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Case 2:07-cv-00484-MMH-SPC Document 1 Filed 08/02/2007 Page 1 of 29
FII:_ED
UNITED STATES DISTRICT COURTMIDDLE DISTRICT OF FLORIDA
FORT MYERS DIVISION
FLORENCE COLE, on Behalf of Herselfand All Others Similarly Situated,
Plaintiff,
V.
HEALTH MANAGEMENT ASSOCIATES,INC., WILLIAM J. SCHOEN, JOSEPH V.VUMBACCO and ROBERT E.FARNHAM,
Defendants.
2001 AUG -2 AM Ii: 42
MIDDLE DISTR IICTOFFLORIDAFORT MYERS. FLORIDA
2: C ( -pt - 411yyf
Plaintiff, by and through her attorneys, alleges the following upon information and belief,
except as to those allegations concerning Plaintiff, which are alleged upon personal knowledge.
Plaintiffs information and belief are based upon, among other things, counsel's investigation,
which includes without limitation: (a) review and analysis of regulatory filings made by Health
Management Association, Inc. ("Health Management" or the "Company") with the United States
Securities and Exchange Commission ("SEC"); (b) review and analysis of securities analysts'
reports concerning Health Management; (c) review and analysis of press releases and media
reports issued by and disseminated by Health Management; and (d) review of other publicly
available information concerning Health Management.
INTRODUCTION
1. This is a class action against Health Management and certain of its officers and
directors for violation of the federal securities laws. Plaintiff brings this action on behalf of
Civil Action No.
himself and all other persons or entities, except for Defendants and certain of their related parties
Case 2:07-cv-00484-MMH-SPC Document 1 Filed 08/02/2007 Page 2 of 29
as described below, who purchased Health Management securities (the "Class") during the
period from January 17, 2007 through July 30, 2007, inclusive (the "Class Period")
2. On December 31, 2006, Health Management operated 60 general acute care
hospitals with a total of 8,589 licensed beds in non-urban communities in Alabama, Arkansas,
Florida, Georgia, Kentucky, Mississippi, Missouri, North Carolina, Oklahoma, Pennsylvania,
South Carolina, Tennessee, Texas, Virginia, Washington and West Virginia. During the fourth
quarter of 2006 Health Management took a $200 million one-time charge related to a change in
its policy for doubtful accounts. After this charge the company revised its reserve policies for
self pay receivables and charity/indigent care policy.
3. Self-Pay receivables are receivables from patients who are uninsured or have a
co-pay or deductible. In December 2006 Health Management transitioned from reserving 100%
of self-pay receivables after 120 days to reserving 75% against self-pay receivables immediately
and 100% after the account ages 300 days. Effective February 1, 2007, the Company again
changed the amount reserved against self pay receivables from 75% immediately to 60% and
100% after almost one year. In addition, the Company began discounting the gross billed charge
to uninsured patients by 40%-60%. Defendants ignored the fact that many uninsured and charity
patients cannot pay their medical bills even at a discounted rate. In its look back review, Health
Management now admits that many uninsured patients - despite new discounts - could not find a
way to pay their bills.
4. On January 17, 2007, Health Management announced a major recapitalization to
be effectuated in March 2007 in which the company borrowed $3.25 billion of new debt to
refinance existing debt and pay shareholders a special one-time cash dividend of $10.00. In this
same January 17, 2007 announcement the Company provided its strategic outlook for 2007. As a
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Case 2:07-cv-00484-MMH-SPC Document 1 Filed 08/02/2007 Page 3 of 29
result of defendant's new policies, Health Management claimed that it expected bad debt
expensed to be in the range of 5% to 6% versus 10.0% in 2006.
5. In addition, during the first quarter of 2007 Health Management revised its
charity/indigent care policy such that beginning in or about January 2007, only those uninsured
accounts for which the patient meets poverty guidelines are being written off as charity/indigent.
6. Defendants modified and manipulated Health Management's reserve policies in
order to present the Company as healthy and soon to experience declining bad debt rates so that
it could borrow additional money, and effect the dividend payment, which brought substantial
sums to the Board Chairman, and the now-former CEO. Defendants knew that it was necessary
to show that Health Management had its bad debt expenses under control in order to borrow
additional money, and to win Board approval of the Recapitalization. With the $3.25 billion
borrowed defendants issued a one time $10.00 per share special cash dividend to all shareholders
of record as of February 27, 2007. The Individual Defendants benefited substantially from this
one time dividend. Given their large stock holdings as set forth below each defendant walked
away with large sums of money.
7. As revealed on July 31, 2007, Health Management, throughout the Class Period,
was experiencing a deterioration in the collectibility of its accounts receivable from uninsured
patients. The deterioration noted relates to the overall collectibility of receivables from uninsured
patients, and to patients billed at discounted amounts who may have been written off as charity
care under the Company's previous policy. In addition, Health Management announced that for
its second quarter of 2007 it took a $39.0 million charge, recorded as an additional reserve to
reflect a recent decline in collectibility of accounts receivable from uninsured patients.
Moreover, HMA announced that it was "updating" is guidance for the entirety of fiscal 2007:
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HMA updated its fiscal 2007 diluted EPS from continuing operations objectiverange to be between $0.45 and $0.50 to reflect increased uninsured volumes, adeterioration in the collectibility of accounts receivable related to those uninsuredvolumes, and lower than anticipated overall paying volumes. This new EPSobjective is based on a net operating revenue objective range of $4.3 to $4.5billion, same hospital admissions from continuing operations experiencing nogrowth from 2006 and bad debt expense as a percentage of net operatingrevenue of approximately 12% for the remainder offiscal year 2007. [Emphasissupplied].
