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EXHIBIT 99.4
WILENTZ, GOLDMAN & SPITZER
A professional Corporation
Nicholas w. McClear, Esq. (2288)
90 Woodbridge Center Drive
P.O. Box 10
Woodbridge, New Jersey 07095-0958
(908) 636-8000
Attorneys for Plaintiffs, Ernest Hecht and
Stephen D. Strandberg, on behalf of themselves
and all others similarly situated.
SUPERIOR COURT OF NEW JERSEY
LAW DIVISION ESSEX COUNTY
DOCKET NO. L-12691-96
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:
ERNEST HECHT and STEPHEN D. :
STRANDBERG, on behalf of :
themselves and all others :
similarly situated, :
:
Plaintiffs, : Civil Action
:
v. : COMPLAINT - CLASS ACTION
:
STEVEN G. PAPERMASTER; ROBERT :
E. PICKERING, JR.; DAVID S. :
LUNDEEN; NORMAN SMITH; RAYMOND :
J. NOORDA; GREGORY A. GROSH; :
MEDAPHIS CORPORATION, a Delaware :
corporation; and RANDOLPH G. BROWN :
: DEMAND FOR JURY TRIAL
:
Defendants. :
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Individual and representative plaintiffs, Ernest Hecht and Stephen D.
Strandberg, on behalf of themselves and all others similarly situated, complain
against defendants Steven G. Papermaster ("PAPERMASTER"), Robert E. Pickering,
Jr. ("PICKERING"), David S. Lundeen ("LUNDEEN"), Norman Smith ("SMITH"), Raymond
J. Noorda ("NOORDA"), and Gregory A. Grosh ("GROSH") (hereinafter
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from time to time collectively called the "BSG DEFENDANTS"); and Medaphis
Corporation ("MEDAPHIS") and Randolph G. Brown ("BROWN") (hereinafter from time
to time collectively called the "MEDAPHIS DEFENDANTS") as follows, upon
information and belief (except for those allegations which pertain to plaintiffs
and their attorneys, which allegations are based upon personal knowledge) based,
inter alia, on the investigation made by plaintiffs' attorneys, which
investigation included, without limitation, a review of various public filings
and articles about BSG Corporation ("BSG") and defendant Medaphis:
NATURE OF THE ACTION
1. This is a class action on behalf of a class comprising all persons
or entities whose options to purchase shares of BSG common stock ("BSG Options")
were converted in connection with the merger between defendant Medaphis and BSG
on or about May 6, 1996 ("Merger") into options to purchase shares of the common
stock ("Shares") of defendant Medaphis ("Medaphis Options") and who suffered
damages as a result thereof.
2. On behalf of themselves and the class, plaintiffs seek, inter alia,
to recover: (A) damages to the class and plaintiffs caused by (I) the BSG
Defendants' violation of their fiduciary duties and the duty to perform due
diligence as directors, officers, and controlling shareholders of BSG in
adequately investigating, negotiating and consummating the Merger Agreement (as
hereinafter defined), the Merger and related transactions with due regard to the
rights of plaintiff and the other members of the class and (ii) the Medaphis
Defendants' fraud; and (B) punitive damages.
BSG CORPORATION
3. Before the Merger, BSG was a privately-held Delaware corporation
with its principal place of business in Austin, Texas.
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4. It was founded by defendant Papermaster in 1987. It described itself as
one of the largest pure client/server and advanced technology systems
integrators serving Fortune 1000 customers. It was engaged in the business of
providing information technology and change management services to organizations
seeking to transform their operations through the strategic use of client/server
and other advanced technologies.
5. BSG had grown substantially since its founding, exceeding a 50% growth
rate every year. In 1993, its revenues were about $26 million. In 1994, its
revenues grew to over $46 million. In 1995, BSG's revenues increased to about
$69.7 million. In 1995, Fortune magazine denominated BSG as one of its "25 Cool
Companies," and Inc. magazine listed it as one of the 1995 Inc. 500 Companies.
6. BSG employed over 650 persons at 11 locations across the United States.
7. Immediately before the Merger, its largest shareholder was NFT
Ventures, Inc. ("NFT"), a Utah corporation. NFT's president and one of its two
directors is defendant Noorda. Its sole shareholder is the Raymond J. Noorda
Family Trust ("Noorda Trust") of which defendant Noorda is one of the two
trustees.
8. Immediately before the Merger, another large shareholder was NP
Ventures LTD ("NP"), a Texas limited partnership. Its general partner was
Powershift Partners, Ltd., whose general partner, in turn, was defendant
Papermaster.
THE UNDERLYING MERGER
THE MERGER AGREEMENT
9. Defendant Medaphis; BSGSUB, Inc., its wholly-owned subsidiary; and BSG
entered into a definitive agreement dated as of March 15, 1996 for the Merger
("Merger Agreement"),
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whereby, in part, defendant Medaphis agreed to acquire, through the merger of
BSGSUB, Inc., into and with BSG, all of BSG's outstanding capital stock for
about 7.5 million Shares and further to assume BSG Options and stock rights,
representing an additional approximately 2.7 million Shares.
10. The Merger was subject to, inter alia, BSG shareholder approval. The
holders of BSG Options, however, had no right to vote to approve the Merger.
11. BSG's Board of Directors, including the BSG Defendants, approved the
execution, delivery and performance of the Merger Agreement, as well as the
Merger itself and all other contemplated transactions. The Merger Agreement
committed BSG's Board of Directors to recommending to BSG's shareholders
approval of the Merger Agreement and the contemplated transactions.
12. Before approval of the Merger Agreement, the BSG Defendants undertook
a financial investigation of Medaphis.
13. Before approval of the Merger Agreement, the BSG Defendants negotiated
its terms with representatives of defendant Medaphis.
14. In anticipation and before the execution of the Merger Agreement,
defendant Papermaster executed a certain Stockholders Agreement and delivered it
to Medaphis.
15. In anticipation and before the execution of the Merger Agreement,
defendant Papermaster used his ability to direct the affairs of NP to cause NP
to execute the Stockholders Agreement and deliver it to Medaphis.
