<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended October 31, 1996
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 incorporation) (IRS Employer Identification No.)
1371-A Abbott Court, Buffalo Grove, Illinois 60089
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 913-2700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO ___
As of December 19, 1996, there were outstanding 9,330,182 shares of common
stock, $.03 par value.
<PAGE>
This Quarterly Report on Form 10-Q/A is intended to amend certain information
contained in Health Management, Inc.'s (the "Company's") Report on Form 10-Q for
the quarter ended October 31, 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 Original Report, December 20, 1996
(the "Original Filing Date"). For any updated information regarding the Company
since the Original Filing Date, see the Company's filings on Form 8-K for the
period from December 20, 1996 through the date hereof.
The undersigned Registrant hereby amends the following items, financial
statements, exhibits or other portions of its Quarterly Report on Form 10-Q for
the quarter ended October 31, 1996, as hereinafter set forth:
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The condensed consolidated financial statements of Health Management,
Inc. (the "Company") begin on the page following Item 2 of this Part I.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
PRELIMINARY STATEMENT
All statements contained herein that are not historical facts, including, but
not limited to, statements regarding the Company's current business strategy,
the Company's projected sources and uses of cash, and the Company's plans for
future development and operations, are based upon current expectations. These
statements are forward-looking in nature and involve a number of risks and
uncertainties. Actual results may differ materially. Among the factors that
could cause actual results to differ materially are the following: the
availability of sufficient capital to finance the Company's business plans on
terms satisfactory to the Company; changes or conditions affecting the
transactions with Transworld Home Health Care, Inc. described herein;
competitive factors; the ability of the Company to adequately defend or reach a
settlement of outstanding litigation and investigations involving the Company or
its prior management; changes in labor, equipment and capital costs; changes in
regulations affecting the Company's business; 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.
SPECIAL CONSIDERATIONS
The Company's business is subject to a number of special considerations, such as
industry trends, certain risks inherent in the business and the Company's recent
events. Some of these considerations are described in "Recent Events and Other
Considerations" below.
RECENT EVENTS AND OTHER CONSIDERATIONS
Financial Condition. As a result of the restatements and special charges
recorded in the Company's financial statements for the fiscal years 1995 and
1996, the Company recorded significant charges to its balance sheet including
reductions of the Company's working capital, retained earnings and stockholders'
equity. The Company was in default under its Credit Agreement with Chase
Manhattan Bank, N.A., as agent and lender. This senior debt, the principal
amount of which aggregate approximately $28.3 million, was acquired by
Transworld Home HealthCare, Inc., a New York corporation ("Transworld"), on
November 13, 1996, the date on which Transworld entered into a stock purchase
agreement and merger agreement with the Company. Also on November 13, 1996,
Transworld agreed to forbear until December 12, 1996 from exercising any
remedies under such bank debt and agreed, in its discretion, to loan the Company
up to an additional $3 million under its revolving credit facility. As of
December 12, 1996, the Forbearance Agreement was further extended until December
23, 1996 and the availability under the revolving line of credit was further
increased by up to an additional $2 million, subject to certain conditions and
at the discretion of Transworld. (See "Transworld Transaction" below.) In
addition, Hyperion Partners II, L.P., the majority stockholder of Transworld,
has acquired the obligations of the Company due to Foxmeyer Drug Co., and has
informed the Company that it is in final negotiations to acquire the obligations
of the Company due to Bindley Western, Inc. and Caremark, Inc. The obligations
of the Company due to Foxmeyer Drug Co., Bindley Western, Inc. and Caremark,
Inc. are in the aggregate amount of approximately $18.2 million. There are no
assurances that Transworld will extend the forbearance agreement past December
23, 1996 and, if no such agreement is reached, it is likely that the Company
will seek protection under the Federal Bankruptcy laws.
Transworld Transaction. In November 1996, Transworld acquired the Company's
outstanding bank debt, agreed to forbear until December 12, 1996 from exercising
any remedies under such bank debt and agreed, in its discretion, to loan the
Company up to an additional $3 million under its revolving credit facility. As
of December 12, 1996, the forbearance agreement was further extended until
December 23, 1996 and the availability under the revolving line of credit was
further increased by up to an additional $2 million, subject to certain
conditions and at the discretion of Transworld.
3
<PAGE>
Also, on November 13, 1996, the Company entered into a Stock Purchase Agreement
with Transworld, pursuant to which Transworld agreed to acquire 8,964,292 newly
issued shares (the "Shares") of common stock of the Company ("Common Stock"),
representing 49% of the outstanding Common Stock, as well as an option to
purchase an additional 2% of the Common Stock. The closing of this transaction
is currently scheduled to occur on or about December 23, 1996, subject to the
satisfaction of certain conditions including, among others, approval of
Transworld's lenders and preliminary court approval of a settlement of the
consolidated class action lawsuit for $7.2 million in cash, which preliminary
court approval was granted on December 20, 1996 (the "Proposed Settlement"). The
consideration for the Shares includes: (1) Transworld entering into the Merger
Agreement, (ii) Transworld purchasing the rights of the Company's senior
lenders, (iii) Transworld forbearing under the Credit Agreement for a specified
period of time (as discussed above), (iv) Transworld agreeing to extend
additional amounts (as discussed above) under the revolving credit facility,
subject to certain conditions and at Transworld's discretion, (v) Transworld
causing to be canceled certain warrants to purchase 5% of the outstanding stock
of the Company on a fully diluted basis, at an exercise price of $2.00 per
share, to which the Company's senior lenders were entitled, and (vi) $1.00 per
share of Common Stock. Of the $1.00 per share consideration, which aggregates
$8,964,292, a portion will be used to repay any amounts loaned to the Company
under the revolving credit facility subsequent to November 13, 1996 and interest
thereon. The option will have an exercise price of $1.00 per share and will have
a one-year term.
