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
 

I, PATRICIA I. AVERY, declare as follows:

    1. I am a member of the firm of Wolf Popper LLP, Co-Lead Counsel for plaintiffs in this litigation. I have knowledge of the matters set forth herein based upon my participation in the prosecution of this litigation.

    2. I submit this Declaration in support of plaintiffs' application, pursuant to Rule 23 of the Federal Rules of Civil Procedure, for this Court's approval of the class action settlement herein, and for an award of attorneys' fees and reimbursement of expenses.

I. PRELIMINARY STATEMENT

    3. Defendants ADAC Laboratories ("ADAC"), David L. Lowe ("Lowe"), R. Andrew Eckert ("Eckert") and P. Andre Simone ("Simone") have agreed to settle this class action for $20 million in cash. The Stipulation of Settlement dated as of January 11, 2000, provides for payment of $20 million which has been deposited in an escrow account since February 29, 2000, and is currently earning interest for the benefit of the Class (the "Settlement Fund").⁽¹⁾

    4. This case was carefully investigated and has been vigorously litigated since its commencement. Defendants have asserted strong defenses and vehemently expressed a belief that plaintiffs could not and would not prevail. The settlement was not fully achieved until plaintiffs reviewed and analyzed tens of thousands of pages of documents and accounting workpapers produced by ADAC and its accountants. In addition, plaintiffs' counsel located and interviewed a number of former employees and other potential witnesses in order to develop evidence and allege sufficient details in their pleadings; consulted with experts about the accounting issues raised in the litigation and damage analysis; and thoroughly researched the law and facts pertinent to the asserted claims and defenses raised by defendants. The settlement negotiations themselves were arduous, occurring over several weeks.

    5. Consequently, this settlement takes into consideration the significant risks specific to the case. This settlement was entered into by the parties in good faith and after arm's-length negotiations between experienced and informed counsel in an action which has been prosecuted and zealously defended by highly skilled lawyers. It was negotiated by experienced counsel for plaintiffs and defendants with a firm understanding of both the strengths and weaknesses of their respective cases. The settlement confers an immediate and substantial benefit on the Class, and eliminates the numerous risks of continued litigation whose outcome, even at trial, was far from certain.

    6. The Settlement Fund was created solely as a result of the efforts of plaintiffs' counsel. No portion of the settlement money came from any fund created by any enforcement proceeding of the government. Plaintiffs' counsel prosecuted this action entirely on their own and without the assistance of any federal or state government agency. The proposed settlement constitutes a very good result for the Class, and is eminently fair, reasonable, and adequate under the circumstances, including, the benefits obtained, the strength of plaintiffs' case, the risk, the expense, complexity and likely duration of further litigation, the stage of the proceedings, the amount of discovery completed, and the experience and views of counsel.

    7. The following is a summary of the principal events which occurred during the course of this litigation and a summary of the nature of the claims involved.

II. THE LITIGATION

    8. On and after December 29, 1998, the following class actions were filed in the United States District Court for the Northern District of California (the "Court"):

        1. E&L Ballan, Trustees, etc. v. ADAC Laboratories, et al., C-98-4934-MHP;

        2. Ingersoll v. ADAC Laboratories, et al., C-98-4939-MJJ;

        3. Field v. ADAC Laboratories, et al., C-98-4936-PJH;

        4. Reynolds v. ADAC Laboratories, et al., C-98-4941-EDL;

        5. Park East, Inc. v. David L. Lowe, et al., C-98-4950-SBA;

        6. Davidson v. ADAC Laboratories, et al., C-99-0019-FMS;

        7. Ansnes v. ADAC Laboratories, et al., C-99-0024-MMC;

        8. Fernandez v. David L. Lowe, et al., C-99-0061-MMC;

        9 Bodoin v. David L. Lowe, et al., C-99-0147-MMC;

        10. Polk v. ADAC Laboratories, et al., C-99-0166-SI;

        11. High v. ADAC Laboratories, et al., C-99-0723-SC; and

        12. Allen v. ADAC Laboratories, et al., C-99-0372-JRBB.

    9. On March 1, 1999, plaintiffs filed motions and supporting papers to consolidate the foregoing twelve related actions pursuant to Federal Rule of Civil Procedure 42. By Order dated April 5, 1999, the actions were consolidated (the "Litigation").

    10. Also on March 1, 1999, plaintiffs filed a motion pursuant to the Private Securities Litigation Reform Act of 1995 ("PSLRA"), §78u-4(a)(3)(B), for the appointment of lead plaintiffs and the approval of lead plaintiffs' selection of co-lead counsel. On April 5, 1999, the Court granted the Ballan Plaintiffs Group's motion for appointment of lead plaintiffs, directing the Ballan Group of plaintiffs to designate certain individual members of the Group to serve as the lead plaintiffs, and appointed Wolf Popper LLP and Milberg Weiss Bershad Hynes & Lerach LLP as Co-Lead Counsel for plaintiffs.  Plaintiffs designated five individuals to serve as the lead plaintiffs in accordance with the Court's April 5, 1999 Order: Joel Cavazos,  Erwin Groner,  Michael Page, Arturo Maimoni, and Boris Rimensberger (an additional 35 Class members supported the appointment).

