<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended July 31, 1996 Commission File No. 0-18472
HEALTH MANAGEMENT, INC.
(Exact name of registrant as specified in charter)
Delaware 75-2096632
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation) (IRS Employer Identification No.)
1371-A Abbott Court, Buffalo Grove, Illinois 60089
-------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 913-2700
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO
---------
As of September 13, 1996, there were outstanding 9,328,240 shares of
common stock, $.03 par value.
This reports consists of 27 pages.
1
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HEALTH MANAGEMENT, INC.
July 31, 1996
TABLE OF CONTENTS
Page No.
--------
Part I. FINANCIAL INFORMATION:
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 3 - 7
Part II. OTHER INFORMATION:
Item 1. Legal Proceedings 16 - 17
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of
Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18 - 21
SIGNATURES 22
EXHIBITS 23 - 27
2
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This Quarterly Report on Form 10-Q/A is intended to amend certain
information contained in Part I, Items 1 and 2, Part II, Items 5 and 6 of
Health Management, Inc.'s (the "Company's") Report on Form 10-Q for the quarter
ended July 31,1996 (the "Original Report") in order to insure that the
information contained in the Original Report is true, accurate and complete as
of the date of the filing of the Original Report, September 16, 1996. See Note
3 to the Condensed Consolidated Financial Statements.
Part I of the original report is hereby amended in its entirety as follows:
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The condensed consolidated financial statements of Health Management,
Inc. (the "Company") begin on the page following Item 2 of this Part I.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
PRELIMINARY STATEMENT
All statements contained herein that are not historical facts, including,
but not limited to, statements regarding the Company's current business
strategy, the Company's projected sources and uses of cash, and the Company's
plans for future development and operations, are based upon current
expectations. These statements are forward-looking in nature and involve a
number of risks and uncertainties. Actual results may differ materially.
Among the factors that could cause actual results to differ materially are the
following: the availability of sufficient capital to finance the Company's
business plans on terms satisfactory to the Company; competitive factors; the
ability of the Company to adequately defend or reach a settlement of
outstanding litigation and investigations involving the Company or its former
management; changes in labor, equipment and capital costs; changes in
regulations affecting the Company's business; future acquisitions or strategic
partnerships; general businesses and economic conditions; and other factors
described from time to time in the Company's reports filed with the Securities
and Exchange Commission. The Company wishes to caution readers not to place
undue reliance on any such forward-looking statements, which statements are
made pursuant to the Private Litigation Reform Act of 1995 and, as such, speak
only as of the date made.
The financial information discussed herein has been restated. (See Note 3
to the Condensed Consolidated Financial Statements).
SPECIAL CONSIDERATIONS
The Company's business is subject to a number of special considerations, such
as industry trends, certain risks inherent in the business and the Company's
recent events. Some of these considerations are described in "Recent Events
and Other Considerations" below.
RECENT EVENTS AND OTHER CONSIDERATIONS
Significant Litigation. The Company has been named as a defendant in several
class action lawsuits and as a nominal defendant in two derivative suits. No
assurances can be given as to the outcome of such litigation and the effects on
the financial condition or future results of operations of the Company.
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However, the Company is in the process of negotiating the final terms of a
Stipulation of Settlement with the plaintiffs' counsel in this case. (See Part
II, Item 1. "Legal Proceedings".)
Changes in Management. Effective May 1, 1996, W. James Nicol, an experienced
health care executive, was named President and Chief Executive Officer of the
Company, succeeding the office of the Chief Executive Officer of the
Company which was formed when Clifford E. Hotte resigned in February 1996.
James R. Mieszala, formerly of Caremark, Inc., who became President of Homecare
Management, Inc., a wholly-owned operating subsidiary of the Company, in
January 1996, was named Chief Operating Officer of the Company effective May
10, 1996. Paul S. Jurewicz, formerly of Caremark, Inc., who became Chief
Financial Officer of the Company in December 1995 was also named the Executive
Vice President of the Company in April 1996. The Company has experienced
substantial turnover of its senior management group over the past twelve months
and several of the Company's executive officers have been in their current
positions for only a limited period of time. The Company's future growth and
success depends, in large part, upon its ability to obtain, retain and expand
its staff of executive and professional personnel. There can be no assurances
that the Company will be successful in its efforts to attract and retain such
personnel.
Financial Condition. As a result of the restatements and special charges
recorded in the Company's financial statements for the fiscal years 1995 and
1996, the Company recorded significant changes to its balance sheet including
reductions of the Company's working capital, retained earnings and
stockholders' equity. The Company is presently in default under its Credit
Agreement with Chase Manhattan Bank, N.A., as agent and lender. Accordingly,
all long term debt has been reclassified as a current liability on the
Company's condensed consolidated balance sheets. The Company has executed a
Forbearance Agreement dated July 26, 1996 with its lenders which provides that,
subject to certain conditions, the lenders agree not to exercise their rights
and remedies under the Credit Agreement until November 15, 1996. Also,
following the restatements, the conversion feature of the $3 million
Convertible Subordinated Note held by Caremark, Inc. was triggered; however,
Caremark, Inc. has not indicated an intent to exercise its right to convert the
note. The conversion of such note is related to the price of the Company's
Common Stock at the time of conversion. In pursuance of additional financing
to remedy the default condition under the Credit Agreement, the Company has
recently engaged National Westminster Bank Plc to act as its financial advisor
to explore a variety of strategic and financial alternatives. The Company may
engage in a public or private offering of securities or a merger of the
Company; however, there can be no assurances that such an offering or merger
will be consummated. Furthermore, the successful consummation of such
financing could result in substantial dilution of the Company's existing shares
and could involve a higher cost of financing.
