants caused the Company to announce the results of its operations for its first fiscal 1996 quarter ended December 31, 1995. In a press release that day, the Company reported "record revenues" of $55.0 million, a 24% increase over the $44.2 million reported for the first quarter of fiscal 1995. The Company reported net income of $3.5 million, or $0.20 per share, as compared to $2.4 million, or $0.15 per share, in the first quarter of fiscal 1995. The Company also reported record bookings of $71 million in the first quarter, a 61% increase compared to the $44 million in the prior year's first quarter. Defendant Lowe, then Chief Executive Officer, stated in the Company's press release:

"We are pleased to report our sixth consecutive quarter of increasing revenues and operating profits. In addition, ADAC's nuclear medicine business achieved $48 million in bookings, a 78 percent increase from the $27 million in the previous first quarter. We believe that the strong market interest in Molecular Coincidence Detection (MCD™) has significantly contributed to the large bookings increase. . . .

Lowe continued, "Our HealthCare Information Systems business posted record bookings of $9 million which include our first order for LabStat™. ADAC's entry into the $400 million laboratory information systems market remains on target with the anticipated product release of LabStat in midcalendar 1996. LabStat will be among the industry's first laboratory clinical information systems designed to operate within an open-system client/server architecture."

39. On or about February 14, 1996, defendants caused the Company to file its Form 10-Q with the SEC for ADAC's first fiscal 1996 quarter, signed by defendant Simone and reviewed and authorized by the Individual Defendants, which republished the Company's financial results reported on January 18, 1996. In the Form 10-Q, defendants stressed the success of ADAC's Medical Systems products business:

Medical Systems product orders increased from $29.5 million to $49.9 million. . . . Medical Systems product revenues increased from $32.0 million to $36.8 million. This product revenue increase was primarily due to a 18.7% or $5.5 million increase in Nuclear Medicine product sales . . . Medical Systems service revenues increased from $9.6 million to $11.0 million, primarily as a result of the continued increase in the installed product base.

Medical Systems product revenue represented 92.7% and 94.4% of the Company's total product revenue during the first quarter of fiscal 1996 and 1995, respectively.

40. In addition, defendants assured investors that the Company's financial statements were prepared in accordance with GAAP:

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles . . . . In the opinion of management, the consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of the information required to be included.

41. Defendants' statements regarding the Company's first fiscal 1996 quarter were materially false and misleading because, as defendants later admitted, the Company's purported record results and growth were largely attributable to the improper recognition of revenue from shipments of its Medical Systems products to warehouses as opposed to ADAC's purported customers, and the failure to record certain expenses, all in violation of GAAP, as further described in ¶¶114-127.

42. On April 22, 1996, defendants caused the Company to issue a press release announcing the results of operations for the Company's second fiscal 1996 quarter ended March 31, 1996. In its press release, the Company reported record revenues of $58.4 million, a 31% increase over the $44.7 million reported for the second quarter of fiscal 1995. The Company reported net income of $3.9 million, or $0.22 per share, as compared to $2.8 million, or $0.17 per share, in the second quarter of fiscal 1995. The Company also reported bookings of $61 million in the second quarter, a 36% increase compared to the $45 million in the prior year's second quarter. The press release went on to quote defendant Lowe, then Chairman and Chief Executive Officer, as stating:

"We are pleased that bookings were again higher than revenue, which adds to our backlog. Total nuclear medicine product bookings were $40 million in this second quarter, compared to $31 million in the comparable period a year ago and $48 million in the first quarter of fiscal 1996. . . ."

Lowe continued, "We are proud to report our seventh consecutive quarter of increasing revenues and operating profits. . . . We also released LabStat™ with Windows 95. This laboratory clinical information system is currently undergoing implementation at three sites. In nuclear medicine, we expect to begin our clinical trials of our breakthrough MCD™ product at five luminary sites on schedule this quarter."

43. On or about May 14, 1996, defendants caused the Company to file its Form 10-Q with the SEC for ADAC's second fiscal 1996 quarter, signed by defendant Simone and reviewed and authorized by the Individual Defendants, which republished the Company's financial results reported on April 22, 1996. In the Form 10-Q, defendants again stressed the success of ADAC's Medical Systems products business:

Medical Systems product revenues increased from $32.0 million in the second quarter of fiscal 1995 to $39.1 million in the second quarter of fiscal 1996, and increased from $64.0 million to $75.9 million in the first six months of 1995 and 1996, respectively. This product revenue increase was primarily due to a 19.1%, or $5.8 million, increase in Nuclear Medicine product revenues for the second quarter of fiscal 1996 compared with the second quarter of fiscal 1995. For the comparable six month periods, Nuclear Medicine product revenue increased 18.9%, or $11.3 million, over the first six months of fiscal 1995. . . . Medical Systems service revenues increased from $10.3 million to $11.4 million in the second quarters of fiscal 1995 and 1996, respectively, and increased from $19.9 million to $22.3 million in the first six months of fiscal 1995 and 1996, respectively, primarily as a result of the continued increase in the installed product base.

Medical Systems product revenue represented 91.0% and 95.3% of the Company's total product revenue during the second quarters of fiscal 1996 and 1995, respectively, and 91.8% and 94.8% of the Company's total product revenue during the first six months of fiscal 1996 and 1995, respectively. . . .

44. In addition, defendants continued to assure investors that the Company's financial statements were prepared in accordance with GAAP:

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles . . . . In the opinion of management, the consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of the information required to be included. . . .

45. Defendants' statements regarding the Company's second fiscal 1996 quarter were materially false and misleading because, as defendants later admitted, the Company's purported record results and growth were largely attributable to the improper recognition of revenue from shipments of its Medical Systems products to warehouses as opposed to ADAC's purported customers, and the failure to record certain expenses, all in violation of GAAP, as described in ¶¶114-127.

46. On July 22, 1996, defendants caused the Company to issue a press release announcing the results of operations for the Company's third fiscal quarter ended June 30, 1996. The Company reported revenues of $62.4 million, a 37% increase over the $45.6 million reported for the third quarter of fiscal 1995; net income of $4.4 million, or $0.24 per share, as compared to $3.1 million, or $0.18 per share, in the third quarter of fiscal 1995; and bookings of $69 million, compared to $48 million in the prior year's third quarter. Defendant Lowe, then Chairman and Chief Executive Officer, was quoted in the Company's release as stating:

"We are very pleased to report our eighth consecutive quarter of increased revenues and operating profits. Strong market response to ADAC's innovative technology and products has resulted in market share growth. . . .

* * *

Lowe continued: "ADAC's HealthCare Information Systems business continues on target with steady increases in revenues for both our radiology and laboratory products. ADAC's QuadRIS and LabStat products, based on client/server architecture, provide the flexibility and expandability that health care providers need to serve not only a single hospital, but also hospital groups."

47. After the Company's July 22, 1996 press release, the price per share of ADAC common stock soared, closing 20% higher.

