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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended January 31, 1997
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 March 24, 1997, there were outstanding 18,294,474 shares of common stock,
$.03 par value.
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HEALTH MANAGEMENT, INC.
January 31, 1997
TABLE OF CONTENTS
Page No.
Part I. FINANCIAL INFORMATION: --------
Item 1. Financial Statements 3
Item 2. Management's Discussion and
Analysis of Financial Condition and
Results of Operations 3 - 13
Part II. OTHER INFORMATION:
Item 1. Legal Proceedings 24 - 26
Item 2. Changes in Securities 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of
Security Holders 26 - 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 28 - 32
SIGNATURES 33
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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 including,
its willingness to continue extensions of the Forbearance Agreement;
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; changes in relations with
suppliers; 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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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 aggregated 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.) Since
that time, the Company has repaid to Transworld all principal amounts borrowed
under the revolving credit facility since November 13, 1996 and the revolving
credit facility has been frozen; however, Transworld has continued to extend the
Forbearance Agreement in short-term intervals, currently expiring March 31,
1997. In addition, Hyperion Partners II, L.P., the majority stockholder of
Transworld, has acquired the obligations of the Company due to Foxmeyer Drug
Co., 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. As a result of the restatement
of the Company's first and second quarters of fiscal 1997 and the special
charges recorded in this, the third quarter of fiscal 1997, the Company has
recorded significant additional charges to its balance sheet including
reductions of the Company's working capital, retained earnings and
stockholders' equity. There are no assurances that Transworld will extend the
Forbearance Agreement past March 31, 1997 and, if no such agreement is reached,
it is probable that the Company will seek protection under the Federal
Bankruptcy laws.
Transworld Transaction. In November 1996, Transworld acquired the Company's
outstanding bank debt, in the principal amount of $28.3 million, 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. The Forbearance Agreement has since been extended in short term
intervals. Also, on November 13, 1996 the Company entered into a Stock
Purchase Agreement ("Stock Purchase") 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 a one-year option to purchase an
additional 746,713 shares of Common Stock at an exercise price of $1.00 per
share. The Stock Purchase was consummated on January 13, 1997. The
consideration for the Shares included: (i) 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)
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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 aggregated $8,964,292, approximately $4.6 million was applied toward
repayment of amounts loaned to the Company under the revolving credit facility
subsequent to November 13, 1996 and approximately $.1 million was applied
towards payment of outstanding interest under the Company's revolving credit
facility. The Company also incurred expenses of approximately $.9 million in
related costs. Upon repayment of such loans, the Company's revolving credit
facility was frozen.
On November 13, 1996 the Company also entered into a Merger Agreement with
Transworld pursuant to which a newly formed subsidiary of Transworld would merge
into the Company and each stockholder of the Company would receive cash
consideration equal to $2.00 per share. On January 13, 1997, the Merger
Agreement was amended to provide for, among other things, a reduced cash
consideration of $1.50 per share in light of certain material adverse changes to
the business and financial condition of the Company. 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 a settlement of the consolidated class action lawsuit
for $7.2 million in cash. On March 17, 1997, the Company announced that it
planned to restate its first and second quarter fiscal 1997 financial results
and take a charge of approximately $13 million in the third quarter of fiscal
1997 (see Note 3 to the Condensed Consolidated Financial Statements). In light
of these events, the Company and Transworld are currently in discussions
regarding a renegotiated deal. If the parties are successful at renegotiating a
deal, the consideration to be paid to stockholders is not likely to exceed $.30
per share. If the parties are not successful in renegotiating the Merger
Agreement or if the Forbearance Agreement is not extended beyond March 31, 1997,
it is probable that the Company will have to seek protection under the Federal
Bankruptcy Laws.
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 effect 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 Purchase Agreement,
preliminary court approval was obtained 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, and preliminary approval by the U.S. District Court for the
Eastern District of New York thereof was granted on December 20, 1996. The
hearing for final approval of the Amended Stipulation of Partial Settlement,
which was scheduled for March 14, 1997, was rescheduled to April 11, 1997. In
connection with the negotiations between the Company and Transworld regarding
further amendments to the Merger Agreement, the Company and Transworld are also
renegotiating with the plaintiffs in the consolidated stockholder class action
to further amend the Stipulation of Partial Settlement to provide for a
reduction in the consideration to be paid to the plaintiff class (See Part II,
Item 1,
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"Legal Proceedings"). If the parties are not successful in renegotiating the
settlement in a manner acceptable to Transworld, it is doubtful that Transworld
and the Company will be successful in renegotiating the Merger Agreement and,
therefore, probable that the Company will have to seek protection under the
Federal Bankruptcy Laws.
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., became Chief Financial
Officer of the Company in December 1995 and was also named the Executive Vice
President of the Company in April 1996. Mr. Jurewicz resigned, effective
January 10, 1997, to assume a new position. Mr. Nicol assumed the additional
duties of Chief Financial Officer effective January 10, 1997 and the Company
has recently retained outside financial consultants to provide support in the
financial area.
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. Also, the Company's ability to successfully conclude the
Transworld transaction may depend on its ability to retain its key personnel to
manage through the transition. 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 January 31, 1997, the Company had
goodwill of approximately $30.8 million, or 39% 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 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.
During the third quarter of fiscal 1997, the Company wrote off approximately
$2.4 million of goodwill related to retail pharmacies closed or sold. See Note
3 to Condensed Consolidated Financial Statements.
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
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August 27, 1996, by its principal wholesaler. More recently, managment has
focused on the pursuit of the Transworld Transaction. Additionally, concerns
about the Company's financial condition may result in declining customer
referrals. While management believes the continued pursuit of its business
strategy could improve the Company's operations and financial performance, no
assurances can be given as to its ultimate success in view of the numerous
distractions presently facing management and the Company's limited capital
resources.