Goodwill and Other Long Lived Assets. At July 31, 1996, the Company had
goodwill of approximately $33.7 million, or 36% of its assets. A significant
portion of the Company's goodwill relates to the Clozaril Patient Management
Business ("CPMB"). It is the Company's policy to review the recoverability of
goodwill and other long-lived assets periodically to determine if any
impairment indicators are present. The evaluation of the recoverability of
goodwill is significantly affected by estimates of future cash flows from each
of the Company's market areas. If estimates of future cash flows from
operations decrease, the Company may be required to write down its goodwill and
other long-lived assets in the future. Any such write-down could have a
material adverse effect on the financial position and results of operations of
the Company.
Business Strategy. The Company's strategy, which it has been in the process of
implementing since May 1996, is focused on the basic factors that could improve
profitability: revenue generation, cost reduction, quality improvement and
cash collections. To generate increased revenue, the Company is directing its
marketing efforts towards improving its referral relationships in addition to
developing new programs, expanding relationships with payor organizations
(including managed care organizations) and forging relationships with
pharmaceutical companies requiring services such as clinical management,
marketing,
4
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reimbursement and other services. Cost reduction efforts are focused on the
integration of the Company's pharmacy locations and increasing efficiencies in
reimbursement and distribution services. Management is also concentrating on
improved cash collections through an emphasis on enhancing systems capabilities
within the Company. While management believes the commencement of this strategy
has improved and will continue to improve the Company's operations and
financial performance, no assurances can be given to its ultimate success.
Internal Controls. The Company has initiated several actions to improve
its internal controls and to enhance its financial reporting and analytical
capabilities. These controls include the implementation on July 1, 1996 of a
perpetual inventory system which management believes should provide both better
controls over the management of on hand inventory and automate the recording of
cost of sales at time of product shipment.
Effective June 1, 1996, the Company transitioned to a single general ledger
system which is intended to improve control over the financial consolidation
process and increase the Company's ability to analyze its business operations.
The finance function of the Company has been consolidated in its Buffalo Grove,
Illinois facility as of July 1996.
Management believes that this consolidation will allow for improved
communications, focused management and a better ability to closely monitor the
financial operations of the Company. The Company also plans to consolidate
from the several accounts receivable systems currently in place to a single
system during the fiscal year 1997. With this new accounts receivable system,
the Company expects to improve the efficiency and effectiveness of its cash
collection activities. There can be no assurances of the impact of these
internal controls on the Company or whether they will be effective.
Potential Dilution. The Company may issue additional shares of the Company's
capital stock in order to obtain financing, in satisfaction of other current
or future liabilities of or litigation involving the Company, upon conversion
of the Convertible Subordinated Note held by Caremark, Inc. or otherwise.
These additional issuances could result in substantial dilution of the
Company's existing shares.
5
<PAGE> 6
RESULTS OF OPERATIONS
Three months ended July 31, 1996 versus July 31, 1995
The Company's revenues were $40,522,910 for the quarter ended July 31, 1996, an
increase of $2,228,880 or 5.8% over revenues of $38,294,030 for the three
months ended July 31, 1995. The increase in revenues was derived from internal
growth resulting from the expansion of the Lifecare Program into new disease
states, ongoing patient referrals from existing referral sources, and the
addition of new referral sources over the course of the comparable periods.
Gross profit margins were 21.4% for the quarter ended July 31, 1996, as
compared to 30.7% for the quarter ended July 31, 1995. The decrease in the
gross profit rate represents an overall reduction in reimbursement rates from
third party payors which reflects the pricing pressures exerted by managed care
payors on the Company, in particular, and across the healthcare industry,
generally.
Operating expenses for the quarter ended July 31, 1996 were $9,087,981, an
increase of $638,365 or 7.6% over the quarter ended July 31, 1995. This
increase was principally attributable to increased legal expenses associated
with the ongoing shareholder litigation and related issues; legal expenses for
the quarter ended July 31, 1996 were approximately $700,000.
Loss from operations for the quarter ended July 1996 was ($426,576), a decrease
of $3,737,756 or 113% from the quarter ended July 31, 1995. The decline in
the gross profit rate from 1996 to 1997 of 9.3 percentage points is the
primary reason for the decline in income from operations.
Interest expense for the quarter ended July 31, 1996 was $739,537, an increase
of $128,601 or 21% over the quarter ended July 31, 1995. This increase is
attributable to increased borrowings under the Company's line of credit
partially offset by reduced interest expense related to the Company's term loan.
Loss before income taxes for the quarter ended July 31, 1996 was ($1,166,113),
a decrease of $3,866,357 or 143% from the quarter ended July 31, 1995. The
decrease is attributable to the reduced gross profit margins and increased
operating and interest expenses.
Income taxes for the three months ended July 31, 1996 are less than the
statutory rate since the Company, in accordance with generally accepted
accounting principles, did not record the benefit, if any, of the potential net
operating loss carryforward because of the uncertainty of its future
realization.
Net loss for the quarter ended July 31, 1996 was ($1,288,070), a decrease
of $2,876,808 or 181% from the quarter ended July 31, 1995.