48. On or about August 13, 1996, defendants caused the Company to file its Form 10-Q with the SEC for ADAC's third fiscal 1996 quarter, signed by defendant Simone and reviewed and authorized by the Individual Defendants, which republished the Company's financial results reported on July 22, 1996. In the Form 10-Q, defendants highlighted the continued success of ADAC's Medical Systems products business:

Medical Systems product revenues increased from $32.7 million in the third quarter of fiscal 1995 to $41.5 million in the third quarter of fiscal 1996, and increased from $96.7 million to $117.4 million in the first nine months of 1995 and 1996, respectively. This product revenue increase was primarily due to an 18.7%, or $5.9 million, increase in Nuclear Medicine product revenues for the third quarter of fiscal 1996 compared with the third quarter of fiscal 1995. For the comparable nine month periods, Nuclear Medicine product revenue increased 18.8%, or $17.2 million, over the first nine months of fiscal 1995. . . . Medical Systems service revenues increased from $10.8 million to $11.8 million in the third quarters of fiscal 1995 and 1996, respectively, and increased from $30.7 million to $34.1 million in the first nine months of fiscal 1995 and 1996, respectively, primarily as a result of the continued increase in the installed product base.

Medical Systems product revenue represented 89.5% and 96.2% of the Company's total product revenue during the third quarters of fiscal 1996 and 1995, respectively, and 91.0% and 95.3% of the Company's total product revenue during the first nine months of fiscal 1996 and 1995, respectively. . . .

49. Defendants once again assured investors that the Company's financial statements were prepared in accordance with GAAP:

The accompanying unaudited condensed interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles . . . . In the opinion of management, the condensed interim consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of the information required to be included.

50. Defendants' statements regarding the Company's third fiscal 1996 quarter were materially false and misleading because, as defendants later admitted, the Company's purported record results and growth were largely attributable to the improper recognition of revenue from shipments of its Medical Systems products to warehouses as opposed to ADAC's purported customers, and the failure to record certain expenses, all in violation of GAAP, as described in ¶¶114-127.

51. On November 4, 1996, defendants caused the Company to issue a press release announcing record results for its fourth quarter and fiscal year ended September 29, 1996. The Company reported its "ninth consecutive quarter of increased revenues," reporting revenues of $64.9 million and net income of $4.8 million, or $0.26 per share, in the fourth quarter. For the fiscal year ended September 29, 1996, ADAC reported revenues of $240.8 million, a 30% increase over the $184.8 million reported for the previous fiscal year. Gross profit margins were reported at 38.7%, with the product gross margin at 39%. For fiscal 1996, ADAC reported net income of $16.6 million, or $0.90 per share. Earnings per share increased approximately 38% from fiscal 1995, when the Company achieved net income of $11.1 million, or $0.65 per share. Defendant Lowe, then Chairman and Chief Executive Officer, was quoted in the press release as stating:

"We are very pleased with our strong results in fiscal 1996 . . . ."

* * *

ADAC also reported strong demand for its Molecular Coincidence Detection (MCD) technology and new laboratory and radiology information systems in fiscal 1996. MCD is designed to provide significant improvements in clinical imaging of the most frequently diagnosed cancers by enabling both single photon emission computed tomography (SPECT) and coincidence imaging using the same nuclear gamma camera.

"MCD bookings increased from 5 units in the third quarter to 22 units in the fourth quarter," said Lowe. "Additionally," stated Lowe, "the continued momentum of ADAC's radiology information system, QuadRIS/RS®, and the recent introduction of our laboratory information system, LabStat, are opening new markets and providing new sources of revenue for the company."

52. After the foregoing press release was issued, the price per share of ADAC common stock closed 5% higher the following day.

53. Relying on ADAC's 1996 fiscal year results, Credit Suisse First Boston Corporation initiated coverage of ADAC with a "Buy" rating. According to the analyst report:

We are initiating coverage of ADAC with a "Buy" rating. In FY96 (September 30), the company had revenues of $241 million and earnings of $0.90 per share. We estimate that its revenue will increase 16%, to $278 million in FY97, and EPS will increase 28%, to $1.15. For FY98, we estimate that revenue will increase 12%, to $312 million, and that EPS will reach $1.40, an increase of 22%. Our corresponding calendar year EPS estimates are $1.00 for 1996 and $1.20 for 1997. Our five-year projected EPS growth rate is 15%. Our 12-18-month price objective in the mid to upper $20 range assumes that the stock can achieve a valuation that reflects its building presence in the information system and radiology services sectors. The companies in these sectors trade on average at more than 20x consensus calendar 1997 EPS estimates, respectively; ADAC is currently trading at only 18.2x our calendar 1997 EPS estimate.

54. On or about December 27, 1996, defendants caused the Company to file its Form 10-K with the SEC for ADAC's 1996 fiscal year, signed by, among others, defendants Lowe, Simone and Eckert, which republished the Company's financial results reported on January 18, 1996, February 14, 1996, April 22, 1996, May 14, 1996, July 22, 1996, August 13, 1996 and November 4, 1996. Defendants again stressed the growth of revenues from the Company's Medical Systems product line:

Medical Systems' product revenues increased in nuclear medicine due to continued customer acceptance of the Company's nuclear medicine product family, including new product introductions, and enhancement options. . . . Medical Systems' revenues increased in dollar volume in all of the Company's geographical markets, while the growth rate was the highest in the North American market. Product gross margins for Medical Systems primarily increased due to reductions in product cost.

Medical Systems' service revenues increased as a result of an increase in the Company's installed customer base, and service gross margins increased primarily from an increase in the Company's installed customer base and increased product reliability.

* * *

Increases in HCIS' product revenues are attributable to the Company's QuadRIS radiology and LabStat laboratory information systems acquired in or developed subsequent to the Company's acquisition of CHC. The Company acquired CHC in July 1995. HCIS' product revenues grew in both laboratory and radiology product families, and product mix shifted more towards laboratory compared to the prior year as that product family increased the volume of installations after introduction of the LabStat product in early fiscal 1996. The increase in HCIS' product gross margins is primarily attributable to efficiency gains by increased shipments and installation of both the laboratory and radiology product families compared with the infrastructure required to deliver such products.

55. Defendants' statements regarding the Company's fourth fiscal 1996 quarter and fiscal year 1996 were materially false and misleading because, as defendants later admitted:

(a) Revenue for the year was overstated by $18.2 million, and net income for the year was overstated by $11.5 million, or 233%, primarily as a result of the improper recognition of revenue as described in ¶¶114-127.

(b) Net income for the year had not increased from the prior year, but in fact declined to less than half the prior year's amount;

(c) Gross profit margin was 36%, not the reported 38.7% and product gross margin was 35.7%, not 39%; and thus

(d) The record financial results announced were due to defendants' improper conduct, not the commercial success of the Company's Medical Systems product division.

56. On January 27, 1997, defendants caused the Company to issue a press release announcing ADAC's tenth consecutive quarter of record results. For its first fiscal quarter of 1997 ended December 29, 1996, the Company reported record revenue of $68.4 million, a 24% increase over the $55.0 million reported for the first quarter of fiscal 1996. Defendants attributed this increase primarily to a 30% increase in revenue from sales of ADAC's Medical Systems products. Gross profit margin increased to 40.3% from 38.4% in the previous year's first quarter, with product gross margins up 3.7% to 41.8% over that time period. ADAC reported net income of $5.1 million, a 44% increase over the $3.5 million reported in the first quarter of fiscal 1996. Earnings per share increased 33% from $0.20 in the first quarter of fiscal 1996 to $0.27 in the first quarter of fiscal 1997. ADAC also reported record bookings of $82 million in the first quarter, adding approximately $13 million of additional backlog. Defendant Lowe, then Chairman and Chief Executive Officer, was quoted as stating:

"We are very pleased to report our tenth consecutive quarterly revenue increase. In the first quarter, we began volume shipments of our Molecular Coincidence Detection (MCD™) product. . . .

