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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K/A-2
XX Annual Report Pursuant to Section 13 or 15(d) of the Securities and
------ Exchange Act of 1934 for the fiscal year ended April 30, 1996.
Transition report pursuant to Section 13 of 15(d) of the
------ Securities Exchange Act of 1934 for transition period
from ____________ to ____________.
Commission File No. 0-18472
HEALTH MANAGEMENT, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2096632
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1371-A Abbott Court, Buffalo Grove, Illinois 60089
(Address of principal executive offices)
Registrant's telephone number, including area code: (847) 913-2700
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
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Common Stock, $.03 par value per share
Indicate by check mark whether the Registrant has (1) filed all
reports required to be filed by Section 12 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) been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K. ______
As of July 23, 1996, the closing price of the Registrant's common
stock quoted on the NASDAQ National Market was $4.50. The aggregate market
value of the voting stock held by non-affiliates of the Registrant was
$33,138,437. As of July 23, 1996, there were 9,330,182 shares of common stock,
$.03 par value, outstanding. For purposes of the computation of the number of
shares of the Registrant's common stock held by non-affiliates, the shares of
common stock held by directors, officers and principal shareholders that filed
a Schedule 13G were deemed to be stock held by affiliates. As of July 23, 1996,
there were 1,966,085 shares of common stock outstanding held by such
affiliates.
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This Annual Report on Form 10-K/A-2 is intended to amend certain information
contained in Part I, Items 1, 7 and 8, and Part IV, Item 14 of Health
Management Inc.'s (the "Company's") Annual Report on Form 10-K, as amended by
the Company's Annual Report on Form 10-K/A, for the year ended April 30, 1996
(the "Original Report"), in order to ensure that the information contained in
the Original Report is true, accurate and complete as of the date of the filing
of the Form 10-K, July 29, 1996.
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 adequately to defend or reach a settlement of outstanding litigations
and investigations involving the Company or its management; changes in labor,
equipment and capital costs; changes in regulations affecting the Company's
business; future acquisitions or strategic partnerships; general business 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.
Part I
Item 1 of Part I is hereby amended in its entirety as follows:
Item 1. Business
Health Management, Inc. (formerly Homecare Management, Inc., which
together with its subsidiaries is referred to herein as the "Company) was
founded in 1986 as a home health care provider. In 1989, the Company made a
strategic shift and began to concentrate on the provision of post-surgical
pharmaceutical products and services to organ transplant patients. Currently,
the Company is focused on the provision of integrated pharmaceutical management
services to patients with chronic medical conditions which may be complicated
by a higher risk of patient non-compliance with the prescribed pharmaceutical
regimen, and to the health care professionals, pharmaceutical manufacturers and
third-party payors involved in the care of such patients. Services offered
include the distribution of prescription drugs, drug utilization review,
patient compliance monitoring, psychosocial support and assistance in insurance
coverage, verification and reimbursement. The Company has expanded its business
primarily through acquisitions to include the oncology, HIV/AIDS, infertility,
multiple sclerosis, schizophrenia and neurology markets.
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Lifecare(TM) Program
Through its Lifecare(TM) Program, the Company provides integrated
pharmaceutical management programs servicing specific patient populations which
can benefit from a highly focused approach to health care delivery. These
services include patient education programs, the preparation, delivery and
administration of prescribed outpatient drug therapies, patient compliance
programs and data management. The Company provides continuity of care to
patients as they move from acute care hospital settings to home-based care
programs.
Pharmaceutical Therapies: The Company provides services to individuals
with chronic medical conditions who require at least one continual drug therapy
and may also require additional oral and/or injectable drug therapies. For
example, organ transplant recipients require a continual drug therapy
consisting of immunosuppressants and other drugs in order to prevent rejection
of the transplanted organ. These individuals also require other oral and, on
occasion, injectable drug therapies to combat or control other conditions
arising from transplant surgery, the disease or medical condition that led to
the transplant or side effects of the immunosuppressant drugs. The Company can
supply the total pharmaceutical needs for each of these patients.
Given the medical condition of these patients, timely and accurate
availability of medications and use that is consistently compliant with
physician instructions can mean the difference between a successful outcome and
a costly complication. The Company's licensed pharmacists and other health care
professionals are available via a toll-free number 24 hours per day, seven days
per week, for assistance or consultation. The Company's pharmacists prepare and
dispense all drug therapies in compliance with the regimen prescribed by each
patient's physician. Most often, orders are received by telephone at one of the
Company's 23 pharmacy locations (in 19 states) and are then shipped directly or
via common carrier to ensure prompt delivery to the patient. The Company's
pharmacists serve the needs of the Company's patients by maintaining the
appropriate pharmaceuticals and medical supplies in inventory, and by having
experience with each of the chronic medical conditions being treated.
Drug Monitoring and Screening: A substantial portion of the costs
associated with treating the chronically ill is attributable to
hospitalizations and medical procedures necessitated by noncompliance and
adverse drug interactions. In addition to the direct costs associated with
noncompliance, including hospital admissions or organ rejections, there are
indirect costs associated with noncompliance which result from work disability
and deteriorated health status. To monitor patient compliance, the Company
maintains a proprietary patient database that contains complete patient
profiles, including demographics, comprehensive listings of all medications
with dosages and directions for use, laboratory results and drug delivery
schedules with the aim of enhancing compliance. A Company pharmacist consults
with the patient's physician or primary health care professional to determine
the patient's plan of treatment, including drug therapy, support services and
delivery requirements. Throughout the course of treatment, a Company pharmacist
appropriately reviews each patient's drug profile, evaluates patient compliance
with the physician's orders and screens for potential interactions among new
drug orders or with existing medications in the patient's profile. In order to
further improve its ability to monitor each patient's compliance with the
prescribed drug therapies, the Company continues to develop its proprietary
patient database. Clinical information for over 22,000 patients is currently
maintained
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through the system. The Company makes information from this database and from
drug utilization review data available to referral sources, third-party payors
and pharmaceutical manufacturers, in compliance with patient confidentiality
requirements.
Psychosocial Support: The Company has designed a regimen of support
services to meet the psychological and social needs of its patients and their
families. These services complement each patient's medical care program and
assist both the patient and the patient's family in managing the difficult
psychological and social challenges presented by the patient's chronic and
sometimes lifelong conditions. Such patients and their families need reliable
and immediate information, counseling on a wide range of concerns regarding
treatment, and assistance with insurance and financial matters. The support
services offered by the Company include: (1) education seminars and videotapes
for the patients and others involved in their care; (2) creation, direction
and/or sponsorship of patient support groups that provide patients with support
and information exchange; (3) newsletters containing medical and non-medical
information relevant to patients and health care professionals; and (4) a
national, toll-free, 24 hours per day and seven days per week telephone hotline
providing counseling and educational information to patients. These services
provide patients with the knowledge and support to enable them to comply with
their prescribed care programs. To provide these psychosocial services, the
Company retains a staff of social workers who are experienced in counseling
patients with these disorders and who assist in the formation and maintenance
of support groups.
Reimbursement: The Company offers billing and reimbursement services
to each of its patients. The Company accepts the assignment of benefits from,
and the responsibility for the submission of, reimbursement claims, and
receives reimbursement payments directly from the patients' insurance carriers
or other third-party payors. The Company's reimbursement specialists review
each prospective patient's insurance plan to analyze whether the plan provides
adequate coverage and to determine the scope and extent of this coverage and
lifetime maximum limits. If the coverage is limited or inadequate for the
required treatments, the Company's staff advises patients on the availability
of alternative and supplemental coverage, including Medicare, Medicaid or other
financial support programs. Additionally, the Company negotiates on behalf of
individual patients with health insurers, HMOs and other health care
reimbursement entities to aid in optimizing and facilitating coverage for
required drug therapies and supportive services.
Services Provided to Pharmaceutical Companies
The Company has several current contracts with pharmaceutical
companies to provide a variety of services such as health care reimbursement
investigation and verification for both patients and professionals, compliance
monitoring and data management services related to specific drugs or clinical
programs. The Company believes that these services will enable it to establish,
maintain and expand its relationships with pharmaceutical companies and to
become an integral component of any comprehensive disease management programs
these drug companies may develop in the future.
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Markets
Organ Transplantation. There are approximately 270 organ transplant
centers in the United States. Currently, these centers perform approximately
20,000 transplants a year, of which an estimated 60% are kidney transplants. At
December 31, 1995, there were approximately 80,000 transplant patients in the
United States and an additional 46,500 patients on the national organ waiting
list according to United Network for Organ Sharing (UNOS). The annual number of
new transplant recipients continues to grow due to increasing public awareness
and participation in organ donation programs and the success of organ
transplant surgeries. Improvements in surgical, pharmaceutical, organ
preservation and tissue typing technologies have allowed more patients to
receive organ transplants each year and further enhance graft survival and
increase the life expectancy of these patients. The Company believes that the
incidence of organ transplantation will continue to expand because it
represents a cost-effective alternative to other therapies and results in a
higher quality of life. For example, the average annual cost of drug therapies
for kidney transplant patients is approximately $10,000, as compared to the
average annual cost of hemodialysis, the principal alternative therapy, which
is approximately $25,000.
Once a transplant has been performed, transplant patients must receive
multiple medications for the rest of their lives because of the possibility of
organ rejection. Additionally, these patients are susceptible to complications
as a result of the transplantation. Based on the Company's experience, each
transplant patient requires medications costing an average of approximately
$10,000 per year. The Company believes that the organ transplant recipient
population spends in excess of $800 million per year on drug therapies and that
this market has increased substantially each year as the number and type of
transplants increase each year.
The Company currently serves approximately 6,700 transplant
recipients. In order to promote growth in the referrals of transplant
recipients, the Company selectively targets hospital-based transplant programs
that direct the outpatient care of their transplant recipients to outside,
third-party service groups. The Company has increased the number of transplant
programs which it serves from 25 at the end of fiscal year 1991 to 100 at the
end of fiscal year 1996. Furthermore, the Company has established contractual
arrangements with health care providers and payors to provide services at
negotiated rates. The Company also intends to continue to expand its
Lifecare(TM) Program by continuing to work with medical professionals and
organizations, such as the United Network for Organ Sharing (UNOS), to educate
the public on the need for organ donations.
Schizophrenia. Schizophrenia is a psychotic disorder which is
estimated to affect approximately one percent of the U.S. population, or 2.5
million people. The Company's services include distribution and monitoring of
antipsychotic medications including Clozapine and Risperidone. Monitoring
services include data administration, phlebotomy services and laboratory
analysis. Clozapine is prescribed primarily for schizophrenia patients who have
not responded to first-line antipsychotic medications. Because of potentially
severe side effects associated with clozapine, patients receiving clozapine
require close weekly monitoring of their white blood cell levels. The Company
presently provides clozapine to approximately 6,800 schizophrenia patients at
an average cost per patient of between $6,000 and $8,000 per year depending
upon the dosage. The Company's Clozaril(R) Patient Management Business
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contains multiple components including weekly blood draws to test for a side
effect associated with the drug clozapine. The Company understands that the FDA
may be contemplating a reduction in blood draw monitoring, which, with no other
changes in the way that the Company participates in this market, could have a
substantial negative impact on the Company's earnings and cash flow.
The Company expects several new antipsychotic drugs to be introduced
in the next year, based upon the recent history of such new products having
been introduced into the market and the present pipeline of potential products
in various stages of the Food and Drug Administration review process. The
Company anticipates providing these new drugs to schizophrenic patients as it
broadens its Lifecare(TM) Program to treat additional mental health patients.
The Company has existing relationships with over 3,000 psychiatrists, various
payors and state mental health and Medicaid programs. New sales and marketing
initiatives are being developed to take advantage of new pharmaceutical
products in this market.
Infertility. Today, there are an estimated 4.5 million women of
child-bearing age in the United States with reduced fertility, although of
those only 100,000 utilize methods available to treat infertility. The primary
treatments for infertility are ovulatory induction and artificial reproductive
technology, often coupled with the use of fertility drugs to maximize success
rates. The average number of monthly cycles of treatment per year for women
seeking such treatment is approximately 2.5. In 1995, the total U.S. market for
drugs used in infertility treatment was approximately $300 million, and the
average cost of treatment per cycle was between $2,000 and $2,500. Currently,
the Company provides services to approximately 300 new individuals per month
through its infertility program.
Neurology. The Company has initiated several programs in this growing
market. Target markets include amyotrophic lateral sclerosis (Lou Gehrig's
disease), multiple sclerosis, Alzheimer's Disease and Parkinson's Disease.
There are 250,000 individuals diagnosed with multiple sclerosis ("MS") in the
United States, of which 125,000 exhibit a form of MS evidenced by moderate
limitations in mobility, referred to as relapsing/remitting MS. Ten thousand
new cases of MS are diagnosed annually. Primary drug therapies for MS patients
are Betaseron(R) and Avonex(R). These drug therapies and related services are
currently being provided through the MS Lifecare(TM) Program to approximately
400 patients.
Oncology. The American Cancer Society estimates that over one million
new cases of cancer will be diagnosed in 1996. One out of every four deaths in
the United States is related to this group of diseases. The rising incidence of
cancer combined with higher survival rates for cancer patients has led to a
corresponding increase in the overall market for cancer therapies. The National
Cancer Institute estimates that $104 billion is spent on cancer patients of
which $35 billion is in direct medical costs. Drug therapies provided by the
Company include: oral medications such as etoposide, methotrexate, melphalan
and cyclophosphamide; intravenous therapies such as 5-flourouracil and
Taxol(R); and injectables such as Neupogen(R) and Intron-A(R). The cost of
these therapies range between $1,500 and $6,000 per annum. The Company
currently provides services to approximately 3,500 oncology patients.
