<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
Amendment No. 3
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) January 14, 1997
Transworld HealthCare, Inc.
(Exact name of Registrant as specified in its charter)
New York
(State or other jurisdiction of incorporation)
1-11570 13-3098275
(Commission File Number) (I.R.S. Employer Identification No.)
75 Terminal Avenue, Clark, New Jersey 07066
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (908) 340-1144
Transworld Home HealthCare, Inc.
(Former name or former address, if changed since last report.)
The registrant hereby amends the following items, financial statements,
exhibits or other portions of its Current Report on Form 8-K filed on or about
January 22, 1997 as set forth in the pages attached hereto: Item 7. Financial
Statements, Pro Forma Financial Information and Exhibits.
<PAGE> 2
Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND
EXHIBITS.
The following are filed as part of this Form 8-K/A:
<TABLE>
<CAPTION>
Page
No.
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<S> <C>
(a) Financial Statements of Health Management, Inc. As a
result of the amended filings by Health Management, Inc. on
June 6, 1997 of its Annual Report on Form 10-K/A for the
fiscal year ended April 30, 1996 and its Quarterly Report
on Form 10-Q/A for the three and nine months ended
January 31, 1997 the required financial statements are hereby
substituted for the financial statements contained in
Amendment No. 2.
Years Ended April 30, 1996, 1995 and 1994
Report of Independent Certified Public Accountants 3
Consolidated Balance Sheets as of April 30, 1996
and 1995 4
Consolidated Statements of Operations for the Years
Ended April 30, 1996, 1995 and 1994 5
Consolidated Statements of Stockholders' Equity for
the Years Ended April 30, 1996, 1995 and 1994 6
Consolidated Statements of Cash Flows for the Years
Ended April 30, 1996, 1995 and 1994 7
Notes to Financial Statements 9
Report of Independent Certified Public Accountants 34
Schedule II - Valuation and Qualifying Accounts and Reserves 35
Nine Months Ended January 31, 1997
Condensed Consolidated Balance Sheets as of
January 31, 1997 (Unaudited) and April 30, 1996 36
Condensed Consolidated Statements of Operations for
the Three and Nine Months Ended January 31, 1997
and 1996 (Unaudited) 38
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended January 31, 1997 and 1996
(Unaudited) 39
Condensed Consolidated Statement of Stockholders' Equity
for the Nine Months Ended January 31, 1997 40
Notes to Financial Statements (Unaudited) 41
</TABLE>
Page 2
<PAGE> 3
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Health Management, Inc. and Subsidiaries
Buffalo Grove, Illinois
We have audited the consolidated balance sheets of Health Management, Inc. and
Subsidiaries as of April 30, 1996 and 1995 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended April 30, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of
financial statements. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Health Management,
Inc. and Subsidiaries at April 30, 1996 and 1995 and the results of their
operations and cash flows for each of the three years in the period ended April
30, 1996 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Notes 1 and
7 to the accompanying consolidated financial statements, the Company is not in
compliance with the provisions of certain loan agreements and is the defendant
in significant litigation. These matters raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are described in Notes 1 and 7. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
BDO Seidman, LLP
Mitchel Field, New York
July 22, 1996, except for Note 4(a)
which is as of July 26, 1996
Page 3
<PAGE> 4
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
====================================================================================================================================
April 30, 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS (NOTE 4(A))
CURRENT:
Cash and cash equivalents $ 3,280,195 $4,562,712
Accounts receivable, less allowance for doubtful accounts of
approximately $10,070,000 and $7,998,000 36,457,199 31,339,809
Inventories 6,800,820 7,787,661
Tax refund receivable (Note 6) 8,037,030 1,827,000
Deferred taxes (Note 6) 1,807,000 3,133,300
Prepaid expenses and other 655,358 1,163,541
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 57,037,602 49,814,023
IMPROVEMENTS AND EQUIPMENT, LESS ACCUMULATED DEPRECIATION AND
AMORTIZATION (NOTES 3 AND 4) 3,825,974 2,136,062
GOODWILL (NOTE 2) 34,008,496 35,464,260
OTHER 1,043,607 1,275,775
- ------------------------------------------------------------------------------------------------------------------------------------
$95,915,679 $88,690,120
====================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT:
Accounts payable $20,714,836 $12,329,991
Accrued unusual charges (Note 5) 3,559,000 -
Accrued expenses 1,526,119 1,862,407
Current maturities of long-term debt (Note 4) 28,746,028 23,135,267
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 54,545,983 37,327,665
LONG-TERM DEBT, LESS CURRENT MATURITIES (NOTE 4) 4,006,077 3,191,123
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 58,552,060 40,518,788
- ------------------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTE 7)
STOCKHOLDERS' EQUITY (NOTE 8):
Preferred stock - $.01 par value - shares authorized 1,000,000;
issued and outstanding, none -
Common stock - $.03 par value - shares authorized 20,000,000;
issued and outstanding 9,328,240 and 9,316,017 279,848 279,481
Additional paid-in capital 38,138,771 38,019,510
Retained earnings (deficit) (1,055,000) 9,872,341
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 37,363,619 48,171,332
- ------------------------------------------------------------------------------------------------------------------------------------
$95,915,679 $88,690,120
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4
<PAGE> 5
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
====================================================================================================================================
Year ended April 30, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES $158,859,638 $88,456,028 $44,249,516
COST OF SALES (INCLUDING UNUSUAL CHARGES OF
$2,840,000 IN 1996) (NOTE 5) 120,223,528 63,708,021 28,643,460
- ------------------------------------------------------------------------------------------------------------------------------------
Gross profit 38,636,110 24,748,007 15,606,056
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Selling 4,649,697 2,898,208 1,847,197
General and administrative 24,324,490 10,648,792 5,428,342
Provision for doubtful accounts (Note 5) 14,714,606 7,978,189 1,781,000
Unusual charges (Note 5) 5,600,000 - -
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 49,288,793 21,525,189 9,056,539
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS (10,652,683) 3,222,818 6,549,517
INTEREST EXPENSE (2,717,155) (269,316) (88,215)
INTEREST INCOME 37,651 333,077 290,341
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (13,332,187) 3,286,579 6,751,643
INCOME TAXES (NOTE 6) (2,404,846) 1,340,391 2,750,685
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $(10,927,341) $1,946,188 $4,000,958
====================================================================================================================================
EARNINGS (LOSS) PER SHARE OF COMMON STOCK
- primary $(1.16) $.21 $.54
====================================================================================================================================
- fully diluted $(1.16) $.21 $.53
