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EXHIBIT 99.2
UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF GEORGIA
ATLANTA DIVISION
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: CIVIL ACTION NO.
IN RE 1996 MEDAPHIS CORPORATION : 1:96-CV-2088-FMH
SECURITIES LITIGATION :
: PLAINTIFFS DEMAND
A JURY TRIAL
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CONSOLIDATED SECOND AMENDED CLASS ACTION COMPLAINT
FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS
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Pursuant to pretrial Order No. 2 entered by the court on October 23,
1996, plaintiffs, on behalf of themselves and all others similarly situated, by
their attorneys, allege the following upon information and belief (except for
those allegations which pertain to plaintiffs and their attorneys, which
allegations are based on personal knowledge). Plaintiffs' information and belief
is based, inter alia, on the investigation made by and through plaintiffs'
attorneys, which investigation included, without limitation, a review and
analysis of various public filings made by and articles concerning Medaphis
Corporation and related entities, press releases, reports of securities
analysts, press reports, and other investigatory efforts.
NATURE OF THE ACTION
1. This is a class action brought against Medaphis Corporation
("Medaphis" or the "Company"), and certain of its officers and directors, on
behalf of a plaintiff class (the "Class") consisting of all persons who
purchased or otherwise acquired Medaphis common stock between February 6, 1996
and October 21, 1996, inclusive (the "Class Period"), and who
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sustained damages thereby. On behalf of themselves and the members of the Class,
plaintiffs seek to recover damages caused by defendants' violations of Sections
10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act").
Certain plaintiffs also assert claims under the Securities Act of 1933 (the
"Securities Act") on behalf of a sub-class (the "Sub-Class") consisting of
persons and entities who, in connection with the HDS Merger (described below),
acquired Medaphis stock during the Class Period pursuant to a registration
statement and prospectus issued by the Company.
2. Medaphis sells outsourced business management services to
doctors and hospitals, primarily for the management of billing and accounts
receivable. For several years, Medaphis has been pursuing a strategy of
aggressive growth through acquisitions, reportedly having acquired more than 40
companies that provide business management services and systems primarily to
physicians and hospitals. For the most part, Medaphis used its common stock as
currency in connection with this acquisition strategy.
3. In order for Medaphis to be able to continue to grow by
making acquisitions through exchanges of its stock, it was imperative that the
company's stock be maintained at high prices. Defendants maintained and
increased the price of Medaphis stock by presenting continued growth in the
Company's reported revenues and earnings, as well as positive developments in
Medaphis' business operations and strategies.
4. One of the ways in which defendants touted the Company's
business and prospects was to boast of the historical and anticipated future
success of Imonics, Inc. ("Imonics"), which was acquired by the Company in
December of 1994. Imonics specialized in systems integration and client service
computing; that is, Imonics helped companies to
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coordinate different types of computer systems to work together and to connect
numerous (and sometimes different) desktop computers to a single "server"
technology. Defendants publicly represented that Imonics was a major contributor
of profits and revenues to Medaphis' overall results. Medaphis also placed
Imonics in charge of the "re-engineering" of Medaphis' core physician billing
business, known as Medaphis Physicians Services Corporation ("MPSC"), in which
it provided critical software integration services that would supposedly make
MPSC more efficient. According to defendants, Imonics provided Medaphis with an
"immense competitive advantage." These and other positive statements of similar
import concerning Imonics and the MPSC re-engineering project permeated
defendants' public statements during the Class Period. At the time these
representations were made, however, and as the investment community was unaware
until the end of the Class Period, Imonics was experiencing severe operational
problems including, among other things, excessive staffing and payroll,
inadequate cost controls and significant cost overruns, and poor operating
performance and shoddy execution on critical projects. Unbeknownst to the
investing public, these problems were so severe that they negated Imonics'
ability to perform as positively portrayed by defendants.
5. Yet another way in which defendants ensured that Medaphis
remained a darling of the investment community was to boast of the acquisitions
made by the Company over the years, and the successful and synergistic
integration of the acquired companies into Medaphis' overall business
operations, especially the Imonics operations. However, defendants knew, but
concealed from the public until the close of the Class Period, that at the time
these statements were being made by defendants, the integration of many of the
newly acquired
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subsidiaries with the operations of Imonics was failing, and doomed to ultimate
failure in view of the dilapidated operating condition of Imonics.
6. Defendants also realized that, in order to maintain
Medaphis' stock price, it was important that the Company meet earnings estimates
being made by and for it by securities analysts. Therefore, on February 6, 1996
(the beginning of the Class Period), the Company reported record operating
results for the fourth quarter and year ended December 1995, results which were
precisely in line with analysts' expectations. It was not until the close of the
Class Period, in October of 1996, that the investment community was stunned to
learn, by the Company's own admission, that these results were materially false
and misleading as a result of defendants' employment of improper and deceptive
accounting practices.
7. Having artificially propped up reported earnings for the
fourth quarter and year ended December 31, 1995, defendants were under enormous
pressure to continue the trend of reporting increased earnings for the first
quarter of 1996. The opportunity to do so arose in February 1996, when Medaphis,
through Imonics, entered into a joint venture (the "Joint Venture") with a
subsidiary of the German conglomerate Bertelsmann AG ("Bertelsmann"), to develop
systems integration projects for customers in Europe. In turn, the Joint Venture
then signed a multi-year systems integration contract (the "Systems Integration
Contract") to provide services to a major telecommunications company.
8. Immediately upon entering into the Systems Integration
Contract, Medaphis recognized $12.5 million of earnings before income taxes and
approximately $7.6 million in net earnings -- earnings which represented a
majority of total reported net income for its first quarter ended March 31,
1996, and which enabled the Company on April 23, 1996 to
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report record revenues and earnings for the quarter. Predictably, in reaction to
these results, Medaphis common stock soared to a near-record high of $48.50 per
share. However, the investment community was not aware until the end of the
Class Period that the first quarter results (like those reported only two months
earlier) were materially false and misleading, and that the recognition of $12.5
million as net income from the Joint Venture at the time of the contract's
signing violated Generally Accepted Accounting Principles as well as the
Company's own stated policy relating to the recognition of revenue. The earnings
had been recognized albeit artificially -- for the purpose of prolonging the
illusion of growth and success.
9. The facade that defendants had created began to crumble on
August 14, 1996, when -- contrary to the expectations theretofore fostered by
the Company -- Medaphis surprised the investment community by reporting that it
would suffer a substantial loss for the quarter ended September 30, 1996. This
reversal was attributable to the need to take write-offs in the total amount of
$35 to $40 million which resulted, among other factors, from: the Company's
falsification of its reported earnings by over $9 million for the first quarter
of 1996; and a $15 million write-off arising from the need to reorganize Imonics
due to the significant operational problems that were known internally but
concealed throughout the Class Period.
10. The Company also disclosed on August 14, 1996 that,
contrary to its previous representations that the Company's technology division
(which included Imonics) was "offsetting" margin and other pressures being
experienced by MPSC, Imonics was suffering from severe operational problems such
that it was not and could not offset pressures adversely affecting MPSC. In
addition to Imonics' problems, the Company revealed for the first time that yet
another highly touted subsidiary, Automation Atwork ("Atwork"), was experiencing
weak
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sales and serious problems with one of its new product lines, and that such
problems had existed since late 1995.
11. The Company further surprised the market on August 14,
1996 by announcing that, as a result of Imonics' severe operational difficulties
and problems associated with the merger of Imonics with other newly acquired
companies, Medaphis could no longer pursue a "growth through acquisitions"
strategy, which had previously been touted by defendants as the key to the
Company's success and the engine of future earnings growth. This acknowledgment
stood in contrast to defendants' numerous earlier statements, which portrayed
Imonics as the Company's great revenue and profit engine and boasted that the
various mergers involving Imonics were progressing seamlessly. It was also
revealed on August 14, 1996 that the operational problems at Imonics were so
significant that Imonics was completely unable to perform its existing
obligations under the Joint Venture and that (unbeknownst to the investing
public), well before the end of the Class Period, the problems were so severe
that Bertelsmann, Imonics' partner in the Joint Venture, insisted that Medaphis
either renegotiate the terms of the Systems Integration Contract or abandon the
agreement altogether.
12. Predictably, the day after these negative announcements,
the market price of Medaphis common stock plummeted by $21.375 per share, or
60%, on extraordinarily high volume of almost 43 million shares, representing
approximately 60% of all such shares then outstanding, to close at $14.25 per
share on August 15, 1996.
13. Yet, as surprising as it was, the company's August 14,
1996 release was itself false and misleading and was only the tip of the
iceberg. After the surprising August 14, 1996 announcement, defendants
represented to analysts and investors that the Company had
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identified all of the problems affecting Medaphis and "concluded that all of the
potential problems have been reserved against."
14. In light of these assurances, the market was shocked on
October 22, 1996, when the Company issued a press release announcing for the
first time that its previously reported revenues and earnings for the fourth
quarter and full year of 1995 were false and had to be restated. The October 22,
1996 announcement also revealed: that the company had written-off additional
previously concealed amounts totalling in the millions of dollars relating to a
reorganization of Imonics; and that the entire senior management of Imonics had
been fired. As a result of these stunning developments, Medaphis would suffer
nearly double the loss announced only two months earlier for the third quarter
1996, and was forced to reduce earnings projections for 1997.
15. The October 22, 1996 press release explained that the
restatements of earnings for the fourth quarter and full year of 1995 were the
result of improperly recorded revenues booked in connection with a major license
agreement executed in December 1995, and other unspecified transactions. In
summary, in its zeal to report growing revenues and profits, the Company
fraudulently recognized earnings and revenues from one or more license
agreements during 1995 on the basis that the agreements were unconditional,
while secretly sending the customers involved side letters relieving the
customer of obligations under the agreement. The revelation that the previously
reported earnings were false reduced -- with the stroke of a pen -- reported
fourth quarter 1995 operating results from net income of approximately $4
million to a loss of $1.1 million for the quarter (a shocking 120% reversal). In
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a similar vein, the previously reported loss of $3.4 million for full year 1995
more than doubled to a restated loss of approximately $8.5 million.
16. Not surprisingly, the October 22 announcements devastated
the market price of Medaphis stock, this time erasing an additional $450 million
in market value as the stock plunged in a single day by $6.375 (or 38%) from
$16.75 to $10.375 per share, which represented a 52-week low. Prior to the
August and October 1996 disclosures, Medaphis common stock traded at prices in
the range of $32.75 to $53.25 per share.
17. In addition to pummeling the price of the Company's stock,
the surprise announcements issued at the end of the Class Period shattered the
credibility of Medaphis with the investment community. Indeed, in commenting
upon these startling disclosures, securities analysts issued blistering
criticisms of the defendants' credibility. One firm, Deutsche Morgan
Grenfell/CJL, complained in an October 23, 1996 report that [t]here were clearly
more negative issues at hand within the Company than were delineated in the
August pre-announcement," and that "we don' t believe management has been as
forthcoming as we would like with operational issues." (emphasis added). Another
firm, Donaldson, Lufkin & Jenrette, complained that Medaphis "management had
suggested that MPSC had turned the corner in the second quarter" and, as a
result, now "have no credibility with investors." Cowen & Co. termed these
developments a "complete shocker" in view of the Company's contrary
representations during the Class Period.
18. Plaintiffs and the other members of the Class and the
Sub-Class, who purchased or otherwise acquired Medaphis stock at artificially
inflated prices, have suffered substantial damages by reason of defendants'
wrongful conduct.
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JURISDICTION AND VENUE
19. The claims asserted herein arise pursuant to Sections
10(b) and 20(a) of the Exchange Act, as amended, 15 U.S.C. Sections 78j(b) and
78t(a), and Rule l0b-5 promulgated thereunder by the Securities and Exchange
Commission ("SEC"), 17 C.F.R. Section 240.10b-5; and Sections 11, 12(a) (2) and
15 of the Securities Act, 15 U.S.C. Sections 77k, 771(a) (2), and 77o.
20. This Court has jurisdiction over the subject matter of
this action pursuant to Section 22 of the Securities Act, 15 U.S.C. Section 77v;
Section 27 of the Exchange Act, 15 U.S.C. ss.78aa; and 28 U.S.C. Sections 1331
and 1337, as amended.
21. Venue is proper in this District under Section 22 of the
Securities Act and Section 27 of the Exchange Act, 15 U.S.C. Section 78aa.
Many of the acts and transactions giving rise to the violations of law
complained of herein, including the preparation and dissemination to the
investing public of false and misleading information, occurred in this
District. Further, defendant Medaphis has its principal place of business in
this District.
22. In connection with the acts, conduct and other wrongs
complained of herein, the defendants, directly or indirectly, used the means and
instrumentalities of interstate commerce, including the United States mails and
interstate telephone communications, and the facilities of the national
securities exchanges.
ORGANIZATION OF THE COMPLAINT
23. Counts I and II of this Complaint are brought on behalf of
the Class, identified in paragraph 31 hereof, pursuant to Sections 10(b) and
20(a) of the Exchange Act.
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24. Counts III, IV and V of this Complaint are brought on
behalf of the Sub- Class, identified in paragraph 31 hereof, and are based only
on the false and misleading statements made in the Registration Statement and
Prospectus issued in connection with Medaphis' merger with Health Data Sciences
Corporation (the "HDS Merger"). These claims are brought pursuant to Sections
11, 12 (a) (2) and 15 of the Securities Act.
THE PARTIES
PLAINTIFFS
25. The following representative plaintiffs appointed by the
Court as Lead Plaintiffs purchased or otherwise acquired Medaphis stock during
the Class Period as identified in their certifications previously filed with the
Court, and were damaged thereby: Carley Capital Group ("Carley"); Catherine
Baker knoll, State Treasurer of the Commonwealth of Pennsylvania, as custodian
of the Pennsylvania School Employees Retirement System Pension Fund; Vicki Mann;
Leonard C. Mead, Jr.; Dennis McDowell; PBHG Growth Fund; Raymond E. and Deborah
J. Smith, Trustees of the Smith Trust; Deborah Ann Smith; and Management Group,
L.P. ("WME"). In connection with their purchases of Medaphis Stock, the Lead
Plaintiffs suffered losses in excess of $35 million.