16. In anticipation and before the execution of the Merger Agreement,
defendant Noorda used his ability to direct the affairs of NFT to cause NFT to
execute the Stockholders Agreement and deliver it to Medaphis.
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17. The Merger Agreement provided, in part, that:
(A) Defendant Medaphis would assume all of BSG's rights and
obligations with respect to the BSG Options.
(B) In connection with the Merger, the BSG Stock Options Plans
would be amended to provide that the BSG Options will evidence the right to
purchase Shares.
(C) The nature of the options would change from Incentive Stock
Options "ISO's") to Non-Qualified Stock Options.
(D) Each holder of BSG Options would have to complete, execute
and return an Option Assumption Agreement, along with the original BSG option
agreements; otherwise the BSG Options would continue to govern.
(E) Each BSG Option Holder completing and returning the Option
Assumption Agreement would receive a Medaphis Option for the number of Shares
equal to the product of the number of shares covered by the BSG Option
multiplied by a conversion ratio based, generally speaking, on (I) the number of
Shares and the number of BSG shares of common stock being exchanged through the
Merger and (ii) the closing price of the Shares on NASDAQ the trading date
before the date of the Agreement ("Conversion Ratio").
(F) The exercise price of a Medaphis Option would be
calculated by dividing the per share exercise price of a BSG Option by the
Conversion Ratio.
18. In addition to the above provisions, the Merger Agreement contained a
number of provisions that benefitted only all or some of the BSG Defendants.
19. The Merger Agreement further provided, in part, that:
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(A) Defendant Medaphis would, for five years, nominate to its
Board of Directors a designee of defendants Papermaster and Noorda.
(B) After the Merger, defendant Papermaster would remain
a director of BSG.
(C) After the Merger, defendant Papermaster would remain
BSG's Chairman of the Board and Chief Executive Officer.
(D) After the Merger, defendant Lundeen would remain an
Executive Vice President and Chief Financial Officer of BSG.
(E) After the Merger, defendant Pickering would be an
Executive Vice President of BSG.
(F) After the Merger, Employment Agreements would be executed
with the BSG Defendants (except Noorda).
(G) After the Merger, BSG would be the parent/umbrella
organization for all of Medaphis's process re-engineering and systems
integration companies and capabilities. Therefore, by virtue of their guaranteed
positions and employment, the BSG Defendants would be in charge of these
expanded operations.
20. In addition to these specific provisions, the BSG Defendants had
substantial personal inducement to approve the Merger Agreement, the Merger, and
related transactions. They would reap most of the financial gain from the
consummation of the Merger. The BSG Defendants, directly or indirectly, held and
controlled enough BSG shares to approve the Merger Agreement, the Merger and
related transactions.
21. On the other hand, the Merger Agreement had a substantial adverse
impact on the interests of the holders of BSG Options:
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(A) Transformation of the options from ISO's to Non-Qualified
Stock Options created negative tax consequences for the holders of BSG Options.
The BSG Options, being ISO's, would have been taxed at lower capital gains rates
and only when the holder sold the shares acquired through exercise of the
options. In contrast, the Medaphis Options, being Non-Qualified Stock Options,
would be taxed as ordinary income and on two occasions: first, when an option
was exercised, and, second, when the shares acquired through exercise of the
options were sold. In effect, the conversion of the nature of the options
reduced their value by about 40%.
(B) As a practical matter, holders of the BSG Options were
compelled to have their BSG Options converted into Medaphis Options. After the
Merger, BSG Options would be worthless.
22. In announcing the execution of the Merger Agreement, BSG and defendant
Papermaster represented to the holders of BSG Options:
[T]his change [from ISO's to Non-Qualified Stock Options] was
a key component in the overall transaction which, among other
benefits ENABLED US TO OBTAIN AN EXTREMELY ATTRACTIVE PRICE
FOR YOUR BSG
SHARES . . . .
(Emphasis supplied).
23. In the same announcement, BSG and defendant Papermaster informed the
holders of BSG Options:
THE SENIOR EXECUTIVES OF BSG AND I PLAN TO CONVERT OUR STOCK
OPTIONS INTO NON-QUALIFIED MEDAPHIS STOCK OPTIONS. I BELIEVE
THAT THIS IS NOT ONLY IN THE BEST INTEREST OF BSG AND OUR
EMPLOYEES, but inherently is in the best interest of Medaphis
and its shareholders.
(Emphasis supplied).
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THE MERGER
24. On May 6, 1996, the Merger was accomplished through the exchange of
about 7.5 million Shares for all BSG capital stock, along with an additional
approximately 2.3 million Shares for the assumption of BSG Options. BSG, Inc.,
was merged into and with BSG, with BSG surviving the Merger as a wholly-owned
subsidiary of defendant Medaphis.
25. Each share of BSG common was exchanged into about .23 of a Share, the
Conversion Ratio being calculated after all shares of BSG's two classes of
preferred stock had been converted into common stock.
26. Further, in connection with the Merger, defendant Medaphis entered
into a Registration Rights Agreement with NFT and with NP whereby NFT and NP are
entitled to certain demand and incidental registration rights with respect to
its Shares received in the Merger.
27. Defendant Medaphis issued a press release dated May 7, 1996,
announcing the Merger. The press release quoted defendant Brown as follows:
Over the past few years, BSG has focused on building the
infrastructure necessary to not only manage its growth, but
also to manage the over 1,000 client/server-based technical
staff who are now a part of the BSG group as a result of this
Merger. Imonics, Rapid Systems Solutions and BSG create, we
believe, the largest specialty client/server IT services
company in the industry. This merger creates wonderful
business opportunities for BSG and Medaphis and we are
delighted about future prospects.
(Emphasis added).