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, based upon the recent
history of such new products having been introduced into the market and the
present pipeline of potential new products in various stages of the Food
and Drug Administration review process. The Company anticipates providing
these new drugs to schizophrenic patients as it broadens its Lifecare(TM)
Program. Management believes that the introduction of Olanzapine has been a
factor in the recent decline of the Company's Clozapine customer base
(approximately 5% during the course of the third quarter of fiscal 1997), 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 at $1 per share resulted in
substantial dilution of the Company's outstanding shares. An additional 746,713
shares of Common Stock could be issued to Transworld pursuant to an option with
an exercise price of $1 per share issued in connection with the Stock Purchase
Agreement. Additionally, the Caremark Convertible Subordinated Note acquired by
Hyperion, the $3,000,000 principal amount and accrued interest of which may be
converted into shares of Common Stock at Hyperion's option, if converted could
also result in the issuance of additional shares of Common Stock. Based on the
Company's calculations, as of March 15, 1997, the Note was convertible into
approximately 262,093 shares of Common Stock at approximately $11.87 per share.
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RESULTS OF OPERATIONS
THREE MONTHS ENDED JANUARY 31, 1997 VERSUS JANUARY 31, 1996
The Company's revenues were $39,767,175, a decrease of $1,034,230 or 2.5% below
revenues of $40,801,405 for the quarter ended January 31, 1996. This decrease
is attributable to the reduction in reimbursement rates that occur when the
pharmacy benefit is "carved out" from the major medical benefit and switched to
a drug card plan at lower revenue rates; the ongoing increase in the number of
transplant patients receiving immunosuppressant drug benefits under Medicare
due to the extension of Medicare coverage beyond the historical one year period
post-transplant (Medicare reimbursement is at lower rates than indemnity
insurance); a decline in the number of patients served by the Company's
Clozaril Patient Management Business (see "Introduction of New Antipsychotic
Drugs; Blood Monitoring," in "Recent Events and Other Considerations," above);
the implementation of the Company's decision to discontinue its modest retail
pharmacy businesses and an increase in the accrual of contractual allowances.
Gross profit margins were 17.3% for the quarter ended January 31, 1997,
compared to 18.0% for the quarter ended January 31, 1996. The decrease in the
gross profit rate reflects an overall reduction in reimbursement rates from
third party payors including pricing pressures exerted by managed care payors
on the Company, as described above, and an increase in Medicare patients, as
described above, even though the quarter ended January 31, 1996 had been
negatively impacted by the one-time write-off of $2,840,000 of medical device
inventory, without which the gross profit rate would have been 24.9%. In
addition, the gross profit margin in the quarter ended January 31, 1997 was
negatively impacted by the following factors: (i) the retroactive reversal by
a vendor, of discounts of approximately $450,000 recorded in prior fiscal 1997
periods presuming payment in accordance with specified terms, such amount being
consented to by the Company in connection with Hyperion's purchase of the
Foxmeyer accounts payable; (ii) lost purchase discounts associated with drug
purchases during the period due to more unfavorable terms under which vendors
have placed the Company and (iii) higher contractual allowances.
Operating expenses for the three months ended January 31, 1997 were
$23,937,132, a net increase of $495,108 or 2.1% over the quarter ended January
31, 1996. The principal components of the net increase were:
- A $1.0 million increase in general and administrative expenses. This
increase is primarily related to increased professional fees, including
$500,000 attributable to the retention of an investment banking firm to
seek additional financing or the sale of the Company.
- A $2.2 million increase in the provision for doubtful accounts. In the
third quarters of fiscal 1997 and 1996 the Company evaluated the
adequacy of the allowance for doubtful accounts, which caused an
increased provision (change in estimate) of $10 million and $8.4 million
in the third quarter of fiscal 1997 and 1996, respectively. See Note 3
to the Condensed Consolidated Financial Statements.
- A $2.8 million decrease in unusual charges. During the third quarter of
fiscal 1997, the Company provided a $2.8 million charge ($2.4 million of
which relates to a write-off of goodwill) for the closing or sale of
three retail pharmacies. The fiscal 1996 charges of $5.6 million relate
to the (a) costs associated with the organizational consolidation and
other cost reduction programs ($3.6 million) and (b) professional fees
related to the Company's litigation and restatements of fiscal 1995
financial statements ($2 million). See Note 3 to the Condensed
Consolidated Financial Statements.
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Loss from operations for the quarter ended January 31, 1997 was ($17,074,054)
compared to a ($16,110,596) loss for the quarter ended January 31, 1996. The
primary reasons for this loss are the decline in gross profits and the increase
in operating expenses described above.
The Company incurred settlement costs of $175,000 during the three months ended
January 31, 1997 related to the estimated settlement of the derivative
lawsuits. No similar costs were incurred during the same period in 1996.
Interest expense for the quarter ended January 31, 1997 was $1,290,701, an
increase of $615,107, or 91.0%, over the quarter ended January 31, 1996. The
increase is attributable to increased borrowings and a higher percentage rate
of interest being paid on the senior debt.
Loss before income taxes for the quarter ended January 31, 1997 was
($18,539,755) compared to a ($16,786,190) loss for the quarter ended January
31, 1996. Expenses related to the increased provision for doubtful accounts,
costs and expenses related to the retail pharmacy closings or sales, increased
interest and professional fees, derivative suit settlement costs and lower
margins were the primary reasons for the loss.
Income taxes for the three months ended January 31, 1997 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 carry forward because of the uncertainty of its future
realization.
The net loss was ($18,514,440) for the quarter ended January 31, 1997 compared
to a net loss of ($9,903,644) for the quarter ended January 31, 1996. The net
loss was primarily a result of the factors discussed above, together with the
tax benefit recorded in the quarter ended January 31, 1996 related to the tax
benefit of a net operating loss carryback, which did not apply in the 1997
third quarter.
Primary and fully diluted loss per common share for the quarter ended January
31, 1997 was ($1.66) compared to a loss per common share of ($1.06) for the
quarter ended January 31, 1996. The weighted average number of shares
outstanding used in the calculation of primary and fully diluted earnings per
share were 11,161,596 for the quarter ended January 31, 1997 and 9,384,732 for
the quarter ended January 31, 1996.
NINE MONTHS ENDED JANUARY 31, 1997 VERSUS JANUARY 31, 1996
Revenues for the nine months ended January 31, 1997 were $120,030,137, an
increase of $1,659,915 or 1.4% in comparison to revenues for the nine months
ended January 31, 1996. The increase in revenues was the result from internal
growth from ongoing patient referrals from existing referral sources and the
addition of new referral sources, partially offset by the same factors discussed
above for the three months ended January 31, 1997.