On November 13, 1996 the Company also entered into a Merger Agreement with
Transworld pursuant to which a newly formed subsidiary of Transworld will merge
into the Company and each stockholder of the Company will receive cash
consideration equal to $2.00 per share. The merger is subject to certain
conditions, which include, among others, approval by the Company's stockholders,
the expiration or termination of any applicable waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and final
court approval of the Proposed Settlement. The Company believes the conditions
of the merger could be satisfied by Spring, 1997. Either party may terminate
the Merger Agreement if the merger is not consummated by June 30, 1997.
Because various conditions to closing the Transworld transactions have not yet
been satisfied, the Company can give no assurances that the transactions
contemplated by the Stock Purchase Agreement and/or the Merger Agreement will be
consummated in their entirety or in the manner contemplated by the Stock
Purchase Agreement and/or the Merger Agreement.
Significant Litigation. The Company has been named as a defendant in a
consolidated stockholder class action lawsuit 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. With respect to the consolidated stockholder class
action lawsuit, the Company entered into a Stipulation of Partial Settlement
with the plaintiffs' counsel and on September 18, 1996 such Stipulation of
Partial Settlement received preliminary court approval (the "Original
Settlement"). The Original Settlement provided for, among other things, the
payment by the Company of $2,000,000 in cash, the issuance of 2,200,000 shares
of Common Stock and warrants to purchase 2,200,000 shares of Common Stock. As a
condition to Transworld's obligation to close the Stock
4
<PAGE>
Purchase Agreement and the Merger Agreement, preliminary court approval and
final court approval, respectively, is required with respect to a modified
settlement providing for a $7,200,000 cash payment in lieu of the consideration
provided in the Original Settlement to be paid after the merger is consummated.
An Amended Stipulation of Partial Settlement to this effect was executed on
December 19, 1996, preliminary approval by the U.S. District Court for the
Eastern District of New York thereof was granted on December 20, 1996 and a
hearing for final approval is currently scheduled for March 14, 1997. (See Part
II, Item 1, "Legal Proceedings"). The Company is in the process of negotiating
with its directors and officers liability insurance carrier with respect to
coverages for damages in connection with the stockholder class action lawsuit
and any payments received from such carrier will reduce the Company's liability
with respect to such suits.
Changes in Management. Effective May 1, 1996, W. James Nicol, an experienced
health care executive, was named President and Chief Executive Officer of the
Company, succeeding the office of the Chief Executive Officer of the Company
which was formed when Clifford E. Hotte resigned in February 1996. James R.
Mieszala, formerly of Caremark, Inc., who became president of Homecare
Management, Inc., a wholly-owned operating subsidiary of the Company, in January
1996, was named Chief Operating Officer of the Company effective May 10, 1996.
Paul S. Jurewicz, formerly of Caremark, Inc., who became Chief Financial Officer
of the Company in December 1995 was also named the Executive Vice President of
the Company in April 1996. The Company has experienced substantial turnover of
its senior management group over the past twelve months and several of the
Company's executive officers have been in their current positions for only a
limited period of time. The Company's future growth and success depends, in
large part, upon its ability to obtain, retain and expand its staff of executive
and professional personnel. The Company's ability to successfully conclude the
Transworld transaction may likewise depend on its ability to retain its key
personnel to manage through the transition. On December 13, 1996, Mr. Jurewicz
submitted notice of his intent to resign, effective January 31, 1997, to assume
a new position. The Company expects that Mr. Nicol will thereafter assume, on an
interim basis, the additional duties of Chief Financial Officer. There can be no
assurances that the Company will be successful in its efforts to attract and
retain such personnel.
Goodwill and Other Long Lived Assets. At October 31, 1996, the Company had
goodwill of approximately $33.4 million, or 37% of its assets. A significant
portion of the Company's goodwill relates to the Clozaril Patient Management
Business ("CPMB") (See "Introduction of New Antipsychotic Drugs; Blood
Monitoring".) It is the Company's policy to review the recoverability of
goodwill and other long-lived assets periodically to determine if any impairment
indicators are present. The
5
<PAGE>
evaluation of the recoverability of goodwill is significantly affected by
estimates of future cash flows from each of the Company's market areas. If
estimates of future cash flows from operations decrease, the Company may be
required to write down its goodwill and other long- lived assets in the future.
Any such write-down could have a material adverse effect on the financial
position and results of operations of the Company.