8. On this unexpected news the price of Health Management stock drop almost 25%
to close at $8.06 on July 31, 2007.
9. For the foregoing reasons, Plaintiff seeks damages for himself and for the Class
for violations of Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934, and Rule
I Ob-5 thereunder.
JURISDICTION AND VENUE
10. This Court has jurisdiction over the subject matter of this action pursuant to 28
U.S.C. §§ 1331, and 1367, and Section 27 of the Securities Exchange Act of 1934 (the
"Exchange Act") (15 U.S.C. § 78aa).
11. This action arises under Sections 10(b) and 20(a) of the Exchange Act (15 U.S.C.
§§ 78j(b) and 78t(a)) and Rule lob-5 promulgated under Section 10(b) (17 C.F.R. § 240.10b-5).
12. Venue is proper in this District pursuant to Section 27 of the Exchange Act (15
U.S.C. § 78aa) and 28 U.S.C. § 1391(b) and (c). Substantial acts in furtherance of the alleged
fraud and/or its effects have occurred within this District, and the Company maintains its
principal executive offices in this District.
13. In connection with the acts and omissions alleged in this Complaint, Defendants,
directly or indirectly, used the means and instrumentalities of interstate commerce, including, but
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Case 2:07-cv-00484-MMH-SPC Document 1 Filed 08/02/2007 Page 5 of 29
not limited to, the mails, interstate telephone communications, and the facilities of the national
securities markets.
PARTIES
14. Plaintiff purchased Health Management common stock during the Class Period,
as set forth in the certification attached hereto.
15. Defendant Health Management owns and operates general acute care
hospitals in non-urban communities located throughout the United States. Upon completion of
the sale of Mountain View Regional Medical Center and Lee Regional Medical Center, HMA
will operate 59 hospitals in 15 states with approximately 8,500 licensed beds. Health
Management's executive offices are located at 5811 Pelican Bay Boulevard, Naples, Florida.
The Company's shares are registered and trade on the New York Stock Exchange under the
symbol HMA. As of February 23, 2007, there were 242,115,863 shares of our common stock
held by approximately 955 record holders
16. Defendant William J. Schoen has served as Chairman of the Board of Directors
since April 1986. He joined Board of Directors in February 1983, became President and Chief
Operating Officer in December 1983, Co-Chief Executive Officer in December 1985 and Chief
Executive Officer in April 1986. He served as President until April 1997 and Chief Executive
Officer until January 2001. According to the 2007 Proxy Statement filed with the SEC on April
13, 2007, as of March 23, 2007 Defendant Schoen beneficially owned 10,455,484 shares of the
company's common stock. According to that Proxy Statement, this amount includes: (a)
4,026,340 shares issuable upon exercise of presently exercisable options; (b) an aggregate of
6,055,837 shares held by various trusts of which Mr. Schoen is settlor, trustee and/or beneficiary;
(c) 7,519 shares held in Mr. Schoen's account under the company's Retirement Savings Plan, as
5
Case 2:07-cv-00484-MMH-SPC Document 1 Filed 08/02/2007 Page 6 of 29
to which shares he has investment power only; and (d) 365,788 shares held by the Schoen
Foundation, of which Mr. Schoen is Chairman.
17. Defendant Joseph V. Vumbacco became Chief Executive Officer and Vice
Chairman in January 2001 and January 2006, respectively. On May 29, 2007, the Company
announced that defendant Vumbacco had been replaced as CEO, and would thereafter be serve
as Vice Chairman of the board and "assume new responsibilities including consulting on
construction projects, legal issues and Federal and state governmental relations." He was
President from April 1997 to December 2005. He also previously served as our Chief
Administrative Officer and our Chief Operating Officer. According to the 2007 Proxy Statment
filed with the SEC on April 13, 2007, as of March 23, 2007 Defendant Vumbacco beneficially
owned 1,500,212 shares of the company's common stock. That number includes: (a) 629,116
shares issuable upon exercise of presently exercisable options; (b) 23,064 shares held in Mr.
Vumbacco's account under the company's Retirement Savings Plan, as to which shares he has
investment power only; (c) 236,634 shares held by Mr. Vumbacco individually; and (d) 611,398
shares held jointly by Mr. Vumbacco and his wife, except for a small portion of shares within a
self-directed IRA in which Mr. Vumbacco has the sole power of disposition. Defendant
Vumbacco sold 862,165 shares on Feb. 5, 2007 for proceeds of $17 million.
18. Defendant Robert E. Farnham became Senior Vice President and Chief Financial
Officer in March 2001. He joined the Company in 1985 and previously served as our Senior
Vice President and Controller. According to the 2007 proxy statment filed with the SEC on
April 13, 2007, as of March 23, 2007 Defendant Farnham beneficially owned 607,082 shares of
the company' s common stock This number includes: (a) 503,294 shares issuable upon exercise
of presently exercisable options; (b) 76,502 shares held by Mr. Farnham individually ; (c) 8,739
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Case 2:07-cv-00484-MMH-SPC Document 1 Filed 08/02/2007 Page 7 of 29
shares held jointly by Mr. Farnham and his wife; and (d) 18,547 shares held in Mr. Farnham's
account under the company's Retirement Savings Plan, as to which shares he has investment
power only.