Lowe continued, "We also made two key strategic investments to further enhance our capabilities. We acquired Geometrics Corporation, the architect of ADAC's successful Pinnacle3™ three-dimensional radiation therapy planning system. Pinnacle3 significantly improves physicians' ability to develop optimal radiation treatment alternatives. We believe that Geometrics' core technology will benefit ADAC's other product lines, particularly nuclear medicine. In addition, our newly-formed ADAC Radiology Services (ARS) division acquired an interest in Medical Transition Strategies (MTS), a management service organization (MSO) for physician-driven radiology networks. . . ."

57. On or about February 12, 1997, defendants caused the Company to file its Form 10-Q with the SEC for ADAC's first fiscal quarter of 1997, signed by defendant Simone and reviewed and authorized by the Individual Defendants, which republished the Company's financial results reported on January 27, 1997. The Form 10-Q highlighted the Company's continued success and focused attention on the growth of revenues in the Company's Medical Systems product line:

Medical Systems' product revenues increased primarily due to continued customer acceptance of the Company's nuclear medicine product family, including new product introductions, and enhancement options. RTP's product revenues also increased due to the FDA's clearance of Pinnacle 3™. Medical Systems' revenues increased in dollar volume in all of the Company's geographical markets. Product gross margins for Medical Systems primarily increased due to reductions in product cost and sales of the Company's new product, Molecular Coincidence Detection (MCD).

Medical Systems' service revenues increased as a result of an increase in the Company's installed customer base. . . .

58. With respect to the Geometrics acquisition, defendants stated the following:

On November 4, 1996, the Company acquired Geometrics Corporation, of Madison, Wisconsin, a developer of specialized medical software used in the planning of radiation therapy treatments for cancer patients. Geometrics will operate as a product development unit of the Company's Radiation Therapy Planning division. In connection with the acquisition, the Company issued 191,000 shares having an approximate fair market value of $3.9 million. The acquisition has been accounted for as a pooling of interests. Prior period financial statements will not be restated because Geometrics is not material to the financial position or results of operations of the Company.

59. In addition, defendants continued to assure investors that the Company's financial statements were prepared in accordance with GAAP:

The accompanying unaudited condensed interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles . . . . In the opinion of management, the condensed interim consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of the information required to be included.

60. Defendants' statements regarding the Company's first fiscal 1997 quarter were materially false and misleading because, as defendants later admitted:

(a) Revenue for the quarter was overstated by $5.3 million, or 8%, and net income for the quarter was overstated by $3 million, or 145%, primarily as a result of the improper recognition of revenue in violation of GAAP, as described in ¶¶114-127.

(b) The acquisition of Geometrics did not qualify for accounting as a pooling of interests and was instead required to be accounted for as a purchase; as a result, $3.9 million of intangibles assets was required to be recorded and amortized (expensed) over the next seven years, thereby reducing ADAC's future net income; and

(c) Gross profit margin for the quarter equaled 34.7%, not 40.3%, and product gross profit equaled 35.3%, not 41.8%.

61. On March 19, 1997, Bear Stearns & Co, Inc. rated ADAC a "Buy," citing the Company's track record of consistent revenue growth as publicly proclaimed by defendants:

* Consistent Growth in Revenue and EPS. For first-quarter (ended December 31, 1996) fiscal 1997, ADAC reported its tenth consecutive quarter of increased revenues. We are projecting sales to increase 17% in fiscal 1997 and close to 14% in fiscal 1998. EPS increased 33%, to $0.27, in the quarter, and we are projecting earnings to grow at a compound rate of 25% over the next couple of years. Should ADAC's new MCD imaging systems gain wide acceptance during the next several months, the company would have an opportunity to accelerate product replacement of nearly 3,000 cameras installed by ADAC with new, more cost-effective technology, providing plenty of upside to our estimates.

62. On April 24, 1997, defendants caused the Company to issue a press release announcing record results for its second fiscal quarter of 1997, ended March 30, 1997. ADAC reported record revenues of $70 million, a 20% increase over the $58.4 million reported for the second quarter of fiscal 1996. Defendants once again attributed this increase to a 23% increase in product revenue and a 10% increase in service revenue. Gross profit margin increased to 41.4% from 38.2% in the previous year's second quarter, with product gross margins up 4.4% to 42.9% over that time period. ADAC reported net income of $5.6 million, a $1.7 million increase over the $3.9 million reported in the second quarter of fiscal 1996. Earnings per share reportedly increased 32% from $0.22 in the second quarter of fiscal 1996 to $0.29 in the second quarter of fiscal 1997. Defendant Lowe, then Chairman and Chief Executive Officer, was quoted as stating:

"In the second quarter, we booked orders of $80 million, which represents an approximate $20 million increase over the same quarter in the prior fiscal year. Our bookings attainment in the second quarter is particularly exciting for us, as our second quarter is a seasonally slow period for incoming orders in the nuclear medicine industry. We are also very pleased to report our tenth consecutive quarterly revenue and operating profit increase."

63. The day after ADAC's April 24, 1997 press release, the price per share of ADAC common stock soared to close 15% higher.

64. On April 25, 1997, Dillon, Read & Co., in response to what they termed ADAC's "Strong Fiscal Second-Quarter Results," rated ADAC a "Buy." In issuing its rating, Dillon, Read & Co. focused on the Company's publicly proclaimed growth in sales and improved margins:

Bookings increased 33% over the year-ago level, to $80 million. The company's backlog increased by $10 million to $94 million. Product revenues increased to $52.9 million compared with $42.9 million last year, while service revenue grew to $17.1 million from $15.5 million.

ADAC booked about 20 Molecular Coincidence Detection, or MCD, systems during the quarter, and shipped an estimated 16-18. Virtually all of the orders booked were for full nuclear medicine systems incorporating MCD, rather than for MCD upgrades for existing installations. Our fiscal 1997 numbers assume a steady 20 system per quarter rate for MCD. However, clinical studies on the clinical utility of MCD, to be published during the summer-fall time period, could lead to an acceleration of this rate later this fiscal year and into fiscal 1998.

Reflecting the strong product revenue growth and the leverage from MCD, overall gross margins improved to 41.4% from 38.2% last year. Gross margins exceeded our estimate by 90 basis points. Product gross margin improved to 42.9% in the second quarter, compared with 38.6% in the year ago period and 41.8% in the prior quarter. R&D and SG&A increased 16.4% and 25.3% respectively, compared with the year-ago quarter.

Operating profit increased 44%, to $10 million, while operating margin improved to 14.3% from 11.9% last year and 13.5% last quarter. The operating margin was 30 basis points better than we had estimated.

65. On or about May 14, 1997, defendants caused the Company to file its Form 10-Q with the SEC for ADAC's second fiscal quarter of 1997, signed by defendant Simone and reviewed and authorized by the Individual Defendants, which republished the Company's financial results reported on April 24, 1997. Defendants continued to stress the growth of revenues in the Company's Medical Systems product line:

For both the quarter and year-to-date, Medical Systems' product revenues increased primarily due to continued customer acceptance of the Company's nuclear medicine product family, including new product introductions and enhancement options. RTP's product revenues also increased due to the FDA's clearance of Pinnacle3™. Geographically, the increase in Medical Systems' revenues was driven by the North and South American markets. Product gross margins for Medical Systems primarily increased due to reductions in product cost and sales of the Company's new product, Molecular Coincidence Detection (MCD).

Medical Systems' service revenues increased as a result of an increase in the Company's installed customer base. . . .