HIV and AIDS. The Centers for Disease Control and Prevention estimates
that 650,000 to 900,000 Americans are living with HIV, the virus that causes
AIDS, and it reports that as many as
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300,000 people have died of AIDS. In 1995, nearly 75,000 new cases of AIDS were
reported. It is estimated that over $15.2 billion was spent on HIV/AIDS care
and treatment in 1995. Available drug protocols believed to slow the
progression of the disease include first line drugs like AZT and the new
protease inhibitors (Invirase(R), Norvir(R) and Crixivan(R)). In addition,
drugs like pentamidine, intravenous and oral antibiotics, parenteral nutrition,
Neupogen(R) and Doxil(R) are used to treat opportunistic infections and
counteract adverse reactions from the disease and its therapies respectively.
The Company presently provides pharmaceutical products to approximately 200
HIV/AIDS patients. The pharmaceutical cost of treatment to these patients
varies between $5,000 and $10,000 per patient per year depending on their
individual symptoms and the therapeutic regimens.
Strategy for Growth and Expansion.
While the Company has historically grown through acquisitions, the
Company's current focus is on revenue generation through internal growth. The
Company's growth strategy is focused on four principal strategic objectives.
First, it seeks to increase the number of patients participating in its
Lifecare(TM) Program by continuing to develop strong working relationships with
medical centers, healthcare professionals and managed care organizations.
Second, it plans to continue to expand its Lifecare(TM) Program to patient
populations with other chronic medical conditions characterized by costly,
long-term drug therapies which can be administered at home or in other
alternate settings. Third, it intends to continue to increase its client base
by expanding relationships with payor organizations which may require
specialized disease management. Finally, it will seek growth through
relationships with pharmaceutical companies which require focused clinical
management, marketing, reimbursement or other services for their new or
existing products.
The Company participates in clinical trials, including Phase IV
studies in order to gain early access to new products for disorders it
presently focuses upon and also to take early advantage of emerging disease
management opportunities. Phase IV study refers to the post-market safety
monitoring requirements which may be imposed by the Food and Drug
Administration after it has approved a new drug application. In connection with
a Phase IV study, the Company is responsible for drug distribution, clinical
patient management, data management and coordination with the contract research
organization. A major pharmaceutical company has contracted with the Company to
provide services in connection with a Phase IV study for Alzheimer's patients.
Acquisitions
The Company has made several acquisitions over the last few years.
Effective March 31, 1995, HMI Illinois, Inc., a Delaware corporation
wholly-owned by the Company ("HMI Illinois"), acquired certain assets
(including equipment, information and records, goodwill, the rights to proceeds
of accounts receivable generated after March 31, 1995 and the assignment of
certain real estate leases), subject to certain liabilities, of the Clozaril(R)
Patient Management Business ("CPMB") from Caremark, Inc., a California
corporation ("Caremark"). CPMB provides ongoing drug therapies and related
support services primarily to schizophrenic patient populations throughout the
United States. Other assets of CPMB, including inventory and provider
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contracts, were transferred pursuant to a transition agreement, dated as of
March 31, 1995, between HMI Illinois and Caremark over a six-month period
commencing on March 31, 1995. The aggregate purchase price for the assets
acquired by HMI Illinois was approximately $23,260,000, consisting of
approximately $20,060,000 in cash, a $200,000 escrow deposit, and a $3,000,000
five-year convertible subordinated note with an annual interest rate of 8%
payable semi-annually. The source of funds for the cash portion of the
acquisition was bank financing provided pursuant to a Credit Agreement, dated
as of March 31, 1995, among the Company, Home Care Management, Inc., HMI
Pennsylvania, Inc., HMI Illinois, the Guarantors named therein, and Lenders
named therein (including Chemical Bank, The Chase Manhattan Bank, N.A. and
European American Bank), and Chemical Bank as agent.
In February 1995, the Company acquired substantially all of the
assets, subject to certain liabilities, of Arcade Pharmacy of Maryland, Inc., a
Maryland corporation ("Arcade") and Kaufmann's of Kenilworth Pharmacy, Inc., a
Maryland Corporation ("Kaufmann's"). The businesses acquired provide ongoing
drug therapies and related products primarily to persons afflicted with chronic
illnesses or infertility problems and also operate as retail pharmacies. The
aggregate purchase price of the acquired assets of Arcade consisted of
$1,812,500 in cash and cash equivalents and 26,002 newly-issued, restricted
shares of Common Stock of the Company, which were valued at $325,000. The
aggregate purchase price for the assets of Kaufmann's consisted of 82,755
newly-issued, restricted shares of Common Stock of the Company, which were
valued at $1,034,375.
In June 1994, the Company acquired substantially all of the assets,
subject to certain liabilities, of Pharmaceutical Marketing Alliance, Inc., a
South Carolina corporation ("PMA"). The business acquired provides drug
therapies and reimbursement services to persons afflicted with multiple
sclerosis. The aggregate purchase price for the acquired assets consisted of
$355,000 in cash and cash equivalents and 20,000 newly-issued, restricted
shares of Common Stock of the Company, which were valued at $243,375. In March
of 1996, the Company closed the operations of HMI PMA, Inc. and consolidated
its marketing initiatives to its Buffalo Grove, Illinois headquarters. (See
Notes 2 and 5 to the Consolidated Financial Statements.)
Effective April 1, 1994, the Company acquired substantially all of the
assets, subject to certain liabilities, of Murray Pharmacy, Too, Inc., a
Pennsylvania corporation ("Murray Too"). The business acquired provides ongoing
drug therapies and related support services primarily to oncology, HIV/AIDS and
infertility patient populations in Western Pennsylvania. Also effective April
1, 1994, through HMI Retail Corporation, a Delaware corporation, a newly-formed
Delaware corporation wholly-owned by the Company, the Company acquired
substantially all the assets subject to certain liabilities of Murray Pharmacy,
Inc., a Pennsylvania corporation ("Murray Pharmacy") that is primarily engaged
in the retail pharmacy business. The aggregate purchase price for the acquired
assets of Murray Too consisted of $7,500,000 in cash and cash equivalents and
368,885 newly-issued, restricted shares of common stock of the Company, which
were valued at $4,600,000. The aggregate purchase price for the acquired assets
of Murray Pharmacy consisted of 248,175 newly-issued, restricted shares of
common stock of the Company, which were valued at $3,094,742.
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Marketing and Sales
The Company's 15 full-time sales personnel market the Lifecare(TM)
Program throughout the United States through presentations at national meetings
of health care professionals, through advertisements in professional journals
and through direct sales calls to physicians and other health care
professionals. Most of the Lifecare(TM) Program patients are initially referred
to the Company by health care professionals from hospitals at which they are
being treated. Other patients contact the Company directly or are referred to
the Company by family members.
The Company also markets itself to medical organizations, health
plans, national and local organizations which advance the interests of patients
with specific chronic disorders and patient groups. Another important element
of the Company's marketing effort is to provide information to referral sources
concerning the nature and availability of the services which the Company
offers, as well as the quality and cost-effectiveness of its programs. This
effort involves development and implementation of training programs for the
Company's sales representatives and field personnel. The Company intends to
intensify its marketing activities directed toward managed health care
organizations, employers and other third party payors, as these groups have
become increasingly involved in health care decision-making.
In order to remain current with information and issues related to
chronic illness disease state management, the Company supports and participates
in various local, state and national professional organizations and societies.
Competition
The markets in which the Company operates are highly competitive and
are experiencing substantial consolidation. Although the Company believes that
its package of services distinguishes it from its competition, there are
several other companies that deliver prescription and non-prescription
medications to its patient populations. These companies include regional and
national pharmacies such as Chronimed Inc., Coram Healthcare Corp., Caremark
Inc., Quantum Health Resource Inc. (recently acquired by Olsten Kimberly
Quality Care, Inc.), Stadtlander Drug Company, Inc. (recently acquired by
Counsel Corp.) and Systemed, Inc. (recently acquired by Medco Containment
Services Inc.).
The competition is based on a number of factors, including price,
quality of care and service, reputation within the medical community, the
ability to develop and maintain relationships with patients and referral
sources and geographical scope. Competition has also been affected by the
decisions of third-party payors and case managers to become more active in
monitoring and directing the care delivered to their beneficiaries.
Relationships with such groups as well as inclusion within a contracted network
has affected and will continue to affect the Company's ability to serve many of
its patients. Similarly, the ability of the Company and its competitors to
align themselves with other health care service providers may increase in
importance. Managed care organizations may attempt to align themselves with
providers who offer a broader range of services than those currently offered
directly by the Company.
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There are relatively few barriers to entry into the local markets
which the Company serves. Local and regional companies are currently competing
in many of the markets presently served by the Company and others may do so in
the future. The Company also expects competitors to develop new strategic
relationships with providers, referral sources and payors, which could result
in a rapid and dramatic increase in competition. The introduction of new
services, the enhancement of current services and the development of strategic
relationships by the Company's competitors could cause a significant decline in
sales, the loss of market acceptance of the Company's services, intense price
competition, or render the Company's services noncompetitive. The Company
expects to continue to encounter increased competition in the future, which, if
not matched by Company initiatives, could limit its ability to maintain or
increase its market share. Such increased competition could have a material
adverse effect on the business, financial condition and results of operations
of the Company.
Reimbursement
The Company provides comprehensive reimbursement services to each of
its patients. These services include: (1) insurance coverage verification, (2)
patient counseling regarding co-payment and deductible obligations, lifetime
maximums, prior authorizations and other limitations to patient benefits, (3)
recommendations for alternative and supplemental coverage for uninsured and
underinsured patients, (4) claim submission, (5) disputed claim resolution and
(6) general patient account management.
The Company bills for drug therapies, medical equipment and supplies
and certain support services. The Company works closely with the patients it
serves to obtain reimbursement from governmental and private third-party
payors. Generally, the Company contacts the third-party payor before delivering
drug therapies in order to determine the patient's coverage and the percentage
of costs that the payor will reimburse. The Company's reimbursement specialists
review such issues as lifetime limits, preexisting condition clauses, the
availability of special state programs and other reimbursementrelated issues.
The Company will often negotiate with the third-party payor on the patient's
behalf to help ensure that coverage is available. In most cases, third-party
payors pay the Company directly for the reimbursable amounts of its charges.
Once reimbursement processing for these patients has been established by a
payor, claims processing and reimbursement tend to become routine, subject to
continued patient eligibility and coverage limitations. Co-payments and
deductibles pursuant to Medicare, Medicaid and private insurance are billed
directly to the patient.
The Company accepts direct assignment of claims for reimbursement from
Medicare and Medicaid, as well as from other third-party payors on behalf of
its patients. This means that the Company processes the claim for its
customers, accepts payment at the prevailing allowable rates and incurs the
risks of delay or nonpayment if services are determined to be improperly billed
or not medically necessary. Additionally, because Medicare and Medicaid
reimburse the Company only for patients who meet certain eligibility
requirements, the Company must rely upon its own internal controls to ensure
that it renders services to individuals eligible for reimbursement. (See
"Item 1. Business--Regulation-Medicare and Medicaid".)
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The Company also provides case management services to qualified
patients. The Company conducts negotiations with insurance companies, HMOs and
other health care reimbursement administrators in order to optimize service
levels to patients and payors.
Private payors traditionally reimburse a higher amount for a given
service and provide a broader range of benefits than governmental payors,
although net revenue and gross profits from private payors have been decreased
by their continuing efforts to contain or reduce the costs of health care. An
increasing percentage of the Company's revenue has been derived in recent years
from agreements with HMOs, PPOs and other managed care providers. Although
these agreements often provide for negotiated reimbursement at reduced rates,
they may also result in lower bad debts, provide for faster payment terms and
provide opportunities to generate greater volumes than traditional referral
sources.
Due to the acquisition of the Clozaril(R) Patient Management Business
at the end of fiscal 1995, the Company expected that its percentage of revenues
attributable to Medicaid reimbursement would increase during 1996. The Company
does not, however, believe this trend will continue to a significant degree in
future years since the Company's revenues now reflect a full year reporting of
the CPMB revenue.
The following table sets forth the approximate percentages of the
Company's revenue attributable to the stated payors for the periods noted:
Fiscal Year Ended April 30,
1996 1995 1994
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Commercial Insurance and other private payors 56% 60% 65%
Medicaid and other state programs 35% 26% 23%
Medicare and other federal programs 9% 14% 12%
TOTAL 100% 100% 100%
A majority of the Company's revenue is derived from third-party
payors, including private insurers, managed care organizations such as HMO's
and PPO's and governmental payors such as Medicare and Medicaid. Similar to
other medical service providers, the Company experiences lengthy reimbursement
periods as a result of third-party payment procedures. Consequently, management
of accounts receivable through effective patient registration, billing,
collection and reimbursement procedures is critical to financial success and
continues to be a high priority for management. The Company has developed
substantial expertise in processing claims and carefully screens new cases to
determine whether adequate reimbursement will be available.