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PARTIES
PLAINTIFFS
28. Plaintiff Ernest Hecht is a citizen of the State of New Jersey,
residing in Millburn, New Jersey, who, when the Merger occurred, held BSG
Options covering 22,383 BSG shares. In connection with the Merger, his BSG
Options were converted into Medaphis Options covering 5,148 Shares, and he has
been damaged as a result of defendants' misconduct as described herein. On or
about June 6, 1996, Mr. Hecht exercised some of his Medaphis Options to acquire
1,000 Shares; on or about August 23, 1996, he exercised some of his Medaphis
Options to acquire another 500 Shares. Mr. Hecht now holds Medaphis Options
covering 3,648 Shares.
29. Plaintiff Stephen D. Strandberg is a citizen of the State of New
Jersey, residing in Maplewood, New Jersey, who, when the Merger occurred, held
BSG Options covering 38,713 BSG shares. In connection with the Merger, his BSG
Options were converted into Medaphis Options covering 8,904 Shares, and he as
been damaged as a result of defendants' misconduct as described herein.
DEFENDANTS
THE BSG DEFENDANTS
30. Defendant Papermaster, before the Merger, was BSG's Chairman,
President and Chief Executive Officer. He remained BSG's Chairman and Chief
Executive Officer after the Merger.
31. Defendant Pickering who, at all relevant times before the Merger, was
an Executive Vice President of BSG.
32. Defendant Lundeen, since August 22, 1995, was BSG's Chief Financial
Officer and an Executive Vice President. He retained these positions with BSG
after the Merger.
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33. Defendant Smith was an Executive Vice President of BSG.
34. Defendant Noorda, since April 18, 1995, was a director of BSG. By
reason of his positions as the president and one of two directors of NFT and one
of the two trustees of the Noorda Trust, he had the power to direct the voting
of NFT's BSG shares, including approval of the Merger. NFT owned about
19,287,848 BSG shares of common stock (after conversion, as required by the
Merger Agreement, of preferred stock into common) immediately before the Merger.
These shares represented about 58.84% of BSG's outstanding capital stock on a
fully diluted basis.
35. Defendant Grosh was an executive of BSG and was appointed as one of
the individuals to investigate Medaphis, the Merger Agreement, the Merger and
related transactions.
THE MEDAPHIS DEFENDANTS
36. Defendant Medaphis is a Delaware corporation with its principal place
of business in the State of Georgia. It is a provider of out-sourced billing,
accounts receivable and business management systems and services to the health
care industry. There are more than 7l million Shares outstanding. Both before
and after the Merger, the Shares were actively traded on the NASDAQ National
Market System ("NASDAQ").
37. Defendant Brown is a citizen of the State of Georgia. At all relevant
times until on or about October 31, 1996, he had been the president, chief
executive officer and a director of defendant Medaphis. He joined Medaphis in
July 1987 as Executive Vice president and Chief Financial Officer and was named
President, Chief Executive Officer and Director in April 1988, and Chairman in
January 1991. Defendant Brown received $1,508,396.00 in total cash compensation
in 1995, including a $1 million dollar signing bonus as part of a five year
employment contract entered into in March 1995. Also in 1995, defendant Brown
received options to purchase 200,000 Shares at an
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exercise price of $22.8150 per share. As of March 12, 1996, defendant Brown
beneficially owned 500,750 Shares.
38. By reason of his stock ownership, management positions membership on
the Board of Directors of Medaphis, and the ability to make public statements in
the name of Medaphis, defendant Brown controlled defendant Medaphis and had the
power and influence to cause it to engage in the unlawful conduct complained of
herein. Defendant Brown had access to the adverse non-public information about
the operations, results and financial condition of Medaphis, as particularized
herein, via access to internal corporate documents, communications with
corporate officers and employees attendance at management and board of director
meetings and committees thereof, and other means.
CLASS ACTION ALLEGATIONS
39. Pursuant to Rules 23(a) and 23(b) (3) of the Federal Rules of Civil
procedure, plaintiffs bring this action as a class action on behalf of a class
(i) comprising all persons or entities whose BSG Options were converted into
Medaphis Options in connection with the Merger and who suffered damages as a
result thereof, but (ii) excluding the defendants; members of the immediate
family of the individual defendants; any entity in which any defendant has or
had a controlling interest; and the legal affiliates, representatives, heirs,
controlling persons, successors and predecessors-in-interest or assigns of any
such excluded party (the "Class").
40. The members of the Class are so numerous that joinder of all members
is impractical, but the exact number of the members of the Class can only be
determined by discovery.
41. There are questions of law and fact common to the members of the
Class. All members of the Class are owed the same duties by defendants;
therefore, the questions of law and
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fact as to the liability of each defendant are common to the Class. Among the
common questions to the Class are:
(A) Did the BSG Defendants perform due diligence in their
investigation, negotiation and consummation of the Merger Agreement, Merger, and
related transactions?
(B) Did the BSG Defendants faithfully discharge their
fiduciary duty and duty of care in their investigation, negotiation and
consummation of the Merger Agreement, the Merger and related transactions?
(C) Did the BSG Defendants faithfully discharge their duties
of loyalty, candor, and fair dealing in their investigation, negotiation and
consummation of the Merger Agreement, the Merger and related transactions?
(D) Were the BSG Defendants negligent in their investigation,
negotiation and consummation of the Merger Agreement the Merger and related
transactions?
(E) Did the Medaphis Defendants provide the BSG Defendants
with materially false or misleading information in connection with the Merger
Agreement, the Merger and related transactions?
(F) Did the Medaphis Defendants' publicly disseminated
releases and statements before the Merger contain materially false or misleading
information?
(G) Did the Medaphis defendants act wilfully or recklessly in
omitting and/or misrepresenting material facts?
(H) Were the market prices for the Shares artificially
inflated by the material nondisclosures and/or misrepresentations?
(I) Have the members of the Class sustained damages?
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(J) If so, what is the appropriate measure of damages?
42. The questions affecting individual members of the Class pertain
primarily to the amount of damages, and, therefore, the common questions of law
and fact predominate over any questions affecting individual members in that
defendants have acted on grounds generally applicable to the entire Class.
43. Plaintiffs' claims are typical of the claims of all other members of
the Class because plaintiffs and the other members of the Class sustained
damages arising out of defendants' misconduct.