Gross profit margins were 19.0% for the nine months ended January 31, 1997, as
compared to 23.9% for the comparable period in the prior year. The decrease in
the gross profit rate reflects an overall reduction in reimbursement rates from
third party payors, including pricing pressures exerted by managed care payors
on the Company, as described above, even though the nine month period ended
January 31, 1996, had been negatively impacted by the one time write-off of
$2,840,000 of medical device inventory, without which the gross profit rate
would have been 26.3%. In addition, the current period gross profit margin was
negatively impacted by the
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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 recorded in the quarter
ended October 31, 1996; (ii) a 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 its price
which primarily affected the quarter ended October 31, 1996; (iii) the
retroactive reversal in the quarter ended January 31, 1997, by the vendor of
discounts of approximately $450,000 recorded in prior fiscal 1997 periods
presuming payment in accordance with specified terms, such amount being
consented to by the Company in connection with Hyperion's purchase of the
Foxmeyer accounts payable and (iv) lost purchase discounts associated with drug
purchases due to more unfavorable terms under which vendors placed the Company
and (v) higher contractual allowances.
Operating expenses for the nine months ended January 31, 1997 were $43,926,971,
a net increase of $3,771,824 or 9.4% over the nine months ended January 31,
1996. The principal components of the net increase were:
- - A $2.4 million increase in general and administrative expenses. This
increase is primarily related to increased professional fees, including (a)
$500,000 attributable to the retention of an investment banking firm to seek
additional financing or the sale of the Company, and (b) increased legal,
audit, tax return preparation and consulting fees.
- - A $2.2 million increase in the provision for doubtful accounts. In the
third quarters of fiscal 1997 and 1996 the Company evaluated the adequacy of
the allowance for doubtful accounts, which caused an increased provision
(change in estimate) of $10 million and $8.4 million in the third quarter of
fiscal 1997 and 1996, respectively. See Note 3 to the Condensed
Consolidated Financial Statements.
- - A $1.4 million decrease in unusual charges. During the nine months ended
January 31, 1997, the Company provided (a) a $2.8 million charge ($2.4
million of which relates to a write-off of goodwill) for the closing or sale
of three retail pharmacies and (b) $1.4 million for costs associated with
overpayments from New York State Medicaid. The fiscal 1996 charges of $5.6
million relate to the (a) costs associated with the organizational
consolidation and other cost reduction programs ($3.6 million) and (b)
professional fees related to the Company's litigation and restatements of
fiscal 1995 financial statements ($2 million). See Note 3 to the Condensed
Consolidated Financial Statements.
Loss from operations for the nine months ended January 31, 1997 was
($21,122,303) compared to a ($11,907,882) loss in the comparable period last
year. The primary reasons for this loss are the decline in gross profits and
the increase in operating expenses described above.
The Company incurred settlement costs of $7,375,000 during the nine months
ended January 31, 1997 related to the estimated costs of the settlement of the
stockholder class action litigation and derivative litigation. No similar
costs were incurred during the same period in 1996.
Interest expense for the nine months ended January 31, 1997 was $2,753,932 an
increase of $815,476, or 42.1% over the nine months ended January 31, 1996.
The increase is attributable to increased borrowings and a higher percentage
rate of interest being paid on the senior debt.
Loss before income taxes for the nine months ended January 31, 1997 was
($31,251,235) compared to a loss of ($13,846,338) for the nine months ended
January 31, 1996. Expenses
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related to the additional $10 million provision for doubtful accounts; the
costs associated with the closing or sale of the Company's three retail
pharmacies; 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; increased interest
expense and professional fees and lower margins generally throughout the nine
month period were the primary reasons for the loss.
Income taxes for the nine months ended January 31, 1997 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 carry forward because of the uncertainty of its future
realization.
The net loss for the nine months ended January 31, 1997 was ($31,347,877)
compared to net loss of ($8,175,384) for the period ended January 31, 1996.
The increase in the net loss was primarily a result of the increased costs
discussed above, together with the tax benefit recorded in the nine months
ended January 31, 1996 related to the tax benefit of a net operating loss
carryback, which did not apply to a significant extent in the nine months ended
January 31, 1997.
Primary and fully diluted loss per common share for the nine months ended
January 31, 1997 were ($3.15) compared to a loss per common share of ($0.87)
for the nine months ended January 31, 1996. The weighted average number of
shares outstanding used in the calculation of primary and fully diluted
earnings per share were 9,939,574 for the nine months ended January 31, 1997
and 9,399,984 for the six months ended January 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The net decrease of $158,377 in the Company's cash and cash equivalents to
$3,121,818 at January 31, 1997 was attributable to cash used in operating
activities, debt repayments and capital expenditures offset by the additional
equity from Transworld.
Working capital at January 31, 1997 was a negative ($19,496,008), a decrease of
$21,987,627 from April 30, 1996. Current assets decreased $12,827,075 due to a
decrease in cash and cash equivalents of $158,377, a decrease in net accounts
receivable of $8,079,990, an increase in inventories of $1,524,072, a decrease
in tax refund receivable of $6,709,924, an increase in deferred tax assets of
$1,110,000 and a decrease in prepaid expenses of $512,856.
Current liabilities increased $9,160,552 from April 30, 1996 principally due to
an increase of $4,948,930 in accrued unusual charges and settlement costs, an
increase in accrued expenses of $1,679,259, and increase in the current
maturities of long term debt of $2,963,080 and decrease in accounts payable of
$430,717. The increase in accrued unusual charges and settlement costs is
primarily the result of the accrual of $7.4 million for the settlement of the
stockholder class action and derivative suit litigation and the accrual of $1.4
million to settle overpayments from New York State Medicaid and the payment of
approximately $3.9 million of such charges accrued as of April 30, 1996.
On November 13, 1996, Transworld acquired the Company's outstanding bank debt
in the aggregate amount of $28.3 million, 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
11
<PAGE> 12
conditions and at the discretion of Transworld. Since that time, the Company
has repaid to Transworld all principal amounts borrowed under the revolving
credit facility since November 13, 1996 and the revolving credit facility has
been frozen; however, Transworld has continued to extend the Forbearance
Agreement in short-term intervals, currently expiring March 31, 1997.