Primary and fully diluted loss per common share for the quarter ended July
31, 1996 were both ($0.14) compared to earnings per share of Common Stock of
$0.17 for the quarter ended July 31, 1995. The weighted average number of
shares outstanding used in the calculation of primary and fully diluted
earnings per share were 9,328,240 and 9,333,528, respectively, for the quarter
ended July 31, 1996 and 9,444,919 for the quarter ended July 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The net decrease of $1,694,493 in the Company's cash and cash equivalents
to $1,585,702 at July 31, 1996 was attributable to cash used in operating
activities.
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Working capital at July 31, 1996 was $1,422,610, a decrease of $1,069,009
from April 30, 1996. Current assets decreased $2,637,517 due to a decrease in
cash and cash equivalents of $1,694,493, an increase in accounts receivable of
$502,146, a decrease in tax refund receivable of $2,154,876, an increase in
inventory of $411,211, an increase in deferred taxes of $550,000 and a decrease
in prepaid expenses of $251,505.
Current liabilities decreased $1,568,508 principally due to a decrease in
accounts payable of $416,088 and a decrease in accrued unusual charges of
$1,408,304.
To facilitate the acquisition of the Clozaril Patient Management Business
in March 1995, the Company borrowed $21,000,000 in the form of term loans and
delivered a $3,000,000 Convertible Subordinated Note to Caremark, Inc. As of
July 31, 1996, $18,000,000 was outstanding on the term loan and approximately
$10,300,000 was outstanding on the Company's line of credit. The Company is in
default under the Credit Agreement. The Company has executed a Forbearance
Agreement with its lenders in which the lenders agree, under certain
conditions, not to exercise their rights under the original loan through the
period ended November 15, 1996. The Company needs to obtain additional
financing to resolve its default condition.
The Company has engaged National Westminster Bank Plc to act as its financial
advisor to explore a variety of strategic and financial alternatives. The
Company may engage in a public or private offering of securities or a merger
of the Company; however, there can be no assurance that such an offering or
merger will be consummated. Furthermore, the successful consummation of such
financing could result in substantial dilution of the Company's existing shares.
The Company purchases its pharmaceuticals from wholesalers and, to a lesser
degree, directly from pharmaceutical manufacturers. Its sources have
established credit limitations and a few suppliers are seeking to reduce their
credit limitations with the Company. Additionally, one supplier, Bindley
Western Industries, Inc., has initiated legal action against the Company
regarding past amounts due. (See Part II, Item 1. "Legal Proceedings".) The
Company's primary supplier, Foxmeyer Drug Company, recently filed for
protection under the Federal Bankruptcy laws. Although the Company has been
able to maintain adequate product supply within the credit limitations, there
can be no assurances it will continue to do so in the future. Such an
inability would have a material adverse impact on the Company if alternative
sources of product supply were inadequate.
If the Company is unsuccessful in obtaining financing, in reaching a
successful outcome in its current litigation or in continuing satisfactory
relations with its suppliers, it may have to consider protection under the
Federal Bankruptcy laws.
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HEALTH MANAGEMENT, INC.
AND SUBSIDIARIES
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Page No.
--------
Balance Sheets as of July 31, 1996 (Unaudited)
and April 30, 1996 (Audited) 9-10
Statements of Operations for the Three Months Ended
July 31, 1996 and July 31, 1995 (Unaudited) 11
Statements of Cash Flow for the Three Months Ended July 31, 1996
and 1995 (Unaudited) 12
Statement of Stockholders' Equity for the Three Months
Ended July 31, 1996 (Unaudited) 13
Notes to Condensed Consolidated Financial Statements (Unaudited) 14-15
8
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HEALTH MANAGEMENT, INC.
And Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
Restated
July 31, 1996 April 30, 1996
------------- --------------
<S> <C> <C>
(Unaudited) (Audited)
CURRENT ASSETS:
Cash and cash equivalents $1,585,702 $3,280,195
Accounts Receivable, Less Allowance for
Doubtful Accounts 36,959,345 36,457,199
Inventories 7,212,031 6,800,820
Tax Refund Receivable 5,882,154 8,037,030
Deferred Taxes 2,357,000 1,807,000
Prepaid expenses and other 403,853 655,358
----------- -----------
TOTAL CURRENT ASSETS 54,400,085 57,037,602
IMPROVEMENTS and EQUIPMENT, Less
Accumulated Depreciation and
Amortization 3,680,009 3,825,974
GOODWILL 33,711,294 34,008,496
OTHER 1,167,110 1,043,607
----------- -----------
$92,958,498 $95,915,679
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
9
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HEALTH MANAGEMENT, INC.
And Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Restated
July 31, 1996 April 30, 1996
------------- --------------
(Unaudited) (Audited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts Payable $20,298,748 $20,714,836
Accrued Unusual Charges 2,150,696 3,559,000
Accrued Expenses 1,778,096 1,526,119
Current Maturities of
Long Term Debt 28,749,935 28,746,028
----------- -----------
TOTAL CURRENT LIABILITIES 52,977,475 54,545,983
Long Term Debt, Less Current
Maturities 3,905,474 4,006,077
----------- -----------
TOTAL LIABILITIES 56,882,949 58,552,060
COMMITMENTS and CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred Stock-$.01 Par Value:
Shares Authorized - 1,000,000
Issued and Outstanding, none
Common Stock-$.03 Par Value:
Shares Authorized - 20,000,000
Issued and Outstanding-9,328,240 279,848 279,848
Additional Paid-in Capital 38,138,771 38,138,771
Accumulated Deficit (2,343,070) (1,055,000)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 36,075,549 37,363,619
----------- -----------
$92,958,498 $95,915,679
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
10
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HEALTH MANAGEMENT, INC.
And Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended July 31
<TABLE>
<CAPTION>
Restated
1996 1995
---- ----
<S> <C> <C>
Revenues $40,522,910 $38,294,030
Cost of Sales 31,861,505 26,533,234
----------- -----------
Gross Profit 8,661,405 11,760,796
----------- -----------
Operating Expenses:
Selling 1,233,317 1,085,202
General and Administrative 7,854,664 7,364,414
----------- -----------
9,087,981 8,449,616
----------- -----------
Income (Loss) from Operations (426,576) 3,311,180
Interest Expense 739,537 610,936
----------- -----------
Income (Loss) Before Income Taxes (1,166,113) 2,700,244
Income Taxes 121,957 1,111,506
----------- -----------
Net Income ($1,288,070) $ 1,588,738
=========== ===========
Earnings (loss) Per Common Share:
Primary ($0.14) $0.17
Fully Diluted ($0.14) $0.17
Weighted Average Shares Outstanding:
Primary 9,328,240 9,444,919
Fully Diluted 9,333,528 9,444,919
</TABLE>
See Notes to Condensed Consolidated Financial Statements
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HEALTH MANAGEMENT, INC.
And Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
For The Three Months Ended July 31
<TABLE>
<CAPTION>
(Unaudited)
Restated
1996 1995
-------- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net Income (loss) ($1,288,070) $1,588,738
Adjustments to Reconcile Net
Income to Net Cash provided by (used in)
Operating Activities:
Depreciation and Amortization 646,345 653,391
Provision for Doubtful Accounts 1,634,915 1,814,812
Deferred Taxes (550,000) (24,321)
Increase (Decrease) in Cash Flows
From Changes in Operating Assets
and Liabilities:
Accounts Receivable (2,137,061) (5,772,364)
Inventory (411,211) (981,222)
Other Receivables - (2,055,192)
Prepaid Expenses and Other 251,505 316,553
Other Assets (123,503) (86,773)
Accounts Payable (416,088) 4,799,873
Accrued Expenses 251,977 (714,393)
Accrued Unusual Charges (1,408,304) -
Tax Refund Receivable 2,154,876 480,956
---------- ----------
NET CASH PROVIDED BY (USED IN ) OPERATING ACTIVITIES (1,394,619) 20,058
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures (203,178) (96,702)
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (203,178) (96,702)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing on Credit Facility - 750,000
Principal Payments on Long-Term Debt (96,696) (812,439)
Proceeds from Exercise of Stock Options - 31,125
---------- ----------
NET CASH USED IN FINANCING ACTIVITIES (96,696) (31,314)
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,694,493) (107,958)
Cash and Cash Equivalents, at Beginning
of Period 3,280,195 4,562,712
---------- ----------
Cash and Cash Equivalents, at End
of Period $1,585,702 $4,454,754
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid for Interest $432,719 $365,573
Cash Paid (Refund) for Taxes ($1,712,294) $395,880
</TABLE>
See Notes to Condensed Consolidated Financial Statements
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HEALTH MANAGEMENT, INC.
And Subsidiaries
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Three Months Ended July 31, 1996
Restated
(Unaudited)
<TABLE>
<CAPTION>
Common Stock
$.03 Par Value Additional
----------------- Paid-in Accumulated
Shares Amount Capital Deficit
------ ------ ------- -------
<S> <C> <C> <C> <C>
Balance, May 1, 1996 9,328,240 $279,848 $38,138,771 ($1,055,000)
Net loss for the Three
Months Ended
July 31, 1996 (1,288,070)
--------- -------- ----------- ----------
Balance, July 31, 1996 9,328,240 $279,848 $38,138,771 ($2,343,070)
========= ======== =========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
13
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HEALTH MANAGEMENT, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
The condensed consolidated financial statements include Health Management,
Inc., a Delaware corporation (the "Company"), and its wholly-owned
subsidiaries, including Homecare Management, Inc., a New York corporation, HMI
Pennsylvania, Inc., a Delaware corporation, HMI Retail Corp., Inc., a Delaware
corporation, HMI PMA, Inc., a Delaware corporation, Health Reimbursement Corp.,
a Delaware corporation, HMI Maryland, Inc., a Delaware corporation, and HMI
Illinois, Inc., a Delaware corporation. All intercompany accounts and
transactions have been eliminated in consolidation.
The Condensed Consolidated Financial Statements included herein are unaudited
and include all adjustments which, in the opinion of management, are necessary
for a fair presentation of the results of operations of the interim period
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These condensed financial statements
should be read in conjunction with the Company's Annual Report on Form 10-K for
the year ended April 30, 1996. The results of operations for periods for the
interim periods are not necessarily indicative of the operating results for the
whole year.
NOTE 2: CONTINGENCIES
The Company and certain of its past and current directors and officers have
been named as defendants in eleven class action securities fraud lawsuits
filed in the United States District Court for the Eastern District of New York.
These lawsuits have been consolidated into one action entitled In re Health
Management, Inc. Securities Litigation, Master File No. 96 Civ. 0889 (ADS).
The consolidated actions allege claims under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, arising out of alleged misrepresentations and
omissions by the Company in connection with certain of its previous securities
filings. The consolidated actions purport to represent a class of persons who
purchased the Company's common stock during a period ending February 27, 1996,
the date the Company announced that it would have to restate certain of its
financial statements. The consolidated actions seek unspecified monetary
damages reflecting the decline in the trading price of the Company's stock that
allegedly resulted from the Company's February 1996 announcements. Pursuant to
the Order of Consolidation, the Company will not be required to answer or
otherwise move in the action until thirty days after it is served with an
amended consolidated complaint, which has not yet been served on the Company.