====================================================================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING
- primary 9,414,500 9,408,300 7,383,040
====================================================================================================================================
- fully diluted 9,414,500 9,420,816 7,593,465
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
Page 5
<PAGE> 6
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED APRIL 30, 1996 (NOTE 8)
================================================================================
<TABLE>
<CAPTION>
Common Stock Unearned
$.03 Par Value Restricted
------------------------ Additional Paid-in Retained Earnings Stock
Shares Amount Capital (Deficit) Compensation
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, MAY 1, 1993 6,076,063 $182,281 $5,647,475 $3,925,195 $ -
Common stock issued upon exercise of stock
options 2,833 85 12,663 - -
Common stock issued upon exercise of stock
warrants 40,330 1,210 216,572 - -
Common stock issued upon conversion of
subordinated debentures 357,145 10,715 364,288 - -
Common stock issued upon public offering 2,000,000 60,000 21,922,258 - -
Common stock issued upon acquisition of Murray
Group 617,060 18,512 7,676,230 - -
Restricted stock issued to consultants 11,000 330 113,795 - (114,125)
Compensation under restricted stock - - - - 57,060
Net income for the year ended April 30, 1994 - - - 4,000,958 -
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, APRIL 30, 1994 9,104,431 273,133 35,953,281 7,926,153 (57,065)
Common stock issued upon acquisition of:
Pharmaceutical Marketing Alliance 20,000 600 242,775 - -
Maryland Pharmacies 108,757 3,263 1,356,112 - -
Common stock issued upon exercise of stock
warrants 78,996 2,370 424,208 - -
Common stock issued upon exercise of stock
options 2,833 85 24,414 - -
Common stock issued to directors 1,000 30 18,720 - -
Compensation under restricted stock - - - - 57,065
Net income for the year ended April 30, 1995 - - - 1,946,188
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, APRIL 30, 1995 9,316,017 279,481 38,019,510 9,872,341 -
Common stock issued upon exercise of stock
options 12,223 367 119,261
Net loss for the year ended April 30, 1996 (10,927,341)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, APRIL 30, 1996 9,328,240 $279,848 $38,138,771 $ (1,055,000) $ -
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
Page 6
<PAGE> 7
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(NOTE 9)
================================================================================
<TABLE>
<CAPTION>
Year ended April 30, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($10,927,341) $1,946,188 $4,000,958
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 2,127,400 846,869 453,149
Provision for doubtful accounts receivable 14,714,606 7,978,189 1,781,000
Deferred taxes 1,326,300 (2,516,300) (701,315)
Write-off of improvements and equipment 263,563
Write-off of goodwill 552,432
Write-off of organizational costs 134,161
Loss from disposition of rental equipment - 287,287 -
Compensation under restricted stock - 57,065 57,060
Common stock issued to director - 18,750 -
Increase (decrease) in cash flows from changes in
operating assets and liabilities, net of effects of
purchase of CPMB and other acquisitions in 1995 and
Murray Group in 1994:
Accounts receivable (19,831,996) (16,706,549) (9,624,966)
Tax refund receivable (6,210,030) (1,827,000) -
Inventories 986,841 (1,826,911) 205,220
Prepaid expenses and other 508,183 (976,058) (205,307)
Other assets 98,008 (239,758) (249,281)
Accounts payable 8,384,845 4,870,054 99,675
Accrued unusual charges 3,559,000 - -
Accrued expenses (336,288) 396,332 203,075
Income taxes payable (1,759,590) 280,467
- ------------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (4,650,316) (9,451,432) (3,700,265)
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash used in acquisition of CPMB (324,366) (20,630,212) -
Cash used in acquisition of Murray Group - - (7,500,000)
Other acquisitions - (2,167,500) (250,000)
Collection of receivable from the seller of
Murray Group - 1,444,426 -
Capital expenditures (1,491,722) (948,368) (565,815)
Proceeds from sale of rental equipment - 214,598 -
- ------------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (1,816,088) (22,087,056) (8,315,815)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 7
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HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(NOTE 9)
================================================================================
<TABLE>
<CAPTION>
Year ended April 30, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 16,450,000 23,000,000 -
Principal payments on long-term debt (11,000,000) - -
Net payment on capital leases (385,741) (123,357) (44,202)
Decrease in bank loan - net - - (200,000)
Proceeds from issuance of common stock - - 21,982,258
Cash paid for deferred borrowing fees - (722,000) -
Proceeds from exercise of warrants - 426,578 217,782
Proceeds from exercise of options 119,628 24,499 12,748
- ------------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 5,183,887 22,605,720 21,968,586
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (1,282,517) (8,932,768) 9,952,506
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR 4,562,712 13,495,480 3,542,974
- ------------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 3,280,195 $4,562,712 $13,495,480
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
Page 8
<PAGE> 9
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
<TABLE>
<S><C>
1. BASIS OF PRESENTATION
AND SUMMARY OF
ACCOUNTING POLICIES
ORGANIZATION AND The consolidated financial statements include Health Management, Inc. (formerly Homecare
PRINCIPLES OF Management, Inc.) (the "Company"), (a Delaware corporation), its wholly-owned subsidiaries Home
CONSOLIDATION Care Management, Inc. (HMI-NY), HMI Pennsylvania, Inc., HMI Retail Corp. Inc., Health Reimbursement
Corp., HMI PMA Inc., HMI Maryland Inc., and HMI Illinois, Inc. All material intercompany accounts
and transactions have been eliminated in consolidation.
BASIS OF PRESENTATION The Company's consolidated financial statements have been presented on a going concern basis, which
contemplates the realization of assets and satisfaction of liabilities in the normal course of
business. As more fully discussed in Note 4, the Company is in violation of its loan agreements
resulting in the related debt being classified as current liabilities. The Company and its lenders
have agreed to a forbearance period during which management intends to attempt to arrange for a
refinancing of the current debt. Also, as described in Note 7, the Company is a defendant in
significant litigation and is the subject of an investigation by the Enforcement Division of the
Securities and Exchange Commission. These matters raise substantial doubt about the Company's
ability to continue as a going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
USE OF ESTIMATES In preparing financial statements in conformity with generally accepted accounting principles,
AND CONCENTRATION management is required to make estimates and assumptions that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities at the date of the
financial statements and revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Approximately 46% of the Company's revenues are currently attributable to sale of two products
which are manufactured solely by one pharmaceutical manufacturer. If the Company were unable to
purchase these two products, its results of operations would be materially and adversely affected.