Moreover, defendants continued to assure investors that the Company's financial statements were prepared in accordance with GAAP:

The accompanying unaudited condensed interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles . . . . In the opinion of management, the condensed interim consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of the information required to be included. . . .

66. Defendants' statements regarding the Company's second fiscal 1997 quarter were materially false and misleading and presented in violation of GAAP because, as defendants later admitted in restating the Company's financials, revenue for the quarter was overstated by $8.4 million, or 14%, and net income was overstated by $2 million, or 57%, primarily as a result of the improper recognition of revenue as described in ¶¶114-127.

67. On July 23, 1997, defendants caused the Company to issue a press release announcing record results for its third fiscal quarter of 1997, ended June 29, 1997. ADAC reported record revenues of $71.5 million, a 15% increase over the $62.4 million reported for the third quarter of fiscal 1996. Defendants attributed this increase to a 16% increase in product revenue and a 12% increase in service revenue. Gross profit margin purportedly increased to 41.5% from 38.7% in the previous year's third quarter, with product gross margins up 3.9% to 42.6% over that time period. ADAC reported net income of $.1 million, or $0.01 per share. Excluding the effect of the $5.9 million one-time charge for in-process research and development related to Cortet, Inc. and certain uncompleted acquisition costs and related expenses, the Company reported net income of $5.8 million in the third fiscal quarter of 1997, a $1.5 million increase over the same period of the prior year. Defendant Lowe, then Chairman and Chief Executive Officer, was quoted in the press release as stating:

"We are very pleased to report our eleventh consecutive quarterly revenue and operating income increase. In the third quarter, we booked orders of $75 million, which represents an increase of approximately $6 million over the same quarter in the prior fiscal year."

"During our third quarter, we completed our acquisition of Cortet, Inc., of Winter Park, Florida, a developer of integrated computer systems for use in cardiac catheterization laboratories. We believe that this acquisition will allow us to accelerate our comprehensive cardiovascular information management strategy by bringing a 'best-in-class' cath lab system to ADAC."

68. Following the issuance of the foregoing press release, Bear, Stearns & Co., Inc. issued an "Attractive" rating on ADAC, focusing on the Company's publicly proclaimed continued growth:

ADAC Laboratories reported third-quarter (ended June) fiscal 1997 operating results of $0.30 per share versus $0.24 in the year-ago quarter, up 25% year over year and in line with our estimate and the consensus. As discussed below, ADAC also took an acquisition-related write-off in the period. The fiscal third quarter extends the company's excellent sales and earnings performance of the past several years. Sales in the period came in at $71.5 million versus $62.4 million in third-quarter fiscal 1996, a 14.5% increase, with both product and service revenues showing respectable growth in a traditionally weak quarter at $53.7 million (versus $46.4 million, up 15.5% year over year) and $17.9 million (versus $16.0 million, up 11.6% year over year), respectively.

* * *

We continue to rate ADAC shares Attractive. We are maintaining our EPS estimates of $1.15 and $1.40 for fiscal 1997 (ending September) and 1998, respectively. ADAC's fundamental business remains strong, as evidenced by the increasing backlog in medical systems, and the company's profitability continues to improve. Over the next 12-18 months, we would expect ADAC shares to trade to at least the $25-$30 level, assuming the stock's multiple will more closely reflect the company's above-average earnings growth.

69. On or about August 13, 1997, defendants caused the Company to file its Form 10-Q with the SEC for ADAC's third fiscal 1997 quarter, signed by defendant Simone and reviewed and authorized by the Individual Defendants, which republished the Company's financial results reported on July 23, 1997. Defendants continued to feature the growth in revenues from the Medical Systems product line:

Medical Systems product revenues for the quarter and nine-month periods ended June 29, 1997 increased more than 20% over the corresponding periods in fiscal 1996 primarily due to increased sales of the Company's nuclear medicine products and product enhancements, as well as the Company's RTP product, Pinnacle3™, which received 510(k) clearance from the United States Food and Drug Administration (FDA) in April 1997. Geographically, the increase in Medical Systems product revenues was driven year-to-date by the North and South American markets and for the quarter by Europe. Product gross margins for Medical Systems increased over the corresponding periods in fiscal 1996 due to reductions in product cost and sales of Molecular Coincidence Detection (MCD™) and Pinnacle3.

Medical Systems' service revenues increased over the corresponding periods in fiscal 1996 as a result of an increase in the Company's installed customer base as well as increased revenues associated with the Company's multi-vendor service business. Gross margins increased as the revenues increased and costs remained relatively fixed.

70. Defendants, moreover, continued to report that the Company had acquired in excess of $5 million of in-process research and development in the acquisition of Cortet, Inc., which it wrote off with a one-time charge.

On May 22, 1997, the Company acquired Cortet, Inc. (Cortet), of Winter Park, Florida, in exchange for 159,087 shares of the Company's common stock valued at approximately $3.9 million and the assumption of certain closing costs and related expenses. Cortet is a developer of client-server information systems for use in cardiac catheterization laboratories. The acquisition was accounted for using the purchase method of accounting. In connection with the acquisition, the Company recognized a one-time, pre-tax charge to operations of $5.9 million for charges related to the purchase of in-process research and development and certain uncompleted acquisition costs and related expenses.

71. In addition, defendants continued to assure investors that the Company's financial statements were prepared in accordance with GAAP:

The accompanying unaudited condensed interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles . . . . In the opinion of management, the condensed interim consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of the information required to be included. . . .

72. Defendants' statements regarding the Company's third fiscal 1997 quarter were materially false and misleading because, as defendants later admitted:

(a) Revenue for the quarter was overstated by $6.3 million, or 10%, primarily as a result of the improper recognition of revenue, in violation of GAAP, as described in ¶¶119-132.

(b) Net income, excluding the effects of in-process research and development and other acquisition charges, was overstated by $2.4 million or 67%;

(c) Only $.5 million of the cost of the acquisition of Cortet, Inc. related to in-process research and development; $5.1 million of the cost of the acquisition of Cortet, Inc. related to existing technologies, which, absent defendants' accounting manipulations, the Company would be required to consider as goodwill and amortize (expense) over seven years at approximately $729,000 per year, causing a reduction in net income in future periods; and

(d) Gross profit margin for the quarter equaled 39.7%, not 41.5%, and product gross profit equaled 40.6%, not 42.6%.

73. On November 5, 1997, defendants caused the Company to issue a press release announcing record results for its fourth fiscal quarter of 1997, ended September 28, 1997. ADAC reported record revenues of $72.5 million, a 12% increase over the $64.9 million reported for the fourth quarter of fiscal 1996. This increase was attributed to an 11% increase in product revenue and a 15% increase in service revenue. ADAC reported net income of $6.0 million, a $1.2 million increase over the $4.8 million reported in the fourth quarter of fiscal 1996, and earnings per share of $0.31 in the fourth quarter of fiscal 1997, an increase of 19% from $0.26 per share in the fourth quarter of fiscal 1996. For the fiscal year ended September 28, 1997, ADAC reported revenues of $282.3 million and net income of $16.8 million, or $0.86 per share. Excluding the effect of a one-time charge for in-process research and development related to the purchase of Cortet, Inc., ADAC reported net income of $22.5 million, or $1.16 per share, reflecting an increase in earnings per share of 29% over the $0.90 per share recorded in fiscal 1996. In announcing the results, defendant Eckert, ADAC's Chief Executive Officer, was quoted in the press release as stating:

"We are quite pleased to report our twelfth consecutive quarterly revenue and operating income increase. Most importantly, we were pleased with our progress on Molecular Coincidence Detection (MCD™) this past quarter as our sales momentum increased significantly. Given our favorable multi-center clinical trial results and the recent FDA 510(k) clearance of our product enhancement, MCD/AC™, the outlook is positive for this exciting product."