    11. Following further extensive research and investigation, including interviews with potential witnesses, on July 19, 1999,     plaintiffs served their Consolidated Complaint. The Consolidated Complaint asserted claims under §§10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated thereunder, on behalf of persons who purchased or otherwise acquired the common stock of ADAC during the period January 10, 1996 through December 28, 1998.

    12. Defendants immediately thereafter moved to dismiss plaintiffs' Consolidated Complaint pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6) and the PSLRA. Defendants also filed a request with this Court that it take judicial notice of various documents pursuant to Federal Rule of Evidence 201 in connection with defendants' motion to dismiss. Defendant Simone filed a separate motion to dismiss, in addition to joining in the overall motion submitted by the other defendants. Plaintiffs prepared, but did not file, a response to defendants' motions because the parties entered into a stipulation taking defendants' motions to dismiss off calendar pending discussions to resolve the Litigation.

    13. On January 11, 2000, the parties entered into a Memorandum of Understanding ("MOU") containing the essential terms of a potential settlement of the Litigation. As part of the MOU, even though under the PSLRA and the rules of this Court plaintiffs would not be entitled to discovery, defendants agreed to produce documents to plaintiffs for their review and analysis in order to enable plaintiffs' counsel to confirm the fairness and reasonableness of the terms of the settlement. However, claiming that some of the information sought was highly sensitive and confidential, before defendants would agree to produce documents in connection with the MOU, the parties drafted and negotiated a protective order which would provide defendants protection from public disclosure of confidential information, while providing plaintiffs with sufficient flexibility to use the information gathered in order to determine the fairness and reasonableness of the proposed settlement. After negotiation concerning the scope of the production and the terms of a confidentiality agreement concerning the documents, defendants produced 58 boxes of documents containing internal company documents and accounting documents.

A. Plaintiffs' Claims

    15. The Complaint asserts claims under §§10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder, on behalf of persons who purchased or otherwise acquired the common stock of ADAC during the period January 10, 1996 to August 18, 1999.

    16. Plaintiffs allege that, during the Class Period, the defendants misrepresented the success of ADAC's business by disseminating false financial statements that reported materially inflated revenues, operating income, net income and earnings per share for fiscal years 1996-1998.

    17. ADAC designs, develops, manufacturers, sells and services medical imaging and healthcare information systems used in hospitals and clinics worldwide. ADAC conducts its business through two principal business units, Medical Systems and Healthcare Information Systems ("HCIS"). ADAC's Medical Systems products, which accounted for over 90% of ADAC'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. ADAC's HCIS products include radiology, cardiology and laboratory information systems.

    18. During the Class Period, defendants reported consecutive quarters of record growth. The Complaint alleges that, unbeknownst to the market, ADAC's highly impressive results were the result of a scheme and course of conduct whereby the defendants caused ADAC 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.⁽²⁾

    19. Plaintiffs allege that defendants reported artificially inflated quarterly and year-end financial results over a three year period by, among other things, recognizing revenue for transactions in which defendants caused ADAC to ship Medical Systems products to ADAC's offsite centralized warehouse facilities - as opposed to purported customers of ADAC - and improperly booking the revenues from such purported sales even though ADAC was not then entitled to payment from its alleged customers. Plaintiffs allege that ADAC's accounting for these and other transactions was in violation of Generally Accepted Accounting Principles ("GAAP"), which necessitated the restatement of ADAC's quarterly and annual financial results for fiscal years 1996, 1997, and 1998, removing in excess of $59 million in revenue and over $21 million in net income from ADAC's previously reported financial statements for this three-year period. In other words, plaintiffs allege that ADAC's revenue was materially inflated during the Class Period. Plaintiffs also allege that ADAC's net income was inflated by over 118% during the Class Period.

    20. Plaintiffs allege in their Complaint that by at least the beginning of the Class Period, defendants were determined to ensure that ADAC reported consistent revenue and earnings gains quarter after quarter, and, in order to compensate for revenue shortfalls between what ADAC's senior management had publicly forecast and ADAC's actual sales, ADAC implemented a series of "plans," or methods to falsify revenue and income.⁽³⁾ Plaintiffs' Complaint provided numerous, detailed examples of instances where defendants had employed such "plans" to falsify revenues in order to inflate ADAC's revenue and income in order to meet or exceed Wall Street analysts' expectations and to make it appear that ADAC was constantly growing. Plaintiffs allege that 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. Plaintiffs allege that the Individual Defendants knew of and, indeed, directed this accounting manipulation, with Lowe and Eckert visiting ADAC field offices several times a quarter and directing the use of the "plans" and side letters to create revenue in order to "make the numbers."

    22. Plaintiffs allege that throughout the Class Period the defendants issued press releases announcing record quarterly bookings and revenues showing material and dramatic increases over the prior year's quarter, and in so doing generally attributed the increases to the strong sales in and success of ADAC's Medical Systems products businesses, nuclear medicine business, including imaging systems, and orders for LabStat™. The various press releases, Forms 10-K, and Forms 10-Q issued by defendants throughout the Class Period stressed the success of and the growth of revenues from ADAC's Medical Systems product line, as well as material increases in quarterly revenues and operating profits. The SEC filings also assured investors that ADAC's financial statements were prepared in accordance with GAAP.