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 occurred on January 13, 1997. The conditions
to closing the stock purchase transaction included, among others, approval of
Transworld's lenders and preliminary court approval of the Proposed Settlement.
The consideration for the Shares includes: (i) 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, approximately $4.6 million was applied toward repayment of amounts
loaned to the Company under the revolving credit facility subsequent to
November 13, 1996, and approximately $.1 million was applied towards payment of
outstanding interest under the Company's revolving credit facility. The
Company also incurred expenses of approximately $.9 million in related costs.
The remainder was used for general corporate purposes. See "Transworld
Transaction." The option has an exercise price of $1.00 per share and 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 would merge
into the Company and each stockholder of the Company would receive cash
consideration equal to $2.00 per share. On January 13, 1997, the Merger
Agreement was amended to provide for among other things, a reduced cash
consideration of $1.50 per share in light of certain material adverse changes to
the business and financial condition of the Company. On March 17, 1997, the
Company announced that it planned to restate its first and second quarter fiscal
1997 financial results and take a charge of approximately $13 million in the
third quarter of fiscal 1997 (see Note 3 to the Condensed Consolidated Financial
Statements). In light of these events, the Company and Transworld are currently
in discussions regarding a renegotiated deal. If the parties are successful at
renegotiating a deal, the consideration to be paid to stockholders is not likely
to exceed $.30 per share. If the parties are not successful in renegotiating
the Merger Agreement, or if the Forbearance Agreement is not extended beyond
March 31, 1997, it is probable that the Company will have to seek protection
under the Federal Bankruptcy laws.
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 recently reduced their
credit limitations with the Company. The Company's historical
12
<PAGE> 13
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 was 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 and there has been no
significant improvement in such relationships since the completion of the Stock
Purchase Agreement. Although the Company has been able to maintain adequate
product supply within established 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.
If the Company is unsuccessful in consummating the Merger Agreement with
Transworld, or Transworld refuses to continue to extend the Forbearance
Agreement, or if the Company is unsuccessful in continuing satisfactory
relations with its suppliers, it is probable that the Company will seek
protection under the Federal Bankruptcy laws.
13
<PAGE> 14
HEALTH MANAGEMENT, INC.
AND SUBSIDIARIES
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Balance Sheets as of January 31, 1997 (Unaudited)
and April 30, 1996 (Audited) 15 - 16
Statements of Operations for the Three and Nine Months Ended January 31,
1997 and January 31, 1996 (Unaudited) 17
Statements of Cash Flow for the Nine Months Ended January 31, 1997 and
January 31, 1996 (Unaudited) 18
Statement of Stockholders' Equity for the Nine Months Ended January 31, 1997
(Unaudited) 19
Notes to Condensed Consolidated Financial Statements (Unaudited) 20 - 23
</TABLE>
14
<PAGE> 15
HEALTH MANAGEMENT, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
January 31, 1997 April 30, 1996
---------------- --------------
(Unaudited) (Audited)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 3,121,818 $ 3,280,195
Accounts Receivable, Less Allowance for
Doubtful Accounts of Approximately
$ 15,829,000 and $10,070,000, respectively 28,377,209 36,457,199
Inventories 8,324,892 6,800,820
Tax Refund Receivable 1,327,106 8,037,030
Deferred Taxes 2,917,000 1,807,000
Prepaid Expenses and other 142,502 655,358
----------- -----------
TOTAL CURRENT ASSETS 44,210,527 57,037,602
IMPROVEMENTS and EQUIPMENT, Less
Accumulated Depreciation and Amortization 3,336,870 3,825,974
GOODWILL 30,766,995 34,008,496
OTHER 140,938 1,043,607
----------- -----------
$78,455,330 $95,915,679
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
15
<PAGE> 16
HEALTH MANAGEMENT, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
January 31, 1997 April 30, 1996
--------------- --------------
(Unaudited) (Audited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts Payable, Including Amounts
to Affiliates in 1997 $20,284,119 $20,714,836
Accrued Unusual Charges and Settlement Costs 8,507,930 3,559,000
Accrued Expenses 3,205,378 1,526,119
Current Maturities of Long Term Debt, Including
Amounts to Affiliates in 1997 31,709,108 28,746,028
----------- -----------
TOTAL CURRENT LIABILITIES 63,706,535 54,545,983
Long Term Debt, Less Current Maturities 645,052 4,006,077
----------- -----------
TOTAL LIABILITIES 64,351,587 58,552,060
COMMITMENTS and CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred Stock - $0.01 Par Value:
Shares Authorized - 1,000,000
Issued and Outstanding, none
Common Stock - $0.03 Par Value:
Shares Authorized - 39,000,000
Issued and Outstanding - 18,294,474 and 9,328,240
shares, respectively 548,834 279,848
Additional Paid-in Capital 45,957,786 38,138,771
Accumulated Deficit (32,402,877) (1,055,000)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 14,103,743 37,363,619
----------- -----------
$78,455,330 $95,915,679
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
16
<PAGE> 17
HEALTH MANAGEMENT, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
January 31, January 31,
--------------------------- -----------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $39,767,175 $40,801,405 $120,030,137 $118,370,222
Cost of Sales 32,904,097 33,469,977 97,225,469 90,122,957
------------ ----------- ------------ -----------
Gross Profit 6,863,078 7,331,428 22,804,668 28,247,265
------------ ----------- ------------ -----------
Operating Expenses:
Selling 1,389,916 1,335,396 4,189,665 3,627,031
General & Administrative 7,670,665 6,669,369 20,031,826 17,660,956
Provision for Doubtful Accounts 12,063,831 9,837,259 15,492,760 13,267,160
Unusual Charges 2,812,720 5,600,000 4,212,720 5,600,000
------------ ----------- ------------ -----------
Total Operating Expenses 23,937,132 23,442,024 43,926,971 40,155,147
Loss from Operations (17,074,054) (16,110,596) (21,122,303) (11,907,882)
Settlement Costs 175,000 -- 7,375,000 --
Interest Expense 1,290,701 675,594 2,753,932 1,938,456
------------ ----------- ------------ -----------
