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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K/A-3
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
-------------------
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
----- -----
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.
This Annual Report on Form 10-K/A-3 is intended to amend certain information
contained in Part I, Items 7 and 8 of Health Management Inc.'s (the
"Company's") Annual Report on Form 10-K, as amended by the Company's Annual
Report on Forms 10-K/A and 10-K/A-2, 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.
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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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Unusual and Other Charges. The Company incurred a substantial
operating loss during the fiscal year 1996. This was a result of unusual
charges recorded in the third quarter of 1996 which consisted of the following:
(1) a $3.6 million charge for costs associated with organizational
consolidations and other cost reduction programs; (2) a $2.8 million charge for
the write-off of medical device inventory; and (3) a $2.0 million charge for
professional fees associated with the Company's restatement and the litigation
as described above. In addition, the Company recorded an additional provision
for doubtful accounts of $8.4 million in the third quarter of 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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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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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 increased 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 three years post-transplant, as opposed to the
historical one year period, which results in lower reimbursement rates for such
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. $5.6 million of this increase was
attributable to unusual charges recorded during the third quarter of fiscal year
1996; $3.6 million of the charge was attributable to costs associated with
organizational consolidation and other cost reduction programs, which includes
severance costs of approximately $1.3 million, a goodwill writedown charge of
approximately $550,000 and 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. The Company also
increased the provision for doubtful accounts by $8,400,000 in the third quarter
of fiscal 1996. This increased provision related primarily to the organ
transplant business where collection efforts are more difficult and the
Company's collection efforts were hampered by inadequate staffing levels and
the requisite follow-up. These efforts are conducted primarily from the
Company's former corporate offices in Long Island, New York, which has been
pacticularily affected by employee turnover. It was not practical to determine
the potential impact of the additional provision on the first two quarters of
fiscal 1996. During 1996, the Company also wrote-off approximately $12.6
million of receivables, against the allowance for doubtful accounts, which were
deemed to be uncollectible because of the age of the receivables and, in some
cases, the collectibility period from third party payors had lapsed. 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 and other charges recorded in the third quarter of fiscal year
1996 resulted in the operating loss for the year.
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.
Loss before income taxes for the year ended April 30, 1996 was
($13,332,187) compared to a $3,286,579 income level for the year ended
April 30, 1995. The unusual and other charges recorded in the third quarter
contributed significantly to the loss for fiscal 1996.
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, in part, the result of the unusual and other
charges 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. The remaining unreserved deferred tax asset is the
estimated benefit of a net operating loss carryback to the Company. Given the
circumstances that led to the modification of the independent auditor's opinion,
a valuation allowance was established for the deferred tax asset.
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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.
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; and (iv) 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, which generally provides for a lower reimbursement rate.
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
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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
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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).
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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).
- 11 -
<PAGE> 12
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
- 12 -
<PAGE> 13
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.
- 13 -
<PAGE> 14
HEALTH MANAGEMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FORM 10-K/A-3 - ITEM 8 AND ITEM 14(A)(1) AND (2)
YEAR ENDED APRIL 30, 1996
<PAGE> 15
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-33
F-2
<PAGE> 16
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> 17
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
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 18
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 24,324,490 10,648,792 5,428,342
Provision for doubtful accounts (Note 5) 14,714,606 7,978,189 1,781,000
Unusual charges (Note 5) 5,600,000 - -
- ------------------------------------------------------------------------------------------------------------------------------------
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
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 19
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 Restricted
------------------------ Additional Paid-in Retained Earnings Stock
Shares Amount 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) $ -
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 20
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> 21
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
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 22
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
<TABLE>
<S><C>
1. BASIS OF PRESENTATION
AND SUMMARY OF
ACCOUNTING POLICIES
ORGANIZATION AND The consolidated financial statements include Health Management, Inc. (formerly Homecare
PRINCIPLES OF Management, Inc.) (the "Company"), (a Delaware corporation), its wholly-owned subsidiaries Home
CONSOLIDATION 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 conformity with generally accepted accounting principles,
AND CONCENTRATION 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.