74. Following the Company's positive November 5, 1997 press release and investor conference call thereafter, Hambrecht & Quist Inc. issued an analyst report rating ADAC a "Strong Buy." In issuing its rating, Hambrecht & Quist focused on ADAC's revenue growth and bookings as reported by the Company, as follows:

* Revenues grew 12% to $72.5 million, while improved margins and controlled expense leveraged EPS growth of 20% to $0.31, compared to our $73.5 million and $0.32 per share estimates.

* Bookings again exceeded billings, and total backlog including services, rose sequentially by $5 million to $102 million.

* MCD momentum has improved with bookings of 22 and sales of 18 units, up dramatically from Q2 with only 12 bookings and 15 sales.

* * *

We are reiterating our Strong Buy recommendation with an upside target of $30 per share since we continue to believe that ADAC's well established growth engine is worth far more than 15 times our FY98 EPS estimate of $1.40, particularly in view of the very real opportunity for Medicare reimbursement of MCD scans.

75. On or about December 29, 1997, defendants caused the Company to file its Form 10-K with the SEC for ADAC's 1997 fiscal year, signed by, among others, defendants Eckert, Lowe and Simone, which republished the Company's financial results reported on January 27, 1997, February 12, 1997, April 24, 1997, May 14, 1997, July 23, 1997, August 13, 1997 and November 5, 1997. In this filing, defendants continued to lead the market to believe that the Company's good fortunes were due to the runaway commercial success of the Company's Medical Systems product line:

Medical Systems' product revenues increased 26% from fiscal 1995 to fiscal 1996 and 19% from fiscal 1996 to fiscal 1997 due to continued customer acceptance of the Company's nuclear medicine, RTP and AMT products, including new product introductions and enhancement options. Product revenue growth is principally driven by the sale of higher priced dual head products and MCD. In addition, RTP experienced significant revenue growth in fiscal 1997 due to the launch of Pinnacle3 in the United States and internationally during that period. In fiscal 1997 and 1996, Medical Systems' revenues increased in dollar volume in all of the Company's geographical markets. In fiscal 1997, the growth rate was highest in the Latin America market, and in fiscal 1996, the growth rate was highest in North America. Gross profit margins for Medical Systems products increased from fiscal 1996 to fiscal 1997 primarily due to the sale of higher margin products and the elimination of certain license fees payable on the sale of RTP products in connection with the acquisition of Geometrics in November 1996, and increased from fiscal 1995 to fiscal 1996 largely due to reductions in product cost.

The increase in Medical Systems' service revenues and the improvement in service gross profit margins from fiscal 1995 to fiscal 1997 resulted from an increase in the number of customers under service contracts, economies of scale related to more effective coverage of field service support costs and improved product reliability. Service revenues increased 18% in fiscal 1997 over fiscal 1996 and 11% in fiscal 1996 over fiscal 1995. The higher growth rate in fiscal 1997 primarily resulted from the acceleration of the Company's multi-vendor service business through acquisition.

76. Defendants' statements regarding the Company's fourth fiscal 1997 quarter and fiscal 1997 were materially false and misleading because, as defendants later admitted:

(a) Revenue for the year was overstated by $18.4 million, or 7%, net income for the quarter was overstated $1 million, or 19%, and net income (before charges) for the year was overstated $8.3 million, or 59%, primarily as a result of the improper recognition of revenue from the shipment of Medical System products to warehouses as opposed to ADAC's purported customers, the improper recognition of revenue, in violation of GAAP, as described in ¶¶114-127; and

(b) The record financial results achieved were due to defendants' improper conduct, not the commercial success of the Company's Medical Systems product division.

77. On January 28, 1998, defendants caused the Company to issue a press release announcing record results for its first fiscal quarter of 1998, ended December 28, 1997. ADAC reported record revenues of $75.5 million, a 10% increase over the $68.4 million reported for the first quarter of fiscal 1997. Gross profit margin was reported at 37.6%, allegedly as a result of improved gross margins in the Company's nuclear medicine and radiation therapy products businesses. ADAC reported net income of $6.3 million (before special charges) in the first quarter of fiscal 1998.

78. On January 29, 1998, in response to the foregoing press release, Hambrecht & Quist Inc. reiterated its "BUY" rating on ADAC and issued a bullish report. In its report, Hambrecht & Quist Inc. republished the financial information contained in the Company's January 28, 1998 press release and went on to state:

A Buy -- We are reiterating our Buy recommendation since ADAC appears to be at a positive fundamental inflection point, with renewed upside potential to $30 per share. While our FY98 sales and earnings outlook is unchanged at $319 million and $1.40 p/sh . . . .

79. On or about February 11, 1998, defendants caused the Company to file its Form 10-Q with the SEC for ADAC's first fiscal 1998 quarter, signed by defendant Simone and reviewed and authorized by the Individual Defendants, which republished the Company's financial results reported on January 28, 1998. Defendants once again highlighted the success of its Medical Systems product segment in generating revenues for the Company:

Medical Systems' product revenues increased 16% for the first quarter of fiscal 1998 compared to the first quarter of fiscal 1997 due to continued customer acceptance of the Company's nuclear medicine, RTP and AMT products, including new product introductions and enhancement options. Product revenue growth was driven principally by the sale of higher priced dual head products and MCD, as well as the Company's RTP product, Pinnacle3, which received 510(k) clearance from the United States Food and Drug Administration (FDA) in April 1997. In the first quarters of fiscal 1998 and 1997, Medical Systems' revenues increased in dollar volume in all of the Company's geographical markets. The growth rate was highest in the Latin America market in the first three months of fiscal 1998, and in North America during the same period in fiscal 1997. Excluding the effects of the discontinued product charge associated with the write-off of the DSA assets, gross profit margins for Medical Systems products increased to 45.3% in the first quarter of fiscal 1998. Including this charge gross profit margins were 38.6% for this period. This compares with gross profit margins of 42.3% for the first quarter of fiscal 1997. Margins before the discontinued product charge increased primarily due to reductions in product cost and sales of Molecular Coincidence Detection (MCD) and Pinnacle3.

The increase in Medical Systems' service revenues and the improvement in service gross profit margins from first quarter fiscal 1997 to the first quarter fiscal 1998 resulted from an increase in the number of customers under service contracts, economies of scale related to more effective coverage of field service support costs and improved product reliability. Service revenues for the period increased 21% over the same period in fiscal 1997. The higher growth rate in first quarter of fiscal 1998 primarily resulted from an increase in the Company's installed customer base as well as the acceleration of the Company's multi-vendor service business through acquisition.

80. In addition, defendants continued to assure investors that the Company's financial statements were prepared in accordance with GAAP:

The accompanying unaudited condensed interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles . . . . In the opinion of management, the condensed interim consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of the information required to be included.