The Company is negotiating the final terms of a Stipulation of Settlement with
plaintiffs' counsel that would resolve the litigation as regards the Company.
Such Stipulation of Settlement will be subject to court approval.
Certain of the Company's current and former officers and directors,
including Messrs. Bergman, Hotte, Clifton and Dimitriadis and Ms. Belloise,
have been named as defendants, and the Company has been named as a nominal
defendant, in a consolidated derivative action filed in the United States
District Court for the Eastern District of New York entitled In re Health
Management, Inc. Stockholders' Derivative Litigation, Master File No. 96 Civ.
1208 (TCP). The consolidated action alleges claims for breach of fiduciary
duty and contribution against the individual director defendants arising out of
alleged
14
<PAGE> 15
misrepresentations and omissions contained in certain of the Company's
previous securities filings. The consolidated action seeks unspecified
monetary damages on behalf of the Company as well as declaratory and injunctive
relief. An amended consolidated complaint was served on the Company on August
12, 1996. The Company's time to answer or move with respect to the amended
consolidated complaint is October 11, 1996. The Company intends to seek
dismissal of the action.
BDO Seidman, LLP has been named as a defendant, and the Company has been
named as a nominal defendant, in a derivative lawsuit filed in the Supreme
Court for the State of New York, County of New York entitled Howard Vogel, et
al. v. BDO Seidman, LLP, et al., Index No. 96-603064. The complaint alleges
claims for breach of contract, professional malpractice, negligent
misrepresentation, contribution and indemnification against BDO Seidman arising
out of alleged misrepresentations and omissions contained in certain of the
Company's previous securities filings. BDO Seidman was the Company's auditor
at the time those filings were made and has continued to serve as such. The
complaint seeks unspecified monetary damages on behalf of the Company as well
as declaratory and injunctive relief. Pursuant to stipulation, the Company's
time to answer or otherwise move against the complaint in this action has been
adjourned indefinitely.
The enforcement division of the Securities and Exchange Commission has a formal
order of investigation relating to matters arising out of the Company's public
announcement on February 27, 1996 that the Company would have to restate its
financial statements for prior periods as a result of certain accounting
irregularities and the Company is fully cooperating with this investigation
and has responded to the commission's requests for documentary
evidence.
NOTE 3: RESTATEMENT
The Company has restated its quarterly financial statements for the quarter
ended July 31, 1996 related to certain errors in the computation, accumulation
and summarization of its accounts payable, as follows:
<TABLE>
<S> <C>
Net income, as previously reported $ 432,000
Adjustment - understatement of accounts
payable and cost of sales (1,851,000)
Less tax benefit of adjustments 131,000
-----------
(1,720,000)
-----------
Net loss, as restated $(1,288,000)
===========
Earnings per common share, as previously
reported - primary and fully diluted $0.05
Adjustments, net of tax (0.19)
-----------
Loss per common share, as
restated - primary and fully diluted $ (0.14)
===========
</TABLE>
The tax benefit of the adjustments is less than the statutory rate since
the Company did not record the benefit, if any, of the potential net operating
loss carryforward because of the uncertainly of its future realization.
15
<PAGE> 16
Items 5 and 6 of Part II of the Original Report are hereby amended in their
entirety as follows:
ITEM 5. OTHER INFORMATION
On March 17, 1997, the Company issued a press release, a copy of which is
attached as Exhibit 99-1 to this Quarterly Report on this Form 10-Q/A.
ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K
(a) Exhibits
3.1 Certificate of Incorporation of the Company, as filed with the
Secretary of State of Delaware on March 25, 1986 (incorporated by
reference to Registration Statement on Form S-1, Registration No.
33-04485).
3.2 Certificate of Amendment to Certificate of Incorporation of the
Company, as filed with the Secretary of State of Delaware on March 9,
1988 (incorporated by reference to Form 10-K for year ended April 30,
1988).
3.3 Certificate of Amendment to Certificate of Incorporation of the
Company, as filed with the Secretary of State of Delaware on March
31, 1992 (incorporated by reference to Registration Statement on Form
S-1, No. 33-46996).
3.4 Certificate of Amendment to Certificate of Incorporation of the
Company, as filed with the Secretary of State of Delaware on October
27, 1994 (incorporated by reference to Form 1O-K for year ended April
30, 1995).
3.5 Amended and Restated By-Laws of the Company (incorporated by
reference to Form 10-Q or the quarter ended January 31, 1996).
4.1 Form of 10% Convertible Subordinated Debenture (incorporated by
reference to Form 8-K dated March 4, 1991).
4.2 Specimen Form of Certificate for Common Stock (incorporated by
reference to Registration Statement on Form S-1, Registration No.
33-46996).
4.3 Form of Representatives' Purchase Warrant (incorporated by
reference to Amendment Number 2 to Registration Statement on Form
S-1, Registration No. 33-46996).
16
<PAGE> 17
4.4 Form of Selling Shareholders' Power of Attorney (incorporated
by reference to Registration Statement on Form S-1, Registration No.
33-46996).
4.5 Form of Selling Shareholders' Custody Agreement (incorporated
by reference to Registration Statement on Form S-1, Registration No.
33-46996).
10.1 Stock Purchase Agreement dated December 8, 1988 (incorporated
by reference to Form 8-K dated December 23, 1988).
10.2 Addendum dated February 1, 1989 to Stock Purchase Agreement
dated December 23, 1988 (incorporated by reference to Amendment
Number 1 to Registration Statement on Form S-1, Registration No.