Business Strategy. The Company's strategy, which it has been in the process of
implementing since May 1996, is focused on the basic factors that could improve
profitability: revenue generation, cost reduction, quality improvement and cash
collections. To generate increased revenue, the Company is directing its
marketing efforts towards improving its referral relationships in addition to
developing new programs, expanding relationships with payor organizations
(including managed care organizations) and forging relationships with
pharmaceutical companies requiring services such as clinical management,
marketing, reimbursement and other services. Cost reduction efforts are focused
on the integration of the Company's pharmacy locations and increasing
efficiencies in reimbursement and distribution services. Management is also
focused on improved cash collections through an emphasis on enhancing systems
capabilities within the Company. However, much of senior management's attention
this fiscal year has been focused on the normally routine task of sourcing
product from its suppliers and this distraction was heightened substantially
following the bankruptcy filing, on August 27, 1996, by its principal
wholesaler. Additionally, concerns about the Company's financial condition may
result in declining customer referrals. While management believes the
commencement of its business strategy has improved and will continue to improve
the Company's operations and financial performance, no assurances can be given
to its ultimate success.
Introduction of New Antipsychotic Drugs; Blood Monitoring. In October, 1996,
Olanzapine, a new antipsychotic agent for the treatment of schizophrenia, was
introduced into the market. The Company also expects several additional
antipsychotic drugs to be introduced in the next year. The Company anticipates
providing these new drugs to schizophrenic patients as it broadens its
Lifecare(TM) Program. To date, management believes that the introduction of
Olanzapine has been a factor in the recent decline of the Company's Clozapine
customer base as physicians preferentially prescribe Olanzapine for treatment of
schizophrenia. Because Olanzapine does not require weekly blood monitoring, and
therefore is less costly than Clozapine, and because the relative efficacy of
Olanzapine is still uncertain, the Company cannot predict the ultimate effect on
its customer base and, in turn, its financial condition from the introduction of
Olanzapine. The Company also cannot predict the effect on its financial
condition of the introduction of other antipsychotic drugs.
In addition, the Company's Clozaril Patient Management Business contains
multiple components including weekly blood draws to test for a side effect
associated with Clozapine. The Company understands that the Food and Drug
Administration may be contemplating a reduction in blood monitoring which,
with no changes in the way that the Company participates in this market, could
have a substantial negative impact on the Company's earnings and cash flow.
Dilution. The Company's issuance of 8,964,292 shares of Common Stock to
Transworld under the Stock Purchase Agreement and up to an additional 746,713
shares of Common Stock pursuant to an option to be issued in connection with the
Stock Purchase Agreement, will result in substantial dilution of the Company's
outstanding shares. Additionally, the Caremark Convertible Subordinated Note to
be acquired by Hyperion, the principal and accrued interest of which may be
converted into shares of Common Stock at Hyperion's option, if converted could
also result in additional dilution to the Company's outstanding
shares. Based on the Company's calculations, the Note is currently convertible
into approximately 256,185 shares of Common Stock.
RESULTS OF OPERATIONS
Three months ended October 31, 1996 versus October 31, 1995
The Company's revenues were $39,740,052, an increase of $465,265 or 1.2% over
revenues of 39,274,787 for the quarter ended October 31, 1995. The increase was
derived from internal growth resulting from the ongoing patient referrals from
existing referral sources and the addition of new referral sources over the
quarter.
Gross profit margins were 20.3% for the quarter ended October 31, 1996, as
compared to 23.3% for the quarter ended October 31, 1995. The gross profit
margin in the quarter ended October 31, 1996 was negatively impacted by the
following factors: i) a one-time payment to Caremark, Inc. of approximately
$525,000 to account for a working capital adjustment relating to the Company's
acquisition of the Clozaril Patient Management Business, ii) a two month delay
in gaining approval for increased Medicare pricing for an immunosuppressant drug
widely distributed by the Company and servicing its organ transplant patients
for which the drug manufacturer raised prices, and iii) lost purchase discounts
associated with drug purchases due to more unfavorable terms under which vendors
recently placed the Company.
Operating expenses for the quarter ended October 31, 1996 were $9,501,858, an
increase of $1,238,351 or 15% over the quarter ended October 31, 1995. This was
primarily attributable to increased legal fees, audit fees, tax return
preparation fees and consulting fees.
Loss from operations for the quarter ended October 31, 1996 was ($1,428,378)
compared to a $891,534 profit for the quarter ended October 31, 1995. The
primary reasons for this loss are the decline in gross profits and the increase
in operating expenses described above.
7
<PAGE>
Interest expense for the quarter ended October 31, 1996 was $723,694, an
increase of $71,768, or 11.0% over the quarter ended October 31, 1995. The
increase is attributable to increased borrowings under the Company's line of
credit partially offset by reduced interest expense related to the Company's
term loan.
Loss before income taxes for the quarter ended October 31, 1996 was
($10,752,072) compared to a $239,608 profit for the quarter ended October 31,
1995. Expenses related to the estimated costs of settlement of the stockholder
class action litigation of $7.2 million and estimated costs associated with
overpayments from New York State Medicaid of $1.4 million together with the
increased legal fees, audit fees, tax return preparation fees and consulting
fees and lower margins were the primary reasons for the loss.
Income taxes for the three months ended October 31, 1996 are less than the
statutory rate since the Company, in accordance with generally accepted
accounting principles, did not record the benefit, if any, of the potential net
operating loss carryforward because of the uncertainty of its future
realization. The loss was ($10,621,418) for the quarter ended October 31, 1996
compared to net income of $139,522 for the quarter ended October 31, 1995. The
net loss was primarily a result of the settlement charges and estimated costs
associated with overpayments from New York State Medicaid, all previously
described.