    23. As a result of ADAC's announced results and track record of consistent revenue growth in sales and improved margins as created by defendants, various stock brokerage firms recommended purchase of ADAC stock, and the price per share of ADAC common stock soared.

    24. Plaintiffs further allege that while defendants were issuing false and misleading statements about ADAC's revenues, the Individual Defendants sold 376,352 shares of ADAC common stock at a significant profit, i.e., Eckert sold 174,501 shares for total proceeds of $3,739,843;  Lowe sold 190,601 shares for total proceeds of $4,035,250; and  Simone sold 11,250 shares for total proceeds of $237,263. Additionally, the Complaint alleges that the Individual Defendants were motivated to engage in the misconduct because their compensation was closely tied to ADAC's financial performance and operations.

    25. Plaintiffs allege that defendants' statements regarding ADAC's quarterly and annual financial results were materially false and misleading because its 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 other expenses, all in violation of GAAP. The Complaint charged that the record financial results achieved were due to defendants' improper conduct, not the runaway commercial success of ADAC's Medical Systems products division.⁽⁴⁾

    26. Defendants' statements regarding ADAC's annual and quarterly results were allegedly materially false and misleading because, as defendants later admitted, revenue, net income, and gross profit margin were overstated as a result of improper revenue recognition practices, and net income had not increased, but, in fact, had declined. Thus, the record financial results announced by the defendants and resultant increase in ADAC's stock price were allegedly due to defendants' improper conduct, not the commercial success of its Medical Systems products division.

    27. On December 29, 1998, prior to the commencement of trading, ADAC announced that it would restate its financial results for the previously reported 1996 and 1997 fiscal years and the first three quarters of 1998 and that such restatement would have a material adverse impact on ADAC's fiscal 1996 and 1997 and quarterly 1998 financial results. The price of ADAC stock immediately dropped 20%.

    28. Plaintiffs alleged that the December 29, 1998 announcement of the necessity to restate previous financials only partially disclosed the truth regarding ADAC's financial condition and that defendants thereafter downplayed the extent to which the scheme would affect the future performance of ADAC. For example, plaintiffs alleged that during a subsequent presentation at a brokerage firm-sponsored Healthcare Conference, defendants reassured investors with favorable comments concerning the strong performance of ADAC and lack of impact on future sales of its new revenue recognition policy.

    29. On March 1, 1999, ADAC filed its 1998 Form 10-K, announcing that it had completed the restatement of its financial results for fiscal 1996 and 1997 and the first three quarters of 1998. In the 1998 Form 10-K, ADAC: (a) admitted that revenue from ADAC's Medical Systems business unit had been improperly recognized; (b) reversed approximately $6 million of revenues in connection with contract accounting for ADAC's LabStat™ product; (c) restated the Geometric Corporation acquisition from pooling accounting to purchase accounting; (d) reduced an acquired in-process research and development charge allegedly taken in connection with the acquisition of Cortet, Inc.; and (e) 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.

    30. The restatement was extensive, affecting virtually every income statement line item at some point during the three years ended September 27, 1998, as set forth in the Complaint (¶104).

    31. Plaintiffs allege that the overstatement represented a material amount of corrections in both quantity and magnitude. For 1996, 1997, and 1998, net income (including special charges) was overstated by 233%, 25%, and 96.4%, respectively; operating income (including special charges) was overstated by 137%, 26.4%, and 72.3%, respectively; gross profit was overstated by 16.3%, 12.1%, and 25.7%, respectively; and net income per share (including special charges) was overstated by 221%, 24.6%, and 97.2%, respectively.

    32. The reaction of stock market analysts was critical and plaintiffs set forth additional details alleging that the information that defendants had disclosed in December 1998 was insufficient to inform the market of the true extent and magnitude of the restatement and continued to cover up defendants' fraud. On April 21, 1999, ADAC issued a press release stating that it would report lower than anticipated revenues and earnings for the second, third and fourth quarters of fiscal 1999 as a result of delays in recognizing revenue under ADAC's recently adopted revenue recognition policy. ADAC's stock price fell almost 50% on this announcement, closing at $6.88 per share.

    33. Plaintiffs asserted that the bad news for investors continued with the filing of ADAC's Form 10-Q for the second quarter in July 1999, in which ADAC disclosed that as a further result of the circumstances leading to the restatement, ADAC would incur $18 million in charges and non-ordinary expenses which would result in a net loss of $20.8 million for the second quarter and a net loss of $16.9 million for the first six months of fiscal 1999. In addition, ADAC disclosed that it expected to take additional charges of approximately $2.4 million in its third quarter and that it would report revenue for the third quarter 12% to 18% lower than the revenues for the second quarter of fiscal 1999, as well as possibly having to restate further its financial results as a result of problems in its South American operations. Plaintiffs also alleged that the auditors found "material weaknesses" in ADAC's internal controls which existed during the Class Period.

    34. Subsequently, in a press release issued on August 18, 1999, ADAC revealed that its South American receivables and recourse obligations had further deteriorated and acknowledged that, as a result of its deteriorating operations in the third quarter, it fell out of compliance in connection with its $75 million revolving credit facility.

    35. The price per share of ADAC stock continued to fall, ending the Class Period 78% lower than the Class Period high of $31.63.