</TABLE>
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<PAGE> 10
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S><C>
CREDIT RISK Financial instruments which potentially subject the Company to concentrations of credit risk
consist principally of temporary cash investments, tax-exempt obligations and trade receivables.
The Company places its temporary cash investments with high credit quality financial institutions
and limits the amount of credit exposure to any one financial institution. At times, such cash
investments exceed the Federal Deposit Insurance Corp. insurance limit. Concentrations of credit
risk with respect to trade receivables are limited due to the diverse group of patients whom the
Company services. No single customer accounted for a significant amount of the Company's sales in
the years ended April 30, 1996, 1995 and 1994. Approximately 44%, 40% and 35% of the Company's
revenues are reimbursed under arrangements with Federal and State medical assistance programs for
the years ended April 30, 1996, 1995, and 1994. At April 30, 1996 and 1995, approximately 43%, and
36% of the Company's accounts receivable are from Federal and State medical assistance programs.
The Company establishes an allowance for doubtful accounts based upon factors surrounding the
credit risk of specific customers, historical trends and other information.
INVENTORIES Inventories are valued at the lower of cost or market. Cost is determined by the first-in, first-
out method (FIFO). Inventories are principally comprised of prescription and over-the-counter
drugs.
REVENUE RECOGNITION Revenues are recognized on the date services and related products are provided to patients and are
recorded at amounts estimated to be received from patients or under reimbursement arrangements with
third party payors.
CASH AND CASH The Company considers all highly liquid investments with a maturity of three months or less when
EQUIVALENTS purchased to be cash equivalents.
IMPROVEMENTS AND Improvements and equipment are stated at cost. Depreciation of equipment and amortization of
EQUIPMENT leasehold improvements are computed over the estimated useful lives of the assets and the lease
term, respectively, ranging from 3 to 7 years for equipment and 13 years for improvements.
Accelerated methods (double declining balance method) are used for both book and tax purposes for
all classes of assets except for leasehold improvements which are amortized using straight line
method.
</TABLE>
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<PAGE> 11
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S><C>
GOODWILL AND OTHER Goodwill represents the excess of the purchase price over the fair value of net assets acquired
LONG-LIVED ASSETS through business combination, accounted for as purchases (see Note 2) and is amortized on a
straight-line basis over the estimated period to be benefitted - thirty years. During the fiscal
year ended April 30, 1996, the Company elected the early adoption of SFAS No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." Prior to the
adoption of SFAS No. 121, the carrying value of goodwill was reviewed periodically based on the
projected gross profits of the businesses acquired over the remaining amortization period.
In accordance with SFAS No. 121 the carrying value of long-lived assets will be reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount may not be
recoverable. The amount of impairment is computed based on the excess of the asset's carrying
value over its fair value under SFAS 121. Long-lived assets acquired in business combinations
accounted for using the purchase method includes the goodwill that arose in those transactions
allocated on a pro rata basis using the relative fair values of the long-lived assets and
identifiable intangibles acquired at the acquisition date. Based on the Company's analysis under
SFAS No. 121, the Company believes that, other than the write-off of goodwill related to the
Pharmaceutical Marketing Alliance acquisition (see Note 2) totalling $553,000, no impairment of the
carrying value of its long-lived assets inclusive of allocated goodwill existed at April 30, 1996.
The Company's analysis at April 30, 1996 has been based on an estimate of future undiscounted net
cash flows. Should the results forecasted not be achieved, future analyses may indicate
insufficient future undiscounted net cash flows to recover the carrying value of the Company's
long-lived assets inclusive of allocated goodwill, in which case SFAS No. 121 would require the
carrying value of such assets to be written down to fair value if lower than carrying value.
INCOME TAXES Deferred taxes are recorded to reflect the temporary differences in the tax bases of assets and
liabilities and their reported amounts in the financial statements. The differences relate
principally to the allowance for doubtful accounts and unusual charges.
</TABLE>
Page 11
<PAGE> 12
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S><C>
EARNINGS PER SHARE Earnings per share are computed on the basis of the weighted average number of common shares and
common stock equivalents outstanding during the year. Fully diluted earnings per share results
mainly from considering the shares issuable upon the conversion of the convertible subordinated
debentures and adjusting the net income by adding back the after-tax effect of the interest expense
thereon.
FAIR VALUE OF The carrying amounts of certain financial instruments, including cash, accounts receivable and
FINANCIAL accounts payable, approximate fair value as of April 30, 1996 because of the relatively short-term
INSTRUMENTS maturity of these instruments. The carrying value of long-term debt, including the current
portion, approximates fair value as of April 30, 1996 based upon the borrowing rates currently
available to the Company for bank loans with similar terms and average maturities.
STOCK-BASED The Financial Accounting Standards Board Issued Statement of Financial Accounting Standard Number
COMPENSATION 123 "Accounting for Stock-Based Compensation" ("SFAS Number 123") in October 1995. Statement
Number 123 encourages companies to recognize expense for stock options and other stock-based
employee compensation plans based on their fair value at the date of grant. As permitted by
Statement Number 123, the Company plans to continue to apply its current accounting policy under
APB Opinion Number 25 "Accounting for Stock Issued to Employees" in 1996 and future years, and will
provide disclosure of the pro forma impact on net income and earnings per share as if the fair
value-based method had been applied.
2. ACQUISITIONS (a) On March 31, 1995, HMI Illinois, a wholly-owned subsidiary of the Company, acquired certain
assets subject to certain liabilities of Caremark Inc.'s Clozaril Patient Management
Business ("CPMB"). The aggregate purchase price was approximately $23,260,000 consisting of
$20,060,000 in cash provided by bank financing, a $200,000 escrow deposit, and a $3,000,000
five year subordinated note with an annual interest rate of 8% payable semi-annually.
</TABLE>
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<PAGE> 13
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S><C>
The acquisition has been accounted for by the purchase method of accounting. The purchase
price has been allocated to the assets acquired based on the estimated fair values of each
asset and liability. The purchased assets consist primarily of inventory and equipment. The
excess of purchase price over fair value of the assets acquired was approximately
$22,860,000.
The unaudited pro-forma condensed combined statement of income for the year ended April 30,
1995 giving effect to the acquisition of CPMB by the Company as if it had occurred as of the
beginning of the year is as follows:
Year ended April 30, 1995
------------------------------------------------------------------------------
(In thousands)
Revenues $133,178
------------------------------------------------------------------------------
Income $6,237
------------------------------------------------------------------------------
Net income $3,505
------------------------------------------------------------------------------
Earnings Per Share
Primary $.37
Fully Diluted $.37
------------------------------------------------------------------------------
Pro-forma adjustments included in the pro-forma condensed combined statement of income
consisted of amortization of goodwill of $666,000, interest expenses of $2,340,000,
allowance for doubtful accounts of $634,000 and increase in cost of sales of $500,000.