Primary and fully diluted loss per common share for the quarter ended October
31, 1996 was ($1.14) compared to earnings per common share of $.01 for the
quarter ended October 31, 1995. The weighted average number of shares
outstanding used in the calculation of primary and fully diluted earnings per
share were 9,328,240 for the quarter ended October 31, 1996 and 9,405,222 for
the quarter ended October 31, 1995.
Six Months Ended October 31, 1996 versus October 31, 1995
Revenues for the six months ended October 31, 1996 were $80,262,962, an increase
of $2,694,145 or 3.5% in comparison to revenues for the six months ended October
31, 1995. The increase in revenues was derived from internal growth from ongoing
patient referrals from existing referral sources and the addition of new
referral sources.
Gross profit margins were 23.2% for the six months ended October 31, 1996, as
compared to 27.0% for the comparable period in the prior year. Gross profit
margins were negatively impacted by the following: (i) a one-time payment to
Caremark, Inc. of approximately $525,000 to account for a working capital
adjustment relating to the Company's acquisition of the Clozaril Patient
Management Business; (ii) the delay in updated Medicare pricing for an
immunosuppressant drug widely distributed by the Company and servicing its organ
transplant patients for which the drug manufacturer raised prices; and (iii)
lost purchase discounts associated with drug purchases due to more unfavorable
terms under which vendors recently placed on the Company.
Operating expenses for the six months ended October 31, 1996 were $18,589,389,
an increase of $1,876,716 or 11.2% over the comparable period last year. This
was primarily attributable to increased legal fees, audit fees, tax return
preparation fees and consulting fees.
8
<PAGE>
Loss from operations for the six months ended October 31, 1996 was ($4,342)
loss compared to a $4,202,714 profit in the comparable period last year. The
primary reasons for the loss are the decline in gross profits and the increased
operating expenses described above.
Interest expense for the six months ended October 31, 1996 was $1,463,231, an
increase of $200,369 or 15.9% over the six months ended October 31, 1995. The
increase was driven by increased borrowings under the Company's line of credit
partially offset by reduced interest expense related to the Company's term loan.
Loss before income taxes for the six months ended October 31, 1996 was
$10,067,573 compared to income of $2,939,852 for the six months ended
October 31, 1995. Expenses related to the estimated costs of the settlement of
the stockholder class action litigation of $7.2 million and estimated costs
associated with overpayments from New York State Medicaid of $1.4 million,
together with increased legal fees, audit fees, tax return preparation fees and
consulting fees and lower margins were the primary reasons for the loss.
Income taxes for the six months ended October 31, 1996 are less than the
statutory rate since the Company, in accordance with generally accepted
accounting principles, did not record the benefit, if any, of the potential net
operating loss carryforward because of the uncertainty of its future
realization.
The net loss for the six months ended October 31, 1996 was ($10,189,530)
compared to net income of $1,728,260 for the period ended October 31, 1995. The
net loss was primarily a result of the settlement charges of $7.2 million,
estimated costs associated with overpayments from New York State Medicaid of
$1.4 million, the increased operating expenses previously discussed and lower
margins.
Primary and fully diluted loss per common share for the six months ended October
31, 1996 were ($1.09) compared to earnings per common share of $0.18 for the six
months ended October 31, 1995. The weighted average number of shares outstanding
used in the calculation of primary and fully diluted earnings per share were
9,328,240 for the six months ended October 31, 1996 and 9,425,071 for the six
months ended October 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The net decrease of $1,965,901 in the Company's cash and cash equivalents to
$1,314,294 at October 31, 1996 was attributable to cash used in operating
activities.
Working capital at October 31, 1996 was a negative $6,675,274, a decrease of
$9,166,893 from April 30, 1996. Current assets decreased $5,250,451 due to a
decrease in cash and cash equivalents of $1,965,901, an increase in net accounts
receivable of $2,533,227, an increase in inventories of $331,569, a decrease in
tax refund receivable of $6,710,637, an increase in deferred tax assets of
$1,110,000 and a decrease in prepaid expenses of $548,709.
Current liabilities increased $3,916,442 from April 30, 1996 principally due to
an increase of $6,051,446 in accrued unusual charges and a decrease in accounts
payable of $1,827,217. This increase is a result of the accrual of $7.2 million
for the settlement of the stockholder class action litigation and the accrual of
$1.4 million to settle overpayments from New York State Medicaid.
On November 13, 1996, Transworld acquired the Company's outstanding bank debt,
agreed to forbear until December 12, 1996 from exercising any remedies under
such bank debt and agreed in its discretion to loan the Company up to an
additional $3 million under its revolving credit facility. As of December 12,
1996, the forbearance agreement was further extended until December 23, 1996 and
the availability under the revolving line of credit was increased by up to an
additional $2 million, subject to certain conditions and at the discretion of
Transworld.
9
<PAGE>
Also on November 13, 1996, the Company entered into a Stock Purchase Agreement
with Transworld, pursuant to which Transworld agreed to acquire 8,964,292 newly
issued shares of Common Stock, representing 49% of the outstanding Common Stock,
as well as an option to purchase an additional 2% of the Common Stock. The
closing of this transaction is currently scheduled to occur on or about December
23, 1996, subject to the satisfaction of certain conditions. The conditions to
closing the stock purchase transaction include, among others, approval of
Transworld's lenders and preliminary court approval of the Proposed Settlement.