44. Plaintiffs will fairly and adequately protect the interest of the
Class and have retained counsel who are experienced and competent in class
actions. Plaintiffs have no interest that is contrary to or in conflict with
those of the other members of the Class that they seek to represent.
45. There is no litigation already commenced by any other member of the
Class concerning the issues raised in this Complaint.
46. The size of the claims of some members of the Class may be relatively
small in comparison to the expense and burden of seeking legal redress
individually for the wrongs defendants committed against them, and absent Class
members have no substantial interest in individually controlling the prosecution
of individual actions.
47. Without a class action, defendants will continue to retain the
proceeds of their wrongful conduct.
48. No difficulties are likely to be encountered in the management of this
action as a Class action.
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49. A class action will cause an orderly and expeditious administration
of claims; will foster economies of time, effort and expense; and will insure
uniformity of decisions.
50. It is desirable to litigate in one forum the claims of the Class.
51. For these reasons, a class action is superior to all other available
methods for the fair and efficient adjudication of this controversy.
APPLICABILITY OF PRESUMPTION OF RELIANCE:
FRAUD-ON-THE-MARKET DOCTRINE
52. At all relevant times, the market for the Shares was an efficient
market for the following reasons, among others:
(A) The Shares were listed and actively traded on NASDAQ, a highly
efficient and automated market.
(B) As a regulated issuer, defendant Medaphis filed periodic public
reports with the SEC. (C) Defendant Medaphis regularly communicated with public
investors via established market communication 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 the financial press, Dow Jones and other similar reporting
services.
(D) Defendant Medaphis was followed by securities analysts employed by
brokerage firms who wrote reports which were distributed to the sales force and
certain customers of their respective brokerage firms. Each of these reports was
publicly available and entered the public marketplace.
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53. As a result, the market for the Shares promptly digested current
information regarding Medaphis from all publicly available sources and reflected
such information in the price of the Shares.
FACTUAL ALLEGATIONS
THE BSG DEFENDANTS' FINANCIAL INVESTIGATION AND NEGOTIATIONS
54. During their financial investigation of Medaphis and their
investigation and negotiation of the Merger Agreement, the Merger, and the
related transactions, the BSG Defendants obtained from the Medaphis Defendants
access to already publicly available information, consisting of: (i) Medaphis's
Annual Report on Form 10-K for the year ending December 31, 1994 (including all
exhibits and items incorporated by reference); (ii) its Quarterly Reports on
Form 10-Q for the 3 quarters ending March 31, June 30 and September 30, 1995
(along with all exhibits and incorporated items); (iii) the proxy statement for
its April 27, 1995 annual shareholders' meeting; and (iv) its Current Reports on
Form 8-K filed with the SEC since September 30, 1995.
55. During their financial investigation of Medaphis and their
investigation and negotiation of the Merger Agreement, the Merger, and the
related transactions, the BSG Defendants obtained from the Medaphis Defendants
access to: (i) Medaphis's audited consolidated balance sheets as of December 31,
1993 and 1994 and statements of operations, changes in stockholders' equity and
cash flows for the fiscal year then ended, along with the notes thereto; and
(ii) its unaudited consolidated balance sheet as of September 30, 1995.
56. During their financial investigation of Medaphis and their
investigation and negotiation of the Merger Agreement, the Merger, and the
related transactions, the BSG Defendants, their accountants, counsel and other
authorized representatives had full access to, inter alia, all of Medaphis's
contracts, commitments, books, records and other information, and the right to
obtain
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all financial, technical and operating data, as well as other information
pertaining to Medaphis's business.
57. During their financial investigation of Medaphis and their
investigation and negotiation of the Merger Agreement, the Merger, and the
related transactions, the BSG Defendants received from the Medaphis Defendants
certain material information about the finances and operations of Medaphis,
including, inter alia:
(A) Medaphis' financial condition during, inter alia, the fiscal year
1995, the fourth quarter 1995 and the first quarter 1996.
(B) The operations and revenues of a joint venture in which Imonics
GMBH, a wholly-owned subsidiary of Medaphis, held a 50% interest ("Joint
Venture").
(C) The results at Medaphis' largest operating subsidiary, Medaphis
physician Services Corporation ("MPSC"), were "improv[ing]" and Medaphis'
re-engineering project.
(D) The operations of Rapid Systems Solutions, Inc., a Medaphis
wholly-owned subsidiary ("Rapid"); Imonics; and all other of Medaphis's process
re-engineering and systems integration companies and capabilities and ability to
integrate their operations under BSG after the Merger.
FINANCIAL RESULTS
58. During their financial investigation of Medaphis and their
investigation and negotiation of the Merger Agreement, the Merger, and the
related transactions, the BSG Defendants received from the Medaphis Defendants
and investigated information about Medaphis's finances and results of operations
for the fiscal year 1995, the fourth quarter 1995 and the first quarter 1996.
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59. As eventually set forth in a press release and its Form 10-K filed on
April I, 1996, defendant Medaphis recorded for the year ending December 31,
1995, a net loss of $1.1 million, and for the quarter ending December 31, 1995,
net income of $4.0 million.
60. As eventually set forth in a press release dated April 23, 1996, and
its Form 10-Q filed with the SEC on May 14, 1996, defendant Medaphis recorded
for the first quarter 1996 net income of about $13.2 million.
61. The fourth quarter 1995 results contained $4.0 million in revenue from
an Imonics license agreement.
62. Defendant Medaphis included in its Consolidated Statement of Income
for the first quarter 1996 about $12.5 million relating to its purported share
of net earnings from the Joint Venture.
63. In its April 23, 1996 press release, defendant Medaphis reported that
it was "pleased with the first quarter": revenues had increased by 24.l% over
the same quarter in the prior year, from $110.1 million to $136.6 million, and
that, excluding certain restructuring and merger costs, net income had increased
by 55% to $13.2 million and earnings per share had increased by 35% to $0.23 per
share.