81. Defendants' statements regarding the Company's first fiscal 1998 quarter were materially false and misleading because, as defendants later admitted:

(a) Revenue for the quarter was overstated by $8.1 million, or 12%, primarily as a result of the improper recognition of revenue from the shipping of Medical Systems products to warehouses as opposed to ADAC's purported customers, and the failure to record certain expenses, all in violation of GAAP, as described in ¶¶114-127;

(b) Revenue for the quarter increased only 7%, not 10%, over the same period of the prior year (id.);

(c) Cost of revenues was understated by $6.4 million, resulting in large part from the misclassification of the charge associated with the Company's LabStat product, the sale of which was to be discontinued (id.);

(d) Gross profit margin for the quarter was 20.7%, not 37.6% -- an overstatement of 81.6%; and

(e) Net income (before charges) was overstated by $2.9 million, or 87%, and was actually only $2.9 million.

82. On February 23, 1998, defendant Eckert was interviewed by The Wall Street Transcript ("TWST") for its Chief Executive Officer Forum. The transcript of the interview was publicly available. During the interview, defendant Eckert stressed the impressive growth that the Company had been experiencing and assured investors that the Company's "history is as good a predictor of the future as anything." He further stated:

TWST: Give us a background summary on ADAC Laboratories. Tell us a little historical background and then bring us up to date, what the company is doing today?

Mr. Eckert: First, I'd like to thank you for the opportunity to tell our story. ADAC Laboratories has been in existence since 1970 and in 1990 focused on the nuclear medicine business as our core business. Nuclear medicine is a diagnostic imaging modality that images the function or physiology of the body. This differs from other popular imaging technologies, such as MRI or CT that primarily image the structure or anatomy of the body. Nuclear has been a very successful business for ADAC. We've built a commanding market share leadership position in the worldwide market and believe there is a great deal of growth available. We finished fiscal 1997 in September with revenues of over $282 million, up from about $240 million in 1996 and $185 million in 1995. So we've enjoyed rapid top line growth and achieved a consistent record of increasing profitability over the last 12 quarters. We have grown the earnings from 65 cents in 1995 to 90 cents in 1996 to now $1.16 in the latest year, 1997. The earnings have been growing at a rate of about 30% as of late. In terms of where our business comes from, in 1997, 63% of the revenues came from nuclear medicine product sales, 19% from our customer support business, 12% from our Healthcare Information Systems division where we are a leader in Radiology Information Systems, and approximately 6% from Radiation Therapy Products where we deliver a best-in-class planning system for radiation oncology work. Each of these businesses is growing, and with the exception of our HCIS business, is contributing significantly to the bottom line.

* * *

TWST: What then is the essential message that you would like to convey to potential long-term investors about ADAC? What do you see, and what should they see as the strengths and advantages that distinguish your company as an investment today?

Mr. Eckert: As a long-term investor analyzing ADAC I believe that history is as good a predictor of the future as anything, and we have demonstrated an outstanding ability to grow profitably through difficult market conditions. As our core markets rebound, we are well positioned to continue our growth. We have become a notable player in the radiology marketplace, building a great reputation as a leader not only in technology but in today's other critical core competencies such as customer support and distribution. The new products coming to market are attractive and will fuel our results and the financial capability to continue to fund ongoing important investments.

83. On April 23, 1998, defendants caused the Company to issue a press release announcing ADAC's fourteenth consecutive record quarter. For its second fiscal quarter ended March 29, 1998, the Company reported record revenue of $77.4 million, an 11% increase over the $70.0 million reported for the same period in fiscal 1997. Gross profit margin allegedly increased to 42.6% from 41.4% in the previous year's second quarter, with product gross margins up 2.2% to 45.1% over that time period. ADAC purportedly achieved net income of $7.0 million, a 25% increase over the $5.6 million reported in the second quarter of fiscal 1997. Defendant Eckert, ADAC's Chief Executive Officer, was quoted in the press release as stating:

"We are pleased to report our fourteenth consecutive quarterly revenue increase and a 21% increase in earnings over the second quarter of fiscal 1997.

"In addition, we are particularly excited to [sic] that revenue for our HealthCare Information Systems business (HCIS) grew 29 percent, from $8.0 million in the second quarter of fiscal 1997 to $10.3 million in the same quarter of fiscal 1998, generating operating income of $1.3 million."

* * *

"Our Radiation Therapy Planning (RTP) business, which is a part of Medical Systems, demonstrated continued growth due to the success of our Pinnacle3 radiation therapy planning software system. Revenues grew 71 percent, from $4.2 million in the second quarter of fiscal 1997 to over $7.2 million in the same period of fiscal 1998, reflecting our growing leadership in this segment of the oncology software market."

84. Following the issuance of the foregoing press release, Hambrecht & Quist Inc. reiterated its "BUY" rating on the Company and issued a positive report on the Company reiterating and relying on the Company's positive statements. According to the report:

* ADAC reported fiscal second quarter results of $77.4 million and $0.35/sh in line with our $78.4 million and $0.35/sh estimate. Revenues increased 10.6%, while improved gross margins and sequentially lower operating expenses leveraged EPS growth of 21.2%.

* Product sales of $56.6 million grew 7.0% versus last year, while service revenues of $20.8 million increased 21.9%. Viewed by product category, medical system and other sales rose 8% to $67 million, while healthcare information system sales rose roughly 29% to $10.3 million.

* * *

* We are reiterating our Buy with ADAC poised at a positive fundamental inflection point, with renewed upside potential to $30 p/sh. . . .

85. On or about May 13, 1998, defendants caused the Company to file its Form 10-Q with the SEC for ADAC's second fiscal 1998 quarter, signed by defendant Simone and reviewed and authorized by the Individual Defendants, which republished the Company's financial results reported on April 23, 1998. According to defendants, sales of ADAC's Medical Systems products continued to grow:

Medical Systems' product revenues for the three- and six-month periods ended March 29, 1998 increased 4% and 9%, respectively, over the same periods in fiscal 1997. Product revenue growth was driven principally by sales of the Company's RTP product, Pinnacle3™, and, to a lesser extent, by sales of refurbished equipment through AMT, and the company's newest business initiative ADAC Multi-Modality Services (AMMS). RTP product revenues for the three-month and six-month periods ended March 29, 1998 increased 74% and 95%, respectively, over the same periods in fiscal 1997. These increases were partially offset by a decline in nuclear revenues of 10% and 4% over the corresponding periods in fiscal 1997. . . .

Excluding the effects of the discontinued product charge associated with the write-off of the DSA assets in the first quarter of fiscal 1998, gross profit margins for Medical Systems products increased to 45.5% in the first six months of fiscal 1998. Including this charge, gross profit margins were 42.1% for this period. This compares with gross profit margins of 42.7% for the first six months of fiscal 1997. Margins before the discontinued product charge increased primarily due to sales of Pinnacle3 and reductions in product cost.

Medical Systems service revenues for the three-month and six-month periods ended March 29, 1998 increased 27% and 24%, respectively, over the same periods in fiscal 1997. These increases resulted from the Company's acquisition of two multi-modality service businesses as well as an increase in the number of customers under service contracts, economies of scale related to more effective coverage of field service support costs and improved product reliability.

86. In addition, defendants assured investors that the Company's financial statements were prepared in accordance with GAAP:

The accompanying unaudited condensed interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles . . . . In the opinion of management, the condensed interim consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of the information required to be included.

87. On or about June 18, 1998, defendants caused the Company to file a Form 10-Q/A with the SEC for ADAC's second fiscal 1998 quarter, signed by defendant Simone and reviewed and authorized by the Individual Defendants, which republished the Company's financial results reported on April 23, 1998 and the information reprinted in the foregoing paragraph.