</TABLE>
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<PAGE> 14
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
(b) On February 6, 1995, the Company acquired substantially all of the assets, subject to
certain liabilities, of two specialty pharmacies located in Maryland. Immediately following
this acquisition, the Company contributed all of the acquired assets, subject to assumed
liabilities, to HMI, Maryland, Inc., a newly formed subsidiary wholly-owned by the Company
("HMI-Maryland"). The aggregate purchase price for the two specialty pharmacies
approximated $3,172,000 and consisted of $1,812,500 in cash and cash equivalents and 108,757
newly-issued shares of common stock of the Company discounted at 25% and valued at
$1,359,500.
The acquisition has been accounted for by the purchase method of accounting. The purchase
price has been allocated to the assets acquired based on the estimated fair value of each
asset. The excess of purchase price over fair value of the assets was approximately
$2,454,000.
(c) On June 16, 1994, the Company acquired certain assets of Pharmaceutical Marketing Alliance,
Inc. (PMA) for a total purchase price of $598,375 which is comprised of cash of $355,000 and
20,000 shares of common stock. Immediately following this acquisition, the Company
contributed all of the acquired assets, subject to assumed liabilities to HMI-PMA, Inc., a
newly-formed wholly-owned subsidiary. The Company also entered into a three-year employment
agreement with three employees of PMA at an aggregate of $225,000 per annum.
The operations of HMI-PMA were closed during fiscal year 1996. Costs associated with this
closure, including write-off of goodwill of $553,000 and termination of employment
agreements were recorded in the year ended April 30, 1996. The write-off and the related
charges were part of the $3,600,000 charge discussed in Note 5.
</TABLE>
Page 14
<PAGE> 15
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
(d) On April 1, 1994, the Company acquired substantially all of the net assets of Murray
Pharmacy, Inc. and Murray Pharmacy Too, Inc. (collectively "Murray Group"), for total
consideration of up to $16,195,000, comprised of cash of $7,500,000, 617,060 shares of non-
registered common stock of the Company, discounted at 25% and valued at $7,695,000, and a
$1,000,000 earn-out based on performance of the companies for the year ended April 30, 1995.
The $1,000,000 earn-out was not recorded because the specified performance level was not
achieved.
In connection with the acquisition, the Company entered into employment agreements with the
two shareholders of the Murray Group. The Company also entered into leases for buildings
owned by the two Murray Group's shareholders (see Note 6(a)).
The acquisition has been accounted for by the purchase method of accounting. The purchase
price has been allocated to the assets acquired based on the estimated fair value of each
asset. The purchased assets consist primarily of accounts receivable and inventory. The
excess of purchase price over the fair value of the assets acquired was approximately
$10,100,000.
As a result of the above acquisitions, total excess of purchase price in excess of net assets
acquired are as follows:
April 30, 1996 1995
-------------------------------------------------------------------------------------
Goodwill resulting from acquisition of:
CPMB $22,860,251 $22,535,855
Maryland pharmacies 2,453,959 2,453,959
PMA - 581,507
Murray group 10,099,860 10,099,860
Other 250,000 250,000
-------------------------------------------------------------------------------------
35,664,070 35,921,181
Less: accumulated amortization 1,655,574 456,921
-------------------------------------------------------------------------------------
$34,008,496 $35,464,260
=====================================================================================
</TABLE>
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<PAGE> 16
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C> <C> <C>
3. IMPROVEMENTS AND Improvements and equipment consist of the following:
EQUIPMENT
April 30, 1996 1995
-----------------------------------------------------------------------------------------
Furniture and equipment $2,380,978 $1,575,503
Transportation equipment 104,090 88,906
Computer equipment 2,689,619 777,133
Leasehold improvements 365,743 491,108
-----------------------------------------------------------------------------------------
5,540,430 2,932,650
Less accumulated depreciation and
amortization 1,714,456 796,588
----------------------------------------------------------------------------------------
$3,825,974 $2,136,062
=========================================================================================
4. LONG-TERM DEBT Long-term debt consists of the following:
April 30, 1996 1995
-----------------------------------------------------------------------------------------
Term loan (a) $18,000,000 $21,000,000
Revolving credit (a) 10,350,000 2,000,000
Subordinated note payable (b) 3,000,000 3,000,000
Capitalized leases and notes payable
requiring monthly payments of $42,252
including assumed interest ranging from
3.2% to 21%, collateralized by equipment
with a book value of $1,354,708. 1,402,105 326,390
-----------------------------------------------------------------------------------------
32,752,105 26,326,390
Less current maturities 28,746,028 23,135,267
-----------------------------------------------------------------------------------------
$ 4,006,077 $ 3,191,123
=========================================================================================
</TABLE>
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HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S><C>
(a) On April 4, 1995, the Company borrowed $21,000,000 on a term loan to fund the cash portion of
the acquisition of CPMB (Note 2(a)). The term loan bears interest at a rate of .5% above the
Alternative Base Rate (as defined by the Credit Agreement and was 8.75% at April 30, 1996)
and is convertible into Eurodollar loans. The principal was payable over five years in
quarterly installment payments of $750,000 through March 31, 1996; $1,000,000 through March
31, 1997, $1,250,000 through March 31, 1999 and $1,000,000 through March 21, 2000.
The Credit Agreement provided for a revolving credit facility of up to $15,000,000,
including up to a $1,000,000 letter of credit facility. This agreement had an original
expiration date of March 1997. Borrowings under this facility bear interest at the
Alternative Base Rate (as defined in the Credit Agreement) and is convertible into
Eurodollar loans. At April 30, 1996, the Company had borrowings under this line of credit
of $10,350,000 bearing interest at 8.25% on $6,350,000 and 7.5% on $4,000,000.
The term loan and the revolving credit facility are collateralized by an assignment of a
security interest in all assets of the Company and its subsidiaries.
The agreements contains restrictions relating to the payment of dividends, liens,
indebtedness, investments and capital expenditures. In addition, the Company must maintain
certain financial ratios and a minimum net worth. As a result of the matters discussed in
Note 7(d) and the unusual charges described in Note 5, the Company was in violation of
certain provisions of the Credit Agreement. Accordingly, all borrowings under the term
loan and the revolving credit facility are classified as current.