To date, the Company's arrangements with managed care organizations
have mostly been on a discounted fee-for-service basis; the Company does not
currently have any significant capitated arrangements. In addition, the Company
has experienced downward pricing pressures and an inability to participate in
certain managed care networks and the Company may continue to experience these
pressures in the future.
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Regulation
The health care field is subject to extensive and dynamic regulatory
change. Changes in the law or new interpretations of existing laws can have a
dramatic effect on permissible activities, the relative costs associated with
doing business and the amount of reimbursement by government and third-party
payors, such as Medicare and Medicaid. The Company is also subject to fraud and
abuse and selfreferral laws which regulate the Company's business relationships
with physicians, other health care providers, referral sources and government
payors.
The federal government and all states in which the Company currently
operates regulate various aspects of its business. In particular, the
operations of the Company's branch locations are subject to federal and state
laws covering the repackaging and dispensing of drugs and regulating interstate
motor carrier transportation. The Company's operations also are subject to
state laws governing pharmacies, nursing services and certain types of home
health agency activities. Certain of the Company's employees are subject to
state laws and regulations governing the ethics and professional practice of
pharmacy and social work. The failure to obtain, renew or maintain any of the
required regulatory approvals or licenses could adversely affect the Company's
business and could prevent the location involved from offering products and
services to patients. Any loss by the Company of its various federal
certifications, its authorization to participate in the Medicare and Medicaid
programs or its licenses under the laws of any state or other governmental
authority from which a substantial portion of its revenues are derived would
have a material adverse effect on its business. The health care services
industry will continue to be subject to intense regulation at the federal and
state levels, the scope and effect of which cannot be predicted. The Company
regularly monitors legislative developments and would seek to restructure a
business arrangement if it was determined that any of its business
relationships placed it in material noncompliance with any statute. No
assurance can be given that the activities of the Company will not be reviewed
and challenged or that government sponsored health care reform, if enacted,
will not result in a material adverse change to the Company.
Medicare and Medicaid. Medicare is a federally funded insurance
program which provides health insurance coverage for certain disabled persons,
including persons eligible for most organ transplants, and persons age 65 and
older. The Company is an authorized supplier eligible to receive direct
reimbursement for outpatient services under Medicare.
Under previous Medicare regulations, certain transplant medications
were reimbursed by Medicare for a period of one year following the transplant
surgery. After one year, the responsibility for paying for such medication
shifted to the patient's third-party insurance carrier or to the patient
directly. Legislation has been enacted by Congress to increase this Medicare
coverage period to three years. This is being implemented in stages which have
already commenced and which will be completed in 1997.
Medicaid is a cooperative state-federal program for medical assistance
to the poor. States have great flexibility in determining eligibility for such
assistance and those services to be paid for under their Medicaid programs.
Beyond mandatory services, states can provide for a wide range of medical
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services, including services not otherwise covered under Medicare, such as
long-term nursing, respiratory therapy, home medical equipment and infusion
therapy.
From time to time the Company is, as are all providers under the
program, subject to government audits of its Medicare and Medicaid
reimbursement claims. The Company has been audited in the past and an audit by
a major client state has recently been commenced. Medicare and Medicaid have
set stringent requirements for reimbursement of the costs of drugs, services,
equipment and supplies and rental of medical equipment. The Company believes
its pricing policies are within the limits established by Medicare and
Medicaid, and the drugs, services, equipment and supplies it provides are
ordered by a physician and documented as being "medically necessary" and,
therefore, reimbursable. However, if a Medicare or Medicaid audit of the
Company's records were to reveal reimbursement for services which are deemed
not to be medically necessary or costs in excess of current guidelines, those
amounts may be disallowed. In that event, the Company would either repay
Medicare or Medicaid, as applicable, or offset the deficiencies against amounts
owed to the Company. In addition, if the Medicare or Medicaid authorities were
to determine that the Company had intentionally violated Medicare or Medicaid
regulations, it may institute criminal or civil proceedings, including
proceedings to revoke the Company's status as a certified Medicare or Medicaid
provider.
Certain states require that the Company have a pharmacy located within
or near the borders of such states in order to qualify for reimbursement for
Medicaid claims filed by their residents. The Company has established certain
of its branch pharmacy facilities to comply with such requirements, and
believes that it is presently positioned to qualify for such reimbursement in
nearly all states.
Medicare and Health Care Reform. Congress takes action in almost every
legislative session to modify the Medicare program for the purpose of reducing
the amount otherwise payable by the program to health care providers in order
to achieve deficit reduction targets, among other reasons. Legislation or
regulations may be enacted in the future that may substantially reduce the
amount paid for the Company's services. Further, statutes or regulations may be
adopted which would impose additional requirements in order for the Company to
be eligible to participate in the federal and state payment programs. Such new
legislation or regulations may adversely affect the Company's business
operations. There is significant national concern today about the availability
and rising cost of health care in the United States. It is anticipated that new
federal and/or state legislation will be passed and regulations adopted to
attempt to provide broader and better health care and to manage and contain its
cost. The Company is unable to predict the content of any legislation or what,
if any, changes may occur in the method and rates of this Medicare and Medicaid
reimbursement or in other government regulations that may affect it business,
or, whether such changes, if made, will have a material adverse effect on its
financial position and results of operations.
Fraud and Abuse Generally. As a supplier of services under the
Medicare and Medicaid programs, the Company is subject to the Medicare and
state health care program anti-kickback laws, which prohibit any remuneration
in return for the referral of Medicare, Medicaid or other state health program
patients, or for purchasing, leasing, ordering or arranging for, or
recommending the purchase, lease or ordering any good, facility, service or
item for which payment may be made under the Medicare, Medicaid or other state
health programs. In addition, several states in which the Company
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operates have laws that prohibit certain direct or indirect payments as well as
fee-splitting arrangements. Possible sanctions for violation of these
restrictions include loss of licensure, and civil and criminal penalties.
Although the Company believes its operations as currently conducted are in
material compliance with existing applicable laws, certain aspects of the
Company's business operations have not been subject to state or federal
regulatory interpretation. There can be no assurance that review of the
Company's business by courts or regulatory authorities will not result in
determinations that could adversely affect the operations of the Company or
that the health care regulatory environment will not change so as to restrict
the Company's existing operations or its expansion.
Stark Amendment and Similar State Laws. Congress adopted legislation
in 1989 (effective January 1992, the "Stark Law") that generally prohibits or
restricts a physician from referring a Medicare beneficiary's clinical
laboratory services to any entity with which such physician has a financial
relationship, and prohibits such entity from billing for or receiving
reimbursement on account of such referral, unless a specified exception is
available. Additional legislation expanding the Stark Law to other physician
and health care business relationships was passed as part of the Omnibus Budget
Reconciliation Act of 1993 ("Stark II"). Stark II extends the Stark Law to
referrals of services eligible for Medicare or Medicaid reimbursement and
expand the provisions prohibiting physicians from making referrals to entities
with which they have financial relationships to all "designated health
services," including, among others, durable medical equipment and supplies;
parenteral and enteral nutrients; home health services; and outpatient
prescription drugs. Stark II took effect January 1, 1995.
Many state jurisdictions have adopted practitioner self-referral
legislation modeled after the Stark Law, some of which apply to referral
sources, third party payors and services not otherwise covered by the federal
law. For instance, New York law prohibits any licensed health practitioner,
including, among others, physicians, nurses and physician assistants, from
referring Medicaid, Medicare or privateinsured patients for clinical
laboratory, x-ray or pharmacy services if the referral is made to an entity
with which such practitioner has a financial relationship.
Numerous exceptions are allowed under the Stark Law, as amended, and
state laws for financial arrangement that would otherwise trigger the referral
prohibition. These vary from jurisdiction to jurisdiction, but generally
include exceptions for certain relationships involving rental of office space
and equipment, employment relationships, personal service arrangements,
payments unrelated to designated services and certain isolated transactions as
long as all of the statutorily required terms for the applicable exception are
met.
Although the Company believes its operations as currently conducted
are in material compliance with existing applicable laws, certain aspects of
the Company's business operations have not been subject to state or federal
regulatory interpretation. There can be no assurance that review of the
Company's business by courts or regulatory authorities will not result in
determinations that could adversely affect the operations of the Company or
that the health care regulatory environment will not change so as to restrict
the Company's existing operations or its expansion.
State Licensure and Notice Requirements. The Company must obtain and
maintain licensure from the various states' boards of pharmacy where it does
business in order to provide pharmacy
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services. In addition, several states have enacted statutes or regulations
which apply to pharmacies that engage in the interstate distribution of
prescription drugs. Some such states generally permit such out-of-state
pharmacies to operate in accordance with the laws of the state in which they
are located, but require them to register with the state's board of pharmacy,
follow certain procedures and make certain disclosures. Other such states
generally require out-of-state pharmacies to obtain a license in those states
and comply with local laws, as in-state pharmacies must do. The Company
believes that it is in substantial compliance with the registration, disclosure
and licensing requirements of those jurisdictions in which it conducts its
business. If the Company were found to be in noncompliance with applicable laws
and regulations, the Company might be subject to sanctions and its operations
in such states might be impaired, interrupted, discontinued or prohibited.
Accreditation
The Company's New York and Pittsburgh facilities have received
accreditation by the Joint Commission on Accreditation of Healthcare
Organizations and the Company is in the process of making application for
accreditation for other facilities.
Sources and Availability of Product Supply
Approximately 18% of the Company's revenues are currently attributable
to sales of Sandimmune (also known as cyclosporine) and Neoral, the primary
immunosuppressive drugs used in the United States and approximately 28% of the
Company's revenues are currently attributable to sales of Clozaril(R) (also
known as clozapine), an anti-psychotic medication used in the treatment of
schizophrenia. The Company currently purchases Sandimmune(R) and Clozaril(R),
drugs manufactured solely by Sandoz, A.G., principally through wholesalers. If
the Company were unable to purchase Sandimmune or Clozaril(R) for any reason,
its results of operations would be materially and adversely affected. The
patents on Sandimmune and Clozaril(R) held by Sandoz, A.G. expired in September
1995 and September 1994, respectively. The Company has to date experienced no
material impact on its business from the expiration of the patents and cannot
predict with certainty the effect the expiration may have in the future. No
generic products have been introduced to date and, to the Company's knowledge,
none appears to be imminent.
The three gonadotropins used in the treatment of infertility,
Pergonal, Metrodin and Humagon, have been in short supply in the general market
throughout 1995 and 1996. To date, the Company's infertility business has not
been materially affected by this shortage, but there can be no assurances that
it will not be affected in the future.
The Company distributes branded pharmaceutical products produced by
single manufacturers. If any of these manufacturers were to experience
disruptions in product availability, the Company's ability to deliver products
to its customers could be adversely affected.
The Company purchases most of its pharmaceuticals from regional and
national drug wholesalers and to a lesser degree directly from pharmaceutical
manufacturers. Its sources have established credit limitations and a few of
such suppliers are seeking to reduce their credit limitations with the Company.
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Although the Company has been able to maintain adequate product supply within
these credit limitations, there can be no assurances that it will continue to
do so in the future. Such an inability would have a material adverse impact on
the Company's relationship with its patients and referral sources and on its
liquidity. One supplier, Bindley Western Industries, Inc., a former supplier of
the Company, has initiated litigation against the Company regarding past due
amounts. (See "Item 3. Legal Proceedings".)
Employees
As of July 17, 1996, the Company employed 466 persons, of whom 363
were full-time employees. Of the full-time and part-time employees, 35 are
executive, corporate and administrative personnel, 18 were sales and marketing
personnel, and 413 were patient services, reimbursement and operating
personnel. The Company also employs contracted social workers, registered
nurses and other personnel on a case by case basis to deliver services in
localized areas. The Company's management believes that relations with its
employees are good. The employees are not represented by any union.
SEE THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR
INFORMATION CONCERNING THE COMPANY'S REVENUES, OPERATING PROFIT AND
LOSS OR IDENTIFIABLE ASSETS.
Items 7 and 8 of Part I are hereby amended in their entirety as follows:
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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
this Item 7 "Management's Discussion and Analysis of Financial Condition and
Results of Operations." Other considerations are presented elsewhere in this
Report.
RECENT EVENTS AND OTHER CONSIDERATIONS.
General. On February 27, 1996, the Company announced that in the
course of an internal investigation it had discovered certain accounting
irregularities, that it intended to write down accounts receivable and
inventory assets, that the Company may have to restate its financial statements
and that it had accepted the resignation of Clifford E. Hotte as Chairman of
the Board and Chief Executive Officer. Thereafter, on April 30, 1996 the
Company filed with the Securities and Exchange Commission restated financial
statements for the fiscal year ended April 30, 1995 and for each of the fiscal
quarters contained therein, including the fiscal quarters ending July 31, 1994,
October 31, 1994 and January 31, 1995; and for the fiscal quarters ended July
31, 1995 and October 31, 1995. As a result of having to restate the foregoing
reports, the Company filed its Quarterly Report on Form 10-Q for the fiscal
quarter ended January 31, 1996 on April 30, 1996.
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Special Charges. The Company incurred a substantial operating loss
during the fiscal year 1996. This was a result of an unusual charge recorded in
the third quarter of 1996 which consisted of the following: (1) an $8.4 million
increase in the allowance for doubtful accounts; (2) a $3.6 million charge for
costs associated with organizational consolidations and other cost reduction
programs; (3) a $2.8 million charge for the write-off of medical device
inventory; and (4) a $2.0 million charge for professional fees associated with
the Company's restatement and the litigation as described above. Absent these
charges, the Company would have recorded pretax profits of approximately $3.5
million for fiscal 1996.