Loss Before Income Taxes (18,539,755) (16,786,190) (31,251,235) (13,846,338)
Income Taxes (25,315) (6,882,546) 96,642 (5,670,954)
------------ ----------- ------------ -----------
Net Loss ($18,514,440) ($9,903,644) ($31,347,877) ($8,175,384)
============ =========== ============ ===========
Loss Per Common Share:
Primary ($1.66) ($1.06) ($3.15) ($0.87)
Full Diluted ($1.66) ($1.06) ($3.15) ($0.87)
Weighted Average Shares
Outstanding:
Primary 11,161,596 9,384,732 9,939,574 9,399,984
Fully Diluted 11,161,596 9,384,732 9,939,574 9,399,984
</TABLE>
See Notes to Condensed Consolidated Financial Statements
17
<PAGE> 18
HEALTH MANAGEMENT, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
For the Nine Months Ended January 31
<TABLE>
<CAPTION>
(Unaudited)
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net Loss ($31,347,877) ($8,175,384)
Adjustments to Reconcile Net Loss to
Net Cash Used In
Operating Activities:
Depreciation and Amortization 1,917,835 1,313,692
Provision for Doubtful Accounts 15,492,760 13,267,160
Unusual charges 2,534,634 -
Deferred Taxes (1,110,000) (3,795,168)
Increase (Decrease) in Cash Flows
From Changes in Operating Assets
and Liabilities:
Accounts Receivable (7,412,770) (16,178,070)
Inventory (1,524,072) (1,909,973)
Prepaid Expenses and Other 512,856 (404,357)
Other Assets 811,169 518,447
Accounts Payable (430,717) 5,907,519
Accrued Expenses 1,679,259 8,153,926
Accrued Unusual Charges and Settlement Costs 4,955,930 -
Tax Refund Receivable 6,709,924 (4,270,527)
---------- -----------
NET CASH USED IN OPERATING ACTIVITIES (7,211,069) (5,572,735)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures (630,364) (1,575,631)
---------- -----------
NET CASH USED IN INVESTING ACTIVITIES (630,364) (1,575,631)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (Payments) on Credit Facility (361,025) 5,925,768
Principal Payments on Long-Term Debt (36,920) -
Proceeds from Sale of Stock 8,081,001 -
Proceeds from Exercise of Stock Options - 57,378
---------- -----------
NET CASH FROM FINANCING ACTIVITIES 7,683,056 5,983,146
---------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (158,377) (1,165,220)
Cash and Cash Equivalents, at Beginning of Period 3,280,195 4,562,712
---------- -----------
Cash and Cash Equivalents, at End of Period $3,121,818 $ 3,397,492
========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid for Interest $2,826,558 $1,510,928
Cash Paid (Refund) for Taxes ($5,005,694) $2,099,047
</TABLE>
See Notes to Condensed Consolidated Financial Statements
18
<PAGE> 19
HEALTH MANAGEMENT, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For The Nine Months Ended January 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Common Stock
$.03 Par Value
-------------- Additional
Paid-in Accumulated
Shares Amount Capital Deficit
------ ------ ---------- -----------
<S> <C> <C> <C> <C>
Balance May 1, 1996 9,328,240 $ 279,848 $38,138,771 ($ 1,055,000)
Issuance of Common Shares 1,942 58 6,942
Sale of Common Stock to
Transworld Home Health
Care, Inc., Net of Expenses 8,964,292 268,928 7,812,073
Net Loss for the Nine
Months Ended
January 31, 1997 (31,347,877)
---------- --------- ----------- ------------
Balance, January 31, 1997 18,294,474 $ 548,834 $45,957,786 ($32,402,877)
========== ========= =========== ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements
19
<PAGE> 20
HEALTH MANAGEMENT, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
The condensed consolidated financial statements include Health Management,
Inc., a Delaware corporation, 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 (collectively, the "Company"). All intercompany
accounts and transactions have been eliminated in consolidation.
The condensed consolidated financial statements have been prepared assuming the
Company will continue as a going concern (Note 5).
Certain 1996 amounts have been reclassified to conform to the 1997
presentation.
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: CONTINGENCIES
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. 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
20
<PAGE> 21
Common Stock. As a condition to Transworld Home HealthCare, Inc.'s
("Transworld") obligation to close the Stock Purchase Agreement, preliminary
court approval was obtained 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. The $7.2 million is
included in settlement costs in the accompanying Condensed Consolidated
Statement of Operations for the nine months ended January 31, 1997 (Note 3).
An Amended Stipulation of Partial Settlement to this effect was executed on
December 19, 1996 and preliminary approval by the U.S. District Court for the
Eastern District of New York thereof was granted on December 20, 1996. The
hearing for final approval of the Amended Stipulation of Partial Settlement,
which was scheduled for March 14, 1997, was rescheduled to April 11, 1997. In
connection with the negotiations between the Company and Transworld regarding
further amendments to the Merger Agreement, the Company and Transworld are also
renegotiating with the plantiffs in the consolidated stockholder class action
to further amend the Stipulation of Partial Settlement to provide for a
reduction in the consideration to be paid to the plantiff class.
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 May, 1997. The
Company has recorded an estimated settlement cost of $175,000 related to this
derivative action in the three months ended January 31, 1997 in the
accompanying Condensed Consolidated Statement of Operations (Note 3).
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.
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. The Company and Transworld
have been named as defendants in a lawsuit filed on March 11, 1997 in the
Chancery Court of the State of Delaware for New Castle County entitled Drew
Bergman v. Health Management, Inc. and Transworld Home HealthCare, Inc., CA No
15609NC. The plantiff in that case seeks reimbursement and advancement of
legal fees and expenses. A hearing on this matter has not yet been scheduled
by the court.
21
<PAGE> 22
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 settled with the New
York State Department of Social Services regarding certain overpayments to the
Company. The Company's liability was approximately $1.4 million, of which
approximately $.5 million was held in escrow by the State. The remaining
amounts will be paid in installments through November 1998, plus interest. The
$1.4 million is included in unusual charges for the nine months ended January
31, 1997 in the accompanying Condensed Consolidated Statements of Operations
(Note 3).
NOTE 3: UNUSUAL CHARGES, SETTLEMENT COSTS AND OTHER CHARGES.