</TABLE>
Page 17
<PAGE> 18
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
On July 26, 1996, the Company and the lenders under the agreements entered into a
forbearance agreement covering the period from July 26, to November 15, 1996. Under this
agreement, the lenders agreed subject to certain conditions, to forbear from exercising any
of their legal, contractual or equitable rights of remedies in respect of any of the
existing events of default during the above forbearance period and the Company agreed to
certain revised financial covenants and reporting requirements. The forbearance agreement
also reduced the availability under the revolving credit facility to a maximum of
$1,500,000 over the borrowings currently outstanding.
Concurrently, the Company engaged National Westminster Bank PLC ("Nat West") to act as its
financial advisor to explore a variety of strategic and financial alternatives. The
Company requires additional financing to remedy the default condition of its term loan and
borrowings under revolving credit facility. In order to satisfy such obligations the
Company may consider engaging in a public or private offering of securities of the Company.
There is no assurance that such financing can be obtained.
(b) In connection with the CPMB acquisition (see Note 2(a)), the Company is obligated on a
$3,000,000 unsecured subordinated note, bearing interest at an annual rate of 8% and
maturing March 31, 2000.
As a result of the restatement of the Company's April 30, 1995 financial statements and the
provision of unusual charges (see Note 5), the Company did not meet certain of the
financial ratios as required by the note. As a result, the note became convertible into
the Company's common stock upon notice received from the holder of the note. The
conversion price is based upon the average closing price of the Company's common stock for
the ten trading days immediately proceeding the conversion date and the ten trading days
immediately subsequent to the conversion date. The Company has not received notice from
the noteholder for conversion.
</TABLE>
Page 18
<PAGE> 19
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C>
The maximum amount of short-term borrowings outstanding during the years ended April 30, 1996,
1995 and 1994 was $10,350,000 $2,300,000 and $2,000,000, respectively. The average amounts
outstanding for the years ended April 30, 1996, 1995 and 1994 were $7,696,000, $592,000 and
$796,000, respectively. The average borrowing rates were 8.37%, 8.875% and 7% for the years ended
April 30, 1996, 1995 and 1994, respectively.
Long term debt matures as follows:
Year ended April 30,
-----------------------------------------------------------------------------------------------------
1997 $28,746,028
1998 377,771
1999 315,873
2000 3,245,162
2001 67,271
-----------------------------------------------------------------------------------------------------
$32,752,105
======================================================================================================
5. Unusual Charges The following charges were incurred during the year ended April 30,
And Other Charges 1996:
Included in costs of sales:
. Write-off of medical device inventory (a) $2,840,000
======================================================================================================
</TABLE>
Page 19
<PAGE> 20
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S><C>
Included in the provision for doubtful accounts:
. Additional provision reflecting a change in the
estimation of the allowance for doubtful accounts (b) $8,400,000
======================================================================================================
Unusual charges:
. Cost associated with organizational consolidation and
other cost reduction programs (c) 3,600,000
. Professional fees related to the Company's litigation and
restatement of fiscal 1995 financial statements (see Note
7(d)) 2,000,000
-----------------------------------------------------------------------------------------------------
$5,600,000
======================================================================================================
(a) Through January 31, 1996, the Company purchased approximately $3.5 million of medical device
inventory under a purchase agreement which provided for a total purchase commitment of
approximately $5.4 million in return for an exclusive right to distribute in the home care
market. A substantial portion of the $3.5 million was purchased during the nine months
ended January 31, 1996.
This device was originally targeted for use in the multiple sclerosis market but was not
being utilized in the treatment of such condition because of the concerns of drug
manufacturers and physicians that the device could affect the molecular stability of the
drug being administered. The lack of acceptance of such device was conclusively identified
during the third quarter of fiscal 1996.
</TABLE>
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<PAGE> 21
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
As a result, in January 1996, the Company notified the manufacturer of this device that the
Company would cease further purchase of such product. The Company also negotiated a return
agreement whereby the manufacturer of the device purchased back the inventory in return for
the forgiveness of $322,000 payable to the manufacturer from the Company and payment to the
Company of $338,000. Accordingly, the Company wrote down its medical device inventory by
$2,840,000.
(b) The Company had an evaluation of its allowance for doubtful accounts completed in the third
quarter of fiscal 1996, using a statistical sampling approach to its receivables. Based on
the result of this sampling, the Company concluded that its allowance for doubtful accounts
was understated by $8.4 million. Accordingly, the Company provided an additional $8.4
million allowance during the quarter ended January 31, 1996 when it revised its estimate of
the required allowance for doubtful accounts.
(c) The organizational consolidation costs include termination benefits accrued totalling
$1,271,000 related to the Company's January 1996 plan of termination of approximately 30
employees as part of the consolidation of the Company's accounting and executive offices in
Buffalo Grove, Illinois. Through April 30, 1996, $545,000 of such benefits had been paid
leaving a balance of $726,000.
The remaining organizational consolidation costs and other cost reduction programs,
totalling $2,329,000 can be summarized as follows:
Estimated lease termination costs $766,000
Write off of PMA goodwill 553,000
Write off of PMA and New York fixed assets 397,000
Write off of deferred financing costs 613,000
----------
$2,329,000
==========
</TABLE>
Page 21
<PAGE> 22
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S><C>
Estimated lease termination costs represent the lease expense for the remaining lease term
of the New York headquarters which is to be closed. The write off of PMA goodwill
represents the carrying value of goodwill of HMI-PMA (see Note 2(c)), which was closed in
fiscal 1996. The write off of PMA and New York fixed assets represents the net book value
of leasehold improvements of PMA and the New York headquarters to be closed. Write off of
deferred financing costs represents deferred financing costs resulting from the Company's
April 1995 term loan and credit agreement under which the Company is currently in default.
Through April 30, 1996, write-off of fixed assets, goodwill and related long lived assets
amounted to $950,000, leaving a balance of $1,379,000.
The above remaining liabilities of $726,000 and $1,379,000 and the unpaid professional fees
of $1,454,000 as of April 30, 1996 were included in accrued unusual charges, the majority of
which are expected to be paid within the year ended April 30, 1997.