26. Additional persons who have filed complaints and/or signed
certifications in connection with this consolidated action, but who were not
named as lead plaintiffs are as follows: Samuel 8. Cinnamon; Robert Dawes; Efim
Derevayanny; Deborah M. Dowd; Kenneth W. Gross; Carol Ann Hayes; James V. Hayes;
Carol Ann Hayes and Vincent Brogna, Trustees of the VRB Irrevocable Trust dated
April 1, 1970; Susan Heslip; Murray Lazar; Werner Levy;
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Frederick R. Adler; Nicholas G. Metcalf; Michel Neiman by Loic Lamoureux,
attorney-in-fact; Joanne M. Noumi; Arthur Rosen; Abraham L. Slomovics; Sarah K.
Steiner; Eric Stewart; Ezriel Tauber; Hal Wickey; Angela Witt; Joseph F.
Anzlovar; Hamilton Lee Durning; Lisa Shepley; Carole Shepley; and William Yates.
These persons purchased or otherwise acquired Medaphis stock during the Class
Period as identified in certifications previously filed with the Court and were
damaged thereby.
27. While the persons identified in paragraph 26 above were
not appointed lead plaintiffs by the Court, they remain ready and willing to
serve as class representatives and lead plaintiffs if necessary.
DEFENDANTS
28. Defendant Medaphis is a corporation organized and existing
under the laws of the State of Delaware. Medaphis maintains its principal
executive offices at 2700 Cumberland Parkway, Suite 300, Atlanta, Georgia.
Medaphis common stock is and was, at all relevant times, actively traded on the
NASDAQ National Market System, under the symbol "MEDA," and was registered
pursuant to Section 12 of the Exchange Act. As of August 12, 1996, there were
reportedly more than 71 million shares of Medaphis common stock outstanding.
Pursuant to the requirements of the Exchange Act and the regulations promulgated
thereunder by the SEC, Medaphis files annual, quarterly and other reports with
the SEC.
29. (a) Defendant Randolph G. Brown ("Brown") was, at all
relevant times until his resignation on October 31, 1996, the President, Chief
Executive Officer and a Director of Medaphis. Defendant Brown also served as a
member of the Executive Committee of
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Medaphis' Board of Directors, which possesses the power and authority of the
Board in the management of the business and affairs of the Company.
(b) Defendant Michael R. Cote ("Cote") is and was, at
all relevant times, Senior Vice President-Finance and Chief Financial Officer of
the Company. Press releases issued by defendants during the Class Period
consistently identified Cote as the contact person at the Company for purposes
of communications with the investment community.
(c) Defendant James S. Douglass ("Douglass") is and
was, at all relevant times, Vice President, Corporate Controller, and Chief
Accounting Officer of the Company.
(d) The individual defendants identified in the
foregoing subparagraphs are sometimes referred to herein collectively as the
"Individual Defendants."
30. The Individual Defendants, because of their directorial,
officer and/or stockholder positions with the Company, controlled and/or
possessed the power and authority to control the contents of its quarterly and
annual reports and filings, press releases and presentations to securities
analysts and, thereby, the investing public. Each Individual Defendant attended
management and/or board meetings and was provided with copies of the Company's
reports and press releases alleged herein to be misleading, before or shortly
after their issuance, and each had the ability and opportunity to prevent their
issuance or cause them to be corrected.
CLASS ACTION ALLEGATIONS
31. All plaintiffs bring this class action pursuant to Fed. R.
Civ. P. 23(a) and (b)(3) on behalf of a Class consisting of all persons who
purchased or otherwise acquired
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Medaphis common stock between February 6, 1996 and October 21, 1996, inclusive,
and who were damaged thereby. Lead Plaintiffs Carley and WME assert Counts III,
IV and V herein on behalf of a Sub-Class consisting of all persons who acquired
Medaphis common stock pursuant to the HDS Merger, described below. Excluded from
the Class and Sub-Class are the defendants; members of the immediate families of
the Individual Defendants; any entity in which any defendant or excluded person
has or had a controlling interest; the officers and directors of Medaphis; and
the legal affiliates, representatives, heirs, controlling persons, successors,
and predecessors in interest or assigns of any such excluded party.
32. The members of the Class and Sub-Class are so numerous and
geographically dispersed that joinder of all members is impracticable. While the
exact number of Class and Sub-Class members is unknown at this time and can only
be determined by appropriate discovery, plaintiffs believe that there are
thousands of members of the Class and Sub-Class located throughout the United
States. As of August 12, 1996, there were 71,848,856 shares of Medaphis common
stock outstanding. The shares outstanding include approximately 6.2 million
shares of Medaphis common stock that were issued by the Company to hundreds of
HDS shareholders in connection with the HDS merger. Throughout the Class Period,
Medaphis shares were actively traded on the NASDAQ National Market System. Many
millions of shares of Medaphis common stock were traded during the Class Period.
Record owners and other members of the Class and Sub-Class may be identified
from records maintained by the Company and/or its transfer agent and may be
notified of the pendency of this action by mail and publication, using forms of
notice similar to those customarily used in securities class actions.
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33. Plaintiffs' claims are typical of the claims of the
members of the Class and the Sub-Class, because all members of the Class and
Sub-Class acquired Medaphis stock at artificially inflated prices and were
damaged as a result of the defendants' violations of the federal securities laws
complained of herein.
34. Plaintiffs will fairly and adequately protect the
interests of the Class and the Sub-Class and have retained counsel who are
experienced and competent in class and securities litigation. Plaintiffs have no
interest that is contrary to or in conflict with those of the members of the
Class or the SubClass.
35. A class action is superior to all other available methods
for the fair and efficient adjudication of this controversy, since joinder of
all members of the Class and SubClass is impracticable. Furthermore, as the
damages suffered by individual members of the Class and Sub-Class may be
relatively small, the expense and burden of individual litigation make it
virtually impossible for the members of the Class and Sub-Class individually to
seek redress for the wrongs done to them. There will be no difficulty in the
management of this action as a class action.
36. Questions of law and fact common to the members of the
Class and Sub- Class predominate over any questions that may affect only
individual members because defendants have acted on grounds generally applicable
to the entire Class and Sub-Class. Among the common questions of law and fact
are:
(a) Whether defendants violated the federal
securities laws as alleged herein;
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(b) Whether the Company's publicly disseminated
releases and statements omitted and/or misrepresented material facts, and
whether defendants breached any duty to convey material facts or to correct
material facts previously disseminated;
(c) Whether defendants participated in and pursued
the common course of conduct complained of herein;
(d) Whether defendants acted willfully or recklessly
in omitting and/or misrepresenting material facts;
(e) Whether the market prices of Medaphis stock
during the Class Period were artificially inflated due to the material
nondisclosures and/or misrepresentations complained of herein; and
(f) Whether the members of the Class and SubClass
have sustained damages and, if so, what is the appropriate measure of damages.
APPLICABILITY OF PRESUMPTION OF RELIANCE:
FRAUD ON THE MARKET DOCTRINE
37. Members of the Class rely upon the presumption of reliance
afforded by the "fraud-on-the-market" doctrine. At all relevant times, the
market for Medaphis common stock was an efficient market. Medaphis stock met the
requirements for listing and was listed and actively traded on the NASDAQ
National Market system, a highly efficient and automated market. Medaphis was
also registered pursuant to Section 12 of the Exchange Act (15 U.S.C. Section
78e) and filed periodic public reports with the SEC and the NASD. Further,
Medaphis regularly communicated with public investors by means of established
market communication
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mechanisms, including through regular disseminations of press releases on the
national circuits of major newswire services and through other wide ranging
public disclosures such as communications with financial press, Dow Jones and
other similar reporting services. Additionally, Medaphis stock was followed by
securities analysts employed by major brokerage firms who wrote reports which
were distributed to the sales force and customers of their respective brokerage
firms and which were publicly available and entered the public marketplace.
Among the various securities firms that regularly followed Medaphis during the
Class Period were Alex. Brown & Sons, Inc.; Bear, Stearns & Co.; Cowen &
Company; Dean Witter Reynolds; Donaldson Lufkin & Jenrette; Hambrecht & Quist;
J.C. Bradford; Jefferies & Company; Mason Cabot; Montgomery Securities; Needham
& Co.; Oppenheimer & Co.; Prudential Securities; Salomon Brothers; Smith Barney;
and UBS Securities.
38. As a result, the market for Medaphis stock promptly
digested current information regarding the Company from all publicly-available
sources and reflected such information in the price of the stock. Moreover,
Medaphis' stock price responded quickly and decisively to adverse Company news
identified in this Complaint, further evidencing the efficiency of the market
for Medaphis stock. Under these circumstances, all persons who purchased or
acquired Medaphis stock during the Class Period suffered similar injury through
their purchase or acquisition of such securities at artificially inflated
prices, and a presumption of reliance applies.
FACTUAL BACKGROUND
1. MEDAPHIS' BUSINESS OPERATIONS AND
METEORIC GROWTH THROUGH ACQUISITIONS
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39. Medaphis has consistently described itself as a leading
provider of business management systems and services to the healthcare industry.
The Company's original and core business consists of billing, collection, and
other outsourced financial services designed to assist its physician clients
with the business management functions associated with providing medical
services. Medaphis also provides subrogation and related recovery services
primarily to healthcare payers, scheduling information management systems to
hospitals and emerging integrated healthcare delivery stems, and systems
integration and work flow engineering systems and services.
40. Medaphis reportedly provides business management systems
and services to over 19,000 physicians and over 2,000 hospitals across the
United States, subrogation and recovery services to healthcare plans covering in
excess of 23 million people nationwide, and systems integration and work flow
engineering systems and services in the United States and abroad. The Company's
operations are organized into two principal operating units: Medaphis Services
Corporation, which includes all doctor and hospital transaction processing
companies, including MPSC; and Medaphis Systems Corporation, which includes all
of Medaphis' technology companies, including its systems integration businesses
(such as Imonics) and its healthcare information businesses (such as Atwork).
41. Over the past several years, a key component of Medaphis'
stated business strategy involved growth through acquisitions of other
businesses, using its stock as currency. Indeed, Medaphis built its reputation
in the investment community by representing itself as a fast-growing company
with an aggressive acquisition program and a successful history of integrating
those acquisitions smoothly into its overall business operations. such
representations
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- -- which, as will be shown herein, were demonstrably false and misleading --
convinced the investment community that the Company's strategy was successful
and poised Medaphis for future earnings growth. Indeed:
Analysts liked the flawless way Medaphis assimilated these
firms [it acquired], which formed the core of the company's
40-plus acquisitions over eight years. As revenue grew
fivefold, Medaphis gained Wall Street stardom. The Atlanta
Journal and Constitution, September 8, 1996.
42. The Company's rising stock price financed Medaphis' growth
strategy. Because Medaphis paid for most of its acquisitions with stock, the
higher the price of the stock, the fewer shares the Company had to exchange to
acquire target businesses.
43. Prior to and during the Class Period, defendants left no
doubt that Imonics -- a company acquired by Medaphis in late 1994 -- was one of
the keys to the Company's success which would enable the Company to continue its
strategy of growth through acquisitions. Medaphis consistently represented that
the Imonics acquisition allowed it to diversify its operations from primarily
billing and accounts receivable management and enabled the Company to offer
integration services to various health care providers and other businesses.
Imonics was also put in charge of re-engineering the physician billing business
of Medaphis, which falls under MPSC, the Company's largest operating unit, which
reportedly accounts for approximately 60% of the Company's total services
revenues. Indeed, with the acquisition of Imonics, Medaphis began a
much-publicized project to re-engineer the paper and labor intensive business of
MPSC in order to significantly reduce personnel-related costs, upgrade the
Company's systems to the
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level of other service industries, and provide for economies of scale.
Defendants have referred to this project as the "Re-Engineering Project".
44. The Re-Engineering Project was designed to allow for the
consolidation of the processing operations of MPSC that had previously been
conducted in over 300 local physician backoffice operations into fewer than 10
large regional data processing centers. The Re-Engineering Project involved
designing and installing software through Imonics to automate the Company's
billing process and reduce the quantity of paper processed.
FALSE AND MISLEADING STATEMENTS
DURING THE CLASS PERIOD
1. DEFENDANT MOTIVATION AND METHODOLOGIES
45. The defendants were aware that in order for Medaphis to
preserve its status as a Wall Street "star," it would have to continue its
aggressive acquisition of high-profit technology companies to generate revenues
sufficient to maintain its growth and cover the high costs of its Re-Engineering
Project. Moreover, to continue its acquisition strategy, Medaphis would have to
use its stock as currency. To this end, beginning at the end of 1995, defendants
set out to increase the price of Medaphis stock and thereby ensure that the
Company's acquisition pipeline remained robust by issuing a series of materially
false and misleading public statements.
46. The materially false and misleading public statements
issued by defendants related in large part to reported financial results and
financial statements that did not comply with Generally Accepted Accounting
Principles ("GAAP"). GAAP encompasses the rules, conventions and practices
recognized and employed by the accounting profession for the preparation of
financial statements. Statements of Financial Accounting Standards are
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promulgated by the profession's Financial Accounting Standards Board, and are
considered the highest authority of GAAP. SEC Regulation S-X (17 C.F.R. Section
210. 4-01(a) (1)) provides that financial statements filed with the SEC which
are not prepared in compliance with GAAP are presumed to be misleading and
inaccurate.