64. The first quarter Form 10-Q, which provided to the public additional
details concerning its financial results, stated:
Revenue. Revenue increased 24.1% to $136.6 million in the
first quarter of 1996 as compared with $110.1 million in the
first quarter of 1995. Revenue growth results from: (i)
acquisitions; (ii) increases in the number of business
management services to clients; and (iii) increases in sales
to information management and systems integration clients. The
Company has consummated 14 business combinations during the
period from January 1, 1995, through March 31, 1996.
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Revenue of the Company's services division was $106.1 million
and $98.1 million, respectively, for the quarters ended March
31, 1996 and 1995. A substantial portion of the revenue in the
Company's services division is recurring, representing
approximately 70% of consolidated revenue. Revenue of the
Company's technology systems division was $30.9 million and
$12.3 million, respectively, for the quarters ended March 31,
1996 and 1995. The Company's overall internal revenue growth
during the quarter ended March 31, 1996 was approximately
19.5%
THE JOINT VENTURE'S OPERATIONS AND REVENUES
65. During their financial investigation of Medaphis and their
investigation and negotiation of the Merger Agreement, the Merger, and the
related transactions, the BSG Defendants received from the Medaphis Defendants
information about the Joint Venture's operations and finances.
66. In February, 1996, immediately before the execution of the Merger
Agreement, Medaphis, through Imonics, had entered into the Joint Venture. The
Joint Venture was formed to pursue custom software development and systems
integration projects for customer service systems in Europe.
67. The Joint Venture reportedly signed a large software licensing and
software engineering contract with a German telecommunications entity to provide
systems integration and work flow engineering systems and services over a
multi-year period.
68. Subsequently, defendant Medaphis provided similar, but less detailed
information about the Joint Venture to the public. In Defendant Medaphis' April
23, 1996 announcement of first quarter 1996 results, defendant Brown noted:
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.
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(Emphasis supplied)
69. The first quarter 10-Q also reported the formation of the Joint
Venture and disclosed inclusion of $12.5 million net earnings from the Joint
Venture.
70. In April 1996, officials of defendant Medaphis attended a
Robinson-Humphrey Co. conference at which they touted the successes at Imonics,
declaring that it was "going like gangbusters".
71. The market responded favorably to the information about the Joint
Venture. In an April 30, 1996 company report on Medaphis by Smith Barney, for
example, the Joint Venture was specifically cited as an example of one of the
areas in which Medaphis had "displayed strong growth."
MPSC AND THE RE-ENGINEERING PROJECT
72. During their financial investigation of Medaphis and their
investigation and negotiation of the Merger Agreement, the Merger, and the
related transactions, the BSG Defendants received from the Medaphis Defendants
and investigated information about the operations and results at MPSC and the
Re-engineering Project.
73. Purportedly to improve its operations and operating results,
productivity and cost efficiency, in late 1994 Defendant Medaphis undertook a
comprehensive re-engineering initiative (the "Re-Engineering Project") of its
physician accounts receivable and practice management operations at MPSC. The
Re-Engineering project involves, among other things, the consolidation of the
processing operations in over 300 offices into fewer than 10 large regional
processing centers. The Project also involves implementation of advanced
client/server computing in its processing operations and at local sales and
services offices. Before the Merger, application development, work flow
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engineering and implementation of these advanced technologies was performed by
Imonics, a subsidiary of defendant Medaphis acquired in 1994.
74. As eventually represented in its Form 10-K for the 1995 fiscal year,
Defendant Medaphis represented to the BSG Defendants that the Re-Engineering
Project "is expected to be substantially completed during 1997."
INTEGRATION OF OTHER SUBSIDIARIES AND OPERATIONS
75. During their financial investigation of Medaphis and their
investigation and negotiation of the Merger Agreement, the Merger, and the
related transactions, the BSG Defendants received from the Medaphis Defendants
information about and investigated the operations of Medaphis' process
re-engineering and systems integration companies and capabilities and the
capability and costs of integrating under BSG.
76. Exhibit 5.15 to the Merger Agreement, provided, in pertinent part,
that:
BSG will be the parent/umbrella organization for all of Medaphis's
process re-engineering and systems integration companies and
capabilities (collectively, the "Relevant Businesses") . Imonics,
BSG Alliance/IT and other Relevant Business will become subsidiaries
or divisions of BSG and will form part of the "BSG (Business
Systems) Group."
77. On March 15, 1995, the date of the Merger Agreement, the Medaphis
Defendants issued a press release announcing the Merger Agreement that stated:
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.
Over the past few years, BSG has focused on building the
infrastructure necessary to not only manage its growth, but also to
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manage the over 1,900 client/server-based technical staff who are
now a part of Medaphis. 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 supplied).
THE MATERIAL INACCURACIES IN THE MEDAPHIS DEFENDANTS' INFORMATION
78. The Medaphis Defendants had misused accounting policy to
inappropriately record about $4 million in revenues from Imonics in the fourth
quarter of 1995, thereby inflating the financials of Medaphis and the price of
the Shares.
79. The Medaphis Defendants had misused accounting policy to
inappropriately record over $12 million in revenues from its Joint Venture in
the first quarter of 1996, thereby inflating the financials of Medaphis and the
price of the Shares.
80. As The Wall Street Journal reported on August 16, 1996:
Robert Olstein, the manager of the Olstein Financial Alert fund, a
mutual fund based in Purchase, N.Y., said he had recently sold the
stock short because of concerns about the company's accounting,
including rises in capitalized software costs and in what are called
"unbilled revenues". Such revenues reflect work done on contracts
for which customers have not yet been charged. Apparently it was the
profits resulting from some of those revenues that were wiped out in
the write-off that provoked yesterday's plunge.
(Emphasis supplied).