33-46996).
10.3* 1989 Stock Option Plan (incorporated by reference to
Registration Statement on Form S-1, Registration No. 33-46996).
10.4 Lease dated April 20, 1990 on Company's Ronkonkoma, New York
facility between the Company and Four L Realty Co. (incorporated by
reference to Registration Statement on Form S-1, Registration No.
33-46996).
10.5 Amendment, dated March 16, 1992 to Lease dated April 20, 1990
on Company's Headquarters between the Company and Four L Realty Co.
(incorporated by reference to Form 10-K for year ended April 30,
1992).
10.6* Company 401(k) Plan (incorporated by reference to Amendment
Number 1 to Registration Statement on Form S-1, Registration No.
33-46996).
10.7* Employment Agreement, dated as of May 1, 1996, between the
Company and W. James Nicol (incorporated by reference to Annual
Report on Form 10-K for the fiscal year ended April 30, 1996).
10.8* Employment Agreement, dated as of January 8, 1996, between the
Company and James R. Mieszala (incorporated by reference to Annual
Report on Form 10-K for the fiscal year ended April 30, 1996).
10.9* Employment Agreement, dated as of December 18, 1995, between
the Company and Paul S. Jurewicz (incorporated by reference to Annual
Report on Form 10-K for the fiscal year ended April 30, 1996).
10.10 Assets Purchase Agreement, dated as of March 27, 1994, between
the Registrant, Murray Pharmacy Too, Inc. and the Shareholders named
therein (incorporated by reference to Current Report on Form 8-K
dated April 1, 1994).
17
<PAGE> 18
10.11 Assets Purchase Agreement, dated as of March 27, 1994, between
HMI Retail Corp., Murray Pharmacy, Inc. and the Shareholders named
therein (incorporated by reference to Annual Report on Form 10-K
filed August 2, 1994).
10.12 Asset Purchase Agreement, dated as of February 21, 1995,
between Caremark Inc. and Health Management, Inc. (incorporated by
reference to Current Report on Form 8-K dated April 14, 1995).
10.13 First Amendment to Asset Purchase Agreement, dated as of March
31, 1995, between Caremark Inc. and Health Management, Inc.
(incorporated by reference to Current Report on Form 8-K dated April
14, 1995).
10.14 Transition Agreement, dated as of March 31, 1995, between
Caremark Inc. and HMI Illinois (incorporated by reference to Current
Report on Form 8-K dated April 14, 1995).
10.15 Credit Agreement, dated as of March 31, 1995 among, Health
Management, Inc., Home Care Management, Inc., HMI Pennsylvania, Inc.,
HMI Illinois, Inc., Chemical Bank, and the Guarantors and Lenders
named therein (incorporated by reference to Current Report on Form
8-K dated April 14, 1995).
10.16 Security Agreement, dated as of March 31, 1995, among Health
Management, Inc., Home Care Management, Inc., Health Reimbursement
Corporation, HMI Retail Corp., Inc., HMI Pennsylvania, Inc. and HMI
Maryland, Inc. and Chemical Bank for itself and the Lenders named
therein (incorporated by reference to Current Report on Form 8-K
dated April 14, 1995).
10.17 Security Agreement and Mortgage-Trademarks and Patent, dated
as of March 31, 1994, among Health Management, Inc., Home Care
Management, Inc., Health Reimbursement Corporation, HMI Retail Corp.,
Inc., HMI Pennsylvania, Inc. and HMI Maryland, Inc. and Chemical Bank
for itself and the Lenders named therein (incorporated by reference
to Current Report on Form 8-K dated April 14, 1995).
10.18 Forbearance Agreement, dated July 26, 1996 among Health Management,
Inc., Home Care Management, Inc., HMI Illinois, Inc., HMI
Pennsylvania, Inc., Health Reimbursement Corporation, HMI Retail
Corp., Inc., HMI PMA, Inc., HMI Maryland, Inc., Chase Manhattan Bank,
as lender and agent, and European American Bank, as lender
(incorporated by reference to Annual Report on Form 10-K for the
fiscal year ended April 30, 1996).
18
<PAGE> 19
10.19 Agreement of Lease by and between Joseph M. Rosenthal and the
Company dated December 13, 1994 (incorporated by reference to Form
10-K for the year ended April 30, 1995).
10.20 Lease by and between Irwin Hirsh and Lloyd N. Myers and HMI
Pennsylvania, Inc. dated March 27, 1994 (incorporated by reference
to Form 10-K for the year ended April 30, 1995).
10.21 Lease by and between Irwin Hirsh and HMI Retail Corp., Inc. dated
March 27, 1994 (incorporated by reference to Form 10-K for the
year ended April 30, 1995).
10.22 Lease Agreement by and between Domas Mechanical Contractors, Inc.
and the Company dated May 18, 1995 (incorporated by reference to
Form 10-K for the year ended April 30, 1995).
11 Statement re Computation of Per Share Earnings (incorporated by
reference to Annual Report on Form 10-K/A for the fiscal year ended
April 30, 1996).
21 Subsidiaries of the Registrant (incorporated by reference to Annual
Report on Form 10-K for the fiscal year ended April 30, 1995).
23 Consent of BDO Seidman, LLP (incorporated by reference to Annual
Report on Form 10-K/A for the fiscal year ended April 30, 1996).
27 Financial Data Schedule
99-1** Press release dated March 17, 1997, issued by the Company.
* Management contract or compensatory plan or arrangement.