The consideration for the Shares includes: (1) Transworld entering into the
Merger Agreement, (ii) Transworld purchasing the rights of the Company's senior
lenders, (iii) Transworld forbearing under the Credit Agreement for a specified
period of time (as discussed more fully above), (iv) Transworld agreeing to
extend additional amounts under the revolving credit facility, subject to
certain conditions and at Transworld's discretion, (v) Transworld causing to be
canceled certain warrants to purchase 5% of the outstanding stock of the Company
on a fully diluted basis, at an exercise price of $2.00 per share, to which the
Company's senior lenders were entitled, and (vi) $1.00 per share of Common
Stock. Of the $1.00 per share consideration, which aggregates $8,964,292, a
portion will be used to repay any amounts loaned to the Company under the
revolving credit facility subsequent to November 13, 1996 and interest thereon.
The option will have an exercise price of $1.00 per share and will have a
one-year term.
On November 13, 1996, the Company also entered into a Merger Agreement with
Transworld pursuant to which a newly formed subsidiary of Transworld will merge
into the Company and each stockholder of the Company will receive cash
consideration equal to $2.00 per share. The merger is subject to certain
conditions, which include, among others, approval by the Company's stockholders
of the merger, the expiration or termination of any applicable waiting period
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and
final court approval of the Proposed Settlement. The Company believes the
conditions of the merger could be satisfied by Spring, 1997. Either party may
terminate the Merger Agreement if the merger is not consummated by June 30,
1997.
Because various conditions to closing the Transworld transactions have not yet
been satisfied, the Company can give no assurances that transactions
contemplated by the Stock Purchase Agreement and/or the Merger Agreement will be
consummated in their entirety or in the manner contemplated by the Stock
Purchase Agreement and/or the Merger Agreement.
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. The Company's primary supplier, Foxmeyer Drug
Company, filed for protection under the Federal Bankruptcy laws on August 27,
1996 and has subsequently been acquired by McKesson Drug Company. There has been
no improvement in the lines of credit available to the Company as a result of
entering into the Stock Purchase Agreement and Merger Agreement with Transworld.
Although the Company has been able to maintain adequate product supply within
the credit limitations, there can be no assurances that it will continue to do
so in the future. Such an inability would have a material adverse impact on the
Company if alternative sources of product supply were inadequate.
10
<PAGE>
If the Company is unsuccessful in consummating the Stock Purchase Agreement or
Merger Agreement with Transworld, or in continuing satisfactory relations with
its suppliers, it is likely that the Company will seek protection under the
Federal Bankruptcy laws.
11
<PAGE>
HEALTH MANAGEMENT, INC.
And Subsidiaries
Condensed Consolidated Balance Sheets
ASSETS
October 31, 1996 April 30, 1996
---------------- --------------
(Unaudited) (Audited)
CURRENT ASSETS:
Cash and cash equivalents $ 1,314,294 $ 3,280,195
Accounts Receivable, Less Allowance for
Doubtful Accounts 38,990,426 36,457,199
Inventories 7,132,389 6,800,820
Tax Refund Receivable 1,326,393 8,037,030
Deferred Taxes 2,917,000 1,807,000
Prepaid expenses and other 106,649 655,358
----------- -----------
Total Current Assets 51,787,151 57,037,602
IMPROVEMENTS and EQUIPMENT, Less
Accumulated Depreciation and
Amortization 3,647,030 3,825,974
Goodwill 33,414,092 34,008,496
OTHER 541,744 1,043,607
----------- -----------
$89,390,017 $95,915,679
=========== ===========
See Notes to Condensed Consolidated Financial Statements
13
<PAGE>
HEALTH MANAGEMENT, INC.
And Subsidiaries
Condensed Consolidated Balance Sheets
LIABILITIES AND STOCKHOLDERS' EQUITY
October 31, 1996 April 30, 1996
---------------- --------------
(Unaudited) (Audited)
CURRENT LIABILITIES:
Accounts Payable $ 18,887,619 $ 20,714,836
Accrued Unusual Charges
and Settlement Costs 9,610,446 3,559,000
Accrued Expenses 1,213,994 1,526,119
Current Maturities of
Long Term Debt 28,750,366 28,746,028
------------ ------------
TOTAL CURRENT LIABILITIES 58,462,425 54,545,983
Long Term Debt, Less Current
Maturities 3,753,503 4,006,077
------------ ------------
TOTAL LIABILITIES 62,215,928 58,552,060
COMMITMENTS and CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred Stock-$.01 Par Value:
Shares Authorized - 1,000,000
Issued and Outstanding, none
Common Stock-$.03 Par Value:
Shares Authorized - 20,000,000
Issued and Outstanding-9,328,240 279,848 279,848
Additional Paid-in Capital 38,138,771 38,138,771
Accumulated Deficit (11,244,530) (1,055,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 27,174,089 37,363,619
------------ ------------
$ 89,390,017 $ 95,915,679
============ ============
See Notes to Condensed Consolidated Financial Statements
14
<PAGE>
HEALTH MANAGEMENT, INC.
And Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
October 31, October 31,
1996 1995 1996 1995
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues $ 39,740,052 $39,274,787 $ 80,262,962 $77,568,817
Costs of Sales 31,666,572 30,119,746 61,677,465 56,652,980
------------ ----------- ------------ -----------
Gross Profit 8,073,480 9,155,041 18,585,497 20,915,837
------------ ----------- ------------ -----------
Operating Expenses:
Selling 1,566,432 1,206,433 2,799,749 2,291,635
General and Administrative 7,935,426 7,057,074 15,790,090 14,421,488
------------ ----------- ------------ -----------
9,501,858 8,263,507 18,589,839 16,713,123
------------ ----------- ------------ -----------
Income (Loss) from
Operations (1,428,378) 891,534 ( 4,342) 4,202,714
Settlement and Other Costs 8,600,000 -- 8,600,000 --
Interest Expense 723,694 651,926 1,463,231 1,262,862
------------ ----------- ------------ -----------
Income (Loss) Before
Income Taxes (10,752,072) 239,608 (10,067,573) 2,939,852
Income Taxes (130,654) 100,086 121,957 1,211,592
------------ ----------- ------------ -----------
Net Income (Loss) ($10,621,418) $ 139,522 ($10,189,530) $ 1,728,260
============ =========== ============ ===========
Earnings (Loss) Per Common
Share:
Primary ($1.14) $0.01 ($1.09) $0.18
Fully Diluted ($1.14) $0.01 ($1.09) $0.18
Weighted Average
Shares Outstanding
Primary 9,328,240 9,405,222 9,328,240 9,425,071
Fully Diluted 9,328,240 9,405,222 9,328,240 9,425,071
</TABLE>
See Notes to Condensed Consolidated Financial Statements
15
<PAGE>
HEALTH MANAGEMENT, INC.
And Subsidiaries
Condensed Consolidated Statement of Cash Flow
For The Six Months Ended October 31
(Unaudited)
1996 1995
------------ ------------
Cash Flows from Operating
Activities:
Net Income (Loss) ($10,189,530) $ 1,728,260
Adjustments to Reconcile Net
Income (Loss) to Net Cash provided by (used in)
Operating Activities:
Depreciation & Amortization 1,293,581 1,302,574
Provision for Doubtful Accounts 3,428,929 3,429,901
Deferred Taxes (1,110,000) (351,168)
Increase (Decrease) in Cash Flows
From Changes in Operating Assets
and Liabilities:
Accounts Receivable (5,962,156) (12,802,321)
Inventory (331,569) (3,055,905)
Prepaid Expenses and Other 548,709 91,802
Other Assets 501,863 (12,535)
Accounts Payable (1,827,217) 6,209,920
Receivable from Seller - (403,000)
Accrued Expenses (312,125) 2,852,438
Accrued Unusual Charges 6,051,446 -
Tax Refund Receivable 6,710,637 (620,380)
------------ ------------
Net Cash Provided by (used in)
Operating Activities (1,197,432) (1,630,414)
Cash Flows from Investing Activities:
Capital Expenditures (520,233) (1,037,034)
------------ ------------
Net Cash (Used In) Investing Activities (520,233) (1,037,034)
Cash Flows from Financing Activities:
Increase in Bank Loan,
Borrowing on Credit Facility - 2,150,000
Principal Payments on Long-Term Debt (248,236) (3,266)
Proceeds from Exercise of Stock Options - 51,875
------------ ------------
Net Cash Used in Financing Activities (248,236) 2,198,609
Net Decrease in Cash & Cash Equivalents (1,965,901) (468,839)
Cash and Cash Equivalents, at Beginning
of Period 3,280,195 4,562,712
------------ ------------
Cash and Cash Equivalents, at End
of Period $ 1,314,294 $ 4,093,873
============ ============
Supplemental Disclosures of Cash Flow
Information:
Cash Paid for Interest 1,177,870 924,511
Cash Paid (Refund) for Taxes (5,441,907) 2,202,380
See Notes to Condensed Consolidated Financial Statements
16
<PAGE>
HEALTH MANAGEMENT, INC.
And Subsidiaries
Condensed Consolidated Statement of Stockholders' Equity
Six Months Ended October 31, 1996
(Unaudited)
Common Stock
$.03 Par Value Additional
---------------------- Paid-in Accumulated
Shares Amount Capital Deficit
----------- -------- ----------- ------------
Balance, May 1, 1996 9,328,240 $279,848 $38,138,771 ($ 1,055,000)
Net Loss for the Six
Months Ended
October 31, 1996 (10,189,530)
----------- -------- ----------- ------------
Balance, October 31, 1996 9,328,240 $279,848 $38,138,771 ($11,244,530)
=========== ======== =========== ============
See Notes to Condensed Consolidated Financial Statements
17
<PAGE>
HEALTH MANAGEMENT, INC.
And Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Basis of Presentation
The condensed consolidated financial statements include Health Management, Inc.,
a Delaware corporation (the "Company"), and its wholly-owned subsidiaries,
including Homecare Management, Inc., a New York corporation, HMI Pennsylvania,
Inc., a Delaware corporation, HMI Retail Corp., Inc., a Delaware corporation,
HMI PMA, Inc., a Delaware corporation, Health Reimbursement Corp., a Delaware
corporation, HMI Maryland, Inc., a Delaware corporation, and HMI Illinois, Inc.,
a Delaware corporation. All intercompany accounts and transactions have been
eliminated in consolidation.