19. Defendants Vumbacco, Schoen, and Farnham are herein collectively referred to as
the "Individual Defendants." Each of the Individual Defendants is or was a member of Health
Management's Executive Committee.
20. The Individual Defendants, who were the Company's principal officers,
controlled Health Management and its public disclosures. Each of them made false and
misleading statements and/or failed to disclose material adverse information concerning the
Company's business and operations during the Class Period, as detailed herein. Because of the
Individual Defendants' positions with the Company, they had access to the adverse undisclosed
information about its business, operations, products, operational trends, financial statements,
markets, and present and future business prospects via access to internal corporate documents
(including the Company's operating plans, budgets, and forecasts and reports of actual operations
compared thereto), conversations and connections with other corporate officers and employees,
attendance at management and/or Board of Directors meetings and committees thereof, and via
reports and other information provided to them in connection therewith.
21. It is appropriate to treat the Individual Defendants as a group for pleading
purposes and to presume that the false, misleading and incomplete information conveyed in the
Company's public filings, press releases and other publications, as alleged herein, were the
collective actions of the narrowly defined group of Defendants identified above. Each of the
above officers and/or directors of Health Management, by virtue of their high level positions
with the Company, directly participated in the management of the Company, was directly
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involved in the day-to-day operations of the Company at the highest levels, and was privy to
confidential proprietary information concerning the Company and its business, operations,
products, growth, financial statements, and financial condition, as alleged herein. Said
Defendants were involved in drafting, producing, reviewing and/or disseminating the false and
misleading statements and information alleged herein, were aware or deliberately disregarded
that the false and misleading statements were being issued regarding the Company, and approved
or ratified these statements in violation of the federal securities laws.
22. As officers and/or directors and controlling persons of a publicly held company
whose common stock was, and is, registered with the SEC pursuant to the Exchange Act, traded
on the NYSE, and governed by the provisions of the federal securities laws, the Individual
Defendants each had a duty to disseminate promptly accurate and truthful information with
respect to the Company's financial condition and performance, growth, operations, financial
statements, business, products, markets, management, earnings, and present and future business
prospects, and to correct any previously issued statements that had become materially misleading
or untrue, so that the market price of the Company's common stock would be based upon truthful
and accurate information. The Individual Defendants' misrepresentations and omissions during
the Class Period violated these specific requirements and obligations.
23. The Individual Defendants participated in the drafting, preparation and/or
approval of the various public, shareholder and investor reports and other communications
complained of herein, and were aware of, or deliberately disregarded, the misstatements
contained therein and omissions therefrom, and were aware of their materially false and
misleading nature. Because of their Board membership and/or executive and managerial
positions with Health Management, each of the Individual Defendants had access to the adverse,
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undisclosed information about the Company's operations, the financial condition and
performance of the Company as particularized herein and knew (or deliberately disregarded) that
these adverse facts rendered the positive representations made by or about Health Management
and its business issued or adopted by the Company materially false and misleading.
24. The Individual Defendants, because of their positions of control and authority as
officers and/or directors of the Company, were able to and did control the content of the various
SEC filings, press releases and other public statements pertaining to the Company during the
Class Period. Each Individual Defendant was provided with copies of the documents alleged
herein to be misleading prior to or shortly after their issuance and/or had the ability and/or
opportunity to prevent their issuance or cause them to be corrected. Accordingly, each of the
Individual Defendants is responsible for the accuracy of the public reports and releases detailed
herein and are therefore primarily liable for the representations contained therein.
25. Each of the Defendants is liable as a participant in a wrongful scheme and course
of business that operated as a fraud or deceit on those who purchased or otherwise acquired
Health Management common stock during the Class Period by disseminating materially false
and misleading statements and/or concealing material adverse facts. The scheme deceived the
investing public regarding Health Management's business, operations, and the intrinsic value of
the Company's common stock, and caused plaintiff and other members of the Class to purchase
Health Management common stock at artificially inflated prices.
CLASS ALLEGATIONS
26. Plaintiff brings this as a class action pursuant to Federal Rule of Civil Procedure
23(a) and (b)(3) on behalf of all persons who purchased Health Management securities during
the Class Period. Excluded from the Class are Defendants, officers and directors of the
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Case 2:07-cv-00484-MMH-SPC Document 1 Filed 08/02/2007 Page 10 of 29
Company, members of the immediate families of the Individual Defendants and each of their
legal representatives, heirs, successors or assigns and any entity in which any Defendant has or
has had a controlling interest.
27. This action is properly maintainable as a class action because:
a. the members of the proposed Class in this action are dispersed throughout
the United States and are so numerous that joinder of all Class members is impracticable. While
the exact number of Class members is unknown to Plaintiff at this time and can only be
ascertained through appropriate discovery, Plaintiff believes that Class members number in the
thousands. Millions of Health Management common stock is traded publicly during the Class
Period on the NYSE under the symbol "HMA". As of February 23, 2007, there were
242,115,863 shares of our common stock held by approximately 955 record holders, and many
more beneficial owners.
b. Plaintiffs claims are typical of those of all members of the Class because
all have been similarly affected by Defendants' actionable conduct in violation of federal
securities laws as alleged herein;
c. Plaintiff will fairly and adequately protect the interests of the Class and
has retained counsel competent and experienced in class action litigation. Plaintiff has no
interests antagonistic to, or in conflict with, the Class that Plaintiff seeks to represent;
d. A class action is superior to other available methods for the fair and
efficient adjudication of the claims asserted herein because joinder of all members is
impracticable. Furthermore, because the damages suffered by individual members of the Class
may be relatively small, the expense and burden of individual litigation make it virtually
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impossible for Class members to redress the wrongs done to them. The likelihood of individual
Class members prosecuting separate claims is remote;
e. Plaintiff anticipates no unusual difficulties in the management of this
action as a class action; and
f. The questions of law and fact common to the members of the Class
predominates over any questions affecting individual members of the Class.