81. According to Medaphis' Form 8-K, which it filed on July 9, 1996 to
report on its acquisition of HDS, its revenue recognition policy is as follows:
Revenues from systems integration contracts are recorded based
on the terms of the underlying contracts which are primarily
time and material or fixed price contracts. Revenue from time
and material type
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contracts is recognized as services are rendered and costs are
incurred based on contractual rates. Revenue from fixed price
contracts is recorded using the percentage of completion
method. Expected losses are charged to operations in the
period such losses are determined. Revenue for which customers
have not yet been invoiced is reflected as accounts
receivable. unbilled in the accompanying consolidated balance
sheets.
(Emphasis added)
82. The BSG Defendants, in their financial investigation of Medaphis and
their investigation and negotiation of the Merger Agreement, the Merger, and the
related transactions, should have verified the validity of the Imonics licensing
agreement and the Joint Venture's contract; the ability of Imonics to complete
them satisfactorily; and the propriety of Medaphis's accounting practices and
inclusion of revenues from the license agreement and the Joint Venture contract
in its financial results.
83. Moreover, the Medaphis Defendants failed to disclose the extent of the
problems being experienced by the Company's MPSC subsidiary and the
Re-Engineering Project, and there was no reasonable basis for the defendants'
information that MPSC was improving and that the Reengineering Project was
positioning the Company for important improvements in operating results.
84. MPSC had not been able, in fact, to consolidate offices, improve
business procedures or develop technology as fast as planned.
85. The BSG Defendants, in their financial investigation of Medaphis and
their investigation and negotiation of the Merger Agreement, the Merger, and the
related transactions, should likewise have discovered the extent of the problems
being experienced by the Company's MPSC subsidiary and the Re-engineering
Project, and further have verified the validity of the basis
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for the defendants' information that MPSC was improving and that the
Re-engineering Project was positioning the Company for important improvements in
operating results.
86. The Medaphis Defendants also acted knowingly or recklessly by touting
the capability and costs of BSG merger to Medaphis without also disclosing the
substantial financial adverse impact that would result from the need to
integrate Rapid's Imonic's operations with BSG.
87. The BSG Defendants, in their financial investigation of Medaphis and
their investigation and negotiation of the Merger Agreement, the Merger, and the
related transactions, should have verified the capability and costs of
integrating Medaphis's process re-engineering and systems integration companies
and capabilities under BSG.
MEDAPHIS' TRUE FINANCIAL CONDITION EXPOSED
88. Only three months after the Merger, Medaphis' true financial condition
and operating difficulties began to be exposed in two bombshell announcements.
89. The first bombshell was on August 14, 1996. After the close of
trading, defendant Medaphis issued a press release disclosing its severe
problems with Imonics and with MPSC and the Re-engineering Project. Defendant
Medaphis announced that it expected to report a large loss, in the range of
$0.28 to $0.33 per share, in the third quarter of 1996, which would include
charges in the range of $35 to $40 million.
90. A substantial portion of Medaphis' difficulties were reported to have
arisen from the need to reorganize Imonics and its problems with the Joint
Venture's contract, so positively reported by defendant Medaphis previously.
Explaining the situation, defendant Medaphis reported:
Management has commenced the process of reorganizing the
Imonics systems integration business. This
reorganization resulted from a review by BSG of
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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.
91. Defendant Medaphis further disclosed that about $9 million of
charges would be made in the third quarter to write off revenues from the Joint
IVenture, caused by the restructuring of the systems integration agreement
entered into by the Joint Venture. Another $15 million in charges related to the
reorganization of Imonics.
92. In addition, defendant Medaphis revealed that MPSC was continuing to
experience poor results, due in part to delays in the Re-Engineering Project. It
further disclosed that, as a result of these problems, Medaphis would take a
restructuring charge of approximately $11 million.
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93. The second bombshell came on October 22, 1996, when defendant
Medaphis further revealed the extent of its problems with Imonics and the joint
venture and admitted that its prior financial statements were materially
inaccurate. It announced that its net loss per share for the third quarter was
actually greater than anticipated on August 14: $0.51, compared to a predicted
$0.28 to $0.33.
94. Again, a substantial portion of the loss was attributable to its
severe problems with Imonics, again resulting in large charges:
(A) There was a charge against revenues of $16.8 million, relating
primarily to Imonics' reorganization, including reorganization of the Joint
Venture's contract.
(B) About $8.5 million was included in salaries and wages relating to
employees and contractors who were no longer providing services to Imonics.
(C) In addition, a $24.3 million restricting charge was recorded,
consisting of about $10,7 million relating to a write-down of Imonics' assets;
$3.7 million of severance costs, primarily for former Imonics employees; $3.2
million in exist costs for lease terminations; and $6.7 million of legal and
other costs.
95. Defendant Medaphis further admitted the need to restate its financial
results for the year and the three months ended December 31, 1995. It was
reported that the restatement related to the 1995 Imonics license agreement.
License fee revenue payable under this agreement had been recognized during the
fourth quarter of 1995. Medaphis anticipated that net income for the quarter and
year ended December 3l, 1995 of $5.1 million, resulting in a net loss for 1995
of $8.5 million, compared with the previously reported net loss of $3.4 million;
and a net loss for the quarter of $1.1 million, instead of the previously
reported net income of $4.0 million.
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96. Medaphis further reported that during the third quarter 1996, it
terminated 430 employees, including Imonics' entire former senior management
team. The firing of Imonics' senior management team had first been announced on
August 26, 1996.
THE SHARES CRASH
97. The market has reacted sharply and dramatically to the two waves of
revelations.
98. On the day following the August 14 disclosures, the price of the
Shares plummeted 60%. The Shares closed at $14-1/4, after dropping by $21-3/8.
Some 43 million Shares changed hands during the day, making it the most active
U.S. issue and representing the sixth-highest single trading day in NASDAQ
history, excluding penny stocks.
99. Similarly, after the second disclosure on October 22, 1996, the
Shares, which had fluctuated in the $12 to $18 range, plunged almost another 38%
and has traded as low as $8.25. On November 6, 1996, the Shares closed at $8.56
and 1/4.