47. Defendants' false and misleading statements also related
to narrative misrepresentations concerning: Medaphis' business operations and
the Re-Engineering Project; Medaphis' earnings growth; the operating
performance, condition and prospects of Imonics; and Medaphis' acquisition and
integration of several companies into the operations of Imonics.
48. Defendants issued these statements directly, through press
releases, SEC filings, and annual and quarterly reports to shareholders.
Defendants also provided guidance to securities analysts and used them as
conduits to provide false and misleading information to the investment
community.
49. In writing their reports, several of which are referred to
herein at paragraphs 52, 53, 54, 85, 89, 106 and 107, securities analysts relied
in substantial part upon information provided to them privately by the Company.
Indeed, it was the Company's practice to have key members of its management
team, including defendants Brown and Cote, communicate with securities analysts
on a regular basis to discuss the Company's business, operations, performance
and prospects. Defendants knew that by disseminating information to the
investment community, investors would rely and act upon such information and
that such information would have an effect on the market price of the Company's
stock.
2. FEBRUARY 6, 1996 PRESS RELEASE ANNOUNCING FOURTH
QUARTER AND YEAR-END 1995 RESULTS AND RELATED
ANALYSTS REPORTS
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21
50. On February 6, 1996, the start of the Class Period,
defendants issued a press release announcing the Company's results for the
fourth quarter and year ended December 31, 1995. The Company reported fourth
quarter earnings of $11.4 million or $0.22 per share before one-time merger and
other charges. These results, which were in line with analysts' estimates,
represented a more than 50% increase over reported earnings of $0.14 per share
in the fourth quarter of 1994. For the full year of 1995, Medaphis reported
operating earnings of $41.9 million or $0.82 per share before charges,
representing an increase of approximately 80% over reported operating earnings
for the full year of 1994. The Company also reported in the February 6, 1996
release that operating revenues grew 29% in the fourth quarter, to $122.5
million, also in line with analysts' projections. Revenue for the year ended
December 31, 1995 was reportedly $467.8 million, up 47% from $319.1 million in
the same period in 1994.
51. In this press release, defendant Brown noted that the
Re-Engineering Project was progressing well and achieving "significant
milestones," and that the Company's technology division (which includes Imonics
and Atwork) "continued to grow rapidly and show positive operating results
outperforming our expectations in the second half of 1995" and was "effectively
offsetting the margin pressure and results" being experienced by MPSC.
52. Securities analysts following Medaphis, while taking note
of the margin pressures at MPSC, recommended the purchase of Medaphis stock
based on defendants' representations and other information provided by the
Company. For example, on February 7, 1996, one day after the quarterly and
annual operating results were issued, Donaldson, Lufkin & Jenrette issued a
research report which stated:
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22
Medaphis reported Q4 and year end 1995 results from continuing
operations of $0.22 and $0.82, respectively.... Based on the
results... it is becoming clear that the higher-growth
technology businesses (such as Imonics, Atwork and Consort)
are more than offsetting the margin pressures at MPSC. As MEDA
essentially hit our EPS projections, we remain comfortable
with our $1.07 EPS estimate for this year and a range of $1.40
-1.50 for 1997.
53. In a similar vein, a research report issued by Hambrecht &
Quist on February 7, 1996, again prepared on the basis of information provided
by the Company and/or its senior management, stated:
Management indicates that, in addition to the technology
units, several of the recent acquisitions are experiencing
growth that is well-above the corporate average. Overall, the
Company's internal growth has largely been moderated by a lack
of growth in the MPSC unit. Looking forward, this unit should
see better growth as the re-engineering effort winds down.
MPSC's growth, when combined with the other units, should
accelerate Medaphis' internal growth rate.... The company
continues to progress on the reengineering front.... To
reiterate, while Medaphis' re-engineering is modestly
depressing margins in the near-term, we believe the long term
efficiencies gained will more than offset any pricing pressure
in the core billing and receivables market and fuel
significant EBITDA margin expansion in 1997.
54. Likewise, a report issued by the firm of Morgan Stanley on
February 6, 1996, on the basis of information provided by the Company and/or its
senior management, stated in relevant part:
MEDA's overall fundamentals continue to be buoyed by its
strong technology divisions. We estimate that the companies
Atwork, Imonics, and recently acquired Consort divisions will
be the driving force to margins. We estimate that these
divisions are on the order of 1-2 times more profitable than
MEDA's core A/R, billing business. As evidence of MEDA's
conviction here, it has significantly added to staff at the
Imonics subsidiary, increasing headcount from 80 to 300 in
1995.
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55. The February 6, 1996 press release announcing operating
results for the fourth quarter and full year, 1995, and the information provided
by defendants to the market through the analysts' reports referred to in
paragraphs 50-54 were materially false and misleading in at least the following
respects:
(a) The financial results incorporated and discussed
therein were false and had been achieved only through the use of improper
accounting practices in violation of GAAP. As was ultimately disclosed at the
close of the Class Period, the operating results reported for this period were
improperly and materially overstated by at least $5 million as a result of the
reporting of revenues and profits under software license agreements entered into
by Imonics, which is permissible under GAAP only where customers are
unconditionally obligated to perform under the agreements. In fact, unbeknownst
to the public, in order to create the illusion that more customers had signed
such license agreements than was actually the case, the Company had aggressively
enlisted one or more major customers, but then provided them with secret side
letters, enabling the customer(s) to avoid paying all of the fees payable under
the agreements. This was improper under GAAP, in the following respects:
Accounting Research Bulletin ("ARB") 13, Chapter 1, section A:
Profit is deemed to be realized when a sale in the ordinary
course of business is effected, unless the circumstances are
such that the collection of the sale price is not reasonably
assured. (Emphasis added).
Financial Accounting Standards Board ("FASB") Statement of
Concepts ("CON"), paragraph 83 (a): Revenues and gains are
generally not recognized until realized or realizable.
Revenues and gains are realized when products (goods or
services), merchandise, or other assets are exchanged for cash
or claims to cash. Revenues and gains are realizable when
related assets received or held are readily convertible to
known amounts of cash or claims to cash. (Emphasis added).
- 23 -
24
FASB Statement of Standards No. 5, paragraph 27: Contingencies
that might result in gains usually are not reflected in the
accounts since to do so might be to recognize revenue prior to
its realization.
FASB Statement of Standards No. 48 ("FAS48"), paragraph 6: If
an enterprise sells its product but gives the buyer the right
to return the product, revenue from the sales transaction
shall be recognized at time of sale only if all of the
following conditions are met: (I) The seller's price to the
buyer is substantially fixed or determinable at the date of
sale; (2) The buyer has paid the seller, or the buyer is
obligated to pay the seller and the obligation is not
contingent on resale of the product; (3) The buyer's
obligation to the seller would not be changed in the event of
theft or physical destruction or damage of the product; (4)
The buyer acquiring the product for resale has economic
substance apart from that provided by the seller; (5) The
seller does not have significant obligations for future
performance to directly bring about resale of the product by
the buyer; and the amount of future returns can be reasonably
estimated.
Where resolution of a significant contingency is part of a license agreement,
then "a sale in the ordinary course of business" has not been "effected." (ARB
43). Additionally, if the contingency is not resolved, then "related assets
received or held are [not] readily convertible to known amounts of cash or
claims to cash." (FASB CON 5). Further, if the non-satisfaction of the
contingency results in the "return" of the product or the absence of any
obligation of the buyer to pay for the license fee, then the buyer is not
"obligated to pay the seller" and revenue may not permissibly be recognized
under the license agreement. (FAS48). As detailed in paragraphs 125-129, the
falsification of reported revenue in the fourth quarter of 1995 ultimately
required the Company, at the end of the Class Period, to restate the results to
reduce reported net income by $5.1 million, resulting in a net loss of $1.1
million rather than the previously reported net income of $4 million for the
quarter, and a net loss of $8.5 million for 1995, over double the previously
reported net loss of $3.4 million for the year.
- 24 -
25
(b) In addition, the representations that the
technology division (consisting primarily of Imonics and Atwork) was
"effectively offsetting" the margin pressures and results at MPSC were
materially false and misleading when made because the technology division was
not able to offset revenue, growth and margin pressures affecting MPSC because:
(i) Imonics was experiencing severe operational problems including, among other
things, excessive staffing, inadequate cost controls, and poor operating
performance so severe that they negated Imonics' ability to perform as
represented; and (ii) Atwork's sales pipeline had been in decline since
September of 1995, and there were significant operating flaws, or "bugs," in
certain of the Atwork division's software products introduced at year end 1995.
3. PUBLIC STATEMENTS RELATING TO
THE RAPID SYSTEMS AND BSG MERGERS
56. Having disseminated its materially false and misleading
press release of February 6, which included false financial results showing
increasing net income rather than the true losses the Company was actually
suffering, Medaphis implemented its scheme to use its stock (the price of which
was artificially inflated as a result of defendants' misstatements) as currency
for additional acquisitions.
57. Thus, on February 29, 1996, defendants caused Medaphis to
file with the SEC a Form 5-4 Registration Statement (the "February 1996
Registration Statement"), which was signed by defendants Brown, Cote and
Douglass. Defendants filed the February 1996 Registration Statement in order to
issue 2 million shares of Medaphis common stock which the Company reported "may
be offered by Medaphis from time to time in connection with acquisitions of
other businesses or properties."
- 25 -
26
58. On March 13, 1996, the defendants issued a press release
announcing that Medaphis had signed a definitive agreement to acquire all of the
outstanding capital stock of Rapid Systems Solutions, Inc. ("Rapid Systems") (a
closely-held, Columbia, Maryland based computer systems integration company) in
exchange for 1,135,000 shares of Medaphis common stock, worth approximately $43
million (the "Rapid Systems Merger"). Defendant Brown stated that Rapid Systems
was acquired specifically because it complemented "the work Imonics is doing on
the Medaphis re-engineering project."
59. Two days later, on March 15, 1996, defendants issued a
press release announcing yet another acquisition, this time reporting that
Medaphis had executed a definitive agreement to acquire all of the outstanding
capital stock of BSG Corporation ("BSG") for approximately $350 million in
stock, including 7.5 million shares of Medaphis common stock and assumption by
Medaphis of BSG stock options and stock rights representing an additional 2.66
million shares of Medaphis common stock (the "BSG Merger"). This transaction
represented the largest acquisition yet for Medaphis. According to the March 15
announcement, the Company's "existing systems integration and information
technology (IT) services companies -- including Imonics Corporation and Rapid
Systems Solutions Inc. -- will come under the BSG umbrella, thereby creating the
industry's largest IT services company focused purely on client/server
technology and applications."
60. Significantly, defendant Brown, in emphasizing the
importance of the BSG Merger, assured investors that BSG had the necessary
infrastructure to manage successfully the integration of both Imonics and Rapid
Systems to create successfully the largest client/server technology services
company in the country:
- 26 -
27
The merger with BSG is a major milestone in increasing our
technology capabilities. Working with Imonics and Rapid
Systems Solutions, BSG will lead our systems integration
efforts and we believe will accelerate transformation of the
way transaction processing is performed in the healthcare
industry.
. . . We are excited about our newly acquired capabilities in
client/server consulting and systems integration. Imonics and
Rapid Systems Solutions combined with BSG have created. we
believe. the largest pure client/server technology services
company in the country. (Emphasis added).
61. A March 18, 1996 Wall Street Journal article reported in
connection with the planned BSG Merger that:
[t]he company said it decided to make a bigger push into
systems integration following the successful 1994 acquisition
of Imonics, which has seen its profit double since the
purchase and its employees increase, according to Michael
Cote, Medaphis' chief financial officer.
62. As a result of the foregoing positive announcements, on
March 20, 1996, Medaphis shares hit a 52-week high of $53.25, a 40% increase
over the stock's March 12, 1996 close of $37.50.
63. The statements concerning the synergies and efficiencies
of the Rapid Systems and BSG Mergers, and the Company's integration of the
operations of Rapid Systems and BSG into its overall business identified in
paragraphs 57-61 above were materially false and misleading. Among other
reasons, because of the severe operational problems at Imonics summarized at
paragraphs 55(b) and 69 hereof, there was no reasonable basis for the
representations concerning the synergies offered by the merger of Imonics and
Rapid Systems with BSG's operations. Defendant Cote's representations concerning
the supposed profitability of Imonics were false and misleading for the same
reason, as well as for the added reason that, as
- 27 -
28
set forth in greater detail at paragraph 55(a) above, Medaphis' publicly
reported profits were materially false and misleading as a result of improper
revenue recognition practices relating specifically to improprieties at Imonics.
64. On April 3, 1996, in connection with the BSG Merger,
Medaphis filed with the SEC a Registration Statement on Form 5-4 (The "BSG
Registration Statement") and a Proxy Statement/Prospectus (the "BSG
Prospectus"). The BSG Registration Statement was signed by defendants Brown,
Cote and Douglass.
65. The BSG Prospectus, which was included as part of the BSG
Registration Statement filed with the SEC, incorporated by reference Medaphis'
Annual Report on Form 10-K for the fiscal year ended December 31, 1995,
including the audited financial statements incorporated by reference therein,
(discussed at paragraphs 70-80 herein), and incorporated the false and
misleading statements of the Company's year-end and fourth quarter 1995 results
as reported in the February 6, 1996 press release referred to at paragraph 50
above. These documents represent that the financial results presented therein
"include all adjustments ... that are necessary for a fair presentation of the
financial position and results of operations for such periods."
66. In addition, the BSG Prospectus repeated defendants'
misleading statements regarding the successful consolidation of Imonics, BSG and
Rapid Systems, stating that the merger "will position Medaphis as the leading
client/server systems integration and workflow engineering company in the United
States." The BSG Prospectus also falsely stated that:
- 28 -
29
Finally, management believes that BSG, Rapid Systems and
Imonics complement each other and that the combination of
these three organizations within Medaphis should produce
synergies. . . . Imonics possesses extremely talented object
oriented programming expertise, an existing library of object
codes and proprietary pricing methodologies. Management of
Medaphis believes that each of the foregoing attributes of
BSG, Rapid Systems and Imonics are complimentary [sic] in
nature and together position Medaphis to take advantage of
systems integration and workflow engineering projects within
and outside the healthcare industry.