28. Among the questions of law and fact common to the Class are:
a. whether Defendants' acts and/or omissions as alleged herein violated the
federal securities laws;
b. whether the Company's Class Period public statements and filings
misrepresented and/or omitted material facts;
c. whether Defendants acted with knowledge or with reckless disregard for
the truth in misrepresenting and/or omitting material facts;
d. whether Defendants participated in and pursued the common course of
conduct complained of herein;
e. whether the market price of Health Management securities was inflated
artificially as a result of Defendants' material misrepresentations and/or omissions during the
Class Period; and
f, to what extent the members of the Class have sustained damages and the
proper measure of damages.
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SUBSTANTIVE ALLEGATIONS COMMON TO ALL COUNTS
29. On January 17, 2007 Health Management announced a recapitalization of its
balance sheet designed to deliver immediate value to its shareholders while enabling them to
participate in the Company's future growth. The press release stated as follows:
As part of the recapitalization, HMA will return approximately $2.4 billion toshareholders through a $10.00 per share one-time special cash dividend.
The special dividend is payable on March 1, 2007 to shareholders of record onFebruary 27, 2007, and HMA's common stock will start trading on the ex-dividend basis beginning on March 2, 2007, the date after the payment date, inaccordance with NYSE listing rules. Shareholders who sell their shares prior to oron the payment date of March 1, 2007 will also be selling their right to receive thespecial cash dividend. Shareholders are advised to contact their financial advisorbefore selling their shares.
30. Defendant Vumbacco said, "The recapitalization we are initiating today enables
HMA to deliver value to shareholders, while continuing to fulfill our commitment to invest in
our hospitals to ensure their ability to provide the highest quality of care to patients and service
to our physicians and communities. We are capitalizing on current capital market conditions,
which. present attractive debt financing options for strong, well-managed companies. We believe
our plan represents a prudent and efficient use of our balance sheet capacity that will enable
HMA to continue generating sustainable free cash flow to meet our capital needs and growth
objectives."
31. The January 17, 2007 press release further stated that Health Management would
recapitalize its balance sheet through $3.25 billion of new senior secured credit facilities,
including the refinancing of amounts outstanding under the Company's current revolving line of
credit.
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32. William J. Schoen, Chairman of the Board, said, "Our Board of Directors and
executive leadership have been engaged in a thoughtful, strategic process to explore a number of
alternatives designed to consider the current realities of the capital marketplace and to determine
how best to deliver value to our shareholders while best positioning our hospitals and our
company for future success - clinically, operationally, and financially. We ultimately reached
three central conclusions: (1) We will shift our sources of capital away from equity and toward
debt, because the debt capital markets currently comprise a more attractive source. (2) We will
reinforce and strengthen our ability to meet all existing commitments and known future
opportunities to invest capital in our hospitals and communities; this will ensure that we continue
to provide the best possible care to patients, service to our physicians, and growth for our
organization. (3) We will issue a one-time dividend as our means of returning excess capital to
the shareholders; this will give our existing shareholders the opportunity to continue participating
in the Company's future performance and growth. We believe the transaction we have chosen
will best support these central conclusions and thus best benefit our patients, our physicians, and
the communities we serve, as well as our shareholders and employees."
33. As part of this announcement to show how the Company and its prospects had
improved, the press release detailed "preliminary financial objectives" which included bad debt
expense as a percentage of revenue in the 5-6% range, and earnings per share of 61-71 cents.
Defendants knew that such rosy numbers were essential to its ability to borrow to effect the
Recapitalization, but that the assumptions underlying such numbers could not possibly be met.
Such stated goals could only be achieved through accounting sleight-of-hand and, as will be
shown, the facade created by defendants lasted for a single fiscal quarter (that ending March 31,
2007), and collapsed completely in the next fiscal quarter, ending June 30, 2007.
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34. In February 2007, Health Management began reserving discounted self-pay
receivables at 60%. Prior to this time is reserved 75% of uninsured amounts. Also, on Feb. 22,
2007, the Company reiterated its "objectives" for 2007, including bad debt expense of 5-6%, and
earnings now increased to 71-81 cents per share.
35. As of March 31, 2007, $2.75 billion of the new $3.25 billion senior secured credit
facilities was outstanding.
36. On April 24, 2007 Health Management announced its consolidated financial
results for the three months ended March 31, 2007. For the period, HMA reported net operating
revenue of $1,143.5 million; earnings before interest, income taxes, depreciation, amortization,
refinancing and debt modification costs and after minority interest ("EBITDA") of $193.9
million ; net income of $65. 0 million; income from continuing operations of $65. 7 million; and
both diluted earnings per share ("EPS") and diluted EPS from continuing operations of $0.27.
With the Recapitalization behind it, the Company now admitted that its previously announced
bad debt reduction goals would not completely be met, that bad debt would be 7.5% to 8.5% of
revenues, but that-happily-"All remaining fiscal year 2007 objectives previously announced
on February 22, 2007 remain unchanged," and that new bad debt policies would nonetheless
reduce bad debt expense by $100-150 million . With earning projections unchanged and
substantial bad debt reduction still expected, the stock remained at artificially inflated prices.