 B. The Work Performed

    37. Plaintiffs' investigation included a review of ADAC's SEC filings, securities analysts' reports and advisories about ADAC, press releases issued by ADAC, media reports about ADAC, and discussions with consultants and others familiar with ADAC's business and operations.

    38. Plaintiffs' counsel's investigation both before and after plaintiffs served their Complaint included interviews with several persons, including former ADAC employees and agents with knowledge about ADAC and relating to the claims alleged. The information derived from these interviews was important. Among other things, plaintiffs' counsel learned of additional relevant facts and avenues of inquiry to be explored with defendants and non-party witnesses. Witnesses detailed the problems associated with ADAC's improper accounting practices, including details of various contracts involved and detailed in the Complaint.

    39. During the litigation, plaintiffs' counsel also conferred on many occasions with consultants with expertise about accounting issues and damage analysis.

    40. Plaintiffs' accounting experts provided valuable advice as to issues of liability, falsity of statements, and scienter. This information was invaluable in preparation of the complaints, interviews of potential witnesses, review of documents, and in evaluating the fairness of the settlement to the Class.

    41. Plaintiffs' damage consultant analyzed the potential recoverable damages and the materiality of the alleged false and misleading statements. The information provided by this consultant also assisted in formulating the Plan of Allocation in connection with the settlement.

  C. Settlement Negotiations

    43. Notwithstanding a desire to investigate the possibility of settlement, the parties held diametrically opposed views on liability and the amount of damages suffered by the Class. Plaintiffs claimed that the overstated financials resulted from a scheme carefully orchestrated by defendants to show a consistent pattern of consecutive quarter-to-quarter growth over an extended period of time. Defendants countered that their announced financials and expectations were reasonable and made in good faith at the time.

    44. In addition to the differing views on liability and damages, there were issues relating to any contribution to a potential settlement between ADAC and defendants' insurance carriers. The insurance was a wasting asset because it was being used to pay defense costs.

    45. Throughout the settlement negotiations, there were significant gaps between plaintiffs' and defendants' perceptions of the strengths and weaknesses of their cases, and defendants remained steadfast in their belief that all material risks associated with ADAC's business had been fully disclosed, plaintiffs' complaint would not be sustained, and plaintiffs would not prevail at trial.

    46. Plaintiffs also recognized the potential viability of defendants' argument that the risks associated with ADAC's stock were adequately disclosed.

    47. The parties conducted settlement negotiations over a number of weeks and months. Finally, on January 11, 2000, the MOU was signed by the parties, providing for the payment of an aggregate of $20 million. Thereafter, as part of the settlement negotiations, defendants produced the 58 boxes of internal documents described above in connection with their agreement to produce discovery to enable plaintiffs to review internal company documents and accounting workpapers in order to confirm the fairness and reasonableness of the proposed settlement.

    48. After the agreement-in-principle was reached, there were extensive negotiations with defendants' counsel concerning the release language and other issues, and many drafts and redrafts of the Stipulation of Settlement and Exhibits thereto were exchanged before final agreement was achieved.

D. Mailing and Publication of Notice of Settlement

    50. The Court's Notice Order also directed plaintiffs' counsel to cause a Summary Notice of Class Action Settlement ("Publication Notice") to be published in Investors Business Daily.

    51. Submitted herewith is the Declaration of Cheryl Washington of Gilardi & Co. LLC, the Claims Administrator, which attests that Notices have been mailed to a total of 27, 052 potential Class members, and that the Publication Notice was published on August 1, 2000, as directed by the Court.

 E. Reaction of the Class

III. FACTORS TO BE CONSIDERED IN SUPPORT OF SETTLEMENT

  A. The Settlement Was Fairly and Aggressively Negotiated by Counsel

  B. Serious Questions of Law and Fact Placed the Outcome of the Action in Significant Doubt

    55. During the course of the litigation, defendants asserted that they possessed absolute defenses to the claims alleged by     plaintiffs. Specifically, defendants asserted the restatement of ADAC's financials was merely a correction of minor misapplied accounting principles and that such restatements are increasingly commonplace and at worst indicate corporate negligence and thus do not rise to the level of fraud or liability under §10(b) of the Exchange Act or Rule 10b-5 promulgated thereunder. Defendants further argued that there were no facts alleged that defendants knew that the accounting information and treatment was inaccurate, that plaintiffs' allegations did not sufficiently identify with particularity the people and documents involved and the dates of events, and that any statements that defendants made were protected by the safe harbor provisions of the PSLRA. Additionally, defendants argued that the restatement could not be invoked to satisfy the heightened pleading standards of In re Silicon Graphics, Inc. Sec. Litig., 183 F.3d 970 (9th Cir. 1999). Defendants argued that GAAP permitted the use of the ship-and-store transactions complained of by plaintiffs and that even if there were violations of GAAP, such violations did not establish the requisite scienter needed to establish liability under the Exchange Act. Further focusing on scienter, defendants claimed that their personal stock sales were neither sufficient in number and value nor were they in temporal proximity to the alleged wrongdoing so as to be "suspicious in time or amount" and evidence scienter. They claimed that they sold small amounts of stock at prices below the highest prices during the Class Period. They also argued that their incentive based compensation was not evidence of any motivation to engage in fraud.