The Company has consolidated its corporate and administrative office
from Holbrook, New York and transferred those functions to its offices in
Buffalo Grove, Illinois. This consolidation, along with other cost reduction
efforts, is expected to yield approximately $1.5 million in annual cost
reductions.
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. (See "Item 3. 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 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 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, the Company recorded significant charges to its balance sheet
including reductions of the Company's working capital, retained earnings and
shareholder's equity. The Company is presently in default under its Credit
Agreement with Chase Manhattan Bank, N.A., as agent and lender, for among other
things, nonpayment of principal. Accordingly, all long term debt has been
reclassified as a current liability on the Company's balance sheet, which as of
July 29, 1996 was $28.3 million. 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
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<PAGE>
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 April 30, 1996 the Company
had goodwill of approximately $34.0 million, or 35% of its assets. A
significant portion of the Company's goodwill relates to the Clorazil Patient
Management Business ("CPMB"). It is the Company's policy to review the
recoverability of goodwill and other long-lived assets quarterly 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. (See Notes 1 and 2 to the Consolidated Financial Statements,
"Goodwill and Other Long-Lived Assets" and "Acquisitions" for information on
additions to goodwill in connection with the acquisition of the CPMB.)
Independent Auditors Opinion. The independent auditor's opinion on the
fiscal year-end financial statements contain a modification relating to the
Company's ability to continue as a going concern. This modification refers to
the default condition on the Company's Credit Agreement and the litigation
described in Item 3 of this Report ("Legal Proceedings"). The Company intends
to vigorously pursue financing alternatives during the period of the
Forbearance Agreement executed with its lenders. There can be no assurances
that any such financing will be successfully consummated.
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 lead to 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, reimbursement and other services. (See "Item 1. Business--Strategy
for Growth and Expansion".) 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 as 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.
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<PAGE>
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 better ability closely to 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.
RESULTS OF OPERATIONS
Year ended April 30, 1996 as compared to year ended April 30, 1995
The Company's revenues were $158,859,638 for the year ended April 30,
1996, an increase of $70,403,610 or 79.6% over revenues of $88,456,028 for the
year ended April 30, 1995. Revenues generated from the Company's acquisition of
the Clozaril(R) Patient Management Business accounted for approximately $47.0
million of the increase levels. Additional growth of approximately $6.0 million
was generated from the acquisition of the Arcade and Kaufmann businesses which
were acquired on February 1, 1995 and therefore were reflected in the Company's
financial statements for the entire fiscal year of 1996 as compared to only the
fourth quarter of fiscal 1995. The remainder of the increase was derived from
internal growth through the expansion of the Lifecare(TM) Program and new
referral sources.
Gross profit margins were 24.3% for the year ended April 30, 1996, a
3.7 percentage-point decline from 28.0% for the preceding fiscal year. The
decrease in the gross profit rate was primarily attributable to the following
factors: (i) a $2.8 million charge was recorded in the third quarter of fiscal
1996 for the write-down of medical device inventory; (ii) a reduction in
reimbursement rates that occurs when the drug benefit is carved out of the
major medical benefit and is converted into a drug card, which generally
provides for a lower reimbursement rate; and (iii) the phase-in of a change in
Medicare regulations extending immunosuppressant drug Medicare benefits to
transplant patients for up to a three year period post-transplant, as opposed
to the historical one year period, which results in lower reimbursement rates
for patients covered thereby as compared to those covered by commercial
insurance carriers and other private payors (see "Business of the
Company-Reimbursement-Medicare and Medicaid"). Without the $2.8 million charge,
the gross profit margin would have been 26.1%. These decreases in gross profit
margins were partially offset by the Clozaril(R) Patient Management Business,
which currently generates a higher gross profit margin than the other segments
of the Company's business and which recorded a gross profit of $15,940,480 or
approximately 41% of the Company's overall gross profit in fiscal 1996. The
erosion of the Company's profit margins is typical of recent healthcare industry
trends and is attributable to the pricing pressure exerted by managed care
organizations. The Company is attempting to minimize the further erosion of
gross profit
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margins by reducing its costs of service and related support activities and
increasing its volume through focused marketing efforts to spread its fixed
costs over a larger patient base. There are no assurances that the Company will
be successful in these efforts.
Operating expenses for the fiscal year ended April 30, 1996 were
$49,288,793, an increase of $27,736,604 or 129.0%, over operating expenses of
$21,525,189 for the year ended April 30, 1995. $14.0 million of this increase
was attributable to an unusual charge recorded during the third quarter of
fiscal year 1996; $8.4 million of the charge was attributable to an increase in
the provision for doubtful accounts; $3.6 million of the charge was
attributable to costs associated with organizational consolidations and other
cost reduction programs, which charge includes severance costs of approximately
$1.3 million, a goodwill writedown charge of approximately $550,000, a charge
for the write-off of assets of approximately $1 million and the accrual of
lease termination costs of approximately $750,000; and $2.0 million was
associated with professional fees arising out of the Company's restatements,
litigation, etc. Operating expenses year over year were also affected by the
inclusion for the full year in fiscal 1996 of the Clozaril(R) Patient
Management Business versus one month in fiscal year 1995 and by the inclusion
for the full year in 1996 of the Arcade and Kaufmann business versus three
months in the fiscal year 1995. The Clozaril(R) Patient Management Business was
acquired on April 1, 1995. The full year inclusion of the Clozaril(R) Patient
Management Business resulted in an increase in operating expenses of
approximately $9.9 million.
The operating loss for the fiscal year 1996 was ($10,652,683), a
$13,875,501 change from the operating profit of $3,222,818 for the fiscal year
1995. The unusual charge recorded in the third quarter of fiscal year 1996
resulted in the operating loss for the year. Absent the unusual charge, income
from operations would have been approximately $6.2 million.
Net interest expense for the year ended April 30, 1996 was $2,679,504
compared to net interest income of $63,761 in fiscal year 1995. The increase in
interest expense was driven by the outstanding term loans associated with the
CPMB acquisition and the borrowings under the Company's line of credit.
Income before income taxes for the year ended April 30, 1996 was a
($13,332,187) loss compared to a $3,286,579 income level for the year ended
April 30, 1995. The unusual charge of approximately $16.8 million recorded in
the third quarter resulted in the loss for fiscal 1996. Without this unusual
charge, income before income taxes for the year ended April 30, 1996 would have
been approximately $3.5 million.
The net loss for the year was ($10,927,341) compared to a net income
of $1,946,188 for the fiscal year ended April 30, 1995. The net loss for the
1996 fiscal year was a direct result of the unusual charge recorded in the
third quarter of this fiscal year. Also contributing to the net loss was a
valuation allowance of approximately $2.5 million to reserve for a deferred tax
asset. Given the circumstances that led to the modification of the independent
auditor's opinion, a valuation allowance was established for the deferred tax
asset. The remaining unreserved deferred tax asset is the estimated benefit of
a net operating loss carryback available to the Company. Absent the unusual
charge, the valuation allowance of the deferred tax asset and using a 41%
effective tax rate, net income would have been approximately $2.1 million.
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Primary and fully diluted earnings per common share for the year ended
April 30, 1996 were both a ($1.16) loss compared to earnings of $0.21 for the
year ended April 30, 1995. The weighted average number of shares outstanding
used in the calculation of primarily and fully diluted earnings per share were
9,414,500 for the year ended April 30, 1996 and 9,408,300 and 9,420,816,
respectively, for the year ended April 30, 1995.
Certain information provided herein, such as income from operations,
income before income taxes as well as net income, excluding in each case the
effects of the unusual charges are, non-GAAP accounting measures. However, the
Company believes that this financial information is useful in evaluating the
business of the Company under normalized circumstances and in comparing from
period to period.
Year ended April 30, 1995 as compared to year ended April 30, 1994
The financial information for the 1995 fiscal year has been restated.
(See the Company's Amended Annual Report on Form 10-K/A-3 for the year ended
April 30, 1995 as filed with the Securities & Exchange Commission on April 30,
1996.)
The Company's revenues were $88,456,028 for the year ended April 30,
1995, an increase of $44,206,512 or 99.9%, over revenues of $44,249,516 for the
year ended April 30, 1994. Revenues generated through the Company's
acquisitions accounted for approximately $26,500,000 of the additional
revenues, of which approximately $20,000,000 is attributable to the acquisition
of the Murray Group. The balance of the increase in revenues was derived from
internal growth resulting from the expansion of the Lifecare Program into new
disease states and new referral sources.
Gross profit margins were 28.0% for the year ended April 30, 1995, as
compared to 35.3% for the year ended April 30, 1994. The decrease in gross
profit margin was primarily attributable to the following factors: (i)
increases in Betaseron revenues, which presently yields lower margins than have
been historically achieved by the Company for other disease management
programs; (ii) reductions in the fixed fee reimbursement rates from certain
state Medicaid programs (principally New York, which lowered its reimbursement
by 10%); (iii) a change in Medicare regulations extending immunosuppressant
drug Medicare benefits to transplant patients for up to three years
post-transplant, as opposed to the historical one year post-transplant period,
which results in lower reimbursement rates for patients covered thereby as
opposed to patients covered by commercial insurance carriers and other private
payors; (iv) and reduction of reimbursement rates that occur when the drug
benefit is carved out from the major medical benefit and is switched to a drug
card.
Operating expenses as a percentage of revenues increased to 24.3% for
the year ended April 30, 1995, as compared to 20.5% for the year ended April
30, 1994. Total operating expenses were $21,525,189 for the year ended April
30, 1995, an increase of $12,468,650 over the year ended April 30, 1994. The
increase was a result of the three factors. First, during the last quarter, the
Company consummated three acquisitions which resulted in approximately $550,000
of expenses which were one time charges to operations. Second, expenses to
increase the provision for doubtful accounts were approximately $5,800,000
higher for the fiscal year 1995. Third, to support the Company's continued
expansion, selling and marketing efforts, expenses increased by approximately
$1,051,000, while payroll
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related expense increased by approximately $2,600,000, with the balance of the
increase being general operating expenses. Approximately $300,000 of the
increased payroll expenses and approximately $300,000 of the increased general
operating expenses were attributable to increased staffing, system development
and training in the area of reimbursement as the Company directed greater
effort toward decreasing its days sales outstanding.
Operating income was $3,222,818 for the year ended April 30, 1995, a
decrease of $3,326,699 or 50.8%, compared to operating income of $6,549,517 for
the year ended April 30, 1994. This decrease is a result of decreases in gross
profit margins and increases in the provisions for doubtful accounts in spite
of significant revenue growth.
Income before taxes was $3,286,579 for the year ended April 30, 1995,
a decrease of $3,465,064 or 51.3%, compared to $6,751,643 for the year ended
April 30, 1994.
The effective tax rate for the year ended April 30, 1995 was 40.8%, an
increase of 0.1 percentage points, compared to 40.7% for the fiscal year ended
April 30, 1994.
Net income was $1,946,188 for the year ended April 30, 1995, compared
to $4,000,958 for the year ended April 30, 1994, a decrease of $2,054,770 or
51.4%.
Primary and fully diluted earnings per common share for the year ended
April 30, 1995 were $.21 and $.21, compared to $.54 and $.53 for the year ended
April 30, 1994. The weighted average number of shares outstanding used in the
calculation of fully diluted earnings per share was 9,420,816 and 7,593,465 for
the years ended April 30, 1995 and April 30, 1994, respectively.
INFLATION
Inflation did not have a material effect on the Company's results
during the periods discussed.
LIQUIDITY AND CAPITAL RESOURCES
The net decrease of $1,282,517 in the Company's cash and cash
equivalents to $3,280,195 at April 30, 1996 was attributable to cash used in
operating activities. Decreases in cash flow from the operating loss and
non-cash adjustments along with increases in allowances for doubtful accounts
were partially offset by increases in accounts payable and decreases in
inventories.
Working capital at April 30, 1996 was $2,491,619, a decrease from a
$12,486,358 level at April 30, 1995. Current assets increased $7,223,579 due to
increases in accounts receivable of $5,117,390 due to a full year inclusion of
accounts receivable from the CPMB business offset by the increased provision on
the allowance for doubtful accounts, and increases in the tax refund receivable
of $6,210,030 created by the 1996 operating loss. Current assets were decreased
by lowered inventory levels of $986,841 and decreased tax deferred assets of
$1,326,300. Current liabilities increased $17,218,318, principally due to an
increase in accounts payable of $8,384,845 driven by the full year inclusion of
the CPMB business. Total accrued expenses increased $3,222,712 due to the
unusual charge. Current maturities of long-term debt increased to $28,746,028
due to the reclassification of the
- 22 -
<PAGE>
Company's long-term debt as a current liability on its balance sheet, due to
the Company's being in default under its Credit Agreement. As of April 30,
1996, the Company was not aware of any material claims, assessments, disputes,
or unsettled matters with any third-party payors.
To facilitate the acquisition of the Clozaril(R) Patient Management
business, 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
April 30, 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 believes it will have sufficient cash to support its
normal ongoing operations during the remainder of the 1997 fiscal year, but it
most likely will not have sufficient cash to cure the current default under its
bank debt or to provide for a settlement of the outstanding stockholder class
action litigation.