67. The BSG Prospectus also provided the following highly
positive description of the Re-Engineering Project:
In order to increase efficiency and position Medaphis to take
advantage of the opportunities being created by ongoing
changes in the healthcare industry, Medaphis has commenced a
re-engineering project which will involve, among other things,
the consolidation of the billing and accounts receivable
processing function of its billing and accounts receivable
management business, which is currently operated out of
approximately 300 local business offices around the country,
into approximately 10 remote processing centers. In addition
to the consolidation of processing operations, the
re-engineering project will involve the establishment of
advanced client/server computing at the local sales and
service offices and at remote processing centers. This
computing infrastructure will be designed to significantly
reduce paper handling and greatly increase the speed of record
recovery while permitting communication over a wide-area
network and across geographic markets and linking together all
of Medaphis' operating divisions . .
68. The BSG Prospectus continued:
Medaphis believes the re-engineering project will provide its
customers and employees with the full information processing
and communications power of an advanced distributed computing
system. The re-engineering project is designed to enable
Medaphis to continue to grow and achieve economies of scale in
several areas, including training, client service, patient and
payor relations, transaction processing operations and
electronic data interchange capabilities. The project is
expected to be substantial Iv completed during 1997. Although
the re-engineering project will involve
- 29 -
30
consolidation of the processing functions of its billing and
accounts receivable management services. Medaphis intends to
continue to maintain and place increased emphasis on the sales
and customer service functions of this business on a local
basis. (Emphasis added).
69. (a) The representations contained in the BSG Registration
Statement and Prospectus, which incorporated Medaphis' operating results for the
fourth quarter and full year 1995 by reference, as well as the May 7, 1996 press
release, were materially false and misleading in the manner and for the reasons
specified in paragraph 55(a) above.
(b) In addition, defendants' representations regarding the
progress, positive results, and expected completion date of the Re-Engineering
Project were materially false and misleading and lacked a reasonable basis when
made in that they misrepresented and/or failed to disclose that: (i) progress on
the Re-Engineering Project was being impeded by, among other things, the serious
management, operational, and other problems being experienced by Imonics, set
forth above, and the Company's inability to successfully integrate and
coordinate the acquisitions of BSG and Rapid Systems; (ii) the software designed
to automate the billing process at MPSC was not appropriate for large volume
processing, thus requiring further software development and causing a deferral
of the office consolidation element of the Re- Engineering Project; and (iii) in
light of these problems, the Re-Engineering Project was not likely to be
completed until 1997, if not 1998, contrary to defendants' representations.
(c) Further, defendants' statements regarding the
synergies to be derived from the BSG and Rapid Systems mergers, and the ability
of Medaphis and Imonics to successfully integrate and coordinate these
acquisitions, were materially false and misleading in
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31
that they misrepresented and/or failed to disclose: (i) the adverse facts
regarding Imonics, identified above at paragraph 55(b); and (ii) that the
integration of Imonics' operations with 8SG and Rapid Systems was not proceeding
well in view of Imonics dilapidated condition, and could not be accomplished
without a complete reorganization of Imonics.
(d) Moreover, defendants' representation that the Company
would "continue to maintain and place increased emphasis on the sales and
customer service functions" of the Company's MPSC division was false and
misleading. As defendants knew or recklessly disregarded, the Company's focus on
the Re-Engineering Project at MPSC was done at the expense of customer service
and customer retention, which was leading to significant revenue declines and
reductions in profitability for Medaphis.
(e) In addition, the increasing staff levels at Imonics,
cited by analysts as a positive growth factor based on defendants'
representations, was, in reality, excessive, as evidenced by the October 22,
1996 disclosure that the Company had terminated 430 employees, including the
entire Imonics senior management team.
4. REPRESENTATIONS CONTAINED IN
THE 1995 10-K AND ANNUAL REPORT
70. On or about April 1, 1996, Medaphis filed with the SEC its
Form 10-K for the fiscal year ended December 31, 1995 (the "1995 l0-K"). The
1995 10-K was signed by, among others, defendants Brown, Cote and Douglass.
71. The 1995 10-K incorporated, at page 19, the same reported
financial results for the fourth quarter and full year of 1995 as were announced
on February 6, 1996 as set forth in paragraph 50 herein. The 1995 10-K also
incorporated by reference the financial
- 31 -
32
presentations set forth in the Company's 1995 Annual Report, which is discussed
in greater detail in paragraphs 75-80 hereof. The 1995 10-K further stated, in
relevant part, that such financial presentations therein "include all
adjustments ... that are necessary for a fair presentation of the financial
position and results of operations for such periods."
72. The 1995 10-K boasted of the "core competencies in the
systems integration and work flow engineering fields," and went on to state that
although MPSC was experiencing some "revenue and margins pressures", these
pressures were being "offset" by growth in Medaphis' information management and
systems integration services business (for which Imonics was responsible), and
that the Re-Engineering Project was easing such pressures.
73. The 1995 l0-K also contained a description of the
Re-Engineering Project virtually identical to that set forth in the BSG
Prospectus quoted at paragraphs 65-67 above.
74. With respect to the Company's revenue recognition policy,
the 1995 10-K stated:
REVENUE RECOGNITION. . . .
Revenue from software licenses is generally recognized upon
shipment of the products and when no significant contractual
obligations remain outstanding. When the Company receives
payment prior to shipment or fulfillment of significant vendor
obligations, such payments are recorded as deferred revenue
and are recognized as revenue upon shipment or fulfillment of
significant vendor obligations. The license agreements
typically provide for partial payments subsequent to shipment;
such terms result in an unbilled receivable at the date the
revenue is recognized. Costs related to insignificant vendor
obligations are accrued upon recognition of the license
revenue. Software maintenance revenue is deferred and
recognized ratably over the term of the maintenance agreement,
which is typically one year.
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33
Revenues from systems integration contracts are recorded on
the percentage of completion method of accounting. (Emphasis
added).
75. At or about the time that it filed the 1995 10-K, the
Company also issued its 1995 Annual Report. Like the 1995 l0-K, the 1995 Annual
Report incorporated the same reported financial results for the fourth quarter
and full year of 1995 as were announced on February 6, 1996. The 1995 Annual
Report represented that the financial statements set forth therein:
present fairly, in all material respects, the financial
position of Medaphis Corporation and subsidiaries at December
31, 1995 and 1994 and the results of their operations and cash
flows for each of the three years in the period ended December
31, 1995 in conformity with generally accepted accounting
principles.
76. In the 1995 Annual Report, the defendants again touted the
benefits and "positive results" of the Re-Engineering Project, and set forth a
description thereof virtually identical to that set forth in the BSG Prospectus
(see paragraphs 65-67 herein), and in the 1995 l0-K (see paragraphs 70-74
herein). The 1995 Annual Report also represented that:
The positive results of this progressive effort are already in
evidence. Today, Medaphis is a leading provider of information
management systems and systems integration and work flow
engineering systems and services to the healthcare industry
and other industries.
77. The 1995 Annual Report also emphasized the positive
contributions that Imonics had made to the Company's business, stating that,
because of Imonics, the Company had gained an "immense competitive advantage"
and had "re-engineered its future." Defendants assured investors that Imonics
would allow the Company to recognize efficiencies that "will dramatically change
the way business is done." The following excerpt appeared in the 1995 Annual
Report:
IMONICS: A LEADER IN BUSINESS PROCESS
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34
RE-ENGINEERING AND SYSTEMS INTEGRATION.
With the 1994 acquisition of Imonics. Medaphis re-engineered
its future. A leader in business process re-engineering and
systems integration, Imonics will enable Medaphis to create
internal efficiencies, while being able to offer the same
cost-effective solutions to others throughout the healthcare
industry, and in other industries. For Medaphis, or for any
other customer service or business operation that processes
large volumes of paper, fax and phone calls, Imonics' software
solutions provide an immense competitive advantage. The first
signs of these increased efficiencies are already in evidence
in our Pittsburgh office. And as they are applied to an even
greater extent in the coming months, our belief is that they
will dramatically change the way business is done throughout
our transaction processing operations and, hopefully, our
entire industry. (Emphasis added.)
78. The Annual Report also stated that the progress of the
Re-Engineering project "has been nothing short of remarkable," and that [t]he
impact on customer service is immeasurable."
79. The 1995 Annual Report also praised the Company's 1995
acquisition of Atwork, which was described as "the leading provider of
information systems that schedule the activities of patients and employees in
healthcare." The 1995 Annual Report offered a highly upbeat assessment of
Atwork:
Atwork solves complex scheduling problems in healthcare
management, and they have historically enjoyed a high level of
client satisfaction. Atwork markets four leading products to
healthcare providers. The first, ANSOS, automates nurse
staffing and scheduling, and, as the market leader, is the
most widely used system of its kind. The second, ORSOS, used
for operating room scheduling and inventory management, is the
market leader as well. The third product, One-Call, is used
for enterprise-wide patient scheduling. And finally, One-Staff
is used to schedule and manage all employees throughout the
healthcare enterprise.
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35
80. The letter to stockholders, included in the 1995 Annual
Report and signed by defendant Brown, stated, among other things, that:
Medaphis has embarked on an aggressive technology initiative
to increase its own internal efficiencies, as well as those of
its clients.
The positive results of this progressive effort are
already in evidence. Today, Medaphis is a leading provider of
information management systems and systems integration and
work flow engineering systems and services to the healthcare
industry and other industries.
***
In the course of solving our own technology problems, we have
discovered a major business opportunity -- the lack of next
generation distributed processing platforms and user-oriented
applications to solve business and information processing
needs of industry in general, particularly healthcare.
81. The representations contained in the 1995 10-K and Annual
Report and the documents incorporated therein by reference, incorporating
Medaphis' operating results for the fourth quarter and full year of 1995, and
Medaphis' revenue recognition policies, were materially false and misleading in
the manner and for the reasons set forth in paragraph 55(a) above. The
representations concerning the finances and operations of Imonics, the progress
of the Re-Engineering Project at MPSC, and the ability of Medaphis and Imonics
to successfully integrate and coordinate the acquisitions of BSG and Atwork were
materially false and misleading for failing to disclose the adverse material
facts concerning Imonics and Atwork specified at paragraphs 55(b) and 69 above.
5. REPRESENTATIONS CONCERNING THE BERTELSMANN
JOINT VENTURE AND MEDAPHIS' RESULT. FOR THE
FIRST QUARTER OF 1996 ENDED MARCH 30. 1996
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36
82. In February 1996, Medaphis, through Imonics, entered into
a Joint Venture with a subsidiary of Bertelsmann, a German corporation.
According to the Company, the Joint Venture was formed to pursue custom software
development and systems integration projects for customer service systems in
Europe, primarily in Germany, over a multi-year period, with each partner
holding a 50% interest in the Joint Venture. The Joint Venture partnership
agreement was signed on March 13, 1996, eighteen days before the close of the
Company's fiscal 1996 first quarter.
83. On or about March 31, 1996, the last day of the first
quarter of fiscal 1996, the Joint Venture concluded an agreement with a German
telecommunications entity to provide systems integration and work flow
engineering systems and services (the "Systems Integration Contact").
Immediately upon entering into the Systems Integration Contract on March 31,
1996, the Company recognized $12.5 million of Joint Venture net earnings,
thereby dramatically improving reported revenues and net earnings for the first
quarter of 1996.
84. On April 23, 1996, Medaphis issued a press release to
announce its first quarter results, which included the $12.5 million in net
earnings recognized in connection with the Systems Integration Contract the
Company rushed to enter into at the close of first quarter. The Company reported
that revenues had increased by 24.1% over results for the first quarter of 1995,
from $110.1 million to $136.6 million, and that reported net income had
increased from a reported loss of over $8.2 million for the quarter ended March
31, 1995, to a reported Profit of $13.2 million for the first quarter of 1996.
Commenting on these reported results, defendant Brown noted that Medaphis was
"pleased with the first quarter," adding:
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37
The performance of our client/server IT services business was
excellent and included formation of a joint-venture with a
subsidiary of Bertelsmann A.G. in Germany. The joint venture
signed a large contract with a telecommunications company
during the quarter.
85. The market recognized the Joint Venture and the new
Systems Integration Contract as an important step for Medaphis, adding
significantly to the Company's value to an investor. In an April 30, 1996 Smith
Barney report, for example, which was prepared based on information provided by
defendants, the Joint Venture was specifically cited as an example of one of the
areas in which Medaphis had "displayed strong growth":
Imonics announced a joint venture with Bertelsmann, AG to
provide systems integration services overseas. Bertelsmann's
BMG Music Club has been a client of Imonics for several years.
In the same announcement, the JV disclosed a major, multi-year
contract with a foreign telecommunications company. Although
Imonics is performing most of the work on [Medaphis']
re-engineering, its headcount has grown to over 400 to also
staff the growth in its outside business.
86. On May 14, 1996, defendants caused Medaphis to file its
first quarter Form 10-Q with the SEC (the "First Quarter 10-Q"), which was
signed by defendants Cote and Douglass, in which it incorporated and provided
additional details concerning first quarter 1996 financial results for the
quarter previously announced on April 23, 1996 (see paragraph 84 herein).
87. The First Quarter 10-Q represented that the financial
information contained therein was "prepared in accordance with the Company's
customary accounting policies and practices."
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38
88. In addition, the First Quarter 10-Q expressly incorporated
the representations contained in the 1995 10-K, including the representation
that "[r]evenues from systems integration contracts are recorded on the
percentage of completion method of accounting," and also contained management's
representation that the financial statements included therein reflect "all
adjustments . . . necessary for a fair presentation of the results of operations
of the interim period."