** Filed with this Report.
(b) Reports on Form 8-K
The Company did not file any Current Reports on Form 8-K during
the fiscal quarter ending July 31, 1996.
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the County of Lake, State of
Illinois, on the 24th day of March, 1997.
HEALTH MANAGEMENT, INC.
(Registrant)
By: /s/ W. James Nicol
----------------------------------------------------
W. James Nicol
(Principal Executive Officer and Financial Officer))
20
<PAGE> 21
INDEX TO EXHIBITS
NO. EXHIBIT
--- -------
3.1 Certificate of Incorporation of the Company, as filed with the
Secretary of State of Delaware on March 25, 1986 (incorporated by
reference to Registration Statement on Form S-1, Registration No.
33-04485).
3.2 Certificate of Amendment to Certificate of Incorporation of the
Company, as filed with the Secretary of State of Delaware on March 9,
1988 (incorporated by reference to Form 10-K for year ended April 30,
1988).
3.3 Certificate of Amendment to Certificate of Incorporation of the
Company, as filed with the Secretary of State of Delaware on March
31, 1992 (incorporated by reference to Registration Statement on Form
S-1, No. 33-46996).
3.4 Certificate of Amendment to Certificate of Incorporation of the
Company, as filed with the Secretary of State of Delaware on October
27, 1994 (incorporated by reference to Form 1O-K for year ended April
30, 1995).
3.5 Amended and Restated By-Laws of the Company (incorporated by
reference to Form 10-Q or the quarter ended January 31, 1996).
4.1 Form of 10% Convertible Subordinated Debenture (incorporated by
reference to Form 8-K dated March 4, 1991).
4.2 Specimen Form of Certificate for Common Stock (incorporated by
reference to Registration Statement on Form S-1, Registration No.
33-46996).
4.3 Form of Representatives' Purchase Warrant (incorporated by
reference to Amendment Number 2 to Registration Statement on Form
S-1, Registration No. 33-46996).
21
<PAGE> 22
4.4 Form of Selling Shareholders' Power of Attorney (incorporated
by reference to Registration Statement on Form S-1, Registration No.
33-46996).
4.5 Form of Selling Shareholders' Custody Agreement (incorporated
by reference to Registration Statement on Form S-1, Registration No.
33-46996).
10.1 Stock Purchase Agreement dated December 8, 1988 (incorporated
by reference to Form 8-K dated December 23, 1988).
10.2 Addendum dated February 1, 1989 to Stock Purchase Agreement
dated December 23, 1988 (incorporated by reference to Amendment
Number 1 to Registration Statement on Form S-1, Registration No.
33-46996).
10.3* 1989 Stock Option Plan (incorporated by reference to
Registration Statement on Form S-1, Registration No. 33-46996).
10.4 Lease dated April 20, 1990 on Company's Ronkonkoma, New York
facility between the Company and Four L Realty Co. (incorporated by
reference to Registration Statement on Form S-1, Registration No.
33-46996).
10.5 Amendment, dated March 16, 1992 to Lease dated April 20, 1990
on Company's Headquarters between the Company and Four L Realty Co.
(incorporated by reference to Form 10-K for year ended April 30,
1992).
10.6* Company 401(k) Plan (incorporated by reference to Amendment
Number 1 to Registration Statement on Form S-1, Registration No.
33-46996).
10.7* Employment Agreement, dated as of May 1, 1996, between the
Company and W. James Nicol (incorporated by reference to Annual
Report on Form 10-K for the fiscal year ended April 30, 1996).
10.8* Employment Agreement, dated as of January 8, 1996, between the
Company and James R. Mieszala (incorporated by reference to Annual
Report on Form 10-K for the fiscal year ended April 30, 1996).
10.9* Employment Agreement, dated as of December 18, 1995, between
the Company and Paul S. Jurewicz (incorporated by reference to Annual
Report on Form 10-K for the fiscal year ended April 30, 1996).
10.10 Assets Purchase Agreement, dated as of March 27, 1994, between
the Registrant, Murray Pharmacy Too, Inc. and the Shareholders named
therein (incorporated by reference to Current Report on Form 8-K
dated April 1, 1994).
10.11 Assets Purchase Agreement, dated as of March 27, 1994, between
HMI Retail Corp., Murray Pharmacy, Inc. and the Shareholders named
therein (incorporated by reference to Annual Report on Form 10-K
filed August 2, 1994).
22
<PAGE> 23
10.12 Asset Purchase Agreement, dated as of February 21, 1995,
between Caremark Inc. and Health Management, Inc. (incorporated by
reference to Current Report on Form 8-K dated April 14, 1995).
10.13 First Amendment to Asset Purchase Agreement, dated as of March 31,
1995, between Caremark Inc. and Health Management, Inc.
(incorporated by reference to Current Report on Form 8-K dated
April 14, 1995).
10.14 Transition Agreement, dated as of March 31, 1995, between
Caremark Inc. and HMI Illinois (incorporated by reference to Current
Report on Form 8-K dated April 14, 1995).
10.15 Credit Agreement, dated as of March 31, 1995 among, Health
Management, Inc., Home Care Management, Inc., HMI Pennsylvania, Inc.,
HMI Illinois, Inc., Chemical Bank, and the Guarantors and Lenders
named therein (incorporated by reference to Current Report on Form
8-K dated April 14, 1995).
10.16 Security Agreement, dated as of March 31, 1995, among Health
Management, Inc., Home Care Management, Inc., Health Reimbursement
Corporation, HMI Retail Corp., Inc., HMI Pennsylvania, Inc. and HMI
Maryland, Inc. and Chemical Bank for itself and the Lenders named
therein (incorporated by reference to Current Report on Form 8-K
dated April 14, 1995).