37. During the first quarter of 2007 Health Management revised its charity/indigent
care policy such that beginning in January 2007, only those uninsured accounts for which the
patient meets poverty guidelines are being written off as charity/indigent . Charity/indigent care
writeoffs for the first quarter ended March 31, 2007 were $26.2 million compared to $142.4
million for the same quarter o the previous year.
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38. During January 2007 Health Management continued its newly implemented bad
debt reserve policy of reserving 75% of uninsured accounts. In February 2007, in conjunction
with the adoption of its discount program, HMA began reserving discounted self-pay receivables
at 60%. Bad debt expense for the first quarter increase to $121.5 million compared to $82.7
million for the same quarter a year ago. The sum of uninsured discounts, charity/indigent
writeoffs and bad debt expense, as a percent of the sum of net operating revenue, uninsured
discounts and charity/indigent write-offs, totaled 20.6% for the first quarter ended March 31,
2007 compared to 19.5% for the same quarter a year ago, and 20.7% for the quarter ended
December 31, 2006.
39. On July 31, 2007 , Health Management announced its consolidated financial
results for the second quarter ended June 30, 2007. For the second quarter ended June 30, 2007,
HMA reported net operating revenue of $1,099.2 million ; earnings before interest , income taxes,
depreciation, amortization, refinancing and debt modification costs and after minority interest
("EBITDA") of $137.0 million; net income of $11.9 million ; income from continuing operations
of $13.1 million; and both diluted earnings per share (`BPS") and diluted EPS from continuing
operations of $0.05. Included in these results is approximately $39.0 million, or approximately
$0.10 per diluted share, of bad debt expense recorded as an additional reserve to reflect a recent
decline in collectibility of accounts receivable from uninsured patients, and a $2.9 million, or
approximately $0.01 per diluted share, gain on the sale of certain home health assets.
40. The July 31, 2007 press release stated as follows (emphasis supplied):
NAPLES, Fla.--(BUSINESS WIRE)--July 31, 2007--Health Management
Associates, Inc. (NYSE:HMA) announced its consolidated financial results for
the second quarter ended June 30, 2007. For the second quarter ended June 30,
2007, HMA reported net operating revenue of $1,099.2 million; earnings before
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interest, income taxes, depreciation, amortization, refinancing and debtmodification costs and after minority interest ("EBITDA") of $137.0 million; netincome of $11.9 million; income from continuing operations of $13.1 million; andboth diluted earnings per share ("EPS") and diluted EPS from continuingoperations of $0.05. Included in these results is approximately $39.0 million, orapproximately $0.10 per diluted share, of bad debt expense recorded as anadditional reserve to reflect a recent decline in collectibility of accountsreceivable from uninsured patients, and a $2.9 million, or approximately $0.01per diluted share, gain on the sale of certain home health assets.
HMA updated its fiscal 2007 diluted EPS from continuing operations objectiverange to be between $0.45 and $0.50 to reflect increased uninsured volumes, adeterioration in the collectibility of accounts receivable related to those uninsuredvolumes, and lower than anticipated overall paying volumes. This new EPSobjective is based on a net operating revenue objective range of $4.3 to $4.5billion , same hospital admissions from continuing operations experiencing nogrowth from 2006 and bad debt expense as a percentage ofnet operating revenueofapproximately 12%for the remainder offiscal year 2007.
Compared to the same quarter a year ago , net operating revenue and net operatingrevenue per adjusted admission from continuing operations at hospitals ownedand operated by HMA for one year or more, referred to as same hospitals,increased 7.1% and 5 . 0%, respectively . Compared to the same quarter a year ago,same hospital admissions from continuing operations increased 0.4%, samehospital adjusted admissions from continuing operations increased 2.0%, samehospital surgeries from continuing operations decreased 1.6% and same hospitalemergency room visits from continuing operations increased 2.0%.
HMA's same hospital EBITDA from continuing operations for the second quarterwas $164.3 million and HMA's same hospital EBITDA margin from continuingoperations was 16.0%. Consolidated EBITDA from continuing operations for thesecond quarter was $137.0 million, and cash flow from continuing operatingactivities was $146.9 million, which includes cash interest and cash tax paymentsaggregating $75.0 million. Excluding the additional bad debt reserve and the gainon sale of assets described previously, same hospital EBITDA from continuingoperations for the second quarter would have been $198.3 million and samehospital EBITDA margin from continuing operations would have been 19.3%.Additional disclosure regarding EBITDA follows the financial statementsincluded with this press release.
During the second quarter, the results of operations from four hospitals(Southwest Regional Medical Center, located in Little Rock, Arkansas; Summit
Medical Center, located in Van Buren, Arkansas; Lee Regional Medical Center,
located in Pennington Gap, Virginia and Mountain View Regional Medical
Center, located in Norton, Virginia) were accounted for as assets held-for-sale and
prior periods have been reclassified. After-tax losses from assets held-for-sale
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totaled $1.2 million during the second quarter of 2007. The results of operationsfrom Williamson Memorial Hospital, located in Williamson, West Virginia hadpreviously been accounted for as an asset held-for-sale. As of June 30, 2007, theresults of operations from Williamson are included in continuing operations andits results in prior periods have been reclassified.
Net operating revenue from all continuing operations for the second quarterincreased 10.3%, total admissions from continuing operations grew 2.8%, andtotal adjusted admissions from continuing operations grew 4.0%, in each case ascompared to the same quarter a year ago, reflecting the admissions contributionfrom hospitals acquired by HMA during fiscal year 2006, as well as thecommencement of operations at HMA's de novo general acute care hospital,which opened during the first quarter ended March 31, 2007.