6. INCOME TAXES The income tax expenses (benefits) are comprised of the following:
Year ended April 30, 1996 1995 1994
-------------------------------------------------------------------------------------------------
Current:
Federal $(4,398,902) $2,793,223 $2,640,000
State and local 667,756 1,063,468 812,000
-------------------------------------------------------------------------------------------------
(3,731,146) 3,856,691 3,452,000
-------------------------------------------------------------------------------------------------
Deferred
Federal 989,000 (1,851,000) (580,000)
State and local 337,300 (665,300) (121,315)
-------------------------------------------------------------------------------------------------
1,326,300 (2,516,300) (701,315)
-------------------------------------------------------------------------------------------------
Total income taxes $(2,404,846) $1,340,391 $2,750,685
=================================================================================================
</TABLE>
Page 22
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HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
The following reconciles the federal statutory tax rate with the actual effective
rate:
Year ended April 30, 1996 1995 1994
----------------------------------------------------------------------------------
Statutory rate (34%) 34% 34%
Increase (decrease) in tax rate
resulting from:
State and local taxes, net of
federal benefit 5% 7 7
Change in deferred tax assets
valuation allowance 11% - -
----------------------------------------------------------------------------------
Effective rate (18%) 41% 41%
==================================================================================
Deferred tax assets (liabilities) consist of the following:
April 30, 1996 1995
----------------------------------------------------------------------------------
Deferred tax assets resulting from:
Allowance for doubtful accounts $4,532,000 $3,163,000
Unusual charges 535,000 -
Deferred tax liability - difference in carrying
value of goodwill for book and tax (734,000) (29,700)
----------------------------------------------------------------------------------
4,333,000 3,133,300
Valuation allowance (2,526,000) -
----------------------------------------------------------------------------------
$1,807,000 $3,133,300
==================================================================================
</TABLE>
Page 23
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HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
A valuation allowance for the deferred tax assets was provided because of uncertainty as to future
realization of the deferred tax assets (exclusive of the remaining carryback benefit) as a result
of the substantial doubt about the Company's ability to continue as a going concern.
As of April 30, 1996, the Company recorded a $8,037,030 tax refund receivable, which consisted of
$1,344,000 of tax refund receivable from amended 1995 tax returns as a result of the restatement
of fiscal 1995 financial statements, $2,530,030 of excessive estimate taxes paid in 1996 and
$4,163,000 estimated refund claim due to 1996 net operating loss carryback.
7. COMMITMENTS AND (a) LEASES
CONTINGENCIES
The Company leases its offices, warehouse and retail pharmacies under operating leases
expiring at various times through August 2002. The Company also leases data processing
equipment under agreements which expire at various times through 2000. These leases have
been classified as capital leases (Note 3).
As of April 30, 1996, future net minimum lease payments under capital leases and
noncancellable operating lease agreements are as follows:
Capital Operating
-----------------------------------------------------------------------------------------------
1997 $416,241 $1,296,629
1998 389,908 1,088,500
1999 312,249 765,575
2000 227,870 680,728
2001 68,405 177,447
Thereafter - 97,654
-----------------------------------------------------------------------------------------------
Total minimum lease payments 1,414,673 4,106,533
Less amounts representing interest 179,803 -
-----------------------------------------------------------------------------------------------
Net minimum lease payments $1,234,870 $4,106,533
===============================================================================================
</TABLE>
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HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Rent expense for the years ending April 30, 1996, 1995, and 1994 amounted to $1,544,788,
$364,448 and $252,534, respectively which included rent expense for the buildings owned by the
two Murray Group shareholders amounted to $106,400, $106,410 for the years ended April 30, 1996
and 1995.
(b) RETIREMENT PLAN
Effective August 1, 1990, the Company established a 401(K) plan for eligible salaried
employees. The contribution for any participant may not exceed statutory limits. After one
year of employment, the Company will match 40% of each employee participant's contributions
up to the first 5% of compensation. The total matching contributions charged against
operations amounted to $178,844, $71,281 and $22,935 for the years ended April 30, 1996,
1995 and 1994.
(c) EMPLOYMENT AGREEMENTS
The Company has in effect employment agreements with certain key officers and employees,
which expire at various dates through May, 1999. Total salaries under these agreements
amount to approximately $900,000 annually.
</TABLE>
Page 25
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HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
(d) LITIGATION
(1) The Company and certain of its past and current directors and officers have been named
as defendants in eleven class action securities fraud lawsuits filed in the United
States District Court for the Eastern District of New York. These lawsuits will be
consolidated shortly into one action. These actions allege claims under Sections 10(b)
and 20(a) of the Securities and Exchange Act of 1934, arising out of alleged
misrepresentations and omissions by the Company in connection with certain of its
disclosure statements. These actions purport to represent a class of persons who
purchased the Company's common stock during a period ending February 27, 1996, the date
the Company announced that it would have to restate certain of its financial
statements. These actions seek unspecified monetary damages reflecting the decline in
the trading price of the Company's stock that allegedly resulted from the Company's
February 1996 announcements. Pursuant to the proposed Order of Consolidation, the
Company will not be required to answer or otherwise move in the consolidated action
until thirty days after it is served with an amended consolidated complaint, which has
not yet been served on the Company.
Certain of the Company's current and former officers and directors have been named as
defendants, and the Company has been named as a nominal defendant, in a consolidated
derivative action filed in the United States District Court for the Eastern District of
New York. The consolidated action alleges claims for breach of fiduciary duty and
contribution against the individual director defendants arising out of alleged
misrepresentations and omissions contained in certain of the Company's corporate
filings, as more fully alleged in the above-described class action lawsuit. The
consolidated action seeks unspecified monetary damages on behalf of the Company as well
as declaratory and injunctive relief. Pursuant to the Stipulation and Order of
Consolidation, the Company is not required to answer or otherwise move in the
consolidated action until sixty days after it is served with an amended consolidated
complaint, which has not yet been served on the Company.
</TABLE>
Page 26
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HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
The Company's auditors have been named as a defendant, and the Company has been named
as a nominal defendant, in a derivative lawsuit filed in the Supreme Court for the
State of New York, County of New York. The complaint against the Company's auditors
alleges claims for misrepresentations and omissions contained in certain of the
Company's corporate filings. The complaint seeks unspecified monetary damages on behalf
of the Company as well as declaratory and injunctive relief. Pursuant to stipulation,
the Company's time to answer or otherwise move against the complaint in this action has
been indefinitely adjourned.
The enforcement division of the Securities and Exchange Commission has a formal order
of investigation relating to matters arising out of the Company's public announcement
on February 27, 1996 that the Company would have to restate its financial statements
for prior periods as a result of certain accounting irregularities and the Company is
fully cooperating with this investigation and has responded to the commission's
requests for documentary evidence.