10.17 Security Agreement and Mortgage-Trademarks and Patent, dated
as of March 31, 1994, among Health Management, Inc., Home Care
Management, Inc., Health Reimbursement Corporation, HMI Retail Corp.,
Inc., HMI Pennsylvania, Inc. and HMI Maryland, Inc. and Chemical Bank
for itself and the Lenders named therein (incorporated by reference
to Current Report on Form 8-K dated April 14, 1995).
10.18 Forbearance Agreement, dated July 26, 1996 among Health Management,
Inc., Home Care Management, Inc., HMI Illinois, Inc., HMI
Pennsylvania, Inc., Health Reimbursement Corporation, HMI Retail
Corp., Inc., HMI PMA, Inc., HMI Maryland, Inc., Chase Manhattan Bank,
as lender and agent, and European American Bank, as lender
(incorporated by reference to Annual Report on Form 10-K for the
fiscal year ended April 30, 1996).
10.19 Agreement of Lease by and between Joseph M. Rosenthal and the
Company dated December 13, 1994 (incorporated by reference to Form
10-K for the year ended April 30, 1995).
10.20 Lease by and between Irwin Hirsh and Lloyd N. Myers and HMI
Pennsylvania, Inc. dated March 27, 1994 (incorporated by reference
to Form 10-K for the year ended April 30, 1995).
23
<PAGE> 24
10.21 Lease by and between Irwin Hirsh and HMI Retail Corp., Inc. dated
March 27, 1994 (incorporated by reference to Form 10-K for the
year ended April 30, 1995).
10.22 Lease Agreement by and between Domas Mechanical Contractors, Inc.
and the Company dated May 18, 1995 (incorporated by reference to
Form 10-K for the year ended April 30, 1995).
11 Statement re Computation of Per Share Earnings (incorporated by
reference to Annual Report on Form 10-K/A for the fiscal year ended
April 30, 1996).
21 Subsidiaries of the Registrant (incorporated by reference to
Annual Report on Form 10-K for the fiscal year ended April 30, 1995).
23 Consent of BDO Seidman, LLP (incorporated by reference to
Annual Report on Form 10-K/A for the fiscal year ended April 30,
1996).
27** Financial Data Schedule
99-1** Press release dated March 17, 1997, issued by the Company.
* Management contract or compensatory plan or arrangement.
** Filed with this Report.
24
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-START> APR-30-1996
<PERIOD-END> JUL-31-1996
<CASH> 1,585,702
<SECURITIES> 0
<RECEIVABLES> 44,562,285
<ALLOWANCES> 7,602,940
<INVENTORY> 7,212,031
<CURRENT-ASSETS> 54,400,085
<PP&E> 5,743,599
<DEPRECIATION> 2,063,590
<TOTAL-ASSETS> 92,958,498
<CURRENT-LIABILITIES> 52,977,475
<BONDS> 32,655,409
0
0
<COMMON> 279,848
<OTHER-SE> 35,795,701
<TOTAL-LIABILITY-AND-EQUITY> 92,958,498
<SALES> 0
<TOTAL-REVENUES> 40,522,910
<CGS> 0
<TOTAL-COSTS> 31,861,505
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,634,915
<INTEREST-EXPENSE> 739,537
<INCOME-PRETAX> (1,166,113)
<INCOME-TAX> 121,957
<INCOME-CONTINUING> (1,288,070)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,288,070)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
[HEALTH MANAGEMENT LETTERHEAD]
FOR IMMEDIATE RELEASE
HEALTH MANAGEMENT, INC. TO RESTATE FIRST & SECOND QUARTER FINANCIAL STATEMENTS
AND TAKE A 3RD QUARTER CHARGE; ANNOUNCES AN AMENDMENT TO THE TRANSWORLD
TRANSACTION
Buffalo Grove, Illinois - March 17, 1997 - Health Management, Inc. ("HMI")
(NASDAQ Small Cap Market: HMIS) announced today that it plans to restate its
financial statements for the first and second quarters of its 1997 fiscal year
to correct certain errors relating to costs of goods sold, which were
previously understated by approximately $1.8 million and $800,000,
respectively. HMI also plans to take a charge of approximately $13 million in
the third quarter of 1997, which includes a writeoff of approximately $2.8
million in goodwill and other costs associated with the sale of the Baltimore
retail pharmacies and a writedown of approximately $10 million in accounts
receivable. The Company will also report substantial operating losses for the
quarter ended January 31, 1997 and for the nine months then ended. The filing
of amended 10-Qs reflecting such restatements and the third quarter 10-Q is
expected to be made on or before March 24, 1997.
HMI and Transworld Home Healthcare, Inc. are currently in discussions regarding
a renegotiated deal.
The March 14, 1997 hearing for final approval of the amended settlement
agreement in respect of the stockholder class action lawsuit was adjourned until
April 11, 1997.
Earlier this week, listing of HMI's common stock was moved the NASDAQ Small Cap
Market from the NASDAQ National Market System.
Health Management, Inc. is a national provider of integrated pharmacy
management services to patients with chronic medical conditions and to health
care professionals, pharmaceutical manufacturers and third-party payers
involved in their care.
For additional information:
At HMI:
Jim Nicol, President CEO and CFO
847-913-2404
At Edelman Financial:
Diane Perry or Joseph Kist (Investors) Mark Danes (Media)
212-704-8293 or 212-704-8239 212-704-4464