For the six months ended June 30, 2007, HMA reported net operating revenue of$2,237.0 million; EBITDA of $328.8 million; net income of $76.9 million;income from continuing operations of $78.0 million; and both diluted EPS anddiluted EPS from continuing operations of $0.31.
Commencing in February 2007, HMA began discounting its gross charges fornon-elective services by 60% for uninsured patients. Uninsured discounts for thequarter ended June 30, 2007 approximated $153.3 million compared to $117.1million for the quarter ended March 31, 2007.
HMA's charity/indigent care write-offs for the second quarter ended June 30,2007 were $18.5 million compared to $140.4 million for the same period a yearago, and $26.2 million for the first quarter ended March 31, 2007.
During January 2007, HMA continued its newly implemented bad debt reservepolicy of reserving 75% of uninsured accounts. In February 2007, in conjunctionwith the adoption of its 60% discount program, HMA began reserving thosediscounted self-pay receivables at 60%. The combination of the 60% discountpolicy and the 60% bad debt reserve on the discounted self-pay receivablesresulted in an overall discount/reserve of 84% of gross charges. Both policies
were based on the current collection experience at the time.
HMA has performed a look-back analysis since the new discount policy went intoeffect in February 2007. The results of this look-back analysis now indicate that
HMA is experiencing a deterioration in the collectibility of its accounts receivable
from uninsured patients. The deterioration noted relates to the overall
collectibility of receivables from uninsured patients, and to patients billed at
discounted amounts who may have been written off as charity care under the
Company's previous policy, based on their inability to pay the previouslyundiscounted gross charges.
Effective July 1, 2007, HMA has updated its existing bad debt reserve policy to
reflect a change in estimate of the collectibility of its self-pay receivables. The
Company will now record incremental reserves as the receivables age, until they
are fully reserved or collected. HMA believes that updating its bad debt reserve
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Case 2:07-cv-00484-MMH-SPC Document 1 Filed 08/02/2007 Page 18 of 29
policy and adding additional bad debt reserves is prudent given the results of itsrecent look-back review.
Bad debt expense for the second quarter was $150.6 million compared to $90.1million for the same period a year ago, and $121.2 million for the first quarterended March 31, 2007.
The sum of uninsured discounts, charity/indigent write-offs and bad debt expense,as a percent of the sum of net operating revenue, uninsured discounts andcharity/indigent write-offs, totaled 25.4% for the second quarter ended June 30,2007 compared to 20.3% for the same quarter a year ago and 20.6% for the firstquarter ended March 31, 2007.
41. The Company now expects 2007 earnings from continuing operations of 45 cents
to 50 cents per share on revenue of $4.3 billion to $4.5 billion, versus a prior profit range of 71
cents to 81 cents per share on revenue of $4.1 billion to $4.3 billion. The guidance assumes no
growth in same hospital admissions from 2006 and bad debt expense as a percentage of net
operating revenue of approximately 12 percent for the rest of 2007, up from a prior range of 7.5
percent to 8.5 percent of revenue.
42. In reaction to these unexpected revelations, Health Management stock fell to
$10.65, from $8.06 just a one day with over 31 million traded. An article in TheStreet.com on
July 31, 2007, described the harm defendants' machinations had caused the Company, noting
that: "experts calculate, HMA has a cash balance of just $110 million -- with earnings on the
decline -- and a huge long-term debt balance totaling some $3.7 billion." CRT Capital Group
Sheryl Skolnick questioned whether Health Management's claimed results for the second quarter
were real, or reflected yet further manipulation of cash flow from operation (CFFO), a vital
measure of the financial viability of a highly-leveraged company. In that same article in
TheStreet.com, analyst Skolnick was quoted as observing:
"As we examined the 2Q07 results, we noted extensive use of the balance sheet tocreate cash flow from operations - something we have been very concerned aboutin the past," wrote Skolnick, whose firm also makes a market in HMA's securities.
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"The 'delta' of balance sheet items this year versus last year was a cash inflow of$62 million . As liabilities can be used to create cash flows ONLY in the shortterm , we deem the reported CFFO for 2Q07 of poor and unsustainable quality."
43. For the foregoing reasons, Plaintiff seeks damages for himself and for the Class
for violations of Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934, and Rule
IOb-5 thereunder.
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ADDITIONAL SCIENTER ALLEGATIONS
44. As alleged herein, Defendants acted with scienter in that Defendants knew that
the public documents and statements issued or disseminated in the name of the Company were
materially false and misleading; knew that such statements or documents would be issued or
disseminated to the investing public; and knowingly and substantially participated or acquiesced
in the issuance or dissemination of such statements or documents as primary violations of the
federal securities laws. As set forth elsewhere herein in detail, Defendants, by virtue of their
receipt of information reflecting the true facts regarding Health Management, their control over,
and/or receipt and/or modification of Health Management's allegedly materially misleading
misstatements and/or their associations with the Company which made them privy to
confidential proprietary information concerning Health Management, participated in the
fraudulent scheme alleged herein.
LOSS CAUSATION/ECONOMIC LOSS
45. During the Class Period, as detailed herein, Defendants engaged in a scheme to
deceive the market and a course of conduct that artificially inflated the price of Health
Management stock and operated as a fraud or deceit on Class Period purchasers of Health
Management stock by concealing the true facts concerning the bad debt reserves. When
Defendants' prior misrepresentations and fraudulent conduct were disclosed and became apparent
to the market, the price of Health Management stock fell precipitously as the prior artificial
inflation came out. As a result of their purchases of Health Management stock during the Class
Period, Plaintiff and the other Class members suffered economic loss, i.e., damages under the
federal securities laws.