89. At or about the time defendants publicly announced
Medaphis' first quarter 1996 operating results and filed the First Quarter 10-Q,
several bullish reports were issued by securities analysts based on information
provided by the Company:
(a) "Over the next several quarters, we expect the
re-engineering program in its core Medaphis Physician Services
Corporation to begin to have an impact while the growth in its
technology businesses continues continues [Sic] to
accelerate." (May 16, 1996 report by Donaldson, Lufkin &
Jenrette Securities Corporation);
(b) "Near-term, we have confidence in our quarterly
estimates as well as our $1.05 - $1. 10 estimate for the full
year." (May 16, 1996 report by Donaldson, Lufkin & Jenrette
Securities Corporation); and
(c) "Based on our conversation with management yesterday, our
comfort level on near-term earnings prospects have increased.
While management did not endorse a specific estimate, it
appears as though there have been some fundamental positive
changes.... While there remains consolidation challenges, we
believe that these are the early signs that the large software
development project is beginning to pay off...." (June 4, 1996
report by Donaldson, Lufkin & Jenrette Securities
Corporation).
90. The representations contained in Medaphis' announcements
concerning the Bertelsmann Joint Venture and the Company's financial results for
the quarter ended March 31, 1996, as set forth in paragraphs 82-88 herein, were
materially false and misleading in that the
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39
financial results set forth therein were falsified and had been achieved only
through the use of improper accounting practices which violated GAAP. Indeed,
the reported net income for this period of $13.2 million was improperly and
materially overstated by virtue of the recognition of $12.5 million in profits
from the Systems Integration Contract immediately upon the execution of the
contract in violation of relevant accounting principles, including GAAP.
Defendants knew or recklessly disregarded, at the time the contract was entered
into, that: (i) Imonics was experiencing serious problems, including
over-staffing, poor management, inadequate cost controls and poor operational
performance (as detailed in paragraphs 55(b) and 69 hereof); and (ii) that, as
is also detailed at paragraphs 55(b) and 69 hereof, Imonics was unable to
perform its obligations under the Systems Integration Contract and the Joint
Venture. Under such circumstances, the recognition of $12.5 million in Joint
Venture net earnings was improper. ARB 43 provides that "profit is deemed to be
realized when a sale in the ordinary course of business is effected, unless the
circumstances are such that the collection of the sale price is not reasonably
assured." Additionally, the Company could not in good faith consider the Systems
Integration Contract to result in "actual or expected cash flow that ha[s]
accrued or will eventuate as a result of the entity's ongoing major or central
operations," if, at the time the contract was entered into, defendants were
aware that there was no basis for the belief that Imonics could fulfill its
obligations under the Contract as proscribed by paragraph 78 of FASB CON 6.
Finally, recognition of the revenues from the contract under such circumstances
was improper under FASB CON 5, paragraph 83, which provides:
Revenues are not recognized until earned. An entity's revenue
earning activity involves delivering or producing goods,
rendering services, or activities that constitute its major or
central operations,
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40
and revenues are considered to have been earned when the
entity has substantially accomplished what it must do to be
entitled to the benefits represented by the revenues.
Accordingly, in recognizing $12.5 million in Joint Venture net earnings in March
of 1996, the Company violated these provisions of GAAP.
91. Second, defendants improperly recognized $12.5 million in
Joint Venture net earnings in the first quarter because if these revenues could
have been properly recognized at all, they should have been recognized ratably
over the period the services were performed under the Systems Integration
Contract in accordance with the percentage-of-completion method of accounting.
As noted above, FASB CON 5, paragraph 83, provides that "revenues are not
"earned," and therefore should not be recognized, until an "entity has
substantially accomplished what it must do to be entitled to the benefits
represented by the revenues." (Emphasis added).
92. In addition, the First Quarter 10-Q, having incorporated
by reference the 1995 10-K (and derivatively the 1995 Annual Report), was
materially false and misleading for the same reasons, specified in paragraph 81
herein, as the 1995 10-K and Annual Report were false and misleading. In
addition, the First Quarter 10-Q expressly incorporated the additional
representation contained in the 1995 10-K that "[r]evenue from systems
integration contracts are recorded on the percentage-of-completion method of
accounting." (Emphasis added). Thus, in recognizing first quarter revenues from
the System Integration Contract, defendants violated the Company's own disclosed
revenue recognition policy, rendering this specific statement false.
6. ADDITIONAL PUBLIC STATEMENTS RELATING
TO IMONICS AND THE HDS MERGER
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41
93. In April 1996, Medaphis officials attended a
Robinson-Humphrey Co. conference at which they touted the success at Imonics,
declaring that it was "going like gangbusters."
94. Seeking to continue its practice of acquiring companies
utilizing overvalued Medaphis stock, on or about May 24, 1996, Medaphis
announced its intention to acquire Health Data Sciences Corporation ("HDS") in
exchange for 6,125,000 Medaphis common shares and assumption or issuance by
Medaphis of stock options representing an additional 556,000 shares. Based on
the May 24, 1996 closing price of Medaphis stock of $40.938, the HDS Merger was
valued at approximately $273.5 million.
95. HDS was a developer and supplier of health care
information systems to institutions, payers, health care networks, and
providers. HDS' main product offering was a line generally known as ULTICARE
(R), an integrated information system which allows doctors and hospitals in
large health care systems to enter and access immediately clinical information
on patients. The ULTICARE system can also schedule medical procedures, such as
surgery.
96. According to an article published in the Atlanta Journal
and Constitution on May 25, 1996, defendant Brown stated that, with the planned
acquisition of HDS, "I think we now have the pieces we need .... This is where
we've been aiming with our business."
97. A definitive Merger Agreement was executed by Medaphis and
HDS on May 23, 1996 (the "HDS Merger"). Under the terms of the HDS Merger,
stockholders of HDS were entitled to receive .7912 of a share of Medaphis common
stock for each share of HDS common stock and HDS preferred stock. In connection
therewith, the defendants were specifically motivated to keep the price of
Medaphis stock artificially high in order to complete
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42
the acquisition of HDS. Indeed, the Merger Agreement explicitly provided that,
if the average closing price of Medaphis stock for a period of time dropped
below $37 per share, HDS could unilaterally terminate the deal. Thus, defendants
knew that it was imperative that the company continue to tout its many
"successes" while concealing the true facts about Medaphis' business.
98. On May 31, 1996, in connection with the HDS Merger,
Medaphis filed an Amendment No. 1 to its Form 5-4 Registration Statement with
the SEC (the "HDS Registration Statement"). The Registration statement included
a Proxy statement/Prospectus, also dated May 31, 1996, which was issued in
connection with a special meeting of HDS stockholders to be held on June 29,
1996 (the "HDS Prospectus"). The HDS Registration Statement was signed by
defendants Brown, Cote and Douglass.
99. The HDS Prospectus included, inter alia, a detailed
description of the background of the HDS Merger, the reasons for the HDS Merger,
and the terms of the Merger. The HDS Prospectus also included an upbeat
description of Medaphis' Re-engineering Project which was substantially similar
to the statements contained in the BSG Prospectus, the 1995 l0- K and the 1995
Annual Report. The defendants again represented in the HDS Prospectus that
"[t]he [Re-Engineering] project is expected to be substantially completed during
1997."
100. As they had in the BSG Prospectus, the defendants also
continued to tout the benefits of the BSG and Rapid Systems mergers in the HDS
Prospectus, stating that:
Management believes that the acquisition of workflow
engineering operations, will position Medaphis as the leading
client/server systems integration and workflow engineering
companies in the United States.
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43
101. The HDS Registration Statement and Prospectus explicitly
incorporated by reference Medaphis' 1995 Annual Report, filed on April 1, 1996,
and its First Quarter 10-Q, filed on May 15, 1996, relevant excerpts of which
are set forth at length at paragraphs 70-80, 87- 88, and 92, respectively. As
such, the HDS Registration Statement and Prospectus was materially false and
misleading for the same reasons the 1995 Annual Report and First Quarter 10-Q
were misleading, as specified in paragraphs 81 and 90-93, respectively.
102. The additional representations in the HDS Prospectus, set
forth in paragraphs 99-100, concerning the finances and operations of Imonics,
the progress of the Re- Engineering Project at MPSC, and the ability of Medaphis
and Imonics to successfully integrate the Company's various acquisitions were
materially false and misleading for failing to disclose the adverse material
facts concerning Imonics specified at paragraphs 55(b) and 69 hereof.
103. Had the full truth about Medaphis been disclosed at the
time, the company never would have been able to complete the HDS Merger. Based
on recent trading prices of Medaphis stock (approximately $8.50 per share), the
acquisition of HDS, which cost the Company just over 6 million shares, would
have cost nearly five times that amount, or 28 million shares. Based on recent
trading prices, defendants' fraudulent conduct enabled the Company to purchase
HDS -- a company valued at $230 - $260 million in the HDS Merger -- for stock
now worth just $53 million, costing HDS shareholders hundreds of millions of
dollars in losses.
7. PUBLIC STATEMENTS RELATING TO
SECOND QUARTER 1996 RESULTS
104. On July 23, 1996, defendants issued a press release
announcing Medaphis' financial results for the second quarter of 1996, ending on
June 30, 1996. The Company reported
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44
that revenue for the three months ended June 30, 1996 was $175.2 million, up 24%
from the $141.3 million in the year-earlier period, and that, excluding merger
and other one-time costs, net income was $18.7 million, up 159%, with earnings
per share of $0.25, up 150%. For the six months ended June 30, 1996, Medaphis
reported a 255% increase in revenues over the six months ended June 30, 1995,
from $274.4 million to $338.8 million, and a 500% increase in net income and
earnings per share, from a loss of $4.6 million or $.08 per share in 1995 to net
income of $16.4 million or $.22 per share in 1996.
105. Defendant Brown continued to assure the investment
community that Medaphis' technology companies were "generat[ing] strong
results," and he explained that much of these "strong results" were attributable
to the recent acquisitions of HDS, Rapid Systems and BSG:
We are pleased with the second quarter and underlying results
of our technology and services businesses. The technology
companies continue to generate strong results, especially our
latest additions: Health Data Sciences Corporation ("HDS"),
BSG Corporation and Rapid systems Solutions, Inc. I am
thrilled with the recent addition of HDS to our technology
capabilities and am excited about the opportunities that it
affords us to offer patient- centered information technology
in the healthcare industry. Medaphis Physician Services
Corporation continued to adversely affect results of the
Services Division in the second quarter; however its operating
results improved slightly over the first Quarter of 1996. We
continue to assess and evaluate the technology and processes
necessary to ensure our long-term success and remain
cautiously optimistic that the re-engineering project and
related management initiatives are positioning the Company for
important improvements in operating results.
(Emphasis added).
106. The defendants' representations concerning the second
quarter of 1996 had their intended effect on the investment community. On July
24, 1996, Bear Stearns issued a
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45
research report based on information provided by the Company which stated, in
relevant part, that:
Importantly, management is confident that the top line and
cost pressures in the physician billing business (which we
estimate to be 25% -30% of total revenue) may have bottomed.
These pressures are expected to continue to moderate over the
third and fourth quarters of 1996 allowing for a stabilization
of this business segment. DURING 1997, we expect to see the
benefits of the re- engineering which we believe will pave the
way for earnings acceleration."
In a similar vein, a Cowen & Co. report dated July 23, 1996, based on
information provided by the Company, stated:
Technology Strategy A Winner - Virtually all of the revenue
growth was derived from terrific performances in the
technology companies (+82% at $70MM). Strongest performers
include Consort Technologies (radiology information systems),
Atwork (medical software), BSG, RSSI and Imonics
(client/server systems integration)."
Likewise, on July 24, 1996, Donaldson Lufkin & Jenrette issued a research report
based on information provided by the Company which stated:
EPS for the next two quarters should be $0.28 and $0.30,
respectively. Management indicated comfort with street
estimates for the third and fourth quarter of this Year. This
is in sharp contrast to previous statements about the last few
quarters when management consistently hedged about its
near-term operating results. (Emphasis Added).
107. The representations contained in the July 23, 1996 press
release, which incorporated and reflected Medaphis' operating results for the
first quarter of 1996 (see paragraph 84 herein), were materially false and
misleading for the reasons set forth in paragraph 90 herein. The representations
concerning the finances and operations of Imonics, the progress of the Re-
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46
engineering Project at MPSC, and the ability of Medaphis and Imonics to
successfully integrate the Company' s various acquisitions were materially false
and misleading for failing to disclose the adverse material facts concerning
Imonics specified at paragraphs 55(b) and 69 hereof. Moreover, defendants'
forecasts of $0.28 and $0.30 per share for the third and fourth quarters of
1996, respectively, were contradicted by the adverse facts set forth above in 55
and P. 69, and were issued by defendants, through analysts' reports endorsed and
adopted by the Company, without any reasonable basis.
THE TRUTH BEGINS TO EMERGE
1. THE AUGUST 14, 1996 DISCLOSURES
108. On August 14, 1996, after the close of trading, Medaphis
finally began to disclose the severe problems which it had been experiencing
with Imonics, as well as the difficulties being encountered with MPSC, Atwork,
the BSG Merger and the Re-engineering Project during the Class Period. On that
day, it issued a press release announcing that it expected to report a in the
range of $0.28 to $0.33 per share in the third quarter of 1996, which would
include substantial charges in the range of $35 to $40 million. It also
announced that it expected earnings per share in the range of only $0.75 to
$0.90 for fiscal 1997, compared with analyst expectations of earnings per share
of $0.27 for the third quarter and $1.42 for fiscal 1997. The press release
stated:
The Company's near-term earnings will be impacted by continued
weakness in Medaphis Physician Services Corp.'s business and
the reorganization of Imonics. Medaphis' near-term outlook
also has been affected by slower than expected sales of some
of the Company's enterprise-wide scheduling products [sold by
Atwork]. The third quarter earnings estimate includes charges
in the range of $35 to $40 million relating primarily to the
reorganization of
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47
Imonics and the re-engineering and consolidation program at
MPSC.