(2) The Company has been named as a defendant in an action pending in the United States
District Court for the Eastern District of New York entitled Bindley Western
Industries, Inc. vs. Health Management Inc., 96 Civ. 2330 (ADS). The action alleges
claims for breach of contract and accounts stated arising out of a dispute regarding
payments for certain goods. The action seeks damages in the amount of $3,187,157.35
together with interest, costs and disbursements. The Company has answered the
complaint, complied with its automatic disclosures obligations and has reduced the
accounts payable to approximately $2,600,000 as of July 26, 1996.
</TABLE>
Page 27
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HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
(3) On April 3, 1995, American Preferred Prescription, Inc. ("APP") filed a complaint
against the Company, Preferred Rx, Inc., Community Prescription Services and Sean Strub
in the New York Supreme Court for tortious interference with existing and prospective
contractual relationships, for lost customers and business opportunities resulting from
allegedly slanderous statements and for allegedly false advertising and promotions.
Four separate causes of actions are alleged, each for up to $10 million in damages.
APP had previously filed a similar suit in the United States Bankruptcy Court of the
Eastern District of New York, which was dismissed and the court abstained from
exercising jurisdiction. The Company has answered the complaint and counterclaimed for
libel and slander predicated upon a false press release issued by APP and added as
defendants the principals of APP. By stipulation dated January 29, 1996, the Company
discontinued its counterclaim against APP and its third-party claims against the
principals of APP. In addition, by motion dated March 12, 1996, APP moved, in the
Supreme Court of the State of New York, to amend its complaint to add, among other
things, a cause of action against the Company alleging that a proposed plan of
reorganization presented by the Company to the Bankruptcy Court in APP's bankruptcy
case was based on fraudulent financial statements. The motion also seeks to amend the
state court complaint to add certain other defendants. These proposed defendants, by
notice of removal dated March 22, 1996, removed the state court action to the
Bankruptcy Court of the Eastern District of New York. By motion dated April 2, 1996,
APP requested that the Bankruptcy Court remand the action to the State Court, which the
Bankruptcy Court granted. HMI opposed the motion to amend the complaint in the State
Court. The motion is currently pending before the State Court. Management believes
APP's suit against it to be without merit, intends to defend the proceeding vigorously
and believes the outcome will not have a material adverse effect on the Company's
results of operations or financial position.
</TABLE>
Page 28
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HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
On or about August 4, 1995, APP commenced an action in the Supreme Court of the State
of New York, County of Nassau, against a former APP employee who is currently employed
by the Company, and Charles Hutson, Susan Hutson and Hutson Consulting Services
(collectively, the "Hutsons"). The Company is not named as a defendant in this
lawsuit. The complaint in this action alleges, among other things, that the employee
provided to the Hutsons, who formed and subsequently discontinued a joint marketing
venture with APP, confidential information which was disclosed to competitors of APP.
On September 1, 1995, the Hutsons removed the action to the Bankruptcy Court. The
employee answered the complaint on December 27, 1995. No depositions have taken place,
nor have any documents been produced. APP moved to remand this case to the Supreme
Court for the County of Nassau. In a hearing which took place before the Bankruptcy
Court on June 27, 1996, the Bankruptcy Court preliminary ruled to grant APP's remand
motion, but provided the Hutsons a further opportunity to submit a written response to
the motion.
The Company is presently unable to determine the possible outcome and costs of the final
resolution of the litigation discussed above. Accordingly, it has not provided for a
possible loss. The resolution of these matters could have a material adverse effect on the
Company's financial position and future results of operations in the near term.
</TABLE>
Page 29
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HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
8. CAPITAL TRANSACTIONS (a) PUBLIC OFFERINGS
On November 18, 1993, the Company completed a secondary public offering of 2,000,000 shares
of stock at $12.00 per share. Proceeds from this offering, net of expenses of the offering
of $2,017,742, were $21,982,258.
(b) OPTIONS AND WARRANTS
Stock options and warrants activities are shown below:
Omnibus Incentive
Incentive Stock Stock Option Directors'
Option Plan (1) Plan (2) Warrants Options (3)
----------------------------------------------------------------------------------
Shares covered 1,000,000 50,000 130,662 26,000
----------------------------------------------------------------------------------
Outstanding at May 1,
----------------------------------------------------------------------------------
1993 - 12,221 130,662 -
Granted 420,000 2,500 - 19,000
Exercised - (2,833) (40,330) -
Cancelled - (833) - -
----------------------------------------------------------------------------------
Outstanding at April
30, 1994 420,000 11,055 90,332 19,000
Granted 132,500 - - 4,000
Exercised (2,000) (833) (78,996) -
Cancelled - - - -
----------------------------------------------------------------------------------
Outstanding at April
30, 1995 550,500 10,222 11,336 23,000
Granted 709,000 - - 3,000
Exercised (11,000) (1,223) - -
Cancelled (309,500)
----------------------------------------------------------------------------------
Outstanding at April
30, 1996 939,000 8,999 11,336 26,000
==================================================================================
At April 30, 1996:
Price range $4.98 - $.90 - $10.875 -
$10.38 $4.50 $5.40 $18.840
Shares exercisable 346,833 8,999 11,336 26,000
Available for grant -0- 5,669 - -
</TABLE>
Page 30
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HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
(1) On May 26, 1993 the Compensation Committee authorized and on October 14, 1993, the
stockholders approved the establishment of an omnibus incentive stock option plan to provide
incentives for key employees and members of the Board of Directors. The maximum number of
shares issuable under the plan is 10% of the outstanding shares up to 1,000,000 shares. The
exercise period for an option shall not exceed ten years from the date of grant, except in
the case of a more than 10% stockholder such period shall not exceed five years. The option
price per share shall be not less than the average market value or, in the case of a 10%
stockholder with respect to incentive stock options, 110% of fair value on the date of
grant.
(2) On February 16, 1990, the Company approved the adoption of an incentive stock option plan
covering 50,000 common shares. The options are exercisable over a ten year period.
(3) During the years ended April 30, 1996, 1995 and 1994, the Company granted a total of 19,000,
4,000 and 3,000 options to its outside directors at an exercise price of $18.84, $16.77, and
$10.875 to $12.088, the market price on the date of the grant, respectively.
(4) Pursuant to a special meeting of the executive committee of the board of directors on April
3, 1996, members of the special committee of the board of directors were granted a total of
25,000 options and 75,000 stock appreciation rights.