The unusual charges, settlement costs and other charges included in the
accompanying Condensed Consolidated Statements of Operations are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
January 31, January 31,
--------------------- ------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Included in Cost of Sales:
Writeoff of medical device inventory $ - $2,840,000 $ - $2,840,000
=========== ========== =========== ==========
Included in the Provision for Doubtful
Accounts:
Additional provisions reflecting changes
in estimation of the allowance
for doubtful accounts $10,000,000 $8,400,000 $10,000,000 $8,400,000
=========== ========== =========== ==========
Unusual Charges:
Costs associated with overpayments from
New York State Medicaid (Note 2) $ - $ - $ 1,400,000 $ -
Costs and other expenses related to the
closing or sale of three retail pharmacies,
including a goodwill write-off
approximately $2.4 million 2,812,720 - 2,812,720 -
Costs associated with organizational
consolidation and other cost
reduction programs - 3,600,000 - 3,600,000
Professional fees related to litigation
and restatements of fiscal 1995 financial
statements - 2,000,000 - 2,000,000
----------- ---------- ----------- ----------
$ 2,812,720 $5,600,000 $ 4,212,720 $5,600,000
=========== ========== =========== ==========
</TABLE>
22
<PAGE> 23
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
January 31, January 31,
------------------ -----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Settlement Costs (Note 2):
Estimated for the
settlement of -
Stockholder class action $ - $ - $7,200,000 $ -
Derivative action 175,000 - 175,000 -
-------- --- ---------- ---
$175,000 $ - $7,375,000 $ -
======== === ========== ===
</TABLE>
NOTE 4: STOCKHOLDERS' EQUITY
During the second quarter of fiscal 1997, the Company issued 1,942 shares
(valued at $7,000), primarily for the purchase of a marketing product. During
the third quarter of fiscal 1997, Transworld acquired 8,964,292 of newly issued,
unregistered common shares (49% of the Company's outstanding common stock),
effective January 13, 1997, at $1 per share, less related expenses of $883,291.
NOTE 5: OTHER MATTERS
The Company entered into Stock Purchase and Merger Agreements ("Agreements")
with Transworld in November, 1996 for Transworld to eventually acquire all the
outstanding common stock of the Company. Transworld or its majority
stockholder, Hyperion Partners II, Ltd., have assumed the Company's senior debt
(approximately $28.3 million), debt previously owed to Caremark, Inc. ($3
million) and certain supplier accounts payable (approximately $15.2 million), as
well as acquiring 49% of the Company's common stock (Note 4), as of January 31,
1997.
If the Company is unable to (a) consummate the Merger Agreement with
Transworld; (b) continue satisfactory relations with its suppliers; (c) continue
to obtain extensions to its current Forbearance Agreement and obtain other
financing for ongoing operations and (d) settle its litigation in a satisfactory
manner, it is probable the Company will seek protection under the Federal
Bankruptcy laws. As a result, there continues to be substantial doubt about the
Company's ability to continue as a going concern. The condensed consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
23
<PAGE> 24
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. 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 shares of Common Stock. As a condition to
Transworld's obligation to close the Stock Purchase Agreement, preliminary
court approval was obtained 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 and
preliminary approval by the U.S. District Court for the Eastern District of New
York thereof was granted on December 20, 1996. The hearing for final approval
of the Amended Stipulation of Partial Settlement, which was scheduled for March
14, 1997, was rescheduled to April 11, 1997. In connection with the
negotiations between the Company and Transworld regarding further amendments to
the Merger Agreement, the Company and Transworld are also renegotiating with
the plantiffs in the consolidated stockholder class action to further amend the
Stipulation of Partial Settlement to provide for a reduction in the
consideration to be paid to the plantiff class.
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 May, 1997.
24
<PAGE> 25
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.
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. The Company and Transworld
have been named as defendants in a lawsuit filed on March 11, 1997 in the
Chancery Court of the State of Delaware for New Castle County entitled Drew
Bergman v. Health Management, Inc. and Transworld Home HealthCare, Inc., CA No.
15609NC. The plaintiff in that case seeks reimbursement and advancement of
legal fees and expenses. A hearing on this matter has not yet been scheduled
by the court.
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.
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
were alleged, each for up to $10 million in damages. By motion dated March 12,
1996, APP moved to amend its complaint to add, among other things, a cause of
action against the Company alleging that a proposed plan of reorganization
presented to the Bankruptcy Court in APP's bankruptcy was based on financial
statements of the Company which were allegedly fraudulent. On September 17,
1996 the Court granted APP's motion to amend its complaint to add a fifth cause
of action. The Company has noticed an appeal of this order. 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, including the Company. The action was
removed to the United States Bankruptcy Court for the Eastern District of New
York, and subsequently remanded to the Supreme Court for the County of Nassau.
The Hutsons noticed their appeal of this order and have moved to dismiss the
action against them, asserting that they are not subject
25
<PAGE> 26
to the jurisdiction of the New York court. The Company is presently covering
certain expenses in connection with this litigation.
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.