109. A substantial portion of the Company's difficulties, and
the resulting third quarter charges, were reported to have arisen from the need
to reorganize its Imonics subsidiary and the Company's problems with the Systems
Integration Contract, so positively reported by Medaphis during the Class
Period. Explaining the situation, Medaphis reported:
Management has commenced the process of reorganizing the
Imonics systems integration business. This reorganization
resulted from a review by BSG of Imonics' overall operations
and an assessment of recent difficulties encountered by
Imonics with a large systems integration agreement entered
into by its European joint venture.
The reorganization of Imonics will include efforts to more
closely align Imonics' business practices with those of BSG.
The BSG model is structured to manage client/server
information technology projects with experienced project
management. It is currently anticipated that Imonics' European
joint venture will continue with its system integration
project on terms and conditions mutually satisfactory to the
parties, but that the agreement relating to the project will
be restructured.
110. Medaphis further disclosed that approximately $9 million
of charges would be made in the third quarter to account for the restructuring
of the Systems Integration Contract entered into by the Joint Venture, with
another $15 million in charges relating to the reorganization of Imonics.
111. In addition, the Company revealed that, contrary to its
July 23, 1996 representations, its MPSC unit was continuing to experience poor
results, due in part to delays in the Re-Engineering Project. The Company
disclosed that as a result of these problems, it would
- 47 -
48
take a restructuring charge of approximately $11 million, and "up to $5 million
of other costs." The Company stated:
The Company expects to incur charges in the third quarter in
the range of $35 to $40 million. These charges are expected to
consist of approximately $9 million relating to the
restructuring of a large systems integration agreement entered
into by Imonics' European joint venture, approximately $15
million relating to reorganization of Imonics, approximately
$11 relating to additional restructuring costs associated with
MPSC's re-engineering and consolidation program and up to $5
million of other costs.
112. Defendant Brown was quoted as stating:
We are extremely disappointed with these developments. The
problems that we have identified at MPSC and Imonics are being
addressed by a new operating management team which possesses
the process and technology expertise and experience we need to
execute our plan.
113. Moreover, in sharp contrast to defendants' previous
statements that Medaphis would continue to grow through acquisitions -- the key
to its success -- the company announced that it had abandoned its acquisition
strategy: "We're focused on re-engineering MPSC's business for future growth,
and not on expanding the business through acquisitions in the near term,"
defendant Douglass stated.
114. As reported in Bloomberg News on August 15, 1996,
Bertelsmann officials had called Medaphis in late July to complain about the
computer integration project which Imonics was working on with the Joint
Venture. In particular, Bertelsmann offered two choices to Medaphis: quit or
renegotiate the contract. According to Cowen & Co. analyst Charles Trafton, the
news of problems with Imonics came as "a complete shocker" and "Imonics was not
delivering."
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49
115. On the same day it announced its anticipated losses for
the third quarter, Medaphis filed its Form 10-Q for the fiscal 1996 second
quarter (the "Second Quarter 10-Q"). In it, the Company disclosed for the first
time that the Joint Venture had begun discussions with its European Partner,
Bertelsmann, and the related customer on July 25. 1996 regarding difficulties
that had been encountered with certain aspects of the Systems Integration
Contract. As a result of these difficulties, which were not disclosed until
August 14, 1996, Medaphis reported that it had been forced to negotiate "the
restructuring of the operating relationships and economics underlying the
Contract," adding:
Although a restructured arrangement among the parties is
subject to the negotiation and execution of definitive
agreements, the Company anticipates that the contract will be
amended and a restructured arrangement will be executed that
will position the Joint Venture to move forward with the
project and to pursue other opportunities and projects on
terms and conditions that are mutually beneficial to the
parties. The Company anticipates recording a loss related to
the restructured arrangement of approximately $9 million
during the third quarter of 1996.
116. With respect to the Imonics' restructuring, the Company
disclosed in the Second Quarter l0-Q that, contrary to previous statements to
the effect that the Company had the necessary infrastructure to create
tremendous business opportunities, the Company would need to take a charge of
$15 million to reorganize Imonics because of over-staffing, inadequate internal
cost controls and poor operating performance. The Second Quarter l0-Q stated:
Many changes have and will continue to occur at Imonics
Corporation ("Imonics") including: headcount reductions,
increased focus on project management, increased cost controls
and implementation of the BSG business model. In addition to
the expected $9 million loss related to the restructured
arrangement noted above, the Company anticipates recording
losses in the third
- 49 -
50
quarter of 1996 related primarily to the reorganization of
Imonics of approximately $15 million.
117. The market reacted sharply and dramatically to Medaphis'
August 14 announcement, with its share price plunging the following day,
decreasing the value of the Company by $1.6 billion. The stock price closed at
$14-1/4 per share, after dropping by $21-3/8, or approximately 60 percent. More
than 42 million shares of Medaphis stock changed hands during the day, making it
the most active U.S. issue on NASDAQ that day and representing the sixth-highest
single trading day in NASDAQ history, excluding penny stocks.
2. THE OCTOBER 22, 1996 DISCLOSURES
118. Despite the startling disclosures of August 14, 1996, and
the resulting drop in the Price of Medaphis stock, defendants had not yet
disclosed the full extent of the company's problems known to or recklessly
disregarded by defendants at the time. Instead, defendants continued to mislead
investors about the current and future business Prospects of Medaphis and
represented that all of the Company's problems had been identified and
adequately reserved against.
119. For example, after a meeting with Medaphis senior
management on August 21, 1996, an analyst with Bear, Stearns & Co. ("Bear
Stearns") reported that:
[a]fter uncovering the problems at Imonics and MPSC,
management undertook a rigorous examination of all business
units in order to assess [the] possibility [of additional
charges and a further reduction in earnings expectations] and
concluded that all of the potential problems have been
reserved against. (Emphasis added).
120. Based largely on this positive meeting with Medaphis
management, Bear Stearns forecast third quarter earnings per share of $0.02
excluding charges of $35 - $40 million,
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51
and continued to give Medaphis stock an "Attractive" rating. Other analysts
issued similar cautiously optimistic reports following the August 21, 1996
meeting, and, based on guidance from Medaphis management, projected earnings per
share of approximately $0.02 for the third quarter, excluding charges, or a loss
of about $0.27 per share including charges.
121. On October 22, 1996, Medaphis shocked the market for the
second time in as many months, issuing a press release announcing third quarter
results that were far worse than analysts' diminished expectations and the
Company's previous projections. The Company also reduced its earnings
projections for 1997 even further, announced even larger charges associated with
the reorganization of Imonics, and revealed that due to improper revenue
recognition practices in the Imonics division. the Company would have to restate
its financial results for the fourth quarter and year ended December 31. 1995.
122. In contrast to its August 16, 1996 forecast of losses in
the range of $.28 - $.33 per share, including charges, Medaphis reported a loss
of $.51 per share, or $36.4 million for the 1996 third quarter. These results
compared to a net loss per share of $0.05 in the year-ago quarter. The Company
reported that revenue fell 10% in the third quarter, to $126.7 million, from
$140.8 million a year ago.
123. In addition, the Company disclosed that rather than
taking charges of between $35 - $40 million, Medaphis reported total charges of
approximately $50 million in the third quarter, relating primarily to the
reorganization of Imonics and the write-off of revenue from the Systems
Integration Contract. The October 22, 1996 press release stated:
The results for the three months ended September 30, 1996
include a charge against revenue of $16.8 million relating
primarily to the reorganization of Imonics, including the
renegotiation of a large
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52
systems integration contract entered into by Imonics' European
joint venture in March 1996. In addition, approximately $8.5
million was included in salaries and wages relating to
employees and contractors, who are no longer providing
services to the Company, costs to complete certain Imonics
contracts and certain other nonrecurring items. In addition, a
$24.3 million restructuring charge was recorded during the
quarter relating to the reorganization of Imonics. The charge
consists of approximately $10.7 million relating to the write
down of Imonics' assets, $3.7 million of severance costs
primarily for former Imonics' employees, $3.2 million in exit
costs for lease terminations and $6.7 million of legal and
other costs.
124. While Medaphis had stated in August that it expected 1997
earnings per share to fall between $0.75 and $0.90, defendant Brown lowered that
range to just $0.60 to $0.75 in connection with the October 22 press release. At
the same time, however, defendant Brown hinted that 1997 earnings are likely to
come in even lower still, stating: "I believe there are risks inherent in the
business which could cause us to fall short of that goal."
125. In yet another stunning disclosure, the Company announced
in the press release that it would restate 1995 results to reflect an actual
loss for the year ended December 31. 1995 of 58.5 million. compared with a
previously reported loss of $3.4 million. For the 1995 fourth quarter, the
Company said it expected to post a loss of $1.1 million. compared with a
previously reported profit of $4 million.
126. Medaphis stated that the 1995 restatements were the
result of improper revenue recognition practices in the Company's Imonics
division, including the improper recognition of $5.1 million in earnings in the
fourth quarter of 1995. According to the Company, the Imonics unit had booked
revenue on a license agreement it had executed in December 1995 despite the
existence of "unauthorized correspondence" which improperly "created a
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53
contingency" under the license agreement. The revenue recognized on this
contract, "together with previously deemed immaterial amounts," reduced net
income for the quarter and year ended December 31, 1995 by $5.1 million. As
disclosed in the press release:
The Company also announced that it intends to restate its
financial results for the year and three months ended December
31, 1995. This restatement relates primarily to a license
agreement entered into by Imonics in December 1995 and
unauthorized correspondence discovered in connection with the
Imonics reorganization which created a contingency upon
license fees payable under the agreement. The license fee
revenue payable under the agreement and recognized by the
Company during the fourth quarter of 1995, together with
previously deemed immaterial amounts, are expected to result
in an aggregate reduction to net income for the quarter and
year ended December 31, 1995 of $5.1 million. After
appropriate adjustments for such items, it is currently
anticipated that the Company's restated results for the year
ended December 31, 1995 will be a net loss of $8.5 million as
compared with a previously reported net loss of $3.4 million.
In addition, it is anticipated that restated results for the
quarter ended December 31, 1995 will reflect a net loss of
$1.1 million, as compared with previously reported net income
of $4.0 million.
127. Continuing the stream of devastating disclosures that
day, Medaphis reported in the press release that during the third quarter it had
laid off 430 employees, including the entire senior management team at Imonics.
This was in stark contrast to defendants' prior statements portraying the growth
in the number of Imonics employees as a positive factor. The Company also
announced it was attempting to negotiate its credit line from $250 million to
$300 million.
128. In a lengthy statement accompanying the October 22 press
release, defendant Brown admitted that BSG had been preoccupied with the
restructuring of Imonics, and
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54
that the Company's strategic acquisition program had "ended," and that "[w]e
have no ongoing plans to make acquisitions at this time."
129. The adverse disclosures of October 22, 1996 drove the
Company's stock down $6.375 or 38%, to close at just $10.375 per share, a
52-week low for the stock. The drop in the market capitalization of the Company
was approximately $450 million. The trading volume of Medaphis stock on October
22 was more than 13 million shares, making it the most actively traded stock in
the United States that day. DURING the Class Period, Medaphis shares,
artificially inflated by defendants' wrongful conduct, had closed as high as $52
1/2 per share (on March 20, 1996).
130. On October 31, 1996, Medaphis announced that it had named
David E. McDowell the Company's new Chairman and Chief Executive, replacing
defendant Brown. According to the Company, defendant Brown had resigned for
"personal" reasons.