The per share exercise price for the stock options and appreciation rights is a price equal
to the average closing price of the shares for the five trading days preceding April 3, 1996
or $4.8375. The vesting schedule for each of the stock options and stock appreciation rights
is one-half upon the appointment of the permanent Chief Executive Officer and one-half on
May 1, 1997.
At April 30, 1996, shares of the Company's authorized and unissued common stock were reserved for
issuance upon exercise of options and warrants, which included 1,009,335 shares for outstanding
options and warrants and 5,669 shares for options available for grant.
</TABLE>
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HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
(c) RESTRICTED STOCK
On May 1, 1993, the Company awarded 11,000 shares of restricted common stock to three
outside consultants. The shares awarded are subject to certain restrictions and forfeiture.
Vesting occurs over a two year period from the date the shares are awarded. The shares were
recorded at their quoted market value at the date of grant of $10.375 per share, or
$114,125. The compensation element related to the awarding of such shares is recognized
ratably over the two-year restriction period. Compensation expense recognized related to
such shares for the years ended April 30, 1996, 1995 and 1994 were $-0-, $57,065 and
$57,060, respectively.
9. SUPPLEMENTAL CASH (a) Supplemental disclosures of cash flow information:
FLOW INFORMATION
Year ended April 30, 1996 1995 1994
---------------------------------------------------------------------------------------------
(1) Cash paid for
interest expense $2,381,667 $174,430 $94,468
(2) Cash paid for
income taxes $1,949,491 $7,745,067 $3,157,483
(b) Supplemental disclosures of non-cash investing and financing activities:
(1) The Company financed $1,361,455 and $177,286 of new equipment during the years ended
April 30, 1996 and 1995.
(2) During the year ended April 30, 1995, $3,000,000 of the purchase price of CPMB was a
five year subordinated note (Note 2(a)).
(3) During the year ended April 30, 1995, the Company issued 128,757 shares of non-
registered common stock in connection with the acquisition of Maryland pharmacies and
PMA (Note 2(b) and (c)).
(4) During the year ended April 30, 1994, holders of $374,999 of the Company's
convertible subordinated debentures converted their debt into 357,145 shares of
common stock.
</TABLE>
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HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
(5) During the year ended April 30, 1994, the Company awarded 11,000 shares of restricted
common stock to three outside consultants. (Note 7(d)).
(6) During the year ended April 30, 1994, the Company issued 617,060 shares of non-
registered common stock in connection with the Murray acquisition. (Note 2(d)).
10. QUARTERLY FINANCIAL The following table summarizes quarterly results:
INFORMATION
(UNAUDITED, IN Year Ended April First Second Third Fourth
THOUSANDS, EXCEPT 30, 1996 Quarter Quarter Quarter Quarter Year
FOR PER SHARE DATA) ---------------------------------------------------------------------------------------------
REVENUE $38,294 $39,275 $40,801 $40,490 $158,860
GROSS PROFIT 11,761 9,155 7,331* 10,389 38,636
INCOME (LOSS)
BEFORE INCOME
TAXES 2,700 239 (16,786)* 514 (13,333)
NET INCOME (LOSS) 1,589 139 (9,904)* (2,751)** (10,927)
EARNINGS (LOSS)
PER COMMON SHARE .17 .01 (1.06) (.28) (1.16)
Year Ended April First Second Third Fourth
30, 1995 Quarter Quarter Quarter Quarter Year
-----------------------------------------------------------------------------------------------
REVENUE: 17,216 20,884 21,982 28,374 88,456
GROSS PROFIT: 4,986 6,103 6,813 6,846 24,748
INCOME (LOSS)
BEFORE INCOME
TAXES: 545 1,807 2,248 (1,313) 3,287
NET INCOME
(LOSS): 304 1,044 1,455 (857) 1,946
EARNINGS (LOSS)
PER COMMON SHARE .03 .11 .15 (.09) .21
* The Company incurred unusual charges of $16,840,000 in the third quarter of fiscal 1996
(see Note 5).
** The Company provided an adjustment of $2,526,000 to its valuation allowance for deferred
tax assets in the fourth quarter of fiscal 1996 (see Note 6).
</TABLE>
Page 33
<PAGE> 34
Report of Independent Certified Public Accountants
on Financial Statement Schedule
Health Management, Inc. and Subsidiaries
Buffalo Grove, Illinois
The audits referred to in our report dated July 22, 1996, except for
Note 4(a) which is as of July 26, 1996 relating to the consolidated
financial statements of Health Management, Inc. and subsidiaries, which is
contained in Item 8 of this Form 10-K, included the audit of the
accompanying schedule of valuation and qualifying accounts. This
financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this
financial statement schedule based upon our audits.
In our opinion such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
BDO Seidman, LLP
Mitchel Field, New York
July 22, 1996
Page 34
<PAGE> 35
Health Management, Inc. and Subsidiaries
Schedule II -- Valuation and Qualifying
Accounts and Reserves
<TABLE>
<CAPTION>
Balance at Additions
Beginning of Charged to Balance at End of
Classification Year Operations Deductions Year
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
Year ended April 30, 1996 $ 7,998,000 $ 14,714,000 $12,642,000 $ 10,070,000
===============================================================================================================
Year ended April 30, 1995 $ 2,206,000 $ 7,978,000 $ 2,186,000 $ 7,998,000
===============================================================================================================
Year ended April 30, 1994 $ 925,000 $ 1,781,000 $ 500,000 $ 2,206,000
===============================================================================================================
</TABLE>
Page 35
<PAGE> 36
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
Page 36
<PAGE> 37
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:
Trade 4,954,235 20,714,836
Due to Hyperion 15,329,884 --
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:
Due to Transworld 28,350,000 --
Due to Hyperion 3,000,000 --
Other 359,108 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
Page 37
<PAGE> 38
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
Page 38
<PAGE> 39
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
Page 39
<PAGE> 40
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
Page 40
<PAGE> 41
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
Page 41
<PAGE> 42
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. The Company is unable to make an estimate of the anticipated
loss, if any, arising from this suit.
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. The Company is unable to make an estimate of the anticipated
loss arising from this suit.
Page 42
<PAGE> 43
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>
Page 43
<PAGE> 44
<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.
Page 44
<PAGE> 45
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Current Report on Form 8-K/A to be signed on
its behalf by the undersigned hereunto duly authorized.
Transworld HealthCare, Inc.
(Registrant)
Date: June 10, 1997 By: /s/ Wayne A. Palladino
--------------------------
Wayne A. Palladino
Senior Vice President and
Chief Financial Officer
Page 45