    56. Defendants raised further arguments in an effort to refute any claim of scienter, asserting, inter alia, that they relied upon ADAC's auditors for the proper accounting treatment. Defendant Simone raised numerous additional issues, including a claim that he had no involvement with the sales at issue in plaintiffs' allegations, and that he had not seen the allegedly improper side letters or spoken with sales personnel or authorized the improper transactions. Simone further claimed that he had no involvement with the public, the press releases complained of or any communications with stock market analysts. Thus, defendants argued that plaintiffs faced substantial risks that their claims based on ADAC's restatement would be rejected.

    57. Plaintiffs argued that the overstatement represented a material amount of corrections in both quantity and magnitude, with net income, operating income, gross profit, and net income per share being overstated as much as 233%, 137%, 25.7%, and 221%, respectively. Plaintiffs also argued that 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. Since GAAP requires that a company's revenue not be recorded until such time as an exchange of merchandise actually has taken place and collection of the sales price on that merchandise is reasonably assured, plaintiffs' position was that the recognition of more than $53 million of revenue from the "sales" of Medical Systems products was improper due to the substantial contingencies regarding payment for these products. By the very nature of the transactions at issue here - shipping large sophisticated nuclear medicine systems to a warehouse other than the sites where they were to be installed - plaintiffs contended that defendants knew or recklessly ignored that there was no exchange of merchandise and that these purported customers were not going to pay for machines sitting in a warehouse until and unless the merchandise was delivered and installed to the satisfaction of ADAC's "customers." Further, many of the receivables for the goods sitting in the warehouses were maintained on ADAC's books for three years with no collection of payment, in violation of GAAP.

    58. Although plaintiffs are confident that they would prevail should the case proceed, plaintiffs recognized that, particularly in light of the severely heightened pleading requirements in this Circuit as a result of the interpretation of the Ninth Circuit's opinion in Silicon Graphics, there would be difficulties in sustaining their claims through pleading and ultimately through trial.

    59. Plaintiffs' counsel were aware that many of the defenses that had been and would be asserted by defendants had some possibility, albeit uncertain, of success and might be presented to a jury. Despite the information accumulated by plaintiffs' counsel, the uncertainty regarding defendants' knowledge of problems and interpretation of risk disclosures made the outcome problematical, especially when weighed against the tangible benefits conferred by the significant settlement of $20 million.

 C. The Ability of Defendants to Withstand a Judgment

    61. Additionally, had plaintiffs successfully established at trial that defendants deliberately engaged in the misconduct complained of, ADAC's insurance carriers would likely have disclaimed coverage for any liability and ADAC itself could have been liable for any damage award. ADAC's financial position has not returned to the levels is experienced during the Class Period. For fiscal 1999, ADAC's gross revenues had increased, but it suffered net losses of $33.6 million versus a profit of over $7 million in 1998 and $13 million in 1997, and net losses per share in 1999 of $1.64, versus profits per share of $.38 in 1999 and $4.73 in 1998. As of January 2, 2000, ADAC's first quarter of fiscal 2000, its net product revenues had declined 6% from the preceding year, gross profits had declined over 16%, and ADAC had continuing operating and net losses and losses per share as opposed to profits. ADAC's cash and cash equivalents had declined over 40% from the preceding quarter; Medical Systems revenues were down and gross margins on Medical Systems products had declined significantly, from 40.3% to 31.7% in the first quarter of fiscal 2000. Medical Systems product revenue did increase 3% for the first six months of fiscal 2000 over the preceding year, but its service revenues declined 2% for the same period. Although for the second quarter of fiscal 2000, ADAC was able to report operating income of $6 million and income per share, its total cash and cash equivalents are less than the amount ADAC is paying into the Settlement Fund. Indeed, partly as a result of the settlement of litigation and related charges, together with the results of ADAC's operations in the first quarter of fiscal 2000, ADAC was out of compliance with its financial covenants in its revolving credit facility with its major lenders. Consequently, in January 2000, ADAC and its bank syndicate signed an amendment increasing ADAC's credit facility and modifying the financial covenants, so that ADAC would no longer be in default. Had the litigation continued and resulted in a significantly greater judgment, the financial impact on ADAC and its facilities, particularly if the insurance carriers declined coverage, would have been far more severe and the likelihood that plaintiffs would promptly recover such a verdict would have been severely diminished.

 D. The Judgment of the Parties that the Settlement Is Fair and Reasonable Provides Additional Support for the Approval of the Settlement

    63. Plaintiffs' counsel are actively engaged in complex state and federal civil litigation throughout the country, particularly the litigation of securities class actions. Our experience in the field allowed us to identify the complex issues involved in this case, including the inherent risk of litigating, the appropriate timing, scope and content of risk disclosures, and to formulate strategies to effectively prosecute plaintiffs' cases. I believe that our reputations as attorneys unafraid to carry a meritorious case, even one with the risks apparent here, through the trial and appellate levels gave us strong leverage in engaging in settlement negotiations with defendants.

    64. In the estimation of plaintiffs' counsel, the compromise embodied in the settlement represents a significant achievement in terms of a successful and efficient resolution of a large and complex class action. Because of defendants' standing assertion that their risk disclosures were sufficient and the knowledge that this case would not be resolved until trial, the settlement was negotiated at arm's length without any diminution of plaintiffs' litigation efforts until an agreement-in-principle had been reached.