As a principal step in its plan to overcome its financial difficulties
and obtain the needed additional funds, 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 "Item 3. Legal Proceedings".) 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 good relations
with its suppliers, it may have to consider protection under the federal
bankruptcy laws.
Stock-Based Compensation
The Financial Accounting Standards Board Issued Statement of Financial
Accounting Standard Number 123 "Accounting for Stock-Based Compensation" ("SFAS
Number 123") in October 1995. Statement Number 123 encourages companies to
recognize expense for stock options and other stockbased employee compensation
plans based on their fair value at the date of grant. As permitted by Statement
Number 123, the Company plans to continue to apply its current accounting
policy under APB
- 23 -
<PAGE>
Opinion Number 25 "Accounting for Stock Issued to Employees" in 1996 and future
years, and will provide disclosure of the pro forma impact on the net income
and earnings per share as if the fair valuebased method had been applied.
Item 8. Financial Statements
The Financial Statements for the fiscal year ended April 30, 1996 may
be found beginning on page F-1 hereof.
Item 14 of Part IV is hereby amended in its entirety as follows:
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents Filed As A Part of This Report
(1) Financial Statements. The financial statements of Health
Management, Inc. and Subsidiaries for the year ended April 30, 1996,
together with the Report of Independent Certified Public Accountants,
are set forth beginning on page F-1 hereof.
(2) Financial Statement Schedules. Financial statement schedules
required by Items 8 and 14(d) of this Report are set forth following
page S-1 of the financial statements.
(b) Reports on Form 8-K
The Company filed four Current Reports on Form 8-K dated February 27,
1996, March 21, 1996, April 14, 1996 and April 15, 1996, respectively,
with the Securities and Exchange Commission, during the fourth quarter
of the fiscal year ended April 30, 1996. Each of the foregoing Forms
8-K related to matters described under Item 5 thereof.
(c) 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).
- 24 -
<PAGE>
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).
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 referenced to
Form 10-K for the year ended April 30, 1996).
- 25 -
<PAGE>
10.8* Employment Agreement, dated as of January 8, 1996, between
the Company and James R. Mieszala (incorporated by referenced
to Form 10-K for the year ended April 30, 1996).
10.9* Employment Agreement, dated as of December 18, 1996, between
the Company and Paul S. Jurewicz (incorporated by referenced
to Form 10-K for the 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).
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
- 26 -
<PAGE>
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
referenced to Form 10-K for the 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).
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 referenced to Form 10-K for the year ended April 30,
1996).
21 Subsidiaries of the Registrant (incorporated by reference to
Form 10-K for the year ended April 30, 1996).
23 Consent of BDO Seidman, LLP**
27 Financial Data Schedule (incorporated by referenced to Form
10-K for the year ended April 30, 1996).
* Management contract or compensatory plan or arrangement.
** Filed herewith.
- 27 -
<PAGE>
Health Management, Inc. and Subsidiaries
===============================================================================
Consolidated Financial Statements
Form 10-K - Item 8 and Item 14(a)(1) and (2)
Year Ended April 30, 1996
<PAGE>
Health Management, Inc. and Subsidiaries
Index
===============================================================================
Report of Independent Certified Public Accountants F-3
Consolidated balance sheets:
April 30, 1996 and 1995 F-4
Consolidated financial statements for the three
years ended April 30, 1996:
Statements of operations F-5
Statements of stockholders' equity F-6
Statements of cash flows F-7 - F-8
Notes to consolidated financial statements F-9 - F-31
F-2
<PAGE>
Report of Independent Certified Public Accountants
Health Management, Inc. and Subsidiaries
Buffalo Grove, Illinois
We have audited the consolidated balance sheets of Health Management, Inc. and
Subsidiaries as of April 30, 1996 and 1995 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended April 30, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of
financial statements. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Health Management,
Inc. and Subsidiaries at April 30, 1996 and 1995 and the results of their
operations and cash flows for each of the three years in the period ended April
30, 1996 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Notes 1 and
7 to the accompanying consolidated financial statements, the Company is not in
compliance with the provisions of certain loan agreements and is the defendant
in significant litigation. These matters raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are described in Notes 1 and 7. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
BDO Seidman, LLP
Mitchel Field, New York
July 22, 1996, except for Note 4(a)
which is as of July 26, 1996
F-3
<PAGE>
Health Management, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
================================================================================================
April 30, 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets (Note 4(a))
Current:
Cash and cash equivalents $ 3,280,195 $ 4,562,712
Accounts receivable, less allowance for doubtful
accounts of approximately $10,070,000 and
$7,998,000 36,457,199 31,339,809
Inventories 6,800,820 7,787,661
Tax refund receivable (Note 6) 8,037,030 1,827,000
Deferred taxes (Note 6) 1,807,000 3,133,300
Prepaid expenses and other 655,358 1,163,541
- ------------------------------------------------------------------------------------------------
Total current assets 57,037,602 49,814,023
Improvements and equipment, less accumulated
depreciation and amortization (Notes 3 and 4) 3,825,974 2,136,062
Goodwill (Note 2) 34,008,496 35,464,260
Other 1,043,607 1,275,775
- ------------------------------------------------------------------------------------------------
$ 95,915,679 $ 88,690,120
================================================================================================
Liabilities and Stockholders' Equity
Current:
Accounts payable $ 20,714,836 $ 12,329,991
Accrued unusual charges (Note 5) 3,559,000 --
Accrued expenses 1,526,119 1,862,407
Current maturities of long-term debt (Note 4) 28,746,028 23,135,267
- ------------------------------------------------------------------------------------------------
Total current liabilities 54,545,983 37,327,665
Long-term debt, less current maturities (Note 4) 4,006,077 3,191,123
- ------------------------------------------------------------------------------------------------
Total liabilities 58,552,060 40,518,788
- ------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 7)
Stockholders' equity (Note 8):
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
and 9,316,017 279,848 279,481
Additional paid-in capital 38,138,771 38,019,510
Retained earnings (deficit) (1,055,000) 9,872,341
- ------------------------------------------------------------------------------------------------
Total stockholders' equity 37,363,619 48,171,332
- ------------------------------------------------------------------------------------------------
$ 95,915,679 $ 88,690,120
================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
F-4
<PAGE>
Health Management, Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
============================================================================================================
Year ended April 30, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 158,859,638 $ 88,456,028 $ 44,249,516
Cost of sales (including unusual charges of
$2,840,000 in 1996) (Note 5) 120,223,528 63,708,021 28,643,460
- ------------------------------------------------------------------------------------------------------------
Gross profit 38,636,110 24,748,007 15,606,056
- ------------------------------------------------------------------------------------------------------------
Operating expenses:
Selling 4,649,697 2,898,208 1,847,197
General and administrative 30,639,096 18,626,981 7,209,342
Unusual charges (Note 5) 14,000,000 -- --
- ------------------------------------------------------------------------------------------------------------
Total operating expenses 49,288,793 21,525,189 9,056,539
- ------------------------------------------------------------------------------------------------------------
Income (loss) from operations (10,652,683) 3,222,818 6,549,517
Interest expense (2,717,155) (269,316) (88,215)
Interest income 37,651 333,077 290,341
- ------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (13,332,187) 3,286,579 6,751,643
Income taxes (Note 6) (2,404,846) 1,340,391 2,750,685
- ------------------------------------------------------------------------------------------------------------
Net income (loss) $ (10,927,341) $ 1,946,188 $ 4,000,958
============================================================================================================
Earnings (loss) per share of common stock
- primary $ (1.16) $ .21 $ .54
============================================================================================================
- fully diluted $ (1.16) $ .21 $ .53
============================================================================================================
Weighted average shares outstanding
- primary 9,414,500 9,408,300 7,383,040
============================================================================================================
- fully diluted 9,414,500 9,420,816 7,593,465
============================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
F-5
<PAGE>
Health Management, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Three Years Ended April 30, 1996 (Note 8)
<TABLE>
<CAPTION>
============================================================================================================================
Common Stock Unearned
$.03 Par Value Retained Restricted
------------------------------ Additional Earnings Stock
Shares Amount Paid-in Capital (Deficit) Compensation
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, May 1, 1993 6,076,063 $ 182,281 $ 5,647,475 $ 3,925,195 $ --
Common stock issued upon exercise of
stock options 2,833 85 12,663 -- --
Common stock issued upon exercise of
stock warrants 40,330 1,210 216,572 -- --
Common stock issued upon conversion
of subordinated debentures 357,145 10,715 364,288 -- --
Common stock issued upon public
offering 2,000,000 60,000 21,922,258 -- --
Common stock issued upon acquisition
of Murray Group 617,060 18,512 7,676,230 -- --
Restricted stock issued to consultants 11,000 330 113,795 -- (114,125)
Compensation under restricted stock -- -- -- -- 57,060
Net income for the year ended April 30,
1994 -- -- -- 4,000,958 --
- ----------------------------------------------------------------------------------------------------------------------------
Balance, April 30, 1994 9,104,431 273,133 35,953,281 7,926,153 (57,065)
Common stock issued upon acquisition
of:
Pharmaceutical Marketing Alliance 20,000 600 242,775 -- --
Maryland Pharmacies 108,757 3,263 1,356,112 -- --
Common stock issued upon exercise of
stock warrants 78,996 2,370 424,208 -- --
Common stock issued upon exercise of
stock options 2,833 85 24,414 -- --
Common stock issued to directors 1,000 30 18,720 -- --
Compensation under restricted stock -- -- -- -- 57,065
Net income for the year ended April 30,
1995 -- -- -- 1,946,188
- ----------------------------------------------------------------------------------------------------------------------------
Balance, April 30, 1995 9,316,017 279,481 38,019,510 9,872,341 --
Common stock issued upon exercise of
stock options 12,223 367 119,261
Net loss for the year ended April 30,
1996 (10,927,341)
- ----------------------------------------------------------------------------------------------------------------------------
Balance, April 30, 1996 9,328,240 $ 279,848 $ 38,138,771 $ (1,055,000) $ --
============================================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
F-6
<PAGE>
Health Management, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Note 9)
<TABLE>
<CAPTION>
=================================================================================================
Year ended April 30, 1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ($10,927,341) $ 1,946,188 $ 4,000,958
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 2,127,400 846,869 453,149
Provision for doubtful accounts
receivable 14,714,606 7,978,189 1,781,000
Deferred taxes 1,326,300 (2,516,300) (701,315)
Write-off of improvements and
equipment 263,563
Write-off of goodwill 552,432
Write-off of organizational costs 134,161
Loss from disposition of rental
equipment -- 287,287 --
Compensation under restricted stock -- 57,065 57,060
Common stock issued to director -- 18,750 --
Increase (decrease) in cash flows from
changes in operating assets and
liabilities, net of effects of purchase
of CPMB and other acquisitions in
1995 and Murray Group in 1994:
Accounts receivable (19,831,996) (16,706,549) (9,624,966)
Tax refund receivable (6,210,030) (1,827,000) --
Inventories 986,841 (1,826,911) 205,220
Prepaid expenses and other 508,183 (976,058) (205,307)
Other assets 98,008 (239,758) (249,281)
Accounts payable 8,384,845 4,870,054 99,675
Accrued unusual charges 3,559,000 -- --
Accrued expenses (336,288) 396,332 203,075
Income taxes payable -- (1,759,590) 280,467
- -------------------------------------------------------------------------------------------------
Net cash used in operating activities (4,650,316) (9,451,432) (3,700,265)
- -------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Cash used in acquisition of CPMB (324,366) (20,630,212) --
Cash used in acquisition of Murray Group -- -- (7,500,000)
Other acquisitions -- (2,167,500) (250,000)
Collection of receivable from the seller of
Murray Group -- 1,444,426 --
Capital expenditures (1,491,722) (948,368) (565,815)
Proceeds from sale of rental equipment -- 214,598 --
- -------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,816,088) (22,087,056) (8,315,815)
- -------------------------------------------------------------------------------------------------
</TABLE>
F-7
<PAGE>
Health Management, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Note 9)
<TABLE>
<CAPTION>
=================================================================================================
Year ended April 30, 1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from long-term debt 16,450,000 23,000,000 --
Principal payments on long-term debt (11,000,000) -- --
Net payment on capital leases (385,741) (123,357) (44,202)
Decrease in bank loan - net -- -- (200,000)
Proceeds from issuance of common stock -- -- 21,982,258
Cash paid for deferred borrowing fees -- (722,000) --
Proceeds from exercise of warrants -- 426,578 217,782
Proceeds from exercise of options 119,628 24,499 12,748
- -------------------------------------------------------------------------------------------------
Net cash provided by financing
activities 5,183,887 22,605,720 21,968,586
- -------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents (1,282,517) (8,932,768) 9,952,506
Cash and cash equivalents, beginning of
year 4,562,712 13,495,480 3,542,974
- -------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 3,280,195 $ 4,562,712 $ 13,495,480
=================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
F-8
<PAGE>
Health Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
1. Basis of Presentation
and Summary of
Accounting Policies
Organization and The consolidated financial statements include
Principles of Health Management, Inc. (formerly Homecare
Consolidation Management, Inc.) (the "Company"), (a Delaware
corporation), its wholly-owned subsidiaries
Home Care Management, Inc. (HMI-NY), HMI
Pennsylvania, Inc., HMI Retail Corp. Inc.,
Health Reimbursement Corp., HMI PMA Inc., HMI
Maryland Inc., and HMI Illinois, Inc. All
material intercompany accounts and
transactions have been eliminated in
consolidation.