</TABLE>
F-9
<PAGE> 23
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S><C>
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 investments with a maturity of three months or less when
EQUIVALENTS purchased to be cash equivalents.
IMPROVEMENTS AND Improvements and equipment are stated at cost. Depreciation of equipment and amortization of
EQUIPMENT 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.
</TABLE>
F-10
<PAGE> 24
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S><C>
GOODWILL AND OTHER Goodwill represents the excess of the purchase price over the fair value of net assets acquired
LONG-LIVED ASSETS 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.
</TABLE>
F-11
<PAGE> 25
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S><C>
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 instruments, including cash, accounts receivable and
FINANCIAL accounts payable, approximate fair value as of April 30, 1996 because of the relatively short-term
INSTRUMENTS 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 Issued Statement of Financial Accounting Standard Number
COMPENSATION 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.
</TABLE>
F-12
<PAGE> 26
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S><C>
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.
</TABLE>
F-13
<PAGE> 27
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
(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.
</TABLE>
F-14
<PAGE> 28
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
(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
=====================================================================================
</TABLE>
F-15
<PAGE> 29
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C> <C> <C>
3. IMPROVEMENTS AND Improvements and equipment consist of the following:
EQUIPMENT
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
=========================================================================================
</TABLE>
F-16
<PAGE> 30
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S><C>
(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.
</TABLE>
F-17
<PAGE> 31
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
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.
</TABLE>
F-18
<PAGE> 32
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C>
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 charges were incurred during the year ended April 30,
And Other Charges 1996:
Included in costs of sales:
. Write-off of medical device inventory (a) $2,840,000
======================================================================================================
</TABLE>
F-19
<PAGE> 33
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S><C>
Included in the provision for doubtful accounts:
. Additional provision reflecting a change in the
estimation of the allowance for doubtful accounts (b) $8,400,000
======================================================================================================
Unusual charges:
. 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
-----------------------------------------------------------------------------------------------------
$5,600,000
======================================================================================================
(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.
</TABLE>
F-20
<PAGE> 34
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
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.
(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
==========
</TABLE>
F-21
<PAGE> 35
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S><C>
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.
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, the majority of
which are expected to be paid within the year ended April 30, 1997.
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
=================================================================================================
</TABLE>
F-22
<PAGE> 36
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
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%
==================================================================================
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
==================================================================================
</TABLE>
F-23
<PAGE> 37
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
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:
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
===============================================================================================
</TABLE>
F-24
<PAGE> 38
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
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.
</TABLE>
F-25
<PAGE> 39
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
(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.
</TABLE>
F-26
<PAGE> 40
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
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.
</TABLE>
F-27
<PAGE> 41
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
(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.
</TABLE>
F-28
<PAGE> 42
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
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.
</TABLE>
F-29
<PAGE> 43
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
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 - -
</TABLE>
F-30
<PAGE> 44
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
(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.
</TABLE>
F-31
<PAGE> 45
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
(c) 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 information:
FLOW 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.
</TABLE>
F-32
<PAGE> 46
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
(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 results:
INFORMATION
(UNAUDITED, IN Year Ended April First Second Third Fourth
THOUSANDS, EXCEPT 30, 1996 Quarter Quarter Quarter Quarter Year
FOR PER SHARE DATA) ---------------------------------------------------------------------------------------------
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).
</TABLE>
F-33
<PAGE> 47
Health Management, Inc.
and Subsidiaries
- ---------------------------------------------------------------------------
Form 10-K Item 14 (d) -
Consolidated Financial Statement Schedule
April 30, 1996
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> 48
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> 49
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> 50
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.
June 5, 1997 /s/ W. James Nicol
-----------------------------------------------------
W. James Nicol, Chief Executive Officer and President
(Principal Executive Officer)
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).
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
<PAGE> 51
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.
(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
<PAGE> 52
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).
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> 1
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