    65. Plaintiffs' counsel strongly believe that the Settlement represents the best possible resolution of this litigation. For the reasons set forth above, I believe the settlement is fair, reasonable and adequate in all respects and should be approved by the Court.

IV. THE PLAN OF ALLOCATION

    66. Pursuant to the Notice Order and as set forth in the Notice, all Class members who wish to participate in the distribution of the Settlement Fund must submit a valid Proof of Claim form postmarked on or before October 24, 2000. As provided in the Stipulation, after deducting all appropriate taxes, administrative costs, attorneys' fees and expenses, the balance of the Settlement Fund is to be distributed according to the Plan of Allocation.

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

    68. The Proposed Plan of Allocation provides:

        a. The Net Settlement Fund will be distributed to Settlement Class members who submit valid, timely Proof of Claim forms ("Authorized Claimants"). Settlement Class members will be eligible to participate in the distribution of the Settlement Fund only if they have a net loss on all transactions in ADAC common stock during the Settlement Class Period.

        b. To the extent there are sufficient funds in the Net Settlement Fund, each Authorized Claimant will receive an amount equal to the Authorized Claimant's claim, as defined below. If, however, the amount in the Net Settlement Fund is not sufficient to permit payment of the total claim of each Authorized Claimant, then each Authorized Claimant shall be paid the percentage that each Authorized Claimant's claim bears to the total of the claims of all Authorized Claimants.

        c. A claim will be calculated as follows:

(1) For shares of ADAC common stock that were purchased or otherwise acquired from January 10, 1996 through December 28, 1998, and

 (a) sold prior to December 29, 1998, the claim per share is 20% of the difference between the purchase price and the sales price;

 (b) sold from December 29,1998 through August 18, 1999, the claim per share is the lesser of (i) $5.25 per share (December 29, 1998 price decline), or (ii) the purchase price less the sales price;

(c) retained at the end of August 18, 1999, the claim per share is the lesser of (i) $5.331, or (ii) the purchase price less $6.263 (five-day average closing price August 19,1999 - August 25, 1999).

(2) For shares of ADAC common stock that were purchased or otherwise acquired from December 29, 1998 through August 18, 1999, and

(a) sold prior to August 19, 1999, the claim pre share is 20% of the difference between the purchase price and the sales price;

(b) retained at the end of August 18, 1999, the claim per share is the lesser of (i) $0.08, or (ii) the purchase price less $6.263 (five day average closing price August 19, 1999 - August 25, 1999).

d. The total of all profits shall be subtracted from the total of all losses to determine if a Settlement Class member has a claim. Only if a Settlement Class member had a net loss, after profits from all transactions in ADAC common stock during the Settlement Class Period are subtracted from the total of all losses, will such Class member be eligible to receive a distribution from the Net Settlement Fund.

e. The date of purchase or sale is the "contract" or "trade" date as distinguished from the "settlement" date. The determination of the price paid per share and the price received per share shall be exclusive of all commissions, taxes, fees, and charges.

f. For Settlement Class members who made multiple purchases or multiple sales during the Settlement Class Period, the earliest subsequent sale shall be matched with the earliest purchase and chronologically thereafter for purposes of the claim calculations.

V. THE FEE APPLICATION

    70. The Notice indicates that plaintiffs' counsel intend to apply for an award of attorneys' fees up to 30% of the Settlement Fund, plus expenses not to exceed $350,000. As set forth in the accompanying Memorandum In Support of Plaintiffs' Application for Attorneys' Fees and Reimbursement of Expenses, plaintiffs are requesting fees of 30% of the Settlement Fund and expenses of $324,194.57. As fully discussed in the accompanying Memorandum, plaintiffs' application is eminently fair and reasonable. Plaintiffs' application is well within the range of fees commonly granted in cases of this type and is fully justified given prosecution of this case on a wholly contingent basis, the exceptional benefits obtained, and the nature, extent, and quality of services rendered.

    71. Plaintiffs also seek reimbursement of expenses. Plaintiffs' counsel's aggregate out-of-pocket expenses total $324,194.57. These expenses, which include experts' fees, were reasonably and necessarily incurred in the prosecution of this action. Each law firm which is seeking reimbursement has prepared a declaration documenting the amount of expenses actually incurred in connection with litigating this case. These are annexed as Exhibits 1-23 to the Declaration of Ellen Gusikoff Stewart in Support of (1) Final Approval of Settlement; (2) Award of Attorneys' Fees and Reimbursement of Expenses; and (3) Approval of Plan of Allocation of Settlement Proceeds.

    72. Plaintiffs' counsel achieved an extremely beneficial result for the Class at great risk and expense to themselves. They were unwavering in their dedication to the interests of the Class and their investment of the time and resources necessary to bring this litigation to a successful conclusion.