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46. Defendants' false and misleading statements had the intended effect and caused
Health Management common stock to trade at artificially inflated levels throughout the Class
Period.
47. As a direct result of the announcements in July 31, 2007, the price of Health
Management stock price fell precipitously. These stock price drops removed the inflation from
the price of Health Management stock causing real economic loss to investors who had
purchased the Company's common stock during the Class Period.
48. The over 25% decline in the price of Health Management common stock after
these disclosures and partial disclosures came to light was a direct result of the nature and extent
of Defendants' fraud finally being revealed to investors and the market. The timing and
magnitude of Health Management stock price decline negates any inference that the loss suffered
by Plaintiff and the other Class members was caused by changed market conditions,
macroeconomic or industry factors or Company-specific facts unrelated to the defendants'
fraudulent conduct.
49. Plaintiff and the other Class members was a direct result of Defendants'
fraudulent scheme to artificially inflate the prices of Health Management stock and the
subsequent significant decline in the value of Health Management stock when Defendants' prior
misrepresentations and other fraudulent conduct were revealed.
APPLICABILITY OF PRESUMPTION OF RELIANCE:FRAUD-ON-THE-MARKET DOCTRINE
50. The market for Health Management ' s securities was open, well-developed and
efficient at all relevant times. As a result of these materially false and misleading statements and
failures to disclose, Health Management's securities traded at artificially inflated prices during
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Case 2:07-cv-00484-MMH-SPC Document 1 Filed 08/02/2007 Page 22 of 29
the Class Period. Plaintiff and other members of the Class purchased or otherwise acquired
Health Management securities relying upon the integrity of the market price of Health
Management's securities and market information relating to Health Management, and have been
damaged thereby.
51. During the Class Period, defendants materially misled the investing public,
thereby inflating the price of Health Management ' s securities , by publicly issuing false and
misleading statements and omitting to disclose material facts necessary to make defendants'
statements, as set forth herein, not false and misleading. Said statements and omissions were
materially false and misleading in that they failed to disclose material adverse information and
misrepresented the truth about the Company, its business and operations, as alleged herein.
52. At all relevant times, the material misrepresentations and omissions particularized
in this Complaint directly or proximately caused or were a substantial contributing cause of the
damages sustained by plaintiff and other members of the Class. As described herein , during the
Class Period, defendants made or caused to be made a series of materially false or misleading
statements about Health Management's business, prospects and operations. These material
misstatements and omissions had the cause and effect of creating in the market an unrealistically
positive assessment of Health Management and its business, prospects and operations, thus
causing the Company's securities to be overvalued and artificially inflated at all relevant times.
Defendants' materially false and misleading statements during the Class Period resulted in
plaintiff and other members of the Class purchasing the Company's securities at artificially
inflated prices, thus causing the damages complained of herein.
53. At all relevant times, the market for Health Management's securities was an
efficient market for the following reasons, among others:
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Case 2:07-cv-00484-MMH-SPC Document 1 Filed 08/02/2007 Page 23 of 29
(a) Health Management's stock met the requirements for listing, and was
listed and actively traded on the NYSE, a highly efficient and automated market;
(b) As a regulated issuer, Health Management filed periodic public reports
with the SEC; and
(c) Health Management regularly communicated with public investors by
established market communication mechanisms, including through regular disseminations of
press releases on the national circuits of major newswire services and through other wide-
ranging public disclosures, such as communications with the financial press and other similar
reporting services. Health Management also was a frequent presented at conferences attended
and monitored by stock analysts in the United States.
54. As a result of the foregoing, the market for Health Management's securities
promptly digested current information regarding Health Management from all publicly available
sources and reflected such information in Health Management's stock price. Under these
circumstances, all purchasers of Health Management's securities during the Class Period
suffered similar injury through their purchase of Health Management's securities at artificially
inflated prices and a presumption of reliance applies.
COUNT I
For Violations of Sections 10(b) ofThe Exchange Act And Rule 10b-5
55. Plaintiff repeats and realleges paragraphs 1 through 59 as if set forth fully herein.
56. In connection with the sale of Health Management securities throughout the Class
Period, Defendants participated, directly or by acquiescence, despite a duty to act, in the
preparation and/or issuance of materially false and misleading statements and omissions.
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Case 2:07-cv-00484-MMH-SPC Document 1 Filed 08/02/2007 Page 24 of 29
57. Defendants knew, or were reckless in not knowing, that the statements contained
in Health Management public filings and press releases were materially false and misleading.
Plaintiff and the Class relied, directly or indirectly by reliance on the integrity of the market, on
Defendants' misstatements and/or omissions and were damaged as a result. But for Defendants'
misrepresentations and/or omissions, Plaintiff and the Class would not have purchased Health
Management securities or would have purchased them at non-artificially inflated prices.
COUNT II
For Violation Of Section 20(a) Of The Exchange Act(Against the Individual Defendants, as defined below)
58. Plaintiff repeats and realleges each of the preceding paragraphs 1 through 62 as if
fully set forth herein.
59. This claim is brought against the Individual Defendants.
60. The Individual Defendants were control persons within the meaning of the
Exchange Act.