88. Defendants' statements regarding the Company's second fiscal 1998 quarter were materially false and misleading because, as defendants later admitted, revenue for the quarter was overstated by $2.9 million, or 4%, and net income for the quarter was overstated by $1.6 million, or 30%, primarily as a result of the improper recognition of revenue from the shipment of Medical System products to warehouses as opposed to ADAC's purported customers, and the failure to record certain expenses, all in violation of GAAP, as described in ¶¶114-127.

89. On July 23, 1998, defendants caused the Company to issue a press release announcing ADAC's fifteenth consecutive quarter of record results. For its third fiscal quarter ended June 28, 1998, the Company reported record revenue of $83.5 million, a 17% increase over the $71.5 million reported for the same period in fiscal 1997. Defendants attributed this increase to an 18% increase in service revenue and a 17% increase in product revenue. Gross profit margin purportedly increased to 43.4%. ADAC achieved net income of $7.5 million or $0.37 per share. Defendant Eckert, ADAC's Chief Executive Officer, was quoted in the press release as stating:

"We are pleased to report our fifteenth consecutive quarterly revenue increase and a 23 percent increase in earnings per share over the third quarter of fiscal 1997."

"In addition, we are particularly excited that revenue for our HealthCare Information Systems business (HCIS) grew 36 percent, from $7.2 million in the third quarter of fiscal 1997 to $9.8 million in the same quarter of fiscal 1998 while operating income totaled $1.4 million. We now have 39 live QuadRIS™ sites with another 28 sites in implementation. We also recently marked the two-year anniversary of our first live QuadRIS site."

"Our Radiation Therapy Products (RTP) business continued its rapid growth in the quarter. Our recent agreement to partner with Siemens Medical Systems, Inc., enabling them to offer ADAC's Pinnacle3™ packaged with their radiation oncology products, will enhance our access to international markets. RTP revenue and operating income both increased approximately 100% from the third quarter of fiscal 1997."

Mr. Eckert continued, "In our nuclear medicine business, the third quarter was marked by several major accomplishments. First, the Health Care Financing Administration (HCFA)'s establishment of favorable reimbursement rates for positron emission tomography (PET) scans for the initial diagnosis and staging of lung cancer contributed to a sizable increase in MCD bookings to 24 units. We believe that HCFA's elimination of uncertainty over these rates will continue to have a positive impact on MCD orders over the next year as healthcare institutions enter their new budgeting cycles."

90. Following the issue of the foregoing press release, Credit Suisse First Boston Corporation reiterated its "BUY" rating on ADAC and issued a bullish report on the Company based upon the Company's positive statements. According to the report:

ADAC's 3Q98 (June 30) results matched our expectations, with strong sales from each business line. The company booked orders for 24 MCD units, up from only 13 in 2Q98, and the contributions from its health care information system and radiation therapy planning businesses also grew nicely, alleviating its dependence on MCD sales. These favorable trends should continue into FY99, and (depending on the strength of 4Q98 results) our EPS estimate for FY99 may prove to be conservative. We reiterate our Buy investment rating.

* * *

The outlook for ADAC over the remainder of FY98 and FY99 remains positive. We expect that MCD sales will be at least sustainable at the current level, and its contribution from its ancillary businesses, which already account for 25% of its annualized revenues and 40% of its operating profits, should increase as a percentage of its total profits. We continue to rate the stock a Buy, and reiterate our 12-month price target of $28, which is based on our Value Based Analysis.

ADAC turned in an exceptionally strong sales performance in 3Q98, booking orders for products and services amounting to over $100 million. . . .

91. On or about August 12, 1998, defendants caused the Company to file its Form 10-Q with the SEC for ADAC's third fiscal 1998 quarter, signed by defendant Simone and reviewed and authorized by the Individual Defendants, which republished the Company's financial results reported on July 23, 1998. In the Form 10-Q, defendants continued to lead the market to believe that the Company's financial success was keyed to the increased contribution of revenues from its Medical Systems product lines:

Medical Systems' product revenues for the three and nine-month periods ended June 28, 1998 increased 4% and 3%, respectively, over the same periods in fiscal 1997. Product revenue growth was driven principally by sales of refurbished CT equipment through the Company's newest business initiative, ARS. . . .

Excluding the effects of the discontinued product charge associated with the write-off of the DSA assets in the first quarter of fiscal 1998, gross profit margins for Medical Systems products increased to 42.1% in the first nine months of fiscal 1998. Including this charge, gross profit margins were 39.5% for this period. This compares with gross profit margins of 41.1% for the first nine months of fiscal 1997. See Note 7 of Notes to Condensed Consolidated Financial Statements. Margins before the discontinued product charge increased primarily due to sales of MCD which were partially offset by the lower margins associated with the ARS product sales.

Medical Systems service revenues for the three- and nine-month periods ended June 28, 1998 increased 21% and 23%, respectively, over the same periods in fiscal 1997. These increases resulted from a higher number of customers under service contracts and, to a lesser extent, from the Company's entry into the ARS business in the first half of fiscal 1998 through acquisition. . . .

92. In addition, defendants again assured investors that the Company's financial statements were prepared in accordance with GAAP:

The accompanying unaudited condensed interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles . . . . In the opinion of management, the consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of the information required to be included. . . .

93. After speaking with ADAC's management, Hambrecht & Quist Inc. published a very upbeat analyst report on September 2, 1998. According to the report:

Recent discussions with management reinforce our optimism regarding ADAC's September results and long term growth outlook. Despite the recent stock market and global economic weakness, ADAC's shares have displayed good relative strength due to its worldwide leadership in the very strong nuclear medicine market and excellent fundamentals in all of its business units.

* * *

Management remains comfortable with our F4Q (September) and F99 sales and earnings estimates of $85.5 million and $0.39/sh; and $363.2 million and $1.69/sh, respectively.

ADAC remains a Strong Buy with a $32 price target due to its improving revenue and earnings visibility, compelling new products (MCD/AC and RTP), successful turnaround story (HCIS), and very attractive valuation of only 14.8X our FY99 earnings estimate.

94. On or about September 22, 1998, defendants caused the Company to file a Form 10-Q/A with the SEC for ADAC's third fiscal 1998 quarter, signed by defendant Simone and reviewed and authorized by the Individual Defendants, which republished the Company's financial results reported on July 23, 1998 and the information reprinted in the foregoing paragraph.

95. Defendants' statements regarding the Company's third fiscal 1998 quarter were materially false and misleading because, as defendants later admitted:

(a) Revenue for the quarter was overstated by $13.8 million, or 20%, and net income for the quarter was overstated by an $4.1 million, or an incredible 122%, primarily as a result of the improper recognition of revenue from the shipping of Medical Systems product products to warehouses as opposed to ADAC's purported customers, and the failure to record certain expenses, all in violation of GAAP, as described in ¶¶114-127;

(b) Revenue for the quarter increased only 7%, not 17%, and product service revenue increased only 4%, not 18%, over the same period of the prior year (id.); and

(c) Gross profit margin for the quarter equaled only 42.1%, not 43.4% (id.).