SUMMARY OF FALSE AND MISLEADING
NATURE OF DEFENDANTS' STATEMENTS
DURING THE CLASS PERIOD
131. All of defendants' representations set forth above, as
well as other substantially similar representations, made during the Class
Period, were materially false and misleading and misrepresented and/or failed to
disclose material adverse information, including that:
(a) The revenues and earnings of Medaphis were materially
and improperly overstated during the Class Period due to defendants' utilization
of improper accounting methods, including by means of "side letters" in the
fourth quarter and year ended
- 54 -
55
December 31, 1995 and in connection with the recognition of $12.5 million in
Joint Venture net earnings under the Systems Integration Contract in the first
quarter ended March 31, 1996;
(b) The Company's revenues, net income, and earnings per
share for the year and three months ended December 31, 1995 were materially
inflated and overstated by $5.1 million as a result of improper revenue
recognition practices in the Company's Imonics division which were violative of
GAAP and other accounting rules and regulations, as set forth above;
(c) The Imonics division, which was responsible for
re-engineering the Company's physician billing business, was over-staffed and
poorly managed, thereby adversely affecting any purported success of the
Re-Engineering Project, and the Imonics division would have to be substantially
reorganized, which would result in a substantial charge in the many millions of
dollars;
(d) The Imonics division would not be able to actively
seek new license revenue opportunities, which had been expected to yield
approximately $50 million in revenue in 1997, until after the division can be
reorganized (through a full integration with BSG), and its serious internal
deficiencies are corrected. Since software license revenue has a high operating
margin, much of the impact of this reduced revenue will fall directly to the
pretax line;
(e) With regard to the Re-Engineering Project, the
software designed to automate the billing process at MPSC was not appropriate
for large volume processing thus requiring further software development and
causing a deferral of the office consolidation element of the Re-Engineering
Project. Thus, the Company would not achieve the expected increase in
profitability which would have resulted from such consolidation;
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56
(f) Medaphis' physician billing business, MPSC, was
performing poorly and the Re-Engineering Project was suffering from multiple
problems;
(g) Due to the severe problems being experienced by the
Company's MPSC subsidiary and the Re-Engineering Project, there was no
reasonable basis for the defendants' statements made in connection with the
report of second quarter 1996 results that MPSC was "improv[ing]" and that the
Re-Engineering Project was "positioning the Company for important improvements
in operating results";
(h) With respect to the Joint Venture's Systems
Integration Contract (executed in the first quarter of 1996 and touted in the
Company's First Quarter l0-Q), Medaphis improperly recognized, in violation of
GAAP, millions of dollars in revenue because: (1) the Contract was subject to
significant contingencies and ongoing obligations, thus making revenue
recognition improper; and (2) the revenue should have been recognized, if at
all, ratably over the life of the Contract, based on the
percentage-of-completion method of accounting, rather than up front upon signing
the Contract. This improper recognition of revenue caused revenue, net income
and earnings per share to be materially overstated in the Company's financial
statements for the quarters ended March 3l, 1996 and June 30, 1996 in violation
of GAAP. Moreover, as a result of Medaphis' failure to meet milestone deadlines,
Medaphis has been forced to reverse at least $9 million in recognized revenues
to reserve for the reduction in Contract terms during the third quarter of 1996;
(i) Further, with respect to the Systems Integration
Contract, Imonics had failed to meet milestone deadlines in implementation of
the Contract due to, inter alia, weak project management, a poor infrastructure
at Imonics, and a failure to provide adequate staffing
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with the skills necessary to perform the project. As a result, the German
customer had chosen to renegotiate the contract on terms substantially less
favorable to the Company;
(j) Contrary to defendants' representations that the
Re-Engineering Project would be substantially completed by fiscal year 1997,
such that the Company would begin to experience operating leverage, i.e.,
enhanced margins in the services division, by the beginning of 1997, defendants
knew or recklessly disregarded but failed to disclose that the Re- Engineering
Project was suffering from numerous problems and thus was not likely to be
completed until late 1997, if not 1998, at which time any benefits therefrom
would only begin to be realized;
(k) The Atwork division's sales pipeline had been in
decline since September 1995, and significant bugs in the Atwork division's
Windows-based scheduling software introduced at year-end 1995 were not corrected
until May 1996. As a result, Atwork's sales were at least 9 months behind
Company forecasts;
(l) Because of the extensive problems at Imonics, BSG
would have to focus all of its attention on reorganizing Imonics and integrating
Imonics and Rapid Systems, and would be unable to pursue any significant revenue
opportunities of its own, thereby negatively impacting results for at least the
remainder of 1996; and
(m) Contrary to defendants' representations, Imonics,
Atwork, and the Company's other technology businesses were not in fact able to
offset revenue, growth, and margin pressures adversely affecting MPSC;
(n) Contrary to defendants' statements regarding the
synergies to be derived from the BSG and Rapid Systems Mergers, the integration
of Imonics' operations with
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BSG and Rapid Systems was not proceeding well, could not be accomplished without
a complete reorganization of Imonics, and would require Medaphis to take
substantial charges against earnings in the third quarter of 1996;
(o) The Company's focus on the Re-Engineering Project at
MPSC was done only at the expense of customer service and customer retention,
which was leading to significant revenue declines and reductions in
profitability for Medaphis;
(p) The increasing staff levels at Imonics, cited by
analysts as a positive growth factor based on defendants' representations, was,
in reality, excessive, as evidenced by the October 23, 1996 disclosure that the
Company had terminated 430 employees, including the entire Imonics senior
management team; and
(q) Defendants' forecasts of $0.28 and $0.30 per share for
the third and fourth quarters of 1996, respectively, were contradicted by the
adverse facts set forth above and were issued by defendants, through analysts'
reports endorsed and adopted by the Company, without any reasonable basis.
COUNT I
ON BEHALF OF ALL PLAINTIFFS, THE CLASS AND
THE SUB-CLASS FOR VIOLATIONS OF
SECTION 10(B) OF THE EXCHANGE ACT AND RULE L0B-5
PROMULGATED THEREUNDER AGAINST ALL DEFENDANTS
132. Plaintiffs incorporate by reference and reallege all
paragraphs previously alleged herein and assert these claims against all
defendants.
133. During the Class Period, defendants, individually and in
concert, engaged in a plan, scheme and course of conduct, pursuant to which they
knowingly and/or recklessly
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engaged in acts, transactions, practices, and courses of business which operated
as a fraud upon plaintiff and other members of the Class and the Sub-Class, and
made various untrue statements of material fact and omitted to state material
facts necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading, to plaintiffs and
other Class and Sub-Class members as set forth above. The purpose and effect of
said scheme was to induce plaintiffs and the members of the Class and Sub-Class
to purchase and/or acquire the Company's common stock at artificially inflated
prices.
134. By reason of the foregoing, defendants knowingly or
recklessly violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated
thereunder in that they (a) employed devices, schemes and artifices to defraud;
(b) made untrue statements of material fact and/or omitted to state material
facts necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading; and (c) engaged in
acts, practices, [and] course of business which operated as a fraud and deceit
upon plaintiffs and other members of the Class and the Sub-Class in an effort to
maintain an artificially high market price for the Company's securities.
135. Each defendant is sued as a primary participant in the
wrongful and illegal conduct charged herein. The Individual Defendants are sued
as controlling persons as alleged below.
136. In addition to the duties of full disclosure imposed on
defendants as a result of their making, or participation in the making of,
affirmative statements and reports to the investing public, defendants had a
duty to promptly disseminate truthful information that would be material to
investors in compliance with the integrated disclosure provisions of the SEC as
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embodied in SEC Regulation S-X (17 C.F.R. Section 210.01 et seq.) and S-K (17
C.F.R. Section 22910 et seq.) and other SEC regulations, including accurate and
truthful information with respect to the Company's business, operations,
financial condition and performance so that the market prices of the Company's
publicly traded securities would be based on truthful, complete and accurate
information. As a seller of Medaphis stock during the Class Period, while in
possession of material non-public information, defendant Medaphis had a duty to
disclose such information or to abstain from trading in such stock.
137. Defendants, individually and in concert, directly and
indirectly, by the use of means and instrumentalities of interstate commerce and
the mails, engaged and participated in a continuous course of conduct to conceal
adverse material information about the business, management, financial
condition, performance, operations, and prospects of the Company, as specified
herein. Defendants employed devices, schemes and artifices to defraud, while in
possession of material adverse non-public information, and engaged in acts,
practices, and a course of conduct as alleged herein in an effort to assure
investors of the Company's value and performance and continued substantial
growth, which included the making of, or the participation in the making of,
untrue statements of material facts and omitting to state material facts
necessary in order to make the statements made about the Company and its
business, operations and future prospects, in light of the circumstances under
which they were made, not misleading, as set forth more particularly herein, and
engaged in transactions, practices and a course of business which operated as a
fraud and deceit upon the purchasers of Medaphis stock during the Class Period.
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138. Each of the Individual Defendants' primary liability and
controlling person liability arises from the following facts, among others: (i)
each of the Individual Defendants was a high-level executive and/or director at
the Company during the Class Period and was a member of the Company's senior
management team; (ii) each of the Individual Defendants, by virtue of his
responsibilities and activities as a senior executive officer and/or director of
the Company, was privy to and participated in the creation, development and
reporting of the Company's internal budgets, plans, projections and/or reports;
(iii) the Individual Defendants enjoyed significant personal contact and
familiarity with each other and were advised of and had access to other members
of the Company's management team, internal reports, and other data and
information about the Company's financial condition and performance at all
relevant times; and (iv) the Individual Defendants were aware of the Company's
dissemination of information to the investing public which they knew or
recklessly disregarded was materially false and misleading.
139. Defendants had actual knowledge of the misrepresentations
and omissions of material facts set forth herein, or acted with reckless
disregard for the truth in that they failed to ascertain and to disclose such
facts, even though such facts were available to them. Defendants' material
misrepresentations and/or omissions were made knowingly or recklessly and for
the purpose and effect of concealing the truth with respect to the Company's
operations, business, management, performance and prospects from the investing
public and supporting the artificially inflated price of its stock. As
demonstrated by their misrepresentation of the Company's condition and
performance throughout the Class Period, if they did not have actual knowledge
of the misrepresentations and omissions alleged, defendants were reckless in
failing to obtain such knowledge by deliberately refraining from taking those
steps necessary to discover
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whether their statements were false or misleading. The Individual Defendants --
by virtue of their receipt of information reflecting the true facts regarding
the Company, and/or their control over or association with the Company that made
them privy to confidential proprietary information concerning the Company --
participated in and knew of (or recklessly disregarded) the fraudulent scheme
alleged herein. The undisclosed problems alleged in this Complaint were
sustained, material and of a nature that evidences that they were in existence
during the Class Period and were therefore known to or within the purview of all
defendants at all relevant times.
140. As a result of the dissemination of the material
misleading information and failure to disclose material facts, as set forth
above, the market price of Medaphis common stock was artificially inflated
during the Class Period. In ignorance of the fact that the market price of
Medaphis stock was artificially inflated, plaintiffs and other members of the
Class and Sub-Class relied, to their damage, directly on the misstatements or on
the integrity of the market both as to price and as to whether to purchase or
acquire these securities. Plaintiffs and the other members of the Class and
Sub-Class would not have purchased or otherwise acquired Medaphis stock at the
market prices they paid or acquired such securities, or at all, if they had been
aware that the market prices had been artificially and falsely inflated by the
defendants' false and misleading statements and concealments. At the time of the
acquisition of Medaphis common stock by plaintiffs and the other members of the
Class and the Sub-Class, the fair market value of said common stock was
substantially less than the prices at which plaintiffs acquired such stock. As a
direct and proximate result of the defendants' wrongful conduct, plaintiffs and
other members of the Class and the Sub-Class have suffered substantial damages
in connection with their acquisitions of Medaphis stock.
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141. The statutory safe harbor provided for forward-looking
statements under certain circumstances does not apply to any of the allegedly
false statements pleaded in this Complaint. To the extent there were any
forward-looking statements, there were no meaningful cautionary statements
identifying important and material factors that could cause actual results to
differ materially from those in the purportedly forward-looking statements.
Alternatively, to the extent that the statutory safe harbor does apply to any
forward-looking statements pleaded herein, the defendants are liable for those
false forward-looking statements because at the time each of those
forward-looking statements was made, the particular speaker knew the
forward-looking statement was false, and the forward-looking statement was
authorized and/or approved by an executive officer of Medaphis who knew that the
statement was false when made.
COUNT II
ON BEHALF OF ALL PLAINTIFFS, THE CLASS AND
THE SUB-CLASS FOR VIOLATIONS
OF SECTION 20(A) OF THE EXCHANGE ACT
AGAINST THE INDIVIDUAL DEFENDANTS
142. Plaintiffs repeat and reallege the allegations set forth
above as if set forth fully herein. This claim is asserted against the
Individual Defendants.
143. At all relevant times, the Individual Defendants acted as
controlling persons of the Company within the meaning of Section 20(a) of the
Exchange Act as alleged herein. By virtue of, among other things, the Individual
Defendants' high-level positions, and defendants' participation in and/or
awareness of the Company's operations and business and/or intimate knowledge of
the Company's operations and business, the Individual Defendants had the power
to influence and control and did influence and control, directly or indirectly,
the various
- 63 -
64
statements and documents complained of herein. The Individual Defendants were
provided with or had unlimited access to copies of the Company's reports, press
releases, public filings and other statements complained of herein prior to
and/or shortly after these statements were issued and had the ability to prevent
the issuance of the statements or to cause the statements to be corrected.
144. In addition, the Individual Defendants had direct
involvement in the operations of the Company, and, therefore, are presumed to
have had the power to control or influence the regular transactions giving rise
to the securities violations alleged herein and exercised the same.
145. As set forth above, defendant Medaphis violated Section
10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder. By virtue of
their controlling positions, the Individual Defendants also are liable for such
primary violations pursuant to Section 20(a) of the Exchange Act. As a direct
and proximate result of defendants' wrongful conduct, plaintiffs and other
members of the Class and Sub-Class suffered damages in connection with their
acquisitions of the Company's stock during the Class Period.
COUNT III
ON BEHALF OF THE SUB-CLASS FOR
VIOLATIONS OF SECTION 11 OF THE
SECURITIES ACT AGAINST ALL DEFENDANTS
- 64 -
65
146. Plaintiffs Carley Capital Group and WME Management Group,
L.P. (the "Sub-Class Plaintiffs") incorporate by reference and reallege the
allegations set forth above as if set forth fully herein.
147. This Count is brought for violations of Section 11 of the
Securities Act, 15 U.S.C. Section 77k, on behalf of the Sub-Class as defined
herein against Medaphis and the Individual Defendants.
148. The HDS Registration Statement, which contained the HDS
Prospectus, (hereinafter referred to as the "Registration Statement" and the
"Prospectus"), and the documents incorporated therein by reference, as set forth
in paragraphs 64-65 and 98-100 hereof, were inaccurate and misleading, contained
untrue statements of material facts, omitted to state other facts necessary to
make the statements made not misleading, and concealed and failed adequately to
disclose material facts, all as set forth in paragraphs 69 and 101-102 above.
149. Medaphis is the registrant for the shares sold to the
Sub-Class Plaintiffs and other members of the Sub-Class. Medaphis issued, caused
to be issued and participated in the issuance of materially false and misleading
written statements to the investing public which were contained in the
Registration Statement, which misrepresented or failed to disclose, inter alia,
the facts set forth above.
150. Each of Defendants Brown, Cote and Douglass, either
personally or through an attorney-in-fact, signed the Registration Statement and
was a director and/or senior executive of Medaphis at the time of the HDS Merger
referred to hereinabove.
151. The defendants named herein were responsible for the
contents and dissemination of the Registration Statement and the Prospectus.
None of the defendants named
- 65 -
66
herein made a reasonable investigation or possessed reasonable grounds for
believing that the statements contained in the Registration Statement and
Prospectus were true and did not omit any material facts and were not materially
misleading, all for the reasons set forth in paragraphs 69, 101-102 and 147
above.