The Condensed Consolidated Financial Statements included herein are unaudited
and include all adjustments which, in the opinion of management, are necessary
for a fair presentation of the results of operations of the interim period
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These condensed financial statements should be
read in conjunction with the Company's Annual Report on Form 10-K for the year
ended April 30, 1996. The results of operations for the interim periods are not
necessarily indicative of the operating results for the whole year.
Note 2: Contingency
The Company and certain of its past and current officers and directors and its
outside auditors, BDO Seidman, LLP have been named as defendants in a
consolidated class action securities fraud lawsuit filed in the United States
District Court for the Eastern District of New York entitled In re Health
Management, Inc. Securities Litigation, Master File No. 96 Civ. 0889 (ADS). The
consolidated actions allege claims under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, arising out of alleged misrepresentations and
omissions by the Company in connection with certain of its previous securities
filings. The consolidated actions purport to represent a class of persons who
purchased the Company's common stock between August 25, 1994 and February 27,
1996, the date the Company announced that it would have to restate certain of
its financial statements. The consolidated actions seek unspecified monetary
damages reflecting the decline in the trading price of the Company's stock that
allegedly resulted from the Company's February 1996 announcements. Pursuant to
the Order of Consolidation, the Company will not be required to answer or
otherwise move in the action until January 6, 1997. The Company entered into a
Stipulation of Partial Settlement with the plaintiffs' counsel and on September
18, 1996 such Stipulation of Partial Settlement received preliminary court
approval (the "Original Settlement"). The Original Settlement provided for,
among other things, the payment by the Company of $2,000,000 in cash, the
issuance of 2,200,000 shares of Common Stock and warrants to purchase
2,200,000 shares of Common Stock. As a condition to Transworld's obligation to
close the Stock Purchase Agreement and the Merger Agreement, preliminary court
approval and final court approval, respectively, is required with respect to a
modified settlement providing for a $7,200,000 cash payment in lieu of the
consideration provided in the Original Settlement. An Amended Stipulation of
Partial Settlement to this effect was executed on December 19, 1996,
preliminary approval by the U.S. District Court for the Eastern District of
New York thereof was granted on December 20, 1996 and a hearing for final
approval is currently scheduled for March 14, 1997. The Company is in the
process of negotiating with its directors and officers liability insurance
carrier with respect to coverages for damages in connection with the
stockholder class action lawsuit and any payments received from such carrier
will reduce the Company's liability with respect to such suits.
Certain of the Company's current and former directors and officers, including
Messrs. Bergman, Hotte, Clifton and Dimitriadis and Ms. Belloise, have been
named as defendants, and the Company has been named as a nominal defendant, in a
consolidated derivative action filed in the United States District Court for the
Eastern District of New York entitled In re Health Management, Inc.
Stockholders' Derivative Litigation, Master File No. 96 Civ. 1208 (TCP). The
consolidated action alleges claims for breach of fiduciary duty and contribution
against the individual director defendants arising out of alleged
misrepresentations and omissions contained in certain of the Company's previous
securities filings. The consolidated action seeks unspecified monetary damages
on behalf of the Company as well as declaratory and injunctive relief. An
amended consolidated complaint was served on the Company on
18
<PAGE>
August 12, 1996. The Company's time to answer or move with respect to the
amended consolidated complaint has been extended pursuant to stipulation until
January 31, 1997.
Under the Company's Certificate of Incorporation and Bylaws, certain officers
and directors may be entitled to indemnification, or advancement of expenses for
legal fees in connection with the above suits. The Company may be required to
make payments in respect thereof in the future.
BDO Seidman, LLP has been named as a defendant, and the Company has been named
as a nominal defendant, in a derivative lawsuit filed in the Supreme Court for
the State of New York, County of New York entitled Howard Vogel, et al. v. BDO
Seidman, LLP, et al., Index No. 96-603064. The complaint alleges claims for
breach of contract, professional malpractice, negligent misrepresentation,
contribution and indemnification against BDO Seidman arising out of alleged
misrepresentations and omissions contained in certain of the Company's previous
securities filings. BDO Seidman was the Company's auditor at the time those
filings were made and has continued to serve as such. The complaint seeks
unspecified monetary damages on behalf of the Company as well as declaratory and
injunctive relief. Pursuant to stipulation, the Company's time to answer or
otherwise move against the complaint in this action has been adjourned
indefinitely.
The enforcement division of the Securities and Exchange Commission has a formal
order of investigation relating to matters arising out of the Company's public
announcement on February 27, 1996 that the Company would have to restate its
financial statements for prior periods as a result of certain accounting
irregularities and the Company is fully cooperating with this investigation and
has responded to the commission's requests for documentary evidence.
As a result of a New York State Medicaid audit, the Company is in discussions
with the New York State Department of Social Services regarding certain
overpayments to the Company. The Company estimates that it will have to pay
approximately $1.4 million in respect thereof.