61. As set forth above, these Defendants violated Section 10(b) of the Exchange Act,
and Rule 10b-5, by their acts and omissions as alleged in this complaint . By virtue of their
positions as control persons, the Section 20(a) Defendants, each of whom violated Section 10(b)
and Rule I Ob-5, are liable pursuant to Section 20(a) of the Exchange Act.
62. As a direct and proximate result of the Individual Defendants' wrongful conduct,
Plaintiff and the Class suffered damages in connection with their purchases of the Company's
securities during the Class Period.
NO SAFE HARBOR
63. The statutory safe harbor provided for forward-looking statements under certain
circumstances does not apply to any of the allegedly false statements pleaded in this Complaint.
24
Case 2:07-cv-00484-MMH-SPC Document 1 Filed 08/02/2007 Page 25 of 29
The statements alleged to be false and misleading herein all relate to then-existing facts and
conditions. In addition, to the extent certain of the statements alleged to be false may be
characterized as forward looking, they were not identified as "forward-looking statements" when
made, there was no statement made with respect to any of those representations forming the basis
of this Complaint that actual results "could differ materially from those projected," and there
were no meaningful cautionary statements identifying important factors that could cause actual
results to differ materially from those in the purportedly forward-looking statements. In the
alternative, to the extent that the statutory safe harbor is intended to apply to any forward-looking
statements pleaded herein, Defendants are liable for those false forward-looking statements
because at the time each of those forward-looking statements was made, the speaker had actual
knowledge that the forward-looking statement was materially false or misleading, and/or the
forward-looking statement was authorized or approved by an executive officer of Health
Management who knew that the statement was false when made.
PRAYER FOR RELIEF
WHEREFORE, Plaintiff, on behalf of himself and all other Class members, prays for
judgment as follows:
A. A determination that this action is a proper class action and a
certification of the Class under Rule 23 of the Federal Rules of Civil Procedure;
B. An award of compensatory damages in favor of Plaintiff and the
other Class members against all Defendants for damages sustained as a result of
Defendants' wrongdoing, including interest thereon;
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Case 2:07-cv-00484-MMH-SPC Document 1 Filed 08/02/2007 Page 26 of 29
C. An award to Plaintiff and the Class of their reasonable costs and
expenses incurred in this action, including counsel fees, expert fees and other
disbursements; and
D. A grant of such other relief as the Court may deem just and proper.
JURY DEMAND
Plaintiff demands a trial by jury.
Dated : August 2, 2007
SAXENA WHITE P.A.
By: H Ot..s ?Maya S enaFla. B No . [email protected] E . White IIIFla. Bar No . [email protected] N. Federal Highway, Suite 257Boca Raton, FL 33431Tel.: 561-394-3399Fax: 561-394-3382
ABBEY SPANIER RODD & ABRAMS, LLPNancy Kaboolian, Esq. (NK 6346)212 East 39th StreetNew York, NY 10016Tel: 212 889-3700Fax: 212 684-5191
PASKOWITZ & ASSOCIATESLaurence D. Paskowitz, Esq. (LP-7324)60 East 42nd St., 46th FloorNew York, NY 10016Tel: 212 685-0969Fax: 212 685-2306
ROY JACOBS & ASSOCIATESRoy L. Jacobs
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Case 2:07-cv-00484-MMH-SPC Document 1 Filed 08/02/2007 Page 27 of 29
60 East 42nd Street ; 46th FloorNew York, NY 10165Tel: 212 867-1156Fax: 212 504-8343
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Case 2:07-cv-00484-MMH-SPC Document 1 Filed 08/02/2007 Page 28 of 29
CERTII{ICATION OF LEAD PLAINTIFFP_ITRSIIANT TO FEDTJAL SWIJRITIWS LAWS
I Florence G. Cole , declare as follows:
1. T have reviewed a copy of the complaint filed in this action.
2. I did not purchase the security that is the subject of this action [Health Management Associates Inc.: NYSE: HMA] at the directionof counsel or in order to participate in any private action arising under the Private Securities Litigation Reform Act (the "PSLRA").
3. [am willing to serve as a representative party on behalf of a class and will testify at deposition and trial, ifnecessary.
4. My transactions in the security that is the subject of this litigation during the class period set forth in the complaint are as follows;
Security
(Conunon stock, Call,
Put Bonds
Transaction
(Purchase/Sale)Quantity Trade Date Price Per Share/
Security
IIMA PURCHASE 500 02112/2007 $19.97
*List additional transactions on a separate sheet of paper, if necessary. If the securities were purchased by joint owners, please providethe above information for the co-owner.
5. I have not served as or sought to serve as a representative party on behalf of a class during the last three years, except as stated herein:
6. 1 will not accept any payment for serving as a representative party, except to receive my pro rata share of any recovery or as ordered orapproved by the court or any award to me by the Court of reasonable costs and expenses (including lost wages) directly relating to myrepresentation of the class.
I declare under penalty ofperjury that the foregoing is true and correct.
Dated: August t, 2007 Signed : XIV/ Flnr .nee G. Cole
Print Name: FLORENCE G. COLE
Case 2:07-cv-00484-MMH-SPC Document 1 Filed 08/02/2007 Page 29 of 29
Address, City, State, Zip Code: 10050 Hollowbrook Drive, Pensacola , FL 32514
Telephone No.: 850-316-8577
Business 'Telephone No. (if applicable):
Telecopier No. (if applicable):
]-mail address (if applicable): [email protected]
If the securities were purchased by joint owners, please provide the above information for the co-owner.
2