100. These facts, as alleged herein, provide a strong inference that:
(A) The BSG Defendants failed to perform due diligence and exercise
reasonable care in the investigation, negotiation and consummation of the Merger
Agreement, Merger and related transactions. Had they performed due diligence and
exercised the requisite care, they would have discovered the inappropriate
accounting policies, operational difficulties, and adverse financial information
ultimately admitted by the Medaphis Defendants.
(B) The BSG Defendants approved the Merger Agreement and the
Merger because of substantial personal inducements given to them, and thus
violated their duties of loyalty and candor.
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(C) The BSG Defendants used the extensive financial and operational
information obtained about Medaphis during the investigation and negotiation of
the Merger Agreement, Merger and related transactions to engage in post-Merger
speculation in the Shares, in breach of their duties of loyalty and candor.
(D) The Medaphis Defendants made materially false and misleading
statements to the BSG Defendants and the investing public knowing that said
statements issued or disseminated in the name of the Company were materially
false and misleading; knew or recklessly disregarded that such statements would
be issued or disseminated to the BSG Defendants and the investing public; and
knowingly and substantially participated or acquiesced in the issuance or
dissemination of such statements.
COUNT I
AGAINST ALL THE BSG DEFENDANTS FOR FAILURE
TO PERFORM DUE DILIGENCE
101. Plaintiffs adopt by reference paragraphs 1 through 100 hereof.
102. Each BSG Defendant owed a fiduciary duty to the plaintiffs and the
other members of the Class because of his or her position as a director, officer
and/or controlling shareholder of BSG to perform due diligence in their
investigation of Medaphis and their investigation and negotiation of the Merger
Agreement, the Merger and related transactions.
103. The BSG Defendants failed to perform due diligence in their
investigation of Medaphis and their investigation and negotiation of the Merger
Agreement, the Merger and related transactions.
104. Had the BSG Defendants performed due diligence, they would have
uncovered the Medaphis Defendants' misrepresentations and the truth about
Medaphis' financial condition.
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105. Had the BSG Defendants performed due diligence, they would not have
approved the Merger Agreement, the Merger and related transactions on the terms
and conditions agreed to and/or would have negotiated better terms for the
conversion of BSG Options into Medaphis Options.
106. The above-described acts and omissions by the BSG Defendants
constitute breaches of their fiduciary duty and duty to perform due diligence
owed to plaintiffs and all other members of the Class.
107. Plaintiffs and all other members of the Class have suffered
substantial damages caused by the BSG Defendants.
COUNT II
AGAINST ALL THE BSG DEFENDANTS FOR BREACH OF
FIDUCIARY DUTY AND DUTY OF CARE
108. Plaintiffs adopt by reference paragraphs 1 through 100 hereof.
109. Each BSG Defendant owed a fiduciary duty and duty of care to the
plaintiffs and the other members of the Class because of his or her position as
a director, officer and/or controlling shareholder of BSG to adequately
investigate Medaphis and investigate and negotiate the Merger Agreement, the
Merger and related transactions.
110. The BSG Defendants failed to exercise the degree of care owed to the
Class to adequately investigate Medaphis and investigate and negotiate the
Merger Agreement, the Merger and related transactions.
111. Had the BSG Defendants exercised the degree of care owed to the
Class, they would have uncovered the Medaphis Defendants' misrepresentations and
the truth about Medaphis' financial condition.
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112. Had the BSG Defendants exercised the required degree of care, they
would not have approved the Merger Agreement, the Merger and related
transactions on the terms and conditions agreed to and/or would have negotiated
better terms for the conversion of BSG Options into Medaphis Options.
113. The above-described acts and omissions by the BSG Defendants
constitute breaches of their fiduciary duties to plaintiffs and all other
members of the Class.
114. Plaintiffs and all other members of the Class have suffered
substantial damages caused by the BSG Defendants.
COUNT III
AGAINST ALL THE BSG DEFENDANTS FOR BREACH OF
DUTIES OF CANDOR, LOYALTY AND FAIR DEALING
115. Plaintiffs adopt by reference paragraphs I through 100 hereof.
116. Each BSG Defendant owed fiduciary duties of candor, loyalty and fair
dealing to the plaintiffs and the other members of the Class because of his or
her position as a director, officer and/or controlling shareholder of BSG to
adequately investigate Medaphis and investigate and negotiate the Merger
Agreement, the Merger and related transactions.
117. The BSG Defendants approved the Merger Agreement, the Merger and
related transactions because their terms were favorable to the BSG Defendants.
118. The above-described acts and omissions by the BSG Defendants
constitute breaches of their fiduciary duties of candor, loyalty and fair
dealing to plaintiffs and all other members of the Class.
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119. Plaintiffs and all other members of the Class have suffered
substantial damages caused by the BSG Defendants.
COUNT IV
AGAINST ALL THE BSG DEFENDANTS FOR NEGLIGENCE
120. Plaintiffs adopt by reference paragraphs 1 through 100 hereof.
121. The BSG Defendants negligently investigated Medaphis and investigated
and negotiated the Merger Agreement, the Merger and related transactions.
122. Had the BSG Defendants exercised the degree of care owed to the
Class, they would have uncovered the Medaphis Defendants' misrepresentations and
the truth about Medaphis' financial condition.
123. Had the BSG Defendants exercised the required degree of care, they
would not have approved the Merger Agreement, the Merger and related
transactions on the terms and conditions agreed to and/or would have negotiated
better terms for the conversion of BSG Options into Medaphis Options.
124. The above-described acts and omissions by the BSG Defendants
constitute breaches of their fiduciary duties to plaintiffs and all other
members of the Class.
125. Plaintiffs and all other members of the Class have suffered
substantial damages caused by the BSG Defendants.
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COUNT V
AGAINST ALL THE MEDAPHIS DEFENDANTS FOR FRAUD AND DECEIT
126. Plaintiffs adopt by reference paragraphs 1 through 100 hereof.
127. For several years, under the leadership of defendant Brown, defendant
Medaphis had grown substantially through a strategy of aggressive growth
primarily by acquisitions such as the Merger. Since 1988, defendant Medaphis
acquired over 40 companies, including more than 20 acquired in the past two
years. The growth was financed through a rising price in its Shares. Because
defendant Medaphis paid for most of its acquisitions through exchange of stock,
as it did for BSG, the higher the price of the Shares, the fewer Shares it had
to pay to make acquisitions.