Basis of Presentation The Company's consolidated financial
statements have been presented on a going
concern basis, which contemplates the
realization of assets and satisfaction of
liabilities in the normal course of business.
As more fully discussed in Note 4, the Company
is in violation of its loan agreements
resulting in the related debt being classified
as current liabilities. The Company and its
lenders have agreed to a forbearance period
during which management intends to attempt to
arrange for a refinancing of the current debt.
Also, as described in Note 7, the Company is a
defendant in significant litigation and is the
subject of an investigation by the Enforcement
Division of the Securities and Exchange
Commission. These matters raise substantial
doubt about the Company's ability to continue
as a going concern. The consolidated financial
statements do not include any adjustments that
might result from the outcome of this
uncertainty.
Use of Estimates In preparing financial statements in
and Concentration conformity with generally accepted accounting
principles, management is required to make
estimates and assumptions that affect the
reported amounts of assets and liabilities and
the disclosure of contingent assets and
liabilities at the date of the financial
statements and revenues and expenses during
the reporting period. Actual results could
differ from those estimates.
Approximately 46% of the Company's revenues
are currently attributable to sale of two
products which are manufactured solely by one
pharmaceutical manufacturer. If the Company
were unable to purchase these two products,
its results of operations would be materially
and adversely affected.
F-9
<PAGE>
Health Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
Credit Risk Financial instruments which potentially
subject the Company to concentrations of
credit risk consist principally of temporary
cash investments, tax-exempt obligations and
trade receivables. The Company places its
temporary cash investments with high credit
quality financial institutions and limits the
amount of credit exposure to any one financial
institution. At times, such cash investments
exceed the Federal Deposit Insurance Corp.
insurance limit. Concentrations of credit risk
with respect to trade receivables are limited
due to the diverse group of patients whom the
Company services. No single customer accounted
for a significant amount of the Company's
sales in the years ended April 30, 1996, 1995
and 1994. Approximately 44%, 40% and 35% of
the Company's revenues are reimbursed under
arrangements with Federal and State medical
assistance programs for the years ended April
30, 1996, 1995, and 1994. At April 30, 1996
and 1995, approximately 43%, and 36% of the
Company's accounts receivable are from Federal
and State medical assistance programs. The
Company establishes an allowance for doubtful
accounts based upon factors surrounding the
credit risk of specific customers, historical
trends and other information.
Inventories Inventories are valued at the lower of cost or
market. Cost is determined by the first-in,
first-out method (FIFO). Inventories are
principally comprised of prescription and
over-the-counter drugs.
Revenue Recognition Revenues are recognized on the date services
and related products are provided to patients
and are recorded at amounts estimated to be
received from patients or under reimbursement
arrangements with third party payors.
Cash and Cash The Company considers all highly liquid
Equivalents investments with a maturity of three months or
less when purchased to be cash equivalents.
Improvements and Improvements and equipment are stated at cost.
Equipment Depreciation of equipment and amortization of
leasehold improvements are computed over the
estimated useful lives of the assets and the
lease term, respectively, ranging from 3 to 7
years for equipment and 13 years for
improvements. Accelerated methods (double
declining balance method) are used for both
book and tax purposes for all classes of
assets except for leasehold improvements which
are amortized using straight line method.
F-10
<PAGE>
Health Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
Goodwill and Other Goodwill represents the excess of the purchase
Long-Lived Assets price over the fair value of net assets
acquired through business combination,
accounted for as purchases (see Note 2) and is
amortized on a straight-line basis over the
estimated period to be benefitted - thirty
years. During the fiscal year ended April 30,
1996, the Company elected the early adoption
of SFAS No. 121 "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets
to be Disposed of." Prior to the adoption of
SFAS No. 121, the carrying value of goodwill
was reviewed periodically based on the
projected gross profits of the businesses
acquired over the remaining amortization
period.
In accordance with SFAS No. 121 the carrying
value of long-lived assets will be reviewed
for impairment whenever events or changes in
circumstances indicate that the carrying
amount may not be recoverable.
The amount of impairment is computed based on
the excess of the asset's carrying value over
its fair value under SFAS 121. Long-lived
assets acquired in business combinations
accounted for using the purchase method
includes the goodwill that arose in those
transactions allocated on a pro rata basis
using the relative fair values of the
long-lived assets and identifiable intangibles
acquired at the acquisition date. Based on the
Company's analysis under SFAS No. 121, the
Company believes that, other than the
write-off of goodwill related to the
Pharmaceutical Marketing Alliance acquisition
(see Note 2) totalling $553,000, no impairment
of the carrying value of its long-lived assets
inclusive of allocated goodwill existed at
April 30, 1996. The Company's analysis at
April 30, 1996 has been based on an estimate
of future undiscounted net cash flows. Should
the results forecasted not be achieved, future
analyses may indicate insufficient future
undiscounted net cash flows to recover the
carrying value of the Company's long-lived
assets inclusive of allocated goodwill, in
which case SFAS No. 121 would require the
carrying value of such assets to be written
down to fair value if lower than carrying
value.
Income Taxes Deferred taxes are recorded to reflect the
temporary differences in the tax bases of
assets and liabilities and their reported
amounts in the financial statements. The
differences relate principally to the
allowance for doubtful accounts and unusual
charges.
F-11
<PAGE>
Health Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
Earnings Per Share Earnings per share are computed on the basis
of the weighted average number of common
shares and common stock equivalents
outstanding during the year. Fully diluted
earnings per share results mainly from
considering the shares issuable upon the
conversion of the convertible subordinated
debentures and adjusting the net income by
adding back the after-tax effect of the
interest expense thereon.
Fair Value of The carrying amounts of certain financial
Financial instruments, including cash, accounts
Instruments receivable and accounts payable, approximate
fair value as of April 30, 1996 because of the
relatively short-term maturity of these
instruments. The carrying value of long-term
debt, including the current portion,
approximates fair value as of April 30, 1996
based upon the borrowing rates currently
available to the Company for bank loans with
similar terms and average maturities.
Stock-Based The Financial Accounting Standards Board
Compensation Issued Statement of Financial Accounting
Standard Number 123 "Accounting for
Stock-Based Compensation" ("SFAS Number 123")
in October 1995. Statement Number 123
encourages companies to recognize expense for
stock options and other stock-based employee
compensation plans based on their fair value
at the date of grant. As permitted by
Statement Number 123, the Company plans to
continue to apply its current accounting
policy under APB Opinion Number 25 "Accounting
for Stock Issued to Employees" in 1996 and
future years, and will provide disclosure of
the pro forma impact on net income and
earnings per share as if the fair value-based
method had been applied.
2. Acquisitions (a) On March 31, 1995, HMI Illinois, a
wholly-owned subsidiary of the Company,
acquired certain assets subject to
certain liabilities of Caremark Inc.'s
Clozaril Patient Management Business
("CPMB"). The aggregate purchase price
was approximately $23,260,000
consisting of $20,060,000 in cash
provided by bank financing, a $200,000
escrow deposit, and a $3,000,000 five
year subordinated note with an annual
interest rate of 8% payable
semi-annually.
F-12
<PAGE>
Health Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
The acquisition has been accounted for
by the purchase method of accounting.
The purchase price has been allocated
to the assets acquired based on the
estimated fair values of each asset and
liability. The purchased assets consist
primarily of inventory and equipment.
The excess of purchase price over fair
value of the assets acquired was
approximately $22,860,000.
The unaudited pro-forma condensed
combined statement of income for the
year ended April 30, 1995 giving effect
to the acquisition of CPMB by the
Company as if it had occurred as of the
beginning of the year is as follows:
Year ended April 30, 1995
- ------------------------------------------------------------------------------
(In thousands)
Revenues $133,178
- ------------------------------------------------------------------------------
Income $6,237
- ------------------------------------------------------------------------------
Net income $3,505
- ------------------------------------------------------------------------------
Earnings Per Share
Primary $.37
Fully Diluted $.37
==============================================================================
Pro-forma adjustments included in the
pro-forma condensed combined statement
of income consisted of amortization of
goodwill of $666,000, interest expenses
of $2,340,000, allowance for doubtful
accounts of $634,000 and increase in
cost of sales of $500,000.
F-13
<PAGE>
Health Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
(b) On February 6, 1995, the Company
acquired substantially all of the
assets, subject to certain liabilities,
of two specialty pharmacies located in
Maryland. Immediately following this
acquisition, the Company contributed
all of the acquired assets, subject to
assumed liabilities, to HMI, Maryland,
Inc., a newly formed subsidiary
wholly-owned by the Company ("HMI-
Maryland"). The aggregate purchase
price for the two specialty pharmacies
approximated $3,172,000 and consisted
of $1,812,500 in cash and cash
equivalents and 108,757 newly-issued
shares of common stock of the Company
discounted at 25% and valued at
$1,359,500.
The acquisition has been accounted for
by the purchase method of accounting.
The purchase price has been allocated
to the assets acquired based on the
estimated fair value of each asset. The
excess of purchase price over fair
value of the assets was approximately
$2,454,000.
(c) On June 16, 1994, the Company acquired
certain assets of Pharmaceutical
Marketing Alliance, Inc. (PMA) for a
total purchase price of $598,375 which
is comprised of cash of $355,000 and
20,000 shares of common stock.
Immediately following this acquisition,
the Company contributed all of the
acquired assets, subject to assumed
liabilities to HMI-PMA, Inc., a
newly-formed wholly-owned subsidiary.
The Company also entered into a
three-year employment agreement with
three employees of PMA at an aggregate
of $225,000 per annum.
The operations of HMI-PMA were closed
during fiscal year 1996. Costs
associated with this closure, including
write-off of goodwill of $553,000 and
termination of employment agreements
were recorded in the year ended April
30, 1996. The write-off and the related
charges were part of the $3,600,000
charge discussed in Note 5.
F-14
<PAGE>
Health Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
(d) On April 1, 1994, the Company acquired
substantially all of the net assets of
Murray Pharmacy, Inc. and Murray
Pharmacy Too, Inc. (collectively
"Murray Group"), for total
consideration of up to $16,195,000,
comprised of cash of $7,500,000,
617,060 shares of non-registered common
stock of the Company, discounted at 25%
and valued at $7,695,000, and a
$1,000,000 earn-out based on
performance of the companies for the
year ended April 30, 1995. The
$1,000,000 earn-out was not recorded
because the specified performance level
was not achieved.
In connection with the acquisition, the
Company entered into employment
agreements with the two shareholders of
the Murray Group. The Company also
entered into leases for buildings owned
by the two Murray Group's shareholders
(see Note 6(a)).
The acquisition has been accounted for
by the purchase method of accounting.
The purchase price has been allocated
to the assets acquired based on the
estimated fair value of each asset. The
purchased assets consist primarily of
accounts receivable and inventory. The
excess of purchase price over the fair
value of the assets acquired was
approximately $10,100,000.
As a result of the above acquisitions,
total excess of purchase price in
excess of net assets acquired are as
follows:
April 30, 1996 1995
- ------------------------------------------------------------------------------
Goodwill resulting from acquisition of:
CPMB $22,860,251 $22,535,855
Maryland pharmacies 2,453,959 2,453,959
PMA - 581,507
Murray group 10,099,860 10,099,860
Other 250,000 250,000
- ------------------------------------------------------------------------------
35,664,070 35,921,181
Less: accumulated amortization 1,655,574 456,921
- ------------------------------------------------------------------------------
$34,008,496 $35,464,260
==============================================================================
F-15
<PAGE>
Health Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
3. Improvements and Improvements and equipment consist of the
Equipment following:
April 30, 1996 1995
- -----------------------------------------------------------------------------
Furniture and equipment $2,380,978 $1,575,503
Transportation equipment 104,090 88,906
Computer equipment 2,689,619 777,133
Leasehold improvements 365,743 491,108
- -----------------------------------------------------------------------------
5,540,430 2,932,650
Less accumulated depreciation and
amortization 1,714,456 796,588
- -----------------------------------------------------------------------------
$3,825,974 $2,136,062
=============================================================================
4. Long-Term Debt Long-term debt consists of the following:
April 30, 1996 1995
- -----------------------------------------------------------------------------
Term loan (a) $18,000,000 $21,000,000
Revolving credit (a) 10,350,000 2,000,000
Subordinated note payable (b) 3,000,000 3,000,000
Capitalized leases and notes payable
requiring monthly payments of
$42,252 including assumed interest
ranging from 3.2% to 21%,
collateralized by equipment with a
book value of $1,354,708. 1,402,105 326,390
- -----------------------------------------------------------------------------
32,752,105 26,326,390
Less current maturities 28,746,028 $23,135,267
- -----------------------------------------------------------------------------
$ 4,006,077 $ 3,191,123
=============================================================================
F-16
<PAGE>
Health Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
(a) On April 4, 1995, the Company borrowed
$21,000,000 on a term loan to fund the
cash portion of the acquisition of CPMB
(Note 2(a)). The term loan bears
interest at a rate of .5% above the
Alternative Base Rate (as defined by
the Credit Agreement and was 8.75% at
April 30, 1996) and is convertible into
Eurodollar loans. The principal was
payable over five years in quarterly
installment payments of $750,000
through March 31, 1996; $1,000,000
through March 31, 1997, $1,250,000
through March 31, 1999 and $1,000,000
through March 21, 2000.