ITEM 2. CHANGE IN SECURITIES - NONE
ITEM 3. DEFAULT UPON SENIOR SECURITIES
The Company is presently in default under its Credit Agreement with Transworld
Home HealthCare, Inc., as successor to Chase Manhattan Bank, N.A., and European
American Bank, for among other things, non-payment of principal in the aggregate
amount of $1,000,000. As of March 24, 1997, the amount of principal owing under
such agreement is $28.15 million and the amount of accrued and unpaid interest
was $183,202. The Company executed a Forbearance Agreement dated November 13,
1996 with Transworld which provided that, subject to certain conditions, the
lenders would not exercise their rights and remedies under the Credit Agreement
until November 12, 1996. The parties have extended this Forbearance Agreement
in short-term intervals and the Forbearance Agreement currently extends to March
31, 1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Stockholders Meeting held on November 6, 1996, several
matters were voted on:
1. ELECTION OF DIRECTORS. With respect to the election of directors all of
the nominees were elected according to the following votes:
For Votes Withheld
--- --------------
Andre C. Dimitriadis 6,162,177 582,221
W. James Nicol 6,162,177 582,221
D. Mark Weinberg 6,162,177 582,221
Dr. Timothy J. Triche 6,162,177 582,221
2. RATIFICATION OF AUDITORS. The selection of BDO Seidman, LLP to audit the
books and records of the Company for the fiscal year ending April 30, 1997
was ratified, according to the following vote:
For Against Abstentions
--- ------- -----------
6,347,984 363,158 33,256
3. AMENDMENT TO CERTIFICATE OF INCORPORATION. The proposal to further amend
the Company's Certificate of Incorporation in order to increase the
authorized capital stock of the Company, from 21,000,000 to 40,000,000
shares, and to increase the authorized Common Stock of the Company, from
20,000,000 to 39,000,000 shares, was approved according to the following
vote:
For Against Abstentions Non-Votes
--- ------- ----------- ---------
5,910,065 597,528 76,277 160,528
26
<PAGE> 27
4. 1996 EMPLOYEE STOCK OPTION PLAN. The proposal to ratify the Company's 1996
Employee Stock Option Plan was approved according to the following vote:
For Against Abstentions
--- ------- -----------
2,180,247 1,326,224 88,983
5. THE 1997 EMPLOYEE STOCK PURCHASE PLAN. The proposal to ratify the
Company's 1997 Employee Stock Purchase Plan was approved according to the
following vote:
For Against Abstentions
--- ------- -----------
2,407,110 1,101,862 86,482
6. ISSUANCE OF STOCK OPTIONS TO THE CHIEF EXECUTIVE OFFICER AND PRESIDENT OF
THE COMPANY. The proposal to ratify the issuance of stock options for
500,000 shares of Common Stock received the affirmative vote of less than a
majority of the issued and outstanding shares of Common Stock and therefore
was not ratified. The votes were as follows:
For Against Abstentions Non-Votes
--- ------- ----------- ----------
2,230,297 1,176,320 136,647 3,201,134
7. ISSUANCE OF CERTAIN STOCK OPTIONS TO NON-EMPLOYEE DIRECTORS. The proposal
to issue options to up to a maximum aggregate of 170,000 shares of Common
Stock of the Company to certain non-employee directors of the Company
received the affirmative vote of less than a majority of the issued and
outstanding shares of the Common Stock and therefore was not ratified. The
votes were as follows:
For Against Abstentions Non-Votes
--- ------- ----------- ----------
2,256,013 1,461,057 105,589 2,921,739
8. 1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN. The proposal to adopt the
Company's 1996 Non-Employee Director Stock Option Plan was ratified
according to the following vote:
For Against Abstentions
--- ------- -----------
2,899,900 769,500 153,259
No other matters were submitted to a vote of stockholders during the Company's
fiscal quarter ending January 31, 1997.
ITEM 5. OTHER INFORMATION
On March 17, 1997, the Company issued a press release, a copy of which is
attached as Exhibit 99-1 to this Quarterly Report on Form 10-Q.
27
<PAGE> 28
ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K
(a) Exhibits
3.1 Certificate of Incorporation of the Company, as filed with the
Secretary of State of Delaware on March 25, 1986 (incorporated by
reference to Registration Statement on Form S-1, Registration No.
33-04485).
3.2 Certificate of Amendment to Certificate of Incorporation of the
Company, as filed with the Secretary of State of Delaware on March 9,
1988 (incorporated by reference to Form 10-K for year ended April 30,
1988).
3.3 Certificate of Amendment to Certificate of Incorporation of the
Company, as filed with the Secretary of State of Delaware on March 31,
1992 (incorporated by reference to Registration Statement on Form S-1,
No. 33-46996).
3.4 Certificate of Amendment to Certificate of Incorporation of the
Company, as filed with the Secretary of State of Delaware on October
27, 1994 (incorporated by reference to Form 10-K for year ended April
30, 1995).
3.5 Certificate of Amendment of Certificate of Incorporation of the
Company, as filed with the Secretary of State of Delaware on November
8, 1996.
3.6 Amended and Restated By-Laws of the Company (incorporated by reference
to Form 10-Q for 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).
28
<PAGE> 29
10.2 Addendum dated February 1, 1989 to Stock Purchase Agreement dated
December 23, 1988 (incorporated by reference to Amendment Number 1 to
Registration Statement on Form S-1, Registration No. 33-46996).
10.3* 1989 Stock Option Plan (incorporated by reference to Registration
Statement on Form S-1, Registration No. 33-46996).
10.4 Lease dated April 20, 1990 on Company's Ronkonkoma, New York facility
between the Company and Four L Realty Co (incorporated by reference to
Registration Statement on Form S-1, Registration No. 33-46996).
10.5 Amendment, dated March 16, 1992 to Lease dated April 20, 1990 on
Company's Headquarters between the Company and Four L Realty Co.
(incorporated by reference to Form 10-K for year ended April 30,
1992).
10.6* Company 401(k) Plan (incorporated by reference to Amendment Number 1
to Registration Statement on Form S-1, Registration No. 33-46996).
10.7* Employment Agreement, dated as of May 1, 1996, between the Company and
W. James Nicol (incorporated by reference to Annual Report on Form
10-K for the fiscal year ended April 30, 1996).
10.8* Letter Agreement dated November 13, 1996, between W. James Nicol and
the Company and guaranteed by Transworld Home HealthCare, Inc.
10.9* Employment Agreement, dated as of September 9, 1996, between the
Company and James R. Mieszala (incorporated by reference to Current
Report on Form 8-K dated September, 1996).
10.10* Letter Agreement dated November 13, 1996, between James R. Mieszala
and the Company and guaranteed by Transworld Home HealthCare, Inc.
10.11* Employment Agreement, dated as of September 9, 1996, between the
Company and Paul S. Jurewicz (incorporated by reference to Current
Report on Form 8-K dated September, 1996).
10.12* Letter Agreement dated November 13, 1996, between Paul S. Jurewicz
and the Company and guaranteed by Transworld Home HealthCare, Inc.
10.13 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).
10.14 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).
29
<PAGE> 30
10.15 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).
10.16 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).
10.17 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).
10.18 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).
10.19 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).
10.20 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).
10.21 Forbearance Agreement, dated July 26, 1996 among Health Management,
Inc., Home Care Management, Inc., HMI Illinois, Inc., HMI
Pennsylvania, Inc., Health Reimbursement Corporation, HMI Retail
Corp., Inc., HMI PMA, Inc., HMI Maryland, Inc., Chase Manhattan Bank,
as lender and agent, and European American Bank, as lender
(incorporated by reference to Annual Report on Form 10-K for the
fiscal year ended April 30, 1996).