96. On November 5, 1998, defendants caused the Company to issue a press release announcing "record" results for its fourth fiscal quarter and year ended September 27, 1998. The Company reported record revenues of $86.9 million and net income (excluding one-time charges) of $8.2 million. Gross profit margin reportedly increased to 43.6%, with product gross margins up 4.8% over the same period of the prior year to 47.6%. For the fiscal year ended September 27, 1998, ADAC reported revenues of $323.4 million and net income of $14.5 million, or $0.71 per share. Excluding the effect of one-time charges, ADAC reported net income of $29 million, or $1.42 per share, reflecting a 23% earnings per share increase over the $1.15 per share recorded for fiscal 1997. In announcing the results, defendant Eckert, ADAC's Chief Executive Officer, was quoted in the press release as stating:

"We are pleased to report another record quarter for our Company. Our revenue and profit growth were very strong in the fourth quarter as all of our major businesses performed quite well. Each of our three major markets are healthy and ADAC's product differentiation across our product lines is being well received."

ADAC Announces Record Fourth Quarter and Fiscal Year Results; 26 Percent Increase in Fiscal Q4 Earnings Per Share, Excluding One-Time Charge, Bus. Wire, Nov. 5, 1998.

(a) Revenue for the year was overstated by $22.8 million, or 8%, primarily as a result of the improper recognition of revenue from the shipping of Medical Systems products to warehouses as opposed to ADAC's purported customers, and the failure to record certain expenses, all in violation of GAAP, as described in ¶¶114-127;

(b) Gross profit margin for the quarter equaled only 37%, not 43.6%, and product gross profit equaled only 38%, not 47.6% (id.);

(c) Net income (before charges) was only $17.7 million, rather than the $29 million reported by ADAC; and

(d) The record financial results announced were the result of defendants' misconduct, not the commercial success of the Company's Medical Systems products division.

The Truth Slowly Begins to Emerge

98. On December 29, 1998, prior to the commencement of trading, ADAC shocked financial market participants when the Company announced that it needed to restate its financial results for the previously reported 1996, 1997 and 1998 fiscal years. According to the Company:

ADAC Laboratories (Nasdaq:ADAC) announced today that its financial results for fiscal years 1996, 1997 and 1998 will be restated. This restatement is a result of an extensive ongoing review by the Company with the assistance of PriceWaterhouseCoopers (PwC) of its accounting principles and their historic application. The Company did not file its Annual Report on Form 10-K yesterday and has applied for an extension.

As part of this restatement, the Company will adjust the timing of certain revenues over the 1996-1998 period. The primary impact of these adjustments will be to move revenues forward into adjacent future periods. Substantially all of the transactions relating to these revenues have been completed and the associated revenues have been or will shortly be recognized. In addition, certain expenses will be adjusted and re-allocated throughout the period.

Based on the review to date, the Company believes that the net effect of these adjustments will have a material adverse impact on the Company's fiscal 1996 and 1997 financial results but are not expected to have a material impact on its previously released fiscal 1998 revenue, although the effect on revenue in individual quarters may be material. In addition, management believes that net income for 1998 may be somewhat lower or somewhat higher than previously reported, depending on the outcome of the ongoing review. Additionally, the Company believes these accounting changes will not have a material impact on the Company's future business prospects.

After the issuance of the Company's earnings release in early November, several issues concerning accounting policies and practices were raised. Thereafter, the Company, working with PwC, undertook an extensive review of these issues, particularly with respect to the accounting treatment of various one-time charges taken by the Company as well as the appropriateness of certain expense and revenue recognition practices that the Company had followed in recent years. Following the review, the Company will apply different revenue recognition guidelines than it has followed, change the accounting for certain transactions and adjust certain expense items.

99. On December 29, 1998, following the issuance of the Company's press release, defendant Eckert hosted a teleconference with investors and stock market analysts. During the call, Eckert downplayed the effect the restatement would have on the Company's 1998 results and, further, stressed that the facts surrounding the restatement would not have a negative impact on 1999:

"First point here is that this release really does reflect accounting issues and accounting issues only. It is not a reflection on the fundamental strength of our company or the optimism our customers have for our product line and as I have stated in the press release we are very comfortable with our competitive position entering 1999 and certainly confident in our growth prospects over the long term."

"[M]ost importantly fiscal 98 revenues we are very confident will be very immaterially different from those previously released. . . ."

"So in terms of 1999, you know I've had a number of questions already this morning about that[,] I have to reiterate these are accounting issues and certainly aggravating for all of [us] on the phone but, things that we will live through because our market positions are quite strong. So stay where you are for today, with respect to estimates and I'll tell you why."

101. The market's reaction to the shocking December 29, 1998 announcement demonstrated the extent to which the market prices of ADAC's securities had become and remained artificially inflated throughout the Class Period. During the day on December 29, the market price of ADAC common stock dropped to as low as $16.88 before closing at $21.88 -- a drop of $5.25, or 20%, from the previous day's close of $27.125.

102. Defendants, however, were determined to downplay the extent to which their scheme would affect the future performance of the Company. During a January 13, 1999 presentation at a Hambrecht & Quist Healthcare Conference, defendant Eckert stressed the continued strong performance of the Company and assured investors that the Company's new revenue recognition policy would not impact future sales:

ADAC presented Wednesday morning at H&Q's 17th annual Healthcare Conference, roughly two weeks after announcing a joint review of its accounting policies with its auditors, PriceWaterhouseCoopers (PwC), which would lead to the restatement of its financial results for fiscal 1996-1998. In a well attended session, ADAC made a decidedly confident presentation, discussing the strong recent performance and future opportunities of its nuclear medicine, radiation therapy planning (RTP), and healthcare information services (HCIS) divisions. As expected, ADAC management did not expand upon earlier comments regarding the ongoing accounting review or the many related shareholder lawsuits, but begin [sic] by emphasizing that the review and restatement resulted from out-dated revenue recognition policies which only affect the timing of sales and earnings (pushing them forward from one quarter to the next), but do not detract from the strength of its underlying operations.

Specifically, CEO Andy Eckert highlighted ADAC's strong market position (a roughly 43% market share of the $550 million world wide nuclear medicine equipment market) . . . . Regarding the impact of its new revenue recognition policy, ADAC does not believe more stringent financial conditions, which require larger up-front and interim payments in the case of delayed installations, will have any meaningful impact on future sales.

103. On March 1, 1999, ADAC announced that it had completed the restatement of its financial results for fiscal 1996, 1997 and the first three quarters of 1998, and had filed its Form 10-K for the fiscal year ended September 27, 1998 ("1998 Form 10-K"). In the 1998 Form 10-K, the Company admitted, with respect to the restatement, the following:

(a) "The Company applied a more stringent revenue recognition policy than it had it in the past. The items recognized and restated were primarily certain sales transactions by the Company's Medical Systems business unit where products sold had been shipped to other than their final installation location." 1998 Form 10-K.

(b) "The Company adopted completed contract accounting for the LabStat product, which resulted in the Company's reversing approximately $6 million of revenues (together with associated costs) previously recognized in fiscal 1996 and 1997." Id.

(c) "The Company also restated the Geometrics acquisition [completed in the first quarter of fiscal 1997] from pooling accounting to purchase accounting." Id.

(d) "The adjustments included a reduction in the acquired in-process research and development charge taken in the third quarter of fiscal 1997." Id.

(e) "The Company also undertook a review of its asset carrying values, accruals and expenses, and financial instruments and financial statements in each restated period and made certain adjustments to these items throughout those periods." Id.

104. As can be seen from the tables below, the restatement was extensive, affecting every income statement line item at some point during the three years ended September 27, 1998:
 

	FY96				FY97				FY98
	Reported	Restated	Difference		Reported	Restated	Difference		Reported*	Restated	Difference
REVENUES:
Product	177,613	159,744	17,869		211,831	194,238	17,593		240,451	219,046	21,405
Service	63,172	62,842	330		70,500	69,649