The Credit Agreement provided for a
revolving credit facility of up to
$15,000,000, including up to a
$1,000,000 letter of credit facility.
This agreement had an original
expiration date of March 1997.
Borrowings under this facility bear
interest at the Alternative Base Rate
(as defined in the Credit Agreement)
and is convertible into Eurodollar
loans. At April 30, 1996, the Company
had borrowings under this line of
credit of $10,350,000 bearing interest
at 8.25% on $6,350,000 and 7.5% on
$4,000,000.
The term loan and the revolving credit
facility are collateralized by an
assignment of a security interest in
all assets of the Company and its
subsidiaries.
The agreements contains restrictions
relating to the payment of dividends,
liens, indebtedness, investments and
capital expenditures. In addition, the
Company must maintain certain financial
ratios and a minimum net worth. As a
result of the matters discussed in Note
7(d) and the unusual charges described
in Note 5, the Company was in violation
of certain provisions of the Credit
Agreement. Accordingly, all borrowings
under the term loan and the revolving
credit facility are classified as
current.
F-17
<PAGE>
Health Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
On July 26, 1996, the Company and the
lenders under the agreements entered
into a forbearance agreement covering
the period from July 26, to November
15, 1996. Under this agreement, the
lenders agreed subject to certain
conditions, to forbear from exercising
any of their legal, contractual or
equitable rights of remedies in respect
of any of the existing events of
default during the above forbearance
period and the Company agreed to
certain revised financial covenants and
reporting requirements. The forbearance
agreement also reduced the availability
under the revolving credit facility to
a maximum of $1,500,000 over the
borrowings currently outstanding.
Concurrently, the Company engaged
National Westminster Bank PLC ("Nat
West") to act as its financial advisor
to explore a variety of strategic and
financial alternatives. The Company
requires additional financing to remedy
the default condition of its term loan
and borrowings under revolving credit
facility. In order to satisfy such
obligations the Company may consider
engaging in a public or private
offering of securities of the Company.
There is no assurance that such
financing can be obtained.
(b) In connection with the CPMB acquisition
(see Note 2(a)), the Company is
obligated on a $3,000,000 unsecured
subordinated note, bearing interest at
an annual rate of 8% and maturing March
31, 2000.
As a result of the restatement of the
Company's April 30, 1995 financial
statements and the provision of unusual
charges (see Note 5), the Company did
not meet certain of the financial
ratios as required by the note. As a
result, the note became convertible
into the Company's common stock upon
notice received from the holder of the
note. The conversion price is based
upon the average closing price of the
Company's common stock for the ten
trading days immediately proceeding the
conversion date and the ten trading
days immediately subsequent to the
conversion date. The Company has not
received notice from the noteholder for
conversion.
F-18
<PAGE>
Health Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
The maximum amount of short-term
borrowings outstanding during the years
ended April 30, 1996, 1995 and 1994 was
$10,350,000 $2,300,000 and $2,000,000,
respectively. The average amounts
outstanding for the years ended April
30, 1996, 1995 and 1994 were
$7,696,000, $592,000 and $796,000,
respectively. The average borrowing
rates were 8.37%, 8.875% and 7% for the
years ended April 30, 1996, 1995 and
1994, respectively.
Long term debt matures as follows:
Year ended April 30,
- ------------------------------------------------------------------------------
1997 $28,746,028
1998 377,771
1999 315,873
2000 3,245,162
2001 67,271
- ------------------------------------------------------------------------------
$32,752,105
==============================================================================
5. Unusual Charges The following unusual charges were incurred
during the year ended April 30, 1996:
Included in costs of sales:
. Write-off of medical device inventory (a) $2,840,000
==============================================================================
F-19
<PAGE>
Health Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
Included in operating expenses:
. Additional provision reflecting a change in the
estimation of the allowance for doubtful
accounts (b) 8,400,000
. Cost associated with organizational consolidation
and other cost reduction programs (c) 3,600,000
. Professional fees related to the Company's
litigation and restatement of fiscal 1995 financial
statements (see Note 7(d)) 2,000,000
- -------------------------------------------------------------------------------
$14,000,000
===============================================================================
(a) Through January 31, 1996, the Company
purchased approximately $3.5 million of
medical device inventory under a
purchase agreement which provided for a
total purchase commitment of
approximately $5.4 million in return
for an exclusive right to distribute in
the home care market. A substantial
portion of the $3.5 million was
purchased during the nine months ended
January 31, 1996.
This device was originally targeted for
use in the multiple sclerosis market
but was not being utilized in the
treatment of such condition because of
the concerns of drug manufacturers and
physicians that the device could affect
the molecular stability of the drug
being administered. The lack of
acceptance of such device was
conclusively identified during the
third quarter of fiscal 1996.
As a result, in January 1996, the
Company notified the manufacturer of
this device that the Company would
cease further purchase of such product.
The Company also negotiated a return
agreement whereby the manufacturer of
the device purchased back the inventory
in return for the forgiveness of
$322,000 payable to the manufacturer
from the Company and payment to the
Company of $338,000. Accordingly, the
Company wrote down its medical device
inventory by $2,840,000.
F-20
<PAGE>
Health Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
(b) The Company had an evaluation of its
allowance for doubtful accounts
completed in the third quarter of
fiscal 1996, using a statistical
sampling approach to its receivables.
Based on the result of this sampling,
the Company concluded that its
allowance for doubtful accounts was
understated by $8.4 million.
Accordingly, the Company provided an
additional $8.4 million allowance
during the quarter ended January 31,
1996 when it revised its estimate of
the required allowance for doubtful
accounts.
(c) The organizational consolidation costs
include termination benefits accrued
totalling $1,271,000 related to the
Company's January 1996 plan of
termination of approximately 30
employees as part of the consolidation
of the Company's accounting and
executive offices in Buffalo Grove,
Illinois. Through April 30, 1996,
$545,000 of such benefits had been paid
leaving a balance of $726,000.
The remaining organizational
consolidation costs and other cost
reduction programs, totalling
$2,329,000 can be summarized as
follows:
Estimated lease termination costs $766,000
Write off of PMA goodwill 553,000
Write off of PMA and New York fixed assets 397,000
Write off of deferred financing costs 613,000
----------
$2,329,000
==========
Estimated lease termination costs
represent the lease expense for the
remaining lease term of the New York
headquarters which is to be closed. The
write off of PMA goodwill represents
the carrying value of goodwill of
HMI-PMA (see Note 2(c)), which was
closed in fiscal 1996. The write off of
PMA and New York fixed assets
represents the net book value of
leasehold improvements of PMA and the
New York headquarters to be closed.
Write off of deferred financing costs
represents deferred financing costs
resulting from the Company's April 1995
term loan and credit agreement under
which the Company is currently in
default.
F-21
<PAGE>
Health Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
Through April 30, 1996, write-off of
fixed assets, goodwill and related long
lived assets amounted to $950,000,
leaving a balance of $1,379,000.
The above remaining liabilities of
$726,000 and $1,379,000 and the unpaid
professional fees of $1,454,000 as of
April 30, 1996 were included in accrued
unusual charges.
6. Income Taxes The income tax expenses (benefits) are
comprised of the following:
Year ended April 30, 1996 1995 1994
- ------------------------------------------------------------------------------
Current:
Federal $(4,398,902) $ 2,793,223 $2,640,000
State and local 667,756 1,063,468 812,000
- ------------------------------------------------------------------------------
(3,731,146) 3,856,691 3,452,000
- ------------------------------------------------------------------------------
Deferred
Federal 989,000 (1,851,000) (580,000)
State and local 337,300 (665,300) (121,315)
- ------------------------------------------------------------------------------
1,326,300 (2,516,300) (701,315)
- ------------------------------------------------------------------------------
Total income taxes $(2,404,846) $ 1,340,391 $2,750,685
==============================================================================
The following reconciles the federal statutory tax rate with the actual
effective rate:
Year ended April 30, 1996 1995 1994
- ------------------------------------------------------------------------------
Statutory rate (34%) 34% 34%
Increase (decrease) in tax rate
resulting from:
State and local taxes, net of
federal benefit 5% 7 7
Change in deferred tax assets
valuation allowance 11% - -
- ------------------------------------------------------------------------------
Effective rate (18%) 41% 41%
==============================================================================
F-22
<PAGE>
Health Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
Deferred tax assets (liabilities) consist of the following:
April 30, 1996 1995
- ------------------------------------------------------------------------------
Deferred tax assets resulting from:
Allowance for doubtful accounts $4,532,000 $3,163,000
Unusual charges 535,000 -
Deferred tax liability - difference in
carrying value of goodwill for book and
tax (734,000) (29,700)
- ------------------------------------------------------------------------------
4,333,000 3,133,300
Valuation allowance (2,526,000) -
- ------------------------------------------------------------------------------
$1,807,000 $3,133,300
==============================================================================
A valuation allowance for the deferred tax
assets was provided because of uncertainty as
to future realization of the deferred tax
assets (exclusive of the remaining carryback
benefit) as a result of the substantial doubt
about the Company's ability to continue as a
going concern.
As of April 30, 1996, the Company recorded a
$8,037,030 tax refund receivable, which
consisted of $1,344,000 of tax refund
receivable from amended 1995 tax returns as a
result of the restatement of fiscal 1995
financial statements, $2,530,030 of excessive
estimate taxes paid in 1996 and $4,163,000
estimated refund claim due to 1996 net
operating loss carryback.
7. Commitments and (a) Leases
Contingencies
The Company leases its offices,
warehouse and retail pharmacies under
operating leases expiring at various
times through August 2002. The Company
also leases data processing equipment
under agreements which expire at
various times through 2000. These
leases have been classified as capital
leases (Note 3).
As of April 30, 1996, future net
minimum lease payments under capital
leases and noncancellable operating
lease agreements are as follows:
F-23
<PAGE>
Health Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
Capital Operating
- ------------------------------------------------------------------------------
1997 $416,241 $1,296,629
1998 389,908 1,088,500
1999 312,249 765,575
2000 227,870 680,728
2001 68,405 177,447
Thereafter - 97,654
- ------------------------------------------------------------------------------
Total minimum lease payments 1,414,673 4,106,533
Less amounts representing
interest 179,803 -
- ------------------------------------------------------------------------------
Net minimum lease payments $1,234,870 $4,106,533
==============================================================================
Rent expense for the years ending April
30, 1996, 1995, and 1994 amounted to
$1,544,788, $364,448 and $252,534,
respectively which included rent
expense for the buildings owned by the
two Murray Group shareholders amounted
to $106,400, $106,410 for the years
ended April 30, 1996 and 1995.
(b) Retirement plan
Effective August 1, 1990, the Company
established a 401(K) plan for eligible
salaried employees. The contribution
for any participant may not exceed
statutory limits. After one year of
employment, the Company will match 40%
of each employee participant's
contributions up to the first 5% of
compensation. The total matching
contributions charged against
operations amounted to $178,844,
$71,281 and $22,935 for the years ended
April 30, 1996, 1995 and 1994.
(c) Employment Agreements
The Company has in effect employment
agreements with certain key officers
and employees, which expire at various
dates through May, 1999. Total salaries
under these agreements amount to
approximately $900,000 annually.
F-25
<PAGE>
Health Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
(d) Litigation
(1) 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 will be consolidated
shortly into one action. These
actions allege claims under
Sections 10(b) and 20(a) of the
Securities and Exchange Act of
1934, arising out of alleged
misrepresentations and omissions by
the Company in connection with
certain of its disclosure
statements. These 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. These 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
proposed Order of Consolidation,
the Company will not be required to
answer or otherwise move in the
consolidated action until thirty
days after it is served with an
amended consolidated complaint,
which has not yet been served on
the Company.
Certain of the Company's current
and former officers and directors
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. The consolidated action
alleges claims for breach of
fiduciary duty and contribution
against the individual director
defendants arising out of alleged
misrepresentations and omissions
contained in certain of the
Company's corporate filings, as
more fully alleged in the
above-described class action
lawsuit. The consolidated action
seeks unspecified monetary damages
on behalf of the Company as well as
declaratory and injunctive relief.
Pursuant to the Stipulation and
Order of Consolidation, the Company
is not required to answer or
otherwise move in the consolidated
action until sixty days after it is
served with an amended consolidated
complaint, which has not yet been
served on the Company.
F-25
<PAGE>
Health Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
The Company's auditors have 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. The complaint against the
Company's auditors alleges claims
for misrepresentations and
omissions contained in certain of
the Company's corporate filings.
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 indefinitely adjourned.
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.
(2) The Company has been named as a
defendant in an action pending in
the United States District Court
for the Eastern District of New
York entitled Bindley Western
Industries, Inc. vs. Health
Management Inc., 96 Civ. 2330
(ADS). The action alleges claims
for breach of contract and accounts
stated arising out of a dispute
regarding payments for certain
goods. The action seeks damages in
the amount of $3,187,157.35
together with interest, costs and
disbursements. The Company has
answered the complaint, complied
with its automatic disclosures
obligations and has reduced the
accounts payable to approximately
$2,600,000 as of July 26, 1996.
F-26
<PAGE>
Health Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
(3) On April 3, 1995, American
Preferred Prescription, Inc.