A. Factors to Be Considered in Support of the Requested Attorneys' Fee Award

1. Extent of Litigation

2. Standing and Expertise of Plaintiffs' Counsel

3. Standing and Caliber of Opposition Counsel

4. The Risks of Litigation and the Need to Ensure the Availability of Competent Counsel in High-Risk, Contingent Securities Cases

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

    78. The above does not even take into consideration the possibility of no recovery. As discussed above, from the outset this case presented a number of unique risks and uncertainties which could have prevented any recovery whatsoever. It is wrong to assume that a law firm handling complex contingent litigation such as this always wins. Tens of thousands of hours have been expended in losing efforts. The factor labeled by the courts as "the risks of litigation" is not an empty phrase. There are numerous cases where plaintiffs' counsel in contingent cases, after the expenditure of thousands of hours, have received no compensation. It is unfortunate, but true, that plaintiffs' counsel who litigate cases in good faith and receive no fees are often the most diligent members of the plaintiffs' bar. It is only the knowledge by defendants and their counsel that the leading members of the plaintiffs' securities bar are actually prepared to, and will, force a resolution on the merits and go to trial, that permits meaningful settlements in actions such as this.

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

    80. For example, there has been a recent trend towards dismissal of actions with prejudice at the pleading or summary judgment stage. Indeed, there are numerous federal appellate decisions affirming dismissals with prejudice in securities cases. See, e.g., Suna v. Bailey Corp., 107 F.3d 64 (1st Cir. 1997); Chill v. General Electric Corp., 101 F.3d 263 (2d Cir. 1996); In re Syntex Corp. Sec. Litig., 95 F.3d 922 (9th Cir. 1996); Gross v. Summa Four, 93 F.3d 987 (1st Cir. 1996); Glassman v. Computervision Corp., 90 F.3d 617 (1st Cir. 1996); In re Stac Electronics Sec. Litig., 89 F.3d 1399 (9th Cir. 1996); Epstein v. Washington Energy Co., 83 F.3d 1136 (9th Cir. 1996); Lovelace v. Software Spectrum, 78 F.3d 1015 (5th Cir. 1996); San Leandro Emergency Medical Group Profit Sharing Plan v. Philip Morris Cos., 75 F.3d 801 (2d Cir. 1996); Acito v. IMCERA Group, 47 F.3d 47 (2d Cir. 1995); In re VeriFone Sec. Litig., 11 F.3d 865 (9th Cir. 1993); In re Donald J. Trump Casino Sec. Litig., 7 F.3d 357 (3d Cir. 1993); Neubronner v. Milken, 6 F.3d 666 (9th Cir. 1993).

    81. Many appellate decisions affirming summary judgments and directed verdicts for defendants also show that surviving a motion to dismiss is no guaranty of recovery. E.g., Silver v. H&R Block, 105 F.3d 394 (8th Cir. 1997); In re Worlds of Wonder Sec. Litig., 35 F.3d 1407 (9th Cir. 1994); McGonigle v. Combs, 968 F.2d 810 (9th Cir. 1992); Moorhead v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 949 F.2d 243 (8th Cir. 1991); In re Convergent Technologies Sec. Litig., 948 F.2d 507 (9th Cir. 1991). Even plaintiffs who succeed at trial may find their judgment overturned on appeal. E.g., Anixter v. Home-Stake Prod. Co., 77 F.3d 1215 (10th Cir. 1996) (overturning plaintiffs' verdict obtained after two decades of litigation); Backman v. Polaroid Corp., 910 F.2d 10 (1st Cir. 1990) (en banc) (reversing plaintiffs' verdict for securities fraud and ordering entry of judgment for defendants).

    82. The adoption of the PSLRA and the Securities Litigation Uniform Standards Act of 1998 have greatly enhanced the risk of litigating securities fraud cases. For example, many recent post-PSLRA cases in this Circuit have been dismissed at the pleading stage (with or without prejudice) in response to defendants' arguments that the complaints do not meet the PSLRA's heightened pleading standards. See, e.g., In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970 (9th Cir. 1999); Yourish v. California Amplifier, 191 F.3d 983 (9th Cir. 1999); Reiger v. Altris Software, Inc., [1999 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶90,491 (S.D. Cal. 1999); In re PetSmart, Inc. Sec. Litig., 61 F. Supp. 2d 982 (D. Ariz. 1999); In re CBT Group PLC Sec. Litig., [1999-2000 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶90,604 (N.D. Cal. 1999); Plevy v. Haggerty, 38 F. Supp. 2d 816 (C.D. Cal. 1998); Hockey v. Medhekar, 30 F. Supp. 2d 1209 (N.D. Cal. 1998); Wenger v. Lumisys, Inc., 2 F. Supp. 2d 1231 (N.D. Cal. 1998); Allison v. Brooktree Corp., 999 F. Supp. 1342 (S.D. Cal. 1998); Molinari v. Netmanage, Inc., [1999 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶90,413 (N.D. Cal. 1998); Head v. Netmanage, Inc., [1999 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶90,412 (N.D. Cal. 1998); Ronconi v. Larkin, [1998 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶90,212 (N.D. Cal. 1998); David T. O'Neal Trust v. Vanstar Corp., No. C 98-0216 MJJ (N.D. Cal. Dec. 22, 1998); Allison v. Brooktree Corp., No. 97-CV-0852 TW(POR), 1998 U.S. Dist. LEXIS 21859 (S.D. Cal. Nov. 25, 1998); Goldberg v. Storm Technology, Inc., Nos. C-97-21101-JF, C-98-20186-JF (N.D. Cal. Nov. 3, 1998); Kainos v. Beacon Diagnostics, Inc., C-97-4618 MHP (N.D. Cal. Sept. 14, 1998); In re Read-Rite Corp. Sec. Litig., No. C-98-20434 (N.D. Cal. Aug. 12, 1998); Brady v. Anderson, No. CV 97-2154(SHx), 1998 U.S. Dist. LEXIS 20774 (C.D. Cal. May 27, 1998); In re YES! Entertainment Corp. Sec. Litig., No. C97-01388 CRB, 1998 U.S. Dist. LEXIS 22106 (N.D. Cal. May 14, 1998); Howard Gunty Profit Sharing v. Quantum Corp., No. C 96 20711 SW (N.D. Cal. Apr. 6, 1998); Molinari v. Symantec Corp., No. C-97-20021-JW, 1998 U.S. Dist. LEXIS 21668 (N.D. Cal. Mar. 17, 1998); In re Fritz Cos. Sec. Litig., No. C 96-2712 MHP (N.D. Cal. Mar. 5, 1998); Edwards v. Casino Data Systems, Inc., No. CV-S-96-1191-LDG(LRL) (D. Nev. Mar. 5, 1998); Chan v. Orthologic Corp., No. CIV-96-1514-PHX-RCB (D. Ariz. Feb 2, 1998).