19
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company, certain of its past and current directors and officers and its
outside auditors, BDO Seidman, LLP have been named as defendants in a
consolidated class action securities fraud lawsuit filed in the United States
District Court for the Eastern District of New York entitled In re Health
Management, Inc. Securities Litigation, Master File No. 96 Civ. 0889 (ADS). The
consolidated actions allege claims under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, arising out of alleged misrepresentations and
omissions by the Company in connection with certain of its previous securities
filings. The consolidated actions purport to represent a class of persons who
purchased the Company's common stock between August 25, 1994 and February 27,
1996, the date the Company announced that it would have to restate certain of
its financial statements. The consolidated actions seek unspecified monetary
damages reflecting the decline in the trading price of the Company's stock that
allegedly resulted from the Company's February 1996 announcements. Pursuant to
the Order of Consolidation, the Company is required to answer or otherwise move
in the action on January 6, 1997. The Company entered into a Stipulation of
Partial Settlement with the plaintiffs' counsel and on September 18, 1996 such
Stipulation of Partial Settlement received preliminary court approval (the
"Original Settlement"). The Original Settlement provided for, among other
things, the payment by the Company of $2,000,000 in cash, the issuance of
2,200,000 million shares of Common Stock and warrants to purchase 2,200,000
million of Common Stock. As a condition to Transworld's obligation to close the
Stock Purchase Agreement and the Merger Agreement, preliminary court approval
and final court approval, respectively, is required with respect to a modified
settlement providing for a $7,200,000 cash payment in lieu of the consideration
provided in the Original Settlement. An Amended Stipulation of Partial
Settlement to this effect was executed on December 19, 1996, preliminary
approval by the U.S. District Court for the Eastern District of New York thereof
was granted on December 20, 1996 and a hearing for final approval is currently
scheduled for March 14, 1997. The Company is in the process of negotiating with
its directors and officers liability insurance carrier with respect to coverages
for damages in connection with the stockholder class action lawsuit and any
payments received from such carrier will reduce the Company's liability with
respect to such suits.
Certain of the Company's current and former officers and directors, including
Messrs. Bergman, Hotte, Clifton and Dimitriadis and Ms. Belloise, have been
named as defendants, and the Company has been named as a nominal defendant, in a
consolidated derivative action filed in the United States District Court for the
Eastern District of New York entitled In re Health Management, Inc.
Stockholders' Derivative Litigation, Master File No. 96 Civ. 1208 (TCP). The
consolidated action alleges claims for breach of fiduciary duty and contribution
against the individual director defendants arising out of alleged
misrepresentations and omissions contained in certain of the Company's previous
securities filings. The consolidated action seeks unspecified monetary damages
on behalf of the Company as well as declaratory and injunctive relief. An
amended consolidated complaint was served on the Company on August 12, 1996. The
Company's time to answer or move with respect to the amended consolidated
complaint has been extended pursuant to stipulation until January 31, 1997.
Under the Company's Certificate of Incorporation and Bylaws, certain officers
and directors may be entitled to indemnification, or advancement of expenses for
legal fees in connection with the above suits. The Company may be required to
make payments in respect thereof in the future.
BDO Seidman, LLP has been named as a defendant, and the Company has been named
as a nominal defendant, in a derivative lawsuit filed in the Supreme Court for
the State of New York, County of New York entitled Howard Vogel, et al. v. BDO
Seidman, LLP, et al., Index No. 96-603064. The complaint alleges claims for
breach of contract, professional malpractice, negligent misrepresentation,
contribution and indemnification against BDO Seidman arising out of alleged
misrepresentations and omissions contained in certain of the Company's previous
securities filings. BDO Seidman was the Company's auditor at the time those
filings were made and has continued to serve as such. The complaint seeks
unspecified monetary damages on behalf of the Company as well as declaratory and
injunctive relief. Pursuant to stipulation, the Company's time to answer or
otherwise move against the complaint in this action has been adjourned
indefinitely.
The enforcement division of the Securities 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. The Company is cooperating fully with this investigation and has
responded to the Commission's requests for documentary evidence.
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. v. Health Management, Inc., 96 Civ. 2330 (ADS). The
action alleged claims for breach of contract and accounts stated arising out of
a dispute regarding payment for certain goods and sought damages in the amount
of $3,187,157.35 together with interest, costs and disbursements.
20
<PAGE>
Hyperion Partners II, L.P., a major shareholder of Transworld, has agreed to
purchase Bindley Western's receivables and Bindley Western has agreed to dismiss
the suit and the parties are negotiating final documentation.
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 action 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 and to add
certain other defendants. These defendants caused the removal of the state court
action to the Bankruptcy Court of the Eastern District of New York. By motion
dated April 12, 1996, APP requested that the Bankruptcy Court remand the action
to the State Court, which the Bankruptcy Court granted. The Company opposed this
motion, which 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.
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 preliminarily ruled to grant APP's remand motion, but
provided the Hutsons a further opportunity to submit a written response to the
motion. After the Hutsons submitted a written response and a hearing was held,
the Bankruptcy Court granted APP's remand motion. The Hutsons have noticed their
appeal of this order.
The outcomes of certain lawsuits and the investigation are uncertain and the
ultimate outcomes could have a material adverse effect on the Company and the
viability of the Company going forward.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the County of Lake, State of
Illinois, on the 6th day of February, 1997.
HEALTH MANAGEMENT, INC.
(Registrant)
By: /s/ W. James Nicol
W. James Nicol
(Principal Executive Officer)