("APP") filed a complaint against
the Company, Preferred Rx, Inc.,
Community Prescription Services and
Sean Strub in the New York Supreme
Court for tortious interference
with existing and prospective
contractual relationships, for lost
customers and business
opportunities resulting from
allegedly slanderous statements and
for allegedly false advertising and
promotions. Four separate causes of
actions are alleged, each for up to
$10 million in damages. APP had
previously filed a similar suit in
the United States Bankruptcy Court
of the Eastern District of New
York, which was dismissed and the
court abstained from exercising
jurisdiction. The Company has
answered the complaint and
counterclaimed for libel and
slander predicated upon a false
press release issued by APP and
added as defendants the principals
of APP. By stipulation dated
January 29, 1996, the Company
discontinued its counterclaim
against APP and its third-party
claims against the principals of
APP. In addition, by motion dated
March 12, 1996, APP moved, in the
Supreme Court of the State of New
York, to amend its complaint to
add, among other things, a cause of
action against the Company alleging
that a proposed plan of
reorganization presented by the
Company to the Bankruptcy Court in
APP's bankruptcy case was based on
fraudulent financial statements.
The motion also seeks to amend the
state court complaint to add
certain other defendants. These
proposed defendants, by notice of
removal dated March 22, 1996,
removed the state court action to
the Bankruptcy Court of the Eastern
District of New York. By motion
dated April 2, 1996, APP requested
that the Bankruptcy Court remand
the action to the State Court,
which the Bankruptcy Court granted.
HMI opposed the motion to amend the
complaint in the State Court. The
motion is currently pending before
the State Court. Management
believes APP's suit against it to
be without merit, intends to defend
the proceeding vigorously and
believes the outcome will not have
a material adverse effect on the
Company's results of operations or
financial position.
F-27
<PAGE>
Health Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
On or about August 4, 1995, APP
commenced an action in the Supreme
Court of the State of New York,
County of Nassau, against a former
APP employee who is currently
employed by the Company, and
Charles Hutson, Susan Hutson and
Hutson Consulting Services
(collectively, the "Hutsons"). The
Company is not named as a defendant
in this lawsuit. The complaint in
this action alleges, among other
things, that the employee provided
to the Hutsons, who formed and
subsequently discontinued a joint
marketing venture with APP,
confidential information which was
disclosed to competitors of APP. On
September 1, 1995, the Hutsons
removed the action to the
Bankruptcy Court. The employee
answered the complaint on December
27, 1995. No depositions have taken
place, nor have any documents been
produced. APP moved to remand this
case to the Supreme Court for the
County of Nassau. In a hearing
which took place before the
Bankruptcy Court on June 27, 1996,
the Bankruptcy Court preliminary
ruled to grant APP's remand motion,
but provided the Hutsons a further
opportunity to submit a written
response to the motion.
The Company is presently unable to
determine the possible outcome and
costs of the final resolution of the
litigation discussed above.
Accordingly, it has not provided for a
possible loss. The resolution of these
matters could have a material adverse
effect on the Company's financial
position and future results of
operations in the near term.
F-28
<PAGE>
Health Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
8. Capital Transactions (a) Public Offerings
On November 18, 1993, the Company
completed a secondary public offering
of 2,000,000 shares of stock at $12.00
per share. Proceeds from this offering,
net of expenses of the offering of
$2,017,742, were $21,982,258.
(b) Options and warrants
Stock options and warrants activities
are shown below:
Omnibus Incentive
Incentive Stock Stock Option Directors'
Option Plan (1) Plan (2) Warrants Options (3)
- -------------------------------------------------------------------------------
Shares covered 1,000,000 50,000 130,662 26,000
===============================================================================
Outstanding at May
1, 1993 - 12,221 130,662 -
Granted 420,000 2,500 - 19,000
Exercised - (2,833) (40,330) -
Cancelled - (833) - -
- -------------------------------------------------------------------------------
Outstanding at April
30, 1994 420,000 11,055 90,332 19,000
Granted 132,500 - - 4,000
Exercised (2,000) (833) (78,996) -
Cancelled - - - -
- -------------------------------------------------------------------------------
Outstanding at April
30, 1995 550,500 10,222 11,336 23,000
Granted 709,000 - - 3,000
Exercised (11,000) (1,223) - -
Cancelled (309,500)
- -------------------------------------------------------------------------------
Outstanding at April
30, 1996 939,000 8,999 11,336 26,000
===============================================================================
At April 30, 1996:
Price range $ 4.98 - $ .90 - $10.875 -
$10.38 $4.50 $5.40 $18.840
Shares exercisable 346,833 8,999 11,336 26,000
Available for grant -0- 5,669 - -
F-29
<PAGE>
Health Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
(1) On May 26, 1993 the Compensation
Committee authorized and on October 14,
1993, the stockholders approved the
establishment of an omnibus incentive
stock option plan to provide incentives
for key employees and members of the
Board of Directors. The maximum number
of shares issuable under the plan is
10% of the outstanding shares up to
1,000,000 shares. The exercise period
for an option shall not exceed ten
years from the date of grant, except in
the case of a more than 10% stockholder
such period shall not exceed five
years. The option price per share shall
be not less than the average market
value or, in the case of a 10%
stockholder with respect to incentive
stock options, 110% of fair value on
the date of grant.
(2) On February 16, 1990, the Company
approved the adoption of an incentive
stock option plan covering 50,000
common shares. The options are
exercisable over a ten year period.
(3) During the years ended April 30, 1996,
1995 and 1994, the Company granted a
total of 19,000, 4,000 and 3,000
options to its outside directors at an
exercise price of $18.84, $16.77, and
$10.875 to $12.088, the market price on
the date of the grant, respectively.
(4) Pursuant to a special meeting of the
executive committee of the board of
directors on April 3, 1996, members of
the special committee of the board of
directors were granted a total of
25,000 options and 75,000 stock
appreciation rights.
The per share exercise price for the
stock options and appreciation rights
is a price equal to the average closing
price of the shares for the five
trading days preceding April 3, 1996 or
$4.8375. The vesting schedule for each
of the stock options and stock
appreciation rights is one-half upon
the appointment of the permanent Chief
Executive Officer and one-half on May
1, 1997.
At April 30, 1996, shares of the Company's
authorized and unissued common stock were
reserved for issuance upon exercise of options
and warrants, which included 1,009,335 shares
for outstanding options and warrants and 5,669
shares for options available for grant.
F-30
<PAGE>
Health Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
(d) Restricted stock
On May 1, 1993, the Company awarded
11,000 shares of restricted common
stock to three outside consultants. The
shares awarded are subject to certain
restrictions and forfeiture. Vesting
occurs over a two year period from the
date the shares are awarded. The shares
were recorded at their quoted market
value at the date of grant of $10.375
per share, or $114,125. The
compensation element related to the
awarding of such shares is recognized
ratably over the two-year restriction
period. Compensation expense recognized
related to such shares for the years
ended April 30, 1996, 1995 and 1994
were $-0-, $57,065 and $57,060,
respectively.
9. Supplemental Cash (a) Supplemental disclosures of cash flow
Flow Information information:
Year ended April 30, 1996 1995 1994
- ------------------------------------------------------------------------------
(1) Cash paid for
interest expense $2,381,667 $ 174,430 $ 94,468
(2) Cash paid for
income taxes $1,949,491 $7,745,067 $3,157,483
(b) Supplemental disclosures of non-cash
investing and financing activities:
(1) The Company financed $1,361,455 and
$177,286 of new equipment during
the years ended April 30, 1996 and
1995.
(2) During the year ended April 30,
1995, $3,000,000 of the purchase
price of CPMB was a five year
subordinated note (Note 2(a)).
(3) During the year ended April 30,
1995, the Company issued 128,757
shares of non-registered common
stock in connection with the
acquisition of Maryland pharmacies
and PMA (Note 2(b) and (c)).
(4) During the year ended April 30,
1994, holders of $374,999 of the
Company's convertible subordinated
debentures converted their debt
into 357,145 shares of common
stock.
F-31
<PAGE>
Health Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
===============================================================================
(5) During the year ended April 30,
1994, the Company awarded 11,000
shares of restricted common stock
to three outside consultants. (Note
7(d)).
(6) During the year ended April 30,
1994, the Company issued 617,060
shares of non-registered common
stock in connection with the Murray
acquisition. (Note 2(d)).
10. Quarterly Financial The following table summarizes quarterly
Information results:
(Unaudited, in
thousands, except
for per share data)
Year Ended April First Second Third Fourth
30, 1996 Quarter Quarter Quarter Quarter Year
- ------------------------------------------------------------------------------
Revenue $38,294 $39,275 $40,801 $40,490 $158,860
Gross profit 11,761 9,155 7,331* 10,389 38,636
Income (loss)
before income
taxes 2,700 239 (16,786)* 514 (13,333)
Net income
(loss) 1,589 139 (9,904)* (2,751)** (10,927)
Earnings (loss)
per common
share .17 .01 (1.06) (.28) (1.16)
Year Ended April First Second Third Fourth
30, 1995 Quarter Quarter Quarter Quarter Year
- ------------------------------------------------------------------------------
Revenue: 17,216 20,884 21,982 28,374 88,456
Gross profit: 4,986 6,103 6,813 6,846 24,748
Income (loss)
before income
taxes: 545 1,807 2,248 (1,313) 3,287
Net income
(loss): 304 1,044 1,455 (857) 1,946
Earnings (loss)
per common
share .03 .11 .15 (.09) .21
* The Company incurred unusual charges of $16,840,000 in the third quarter
of fiscal 1996 (see Note 5).
** The Company provided an adjustment of $2,526,000 to its valuation
allowance for deferred tax assets in the fourth quarter of fiscal 1996
(see Note 6).
F-32
<PAGE>
Health Management, Inc.
and Subsidiaries
- ---------------------------------------------------------------------------
Form 10-K Item 14 (d) -
Consolidated Financial Statement Schedule
April 30, 1996
<PAGE>
Health Management, Inc.
and Subsidiaries
Index to Consolidated Financial Statements Schedule
- ---------------------------------------------------------------------------
Report of independent certified public accountants S-3
Schedule II -- Valuation and qualifying accounts
and reserves S-4
S-2
<PAGE>
Report of Independent Certified Public Accountants
on Financial Statement Schedule
Health Management, Inc. and Subsidiaries
Buffalo Grove, Illinois
The audits referred to in our report dated July 22, 1996, except for
Note 4(a) which is as of July 26, 1996 relating to the consolidated
financial statements of Health Management, Inc. and subsidiaries, which is
contained in Item 8 of this Form 10-K, included the audit of the
accompanying schedule of valuation and qualifying accounts. This
financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this
financial statement schedule based upon our audits.
In our opinion such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
/s/ BDO Seidman,LLP
BDO Seidman, LLP
Mitchel Field, New York
July 22, 1996
S-3
<PAGE>
Health Management, Inc. and Subsidiaries
Schedule II -- Valuation and Qualifying
Accounts and Reserves
<TABLE>
<CAPTION>
Balance at Additions
Beginning of Charged to Balance at End of
Classification Year Operations Deductions Year
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
Year ended April 30, 1996 $7,998,000 $14,714,000 $12,642,000 $10,070,000
===============================================================================================================
Year ended April 30, 1995 $2,206,000 $ 7,978,000 $ 2,186,000 $ 7,998,000
===============================================================================================================
Year ended April 30, 1994 $ 925,000 $ 1,781,000 $ 500,000 $ 2,206,000
===============================================================================================================
</TABLE>
S-4
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
HEALTH MANAGEMENT, INC.
April 18, 1997 /s/ W. James Nicol
-----------------------------------------------------
W. James Nicol, Chief Executive Officer and President
(Principal Executive Officer)
<PAGE>
INDEX TO EXHIBITS
Exhibit Page
------- ----
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).
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).
<PAGE>
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 referenced to Form 10-K for the year ended April
30, 1996).
10.8* Employment Agreement, dated as of January 8, 1996,
between the Company and James R. Mieszala
(incorporated by referenced to Form 10-K for the
year ended April 30, 1996).
10.9* Employment Agreement, dated as of December 18, 1996,
between the Company and Paul S. Jurewicz
(incorporated by referenced to Form 10-K for the
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).
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.
<PAGE>
(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 referenced to Form
10-K for the 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).
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).
<PAGE>
11 Statement re Computation of Per Share Earnings
(incorporated by referenced to Form 10-K for the
year ended April 30, 1996).
21 Subsidiaries of the Registrant (incorporated by
reference to Form 10-K for the year ended April 30,
1996).
23 Consent of BDO Seidman, LLP**
27 Financial Data Schedule (incorporated by referenced
to Form 10-K for the year ended April 30, 1996).
* Management contract or compensatory plan or arrangement.
** Filed herewith.
<PAGE>
Consent of BDO Seidman, LLP
Independent Certified Public Accountants
Health Management, Inc.
We hereby consent to the incorporation by reference in the Company's
Registration Statement on Form S-8 (Registration No. 33-90130) filed with the
Securities and Exchange Commission on March 8, 1995 of our reports dated July
22, 1996, except for Note 4(a) which is as of July 26, 1996, relating to the
consolidated financial statements and schedule of Health Management, Inc.
appearing in this Annual Report on Form 10-K for the year ended April 30, 1996.
Our reports contain an explanatory paragraph regarding the Company's ability to
continue as a going concern.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Mitchel Field, New York
July 29, 1996