10.22 Forebearance Agreement, dated as of November 13,
1996, between the Company and Transworld Home Healthcare, Inc.
(incorporated by reference to the Form 8-K dated November 13, 1996).
10.23 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).
10.24 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).
10.25 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).
30
<PAGE> 31
10.26 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).
10.27 Stipulation of Partial Settlement dated September 16, 1996, between
the Company and the Representative Plaintiffs (incorporated by
reference to Form 8-K dated September, 1996).
10.28 Amended Stipulation of Partial Settlement dated December 19, 1996,
between the Company and the Representative Plaintiffs (incorporated by
reference to Form 8-K, dated December 23, 1996).
10.29 Agreement and Plan of Merger among IMH Acquisition Corp., Transworld
Home HealthCare, Inc. and the Company (incorporated by reference to
Form 8-K dated November 13, 1996).
10.30 Merger Agreement Amendment, dated January 13, 1997,
among IMH Acquisition Corp., Transworld Home HealthCare, Inc. and the
Company (incorporated by reference to Form 8-K dated January 13,
1997)
10.31 Stock Purchase Agreement dated as of November 13, 1996, between the
Company and Transworld Home HealthCare, Inc. (incorporated by
reference to Form 8-K dated November 13, 1996).
10.32* 1996 Non-Employee Director Stock Option Plan (incorporated by
reference to Schedule 14A dated October 9, 1996).
10.33* 1996 Employee Stock Option Plan (incorporated by reference to
Schedule 14A dated October 9, 1996)
10.34* 1997 Employee Stock Purchase Plan (incorporated by reference to
Schedule 14A dated October 9, 1996)
11 Statement re Computation of Per Share Earnings (incorporated by
reference to Annual Report on Form 10-K/A for the fiscal year ended
April 30, 1996).
27+ Financial Data Schedule
99-1+ Press release dated March 17, 1997, issued by the Company
* Management contract or compensatory plan or arrangement.
+ Filed with this Report.
(b) Reports on Form 8-K - The Company filed the following Current Reports
on Form 8-K during the fiscal quarter ending January 31, 1997:
31
<PAGE> 32
Form 8-K, Document Date - November 1, 1996, which was filed with the
Securities and Exchange Commission on November 8, 1996 and Form 8-K/A
thereto which was filed with the Commission on November 22, 1996.
Form 8-K, Document Date - November 8, 1996, which was filed with the
Securities and Exchange Commission on November 13, 1996.
Form 8-K, Document Date - November 13, 1996, which was filed with the
Securities and Exchange Commission on December 5, 1996.
Form 8-K, Document Date - December 23, 1996, which was filed with the
Securities and Exchange Commission on January 2, 1997.
Form 8-K, Document Date - January 13, 1997, which was filed with the
Securities and Exchange Commission on January 28, 1997.
32
<PAGE> 33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the County of Lake, State of
Illinois, on the 24th day of March, 1997.
HEALTH MANAGEMENT, INC.
(Registrant)
By: /s/ W. James Nicol
------------------------
W. James Nicol
(Principal Executive Officer and Financial Officer)
33
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-START> OCT-31-1996
<PERIOD-END> JAN-31-1997
<CASH> 3,121,818
<SECURITIES> 0
<RECEIVABLES> 44,206,393
<ALLOWANCES> 15,829,184
<INVENTORY> 8,324,892
<CURRENT-ASSETS> 44,210,527
<PP&E> 6,086,098
<DEPRECIATION> 2,749,228
<TOTAL-ASSETS> 78,455,330
<CURRENT-LIABILITIES> 63,706,535
<BONDS> 32,354,160
0
0
<COMMON> 548,834
<OTHER-SE> 13,554,909
<TOTAL-LIABILITY-AND-EQUITY> 78,455,330
<SALES> 0
<TOTAL-REVENUES> 120,030,137
<CGS> 0
<TOTAL-COSTS> 97,225,469
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 15,492,760
<INTEREST-EXPENSE> 2,753,932
<INCOME-PRETAX> (31,251,235)
<INCOME-TAX> 96,642
<INCOME-CONTINUING> (31,347,877)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (31,347,877)
<EPS-PRIMARY> (3.15)
<EPS-DILUTED> (3.15)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
[HEALTH MANAGEMENT LETTERHEAD]
FOR IMMEDIATE RELEASE
HEALTH MANAGEMENT, INC. TO RESTATE FIRST & SECOND QUARTER FINANCIAL STATEMENTS
AND TAKE A 3RD QUARTER CHARGE; ANNOUNCES AN AMENDMENT TO THE TRANSWORLD
TRANSACTION
Buffalo Grove, Illinois - March 17, 1997 - Health Management, Inc. ("HMI")
(NASDAQ Small Cap Market: HMIS) announced today that it plans to restate its
financial statements for the first and second quarters of its 1997 fiscal year
to correct certain errors relating to costs of goods sold, which were
previously understated by approximately $1.8 million and $800,000,
respectively. HMI also plans to take a charge of approximately $13 million in
the third quarter of 1997, which includes a writeoff of approximately $2.8
million in goodwill and other costs associated with the sale of the Baltimore
retail pharmacies and a writedown of approximately $10 million in accounts
receivable. The Company will also report substantial operating losses for the
quarter ended January 31, 1997 and for the nine months then ended. The filing
of amended 10-Qs reflecting such restatements and the third quarter 10-Q is
expected to be made on or before March 24, 1997.
HMI and Transworld Home Healthcare, Inc. are currently in discussions regarding
a renegotiated deal.
The March 14, 1997 hearing for final approval of the amended settlement
agreement in respect of the stockholder class action lawsuit was adjourned until
April 11, 1997.
Earlier this week, listing of HMI's common stock was moved the NASDAQ Small Cap
Market from the NASDAQ National Market System.
Health Management, Inc. is a national provider of integrated pharmacy
management services to patients with chronic medical conditions and to health
care professionals, pharmaceutical manufacturers and third-party payers
involved in their care.
For additional information:
At HMI:
Jim Nicol, President CEO and CFO
847-913-2404
At Edelman Financial:
Diane Perry or Joseph Kist (Investors) Mark Danes (Media)
212-704-8293 or 212-704-8239 212-704-4464