128. The Medaphis Defendants knew that in order for Medaphis to be able to
continue to grow through acquisitions, most often using the Shares as currency,
it was imperative that the Shares trade at high prices. The Medaphis Defendants
further realized that they must present their overall business in an
extraordinary favorable light to maintain and increase the price of the Shares.
129. Specifically with regard to the Merger, the Medaphis Defendants had a
substantial incentive to keep the price of the Shares artificially high in order
to give up fewer shares in the Merger as well as increase the exercise price of
the Medaphis Options, thus lowering their value.
130. Further, defendant Brown had a substantial personal incentive to
inflate the price of the Shares in order, among other things, to: (i) protect
and enhance his executive position and the consequent substantial compensation
and prestige; and (ii) enhance the value of his substantial personal holdings of
Medaphis securities and options to acquire such securities.
131. The Medaphis Defendants, individually and in concert, engaged in a
plan, scheme and course of conduct, pursuant to which they knowingly and/or
recklessly engaged in acts, transactions,
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practices, and courses of business which operated as a fraud and deceit, and
made various untrue statement 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, as described herein.
The purpose and effect of the scheme was to artificially inflate the price of
the Shares.
132. The Medaphis Defendants, directly and indirectly, engaged and
participated in, and aided and abetted a common plan, scheme and continuing
course of conduct to conceal or fail to disclose material information about the
business, management, earnings, and finances of Medaphis as described herein.
The Medaphis Defendants employed devices, schemes and artifices to defraud and
engaged in acts, practices and a course of conduct as herein alleged in an
effort to fraudulently reduce the amount of and exercise price of Medaphis
Options, which included the making of untrue statements of material facts,
omitting to state material facts necessary in order to make the statements made,
in the light of the circumstances under which they were made, not misleading,
and engaging in transactions, practices and courses of business which operated
as a fraud or deceit.
133. The false and misleading statements and omissions therefrom, were
done with the intent to deceive or defraud or to aid and abet the deception and
defraud, or were made with such recklessness or indifference to truth as to
constitute intent to deceive and fraud.
134. The acts, practices and common course of conduct by said defendants
operated as a fraud and deceit upon (a) the market in the Shares; and (b)
plaintiffs and the other members of the Class.
135. The Medaphis Defendants had a duty to promptly disseminate accurate
and truthful information with respect to Medaphis' operations, results and
financial condition, or to cause and
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direct that such information be disseminated, and to promptly correct any
previously disseminated information that was misleading.
136. As a result of the Medaphis Defendants' fraud and deceit, the market
price of the Shares was artificially inflated at the time of both the Merger
Agreement and the Merger, causing injury to plaintiffs and other members of the
class.
WHEREFORE, individual and representative plaintiffs, Ernest Hecht and
Stephen D. Strandberg, on behalf of themselves and the other members of the
Class, respectfully request that this Court:
(A) Determine that this lawsuit may be maintained as a class action
pursuant to Rules 23(a) and 23(b) (3) of the Federal Rules of Civil Procedure on
behalf of the Class defined herein;
(B) Award compensatory damages against the defendants, jointly and
severally, in favor of the plaintiffs and the other members of the Class in an
amount to be determined by the Court as fair and just for the misconduct of
defendants;
(C) Award the plaintiffs and the other members of the Class punitive
damages;
(D) Awarding such further relief as this Court may deem just and
equitable, including any equitable or injunctive relief as permitted by the law
or equity to attach, to impound or otherwise restrict the defendants' assets to
assure plaintiffs have an effective remedy;
(E) Awarding plaintiffs and the other members of the Class
pre-judgment and post-judgment interest, as well as their reasonable attorneys'
fees and expert witnesses' fee' other costs.
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WILENTZ, GOLDMAN & SPITZER
A Professional Corporation
By:/s/
-------------------------------------
NICHOLAS W. McCLEAR
Attorneys for Plaintiffs
Ernest Hecht and Stephen D. Strandberg,
individually and on behalf of all others
similarly situated
DATED: November 8, 1996
OF COUNSEL:
FREUNDLICH & REISEN
159 Millburn Avenue
Millburn, New Jersey 07041
(201) 376-1090
LAWRENCE E. FELDMAN, ESQ.
Lawrence E. Feldman & Associates
Manor Professional Building
7837 Old York Road
Elkins Park, PA 19028
(215) 635-4704
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DEMAND FOR TRIAL FOR JURY
Individual and representative plaintiffs, Ernest Hecht and Stephen D.
Strandberg, individually and on behalf of all others similarly situated, demand
trial by jury on all issues.
WILENTZ, GOLDMAN & SPITZER
A Professional Corporation
By: /s/
-----------------------------
NICHOLAS W. McCLEAR
Attorneys for Plaintiffs
Ernest Hecht and Stephen D. Strandberg,
individually and on behalf of all others
similarly situated
DATED:
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DESIGNATION OF TRIAL COUNSEL
Trial counsel on behalf of Ernest Hecht and Stephen D. Strandberg,
individually and on behalf of all others similarly situated shall be Nicholas W.
McClear, Esq.
WILENTZ, GOLDMAN & SPITZER
A Professional Corporation
By: /s/
----------------------------
NICHOLAS W. McCLEAR
Attorneys for Plaintiffs
Ernest Hecht and Stephen D. Strandberg,
individually and on behalf of all others
similarly situated
DATED: November 8, 1996
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CERTIFICATION PURSUANT TO RULE 4:5-1
We hereby certify that the matter in controversy is not, to our knowledge,
the subject of any other pending action or arbitration proceeding, and that no
other action or arbitration proceeding is contemplated by the plaintiffs at this
time. We are not aware of any other parties who should be joined in this action
at this time.
By: /S/
----------------------------
NICHOLAS W. McCLEAR
DATED: November 8, 1996
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