    83. The foregoing fully refutes the argument that the commencement of a class action is a guarantee of a settlement and a large fee. It takes hard and diligent work by skilled counsel to develop facts and theories which will persuade defendants to enter into serious settlement negotiations. If defendants believe they will prevail, experience shows that they will litigate to the end. The risk factor is real.

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

    85. When we undertook to act for the plaintiffs in this matter, it was with the knowledge that we would spend many hours of hard work against some of the best defense lawyers in the United States with no assurance of ever obtaining any compensation for our efforts, or even for the overhead of our offices, which is an increasingly substantial consideration. We were aware that the only way we would be compensated was to achieve a successful result. The benefits conferred on the plaintiffs by this Settlement are particularly noteworthy in that a Settlement Fund worth $20 million (plus accrued interest) was obtained for the Class despite the existence of substantial risks and the vigorous defense mounted by defendants and without the benefit of any government agency.

VI. CONCLUSION

    86. For the reasons set forth above and in the accompanying Memorandum of Points and Authorities in Support of Final Approval of Class Action Settlement and Memorandum of Points and Authorities in Support of Plaintiffs' Application for Attorneys' Fees and Reimbursement of Expenses, plaintiffs respectfully submit that: (i) the settlement is fair, reasonable and adequate and should be approved; and (ii)  the application for attorneys' fees and reimbursement of expenses should be granted.

    I declare under penalty of perjury under the laws of the State of New York and California that the foregoing is true and correct. Executed at New York, New York this 7^th day of September, 2000.
 

_________________
PATRICIA I. AVERY
 

N:\CASES\ADAC2.SET\DLM82399.dec

I, the undersigned, declare:

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

2. That on September 8, 2000, declarant served the DECLARATION OF PATRICIA I. AVERY IN SUPPORT OF FINAL APPROVAL OF THE PROPOSED CLASS ACTION SETTLEMENT AND APPLICATION FOR ATTORNEYS' FEES AND REIMBURSEMENT OF EXPENSES by depositing a true copy thereof in a United States mailbox at San Diego, California in a sealed envelope with postage thereon fully prepaid and addressed to the parties listed on the attached Service List and that this document was forwarded to the following designated Internet site at:

http://securities.milberg.com

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

I declare under penalty of perjury that the foregoing is true and correct. Executed this 8th day of September, 2000, at San Diego, California.
 

_________________________
DANELLE L. McNERTNEY

1. The settlement is not a "claims-made" settlement. Once the settlement is finally approved by this Court, no escrowed funds will ever be returned to ADAC or ADAC's insurance carrier.

2. The Complaint details the reported revenues and income, the amounts by which they were overstated, and the percentage by which the revenues and net income were overstated. See, e.g., ¶¶ 2, 104-106.

3. There were four different methods allegedly utilized: (a) "Slow truck" - slow downs in the shipping process to stretch the delivery time to as much as 30 days, used to ship systems at quarter end and report the shipped system as revenue, although the customer was unable or unwilling to accept immediate delivery; (b) "Ship and store - order received" - if an order requested delivery more than 30 days beyond quarter end, ADAC asked the customer to allow ADAC to ship the system to a warehouse, but to bill the customer as if the customer had received the system, with ADAC paying all shipping and storage charges, and waiving the down payment; (c) "Ship and store - no order received." - if quarterly revenue goals were not reachable, ADAC's sales managers contacted potential customers who did not have board approval for a purchase or who for some other reason could not issue a purchase order to ADAC, to offer them a side agreement in which the customer would "purchase" the system subject to a side letter which allowed full rights to cancel without recourse if board approval or financing was not obtained, the system would be shipped to a storage facility and the "sale" reported as revenue; or (d) a mixture of real, Ship-and-Store/Real and Ship-and-Store/Phantom orders, with a "Ship in Place" where systems were recorded as revenue, but the actual system was not complete and shipped.

4. Plaintiffs also charged that ADAC improperly capitalized certain software costs that should have been recorded as research and development expenses, and improperly recognized revenue of over $15million on certain South American contracts.