152. Defendants had actual knowledge of the misrepresentations
and omissions of material facts set forth herein, or acted with reckless
disregard for the truth in that they failed to ascertain and to disclose such
facts, even though such facts were available to them. Defendants' material
misrepresentations and/or omissions were made knowingly or recklessly and for
the purpose and effect of concealing the truth with respect to the Company's
operations, business, management, performance and prospects from the investing
public and supporting the artificially inflated price of its stock.
153. The Sub-Class Plaintiffs acquired shares of Medaphis
stock issued pursuant to, or traceable to, the Registration Statement.
154. The Sub-Class Plaintiffs and the other members of the
Sub-Class have sustained damages. The value of the Company's shares has declined
substantially subsequent to and due to defendants' violations.
155. At the times they purchased the Company's shares, the
Sub-Class Plaintiffs and other members of the Sub-Class were without knowledge
of the facts concerning the wrongful conduct alleged herein and could not have
reasonably discovered those facts. Less than one year has elapsed from the time
that the Sub-Class Plaintiffs discovered or reasonably could have discovered the
facts upon which this Complaint is based to the time of filing this
- 66 -
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Complaint. Less than three years has elapsed from the time that the securities
upon which this claim is brought were bona fide offered to the public to the
time of filing this Complaint.
156. The Sub-Class Plaintiffs are entitled to recover from
defendants damages measured by the difference between their exchange price for
Medaphis securities and the actual value of such securities.
COUNT IV
ON BEHALF OF THE SUB-CLASS
FOR VIOLATIONS OF SECTION 12(A) (2) OF THE
SECURITIES ACT AGAINST ALL DEFENDANTS
157. The Sub-Class Plaintiffs incorporate by reference and
reallege the allegations set forth above as if set forth fully herein.
158. This Claim is brought by the Sub-Class Plaintiffs
pursuant to Section 12(a) (2) of the Securities Act, 15 U.S.C. Section 771(a)
(2), on behalf of the Sub-Class against Medaphis and the Individual Defendants.
159. The statements referred to above at paragraphs 64-65 and
98-100 were each made in a "prospectus" as that term is defined in Section 2(a)
(10) of the Securities Act, contained untrue statements of material facts,
omitted to state other facts necessary to make the statements made not
misleading, and concealed and failed to disclose material facts on the grounds
and for the reasons set forth in paragraphs 69 and 101-102 herein. The actions
of the defendants named in this Count solicited the sale of shares of Medaphis
common stock in
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connection with the HDS Merger for their personal financial gain. Those actions
included participating in the preparation of the materially false and misleading
Prospectus and other materials used in the sale of Medaphis common stock.
160. The defendants owed to the purchasers of the Company's
shares, including the Sub-Class Plaintiffs and other members of the Sub-Class,
the duty to make a reasonable and diligent investigation of the statements
contained in the Prospectus and other offering materials to ensure that such
statements were true and that there was no omission to state a material fact
required to be stated in order to make the statements contained therein not
materially misleading.
161. Defendants had actual knowledge of the misrepresentations
and omissions of material facts set forth herein, or acted with reckless
disregard for the truth in that they failed to ascertain and to disclose such
facts, even though such facts were available to them. Defendants' material
misrepresentations and/or omissions were made knowingly or recklessly and for
the purpose and effect of concealing the truth with respect to the Company's
operations, business management, performance and prospects from the investing
public and supporting the artificially inflated price of its stock.
162. The Sub-Class Plaintiffs and other members of the
Sub-Class purchased or otherwise acquired the Company's common stock pursuant to
and traceable to the Prospectus. The Sub-Class Plaintiffs did not know, or in
the exercise of reasonable diligence could not have known, of the untruths and
omissions contained in or made in connection with the Prospectus.
163. The Sub-Class Plaintiffs and other members of the
Sub-Class have sustained injury and suffered damages.
- 68 -
69
164. By reason of the conduct alleged herein, the defendants
named in this Count violated Section 12 (a) (2) of the Securities Act.
Accordingly, the Sub-Class Plaintiffs and the other members of the Sub-Class who
hold the Company's shares have the right to rescind and recover the
consideration paid for the Company's shares and hereby elect to rescind and
tender their shares of the Company to the defendants sued herein. Sub-Class
members who have sold their shares of Medaphis are entitled to rescissory
damages.
165. Less than three years have elapsed from the time that the
securities upon which this Count is brought were sold to the public to the time
of the filing of this action. Less than one year has elapsed from the time when
the Sub-Class Plaintiffs discovered or reasonably could have discovered the
facts upon which this Count is based to the time of the filing of this action.
COUNT V
ON BEHALF OF THE SUB-CLASS FOR VIOLATIONS
OF SECTION 15 OF THE SECURITIES ACT
AGAINST THE INDIVIDUAL DEFENDANTS
166. The Sub-Class Plaintiffs incorporate by reference and
reallege the allegations set forth above as if set forth fully herein.
167. The Individual Defendants acted as controlling persons of
the Company within the meaning of Section 15 of the Securities Act. By reason of
their senior management positions, stock ownership and directorships as alleged
above, these defendants had the power to
- 69 -
70
influence and exercised the same to cause Medaphis to engage in the acts and
conduct complained of in Count III herein.
168. Defendants had actual knowledge of the misrepresentations
and omissions of material facts set forth herein, or acted with reckless
disregard for the truth in that they failed to ascertain and to disclose such
facts, even though such facts were available to them. Defendants' material
misrepresentations and/or omissions were made knowingly or recklessly and for
the purpose and effect of concealing the truth with respect to the Company's
operations, business management, performance and prospects from the investing
public and supporting the artificially inflated price of its stock.
169. By reason of such conduct, the Individual Defendants are
liable pursuant to Section 15 of the Securities Act, 15 U.S.C. Section 77o. As a
direct and proximate result of the conduct of the Individual Defendants alleged
in Count III herein, the Sub-Class Plaintiffs and the other members of the
Sub-Class suffered damages in connection with their acquisitions of the
Company's securities pursuant to the HDS Merger.
WHEREFORE, plaintiffs, on behalf of themselves and on behalf
of the Class and Sub-Class, pray for judgment as follows:
(a) Declaring this action to be a class action pursuant to
Rules 23(a) and 23(b) (3) of the Federal Rules of Civil Procedure on behalf of
the Class and the Sub-Class as defined herein;
(b) Awarding plaintiffs and the members of the Class
and/or Sub-Class rescissory or compensatory damages in an amount which may be
proven at trial, together with interest thereon;
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(c) Awarding the Sub-Class Plaintiffs and members of the
Sub-Class rescission and damages in accordance with Section 12 (a) (2) of the
Securities Act on Counts IV and V;
(d) Awarding plaintiffs and the members of the Class and
Sub-Class pre-judgment and post-judgment interest, as well as their reasonable
attorneys' and experts' witness fees and other costs; and
(e) Awarding such other and further relief as this Court
may deem just and proper, including any extraordinary equitable and/or
injunctive relief as permitted by law or equity to attach, impound or otherwise
restrict the defendants' assets to assure plaintiffs have an effective remedy.
DEMAND FOR JURY TRIAL
Plaintiffs, on their own behalf and on behalf of the Class and
Sub-Class, hereby demand a trial by jury on all Counts hereof.
Dated: February 3, 1997 APPEL, CHITWOOD & HARLEY
BY: /s/
--------------------------------
Martin Chitwood
Georgia Bar No. 124950
Christi C. Mobley
Georgia Bar No. 107869
1400 Resurgens Plaza
945 East Paces Ferry Rd.
Atlanta, GA 30326
(404) 266-1650
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72
- and -
BARRACK RODOS AND BACINE
BY: /s/
--------------------------------
Leonard Barrack
Gerald J. Rodos
Sheldon L. Albert
Anthony J. Bolognese
3300 Two Commerce Square
2001 Market Street
Philadelphia, PA 19103
(215) 963-0600
- and -
BERGER & MONTAGUE, P.C.
BY: /s/
--------------------------------
Sherrie R. Savett
Genna D. Kidd
1622 Locust Street
Philadelphia, PA 19103
(215) 875-3000
CO-LEAD COUNSEL FOR PLAINTIFFS
CARR, TABB & POPE
BY: /s/
--------------------------------
W. Pitts Carr
Georgia Bar No. 112100
Render C. Freeman
Georgia Bar No. 275910
1355 Peachtree Street, N.E.
Suite 2000
Atlanta, GA 30309
(404) 876-7790
LIAISON COUNSEL FOR PLAINTIFFS
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73
ABBEY GARDY & SQUITIERI
Jill Abrams
212 East 39th Street
New York, NY 10016
(212) 889-3700
ALPERT BARKER & CALCUTT
Jonathan Alpert Patrick
Calcutt 100 South Ashley
Drive Suite 2000 Tampa, FL
33602 (813) 223-4131
BERMAN, DEVALERIO & PEASE
Glen DeValerio
One Liberty Square
Boston, Massachusetts 02109
(617) 542-8300
BERNSTEIN, LIEBHARD
& LIFSHITZ
Mel E. Lifshitz
274 Madison Avenue
New York, NY 10016
(212) 779-1414
BERNSTEIN, LITOWITZ, BERGER
& GROSSMAN
Vincent R. Cappucci
Steven B. Singer
Kevin M. McGee
1285 Avenue of the Americas
New York, New York 10019
(212) 554-1400
FINKELSTEIN, THOMPSON
& LOUGHRAN
Burton Finkelstein
Doug Thompson
1055 Jefferson Street, N.W.
Suite 601
Washington, DC 20007
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74
GOODKIND LABATON RUDOFF &
SUCHAROW, L.L.P.
Jonathan M. Plasse
Barbara J. Hart
100 Park Avenue
New York, New York 10017
(212) 907-0700
HOFFMAN & EDELSON
Marc H. Edelson
Jerry Hoffman
Suite 280, Jenkintown Plaza
101 Greenwood Avenue
Jenkintown, PA 19046
(215) 886-4111
JAROSLAWICZ & JAROSLAWICZ
David Jaroslawicz
150 William Street
19th Floor
New York, New York 10038
(212) 227-2780
KAPLAN, KILSHEIMER
& FOX, L.L.P.
Robert N. Kaplan
Richard J. Kilsheimer
Ariana J. Tadler
685 Third Avenue
New York, New York 10017
(212) 554-1444
LAW OFFICE OF MILES TEPPER
Miles M. Tepper
7 Becker Farm Road
Roseland, NJ 07068
(201) 740-1881
MAGER, LIEBENBERG & WHITE
Roberta Liebenberg 10th
Floor, 2 Penn Center 15th &
JFK Boulevard Philadelphia,
PA 19102
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75
(215) 569-6921
MANN & WOOLRIDGE
Theo Davis Mann
28 Jackson Street
Newnan, GA 30263
(770) 253-2222
MILBERG WEISS BERSHAD HYNES
& LERACH LLP
David J. Bershad
Richard H. Weiss
Janine L. Pollack
One Pennsylvania Plaza
New York, New York 10119
(212) 594-5300
POMERANTZ, HAUDEK, BLOCK
& GROSSMAN
Stanley B. Grossman
D. Brian Hufford
100 Park Avenue
New York, New York 10017
(212) 818-0477
RACKEMANN, SAWYER & BREWSTER, P.C.
Alan B. Rubenstein
One Financial Center
Boston, MA 02111
(617) 542-2300
SCHATZ & NOBEL, P.C.
Jeffrey S. Nobel
216 Main Street
Hartford, Ct. 06106
(860) 493-6292
LOCKRIDGE GRINDAL NAUEN &
HOLSTEIN, PLLP
Richard Lockridge
W. Joseph Bruckner
Suite 2200
100 Washington Ave., South
- 75 -
76
Minneapolis, MN 58401
(612) 339-6900
SCHIFFRIN & CRAIG, LTD.
Andrew L. Barroway
Three Bala Plaza East
Suite 400
Bala Cynwyd, PA 19004
SPECTOR & ROSEMAN, P.C.
Robert M. Roseman
Jeffrey L. Kodroff
Mark J. Dorval
2000 Market Street
12th Floor
Philadelphia, PA 19103
(215) 864-2424
WECHSLER HARWOOD HALEBIAN
& FEFFER, LLP
Jeff Haber
805 Third Avenue
New York, NY 10022
(212) 935-7400
WEISS & YOURMAN
Joseph H. Weiss
Mark D. Smilow
319 Fifth Avenue
New York, New York 10016
(212) 682-2010
WOLF HALDENSTEIN ADLER
FREEMAN & HERZ, L.L.P.
Fred Taylor Isquith
Neil L. Zola
270 Madison Avenue
New York, New York 10016
(212) 545-4653
COUNSEL FOR PLAINTIFFS
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IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF GEORGIA
ATLANTA DIVISION
- -----------------------------------------X
IN RE 1996 MEDAPHIS CORPORATION : CIVIL ACTION NO.
SECURITIES LITIGATION : 1: 96-CV 2088-FMH
- -----------------------------------------X
CERTIFICATE OF SERVICE
This is to certify that I have this day served a true and correct copy
of the within and foregoing "CONSOLIDATED SECOND AMENDED CLASS ACTION COMPLAINT
FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS" upon counsel for defendants by
facsimile and hand delivery this 3rd day of February, 1997 at the following
address:
M. Robert Thornton, Esq.
King & Spalding
191 Peachtree Street, N.E.
Suite 4200
Atlanta, Georgia 30303
/s/
--------------------------------
Martin D. Chitwood
Georgia Bar No. 124950
Christi C. Mobley
Georgia Bar No. 107869
APPEL, CHITWOOD & HARLEY
1400 Resurgens Plaza
945 East Paces Ferry Road
Atlanta, Georgia 30326
(404) 266-1650
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