<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended October 31, 1996
Commission File No. 0-18472
HEALTH MANAGEMENT, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2096632
(State or other jurisdiction of incorporation) (IRS Employer Identification No.)
1371-A Abbott Court, Buffalo Grove, Illinois 60089
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 913-2700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO ___
As of December 19, 1996, there were outstanding 9,330,182 shares of common
stock, $.03 par value.
<PAGE>
HEALTH MANAGEMENT, INC.
October 31, 1996
TABLE OF CONTENTS
Page No.
--------
Part I. FINANCIAL INFORMATION:
Item 1. Financial Statements.........................................
Item 2. Management's Discussion
and Analysis of
Financial Condition and
Results of Operations........................................
Part II. OTHER INFORMATION:
Item 1. Legal Proceedings............................................
Item 2. Changes in Securities........................................
Item 3. Defaults Upon Senior Securities..............................
Item 4. Submission of Matters to a Vote of
Security Holders ............................................
Item 5. Other Information............................................
Item 6. Exhibits and Reports on Form 8-K.............................
SIGNATURES............................................................
EXHIBITS..............................................................
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The condensed consolidated financial statements of Health Management,
Inc. (the "Company") begin on the page following Item 2 of this Part I.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
PRELIMINARY STATEMENT
All statements contained herein that are not historical facts, including, but
not limited to, statements regarding the Company's current business strategy,
the Company's projected sources and uses of cash, and the Company's plans for
future development and operations, are based upon current expectations. These
statements are forward-looking in nature and involve a number of risks and
uncertainties. Actual results may differ materially. Among the factors that
could cause actual results to differ materially are the following: the
availability of sufficient capital to finance the Company's business plans on
terms satisfactory to the Company; changes or conditions affecting the
transactions with Transworld Home Health Care, Inc. described herein;
competitive factors; the ability of the Company to adequately defend or reach a
settlement of outstanding litigation and investigations involving the Company or
its management; changes in labor, equipment and capital costs; changes in
regulations affecting the Company's business; general business and economic
conditions; and other factors described from time to time in the Company's
reports filed with the Securities and Exchange Commission. The Company wishes to
caution readers not to place undue reliance on any such forward-looking
statements, which statements are made pursuant to the Private Litigation Reform
Act of 1995 and, as such, speak only as of the date made.
SPECIAL CONSIDERATIONS
The Company's business is subject to a number of special considerations, such as
industry trends, certain risks inherent in the business and the Company's recent
events. Some of these considerations are described in "Recent Events and Other
Considerations" below.
RECENT EVENTS AND OTHER CONSIDERATIONS
Financial Condition. As a result of the restatements and special charges
recorded in the Company's financial statements for the fiscal years 1995 and
1996, the Company recorded significant charges to its balance sheet including
reductions of the Company's working capital, retained earnings and stockholders'
equity. The Company was in default under its Credit Agreement with Chase
Manhattan Bank, N.A., as agent and lender. This senior debt, the principal
amount of which aggregate approximately $28.3 million, was acquired by
Transworld Home HealthCare, Inc., a New York corporation ("Transworld"), on
November 13, 1996, the date on which Transworld entered into a stock purchase
agreement and merger agreement with the Company. Also on November 13, 1996,
Transworld agreed to forbear until December 12, 1996 from exercising any
remedies under such bank debt and agreed, in its discretion, to loan the Company
up to an additional $3 million under its revolving credit facility. As of
December 12, 1996, the Forbearance Agreement was further extended until December
23, 1996 and the availability under the revolving line of credit was further
increased by up to an additional $2 million, subject to certain conditions and
at the discretion of Transworld. (See "Transworld Transaction" below.) In
addition, Hyperion Partners II, L.P., the majority stockholder of Transworld,
has acquired the obligations of the Company due to Foxmeyer Drug Co., and has
informed the Company that it is in final negotiations to acquire the obligations
of the Company due to Bindley Western, Inc. and Caremark, Inc. The obligations
of the Company due to Foxmeyer Drug Co., Bindley Western, Inc. and Caremark,
Inc. are in the aggregate amount of approximately $18.2 million. There are no
assurances that Transworld will extend the forbearance agreement past December
23, 1996 and, if no such agreement is reached, it is likely that the Company
will seek protection under the Federal Bankruptcy laws.
Transworld Transaction. In November 1996, Transworld acquired the Company's
outstanding bank debt, agreed to forbear until December 12, 1996 from exercising
any remedies under such bank debt and agreed, in its discretion, to loan the
Company up to an additional $3 million under its revolving credit facility. As
of December 12, 1996, the forbearance agreement was further extended until
December 23, 1996 and the availability under the revolving line of credit was
further increased by up to an additional $2 million, subject to certain
conditions and at the discretion of Transworld.
3
<PAGE>
Also, on November 13, 1996, the Company entered into a Stock Purchase Agreement
with Transworld, pursuant to which Transworld agreed to acquire 8,964,292 newly
issued shares (the "Shares") of common stock of the Company ("Common Stock"),
representing 49% of the outstanding Common Stock, as well as an option to
purchase an additional 2% of the Common Stock. The closing of this transaction
is currently scheduled to occur on or about December 23, 1996, subject to the
satisfaction of certain conditions including, among others, approval of
Transworld's lenders and preliminary court approval of a settlement of the
consolidated class action lawsuit for $7.2 million in cash, which preliminary
court approval was granted on December 20, 1996 (the "Proposed Settlement"). The
consideration for the Shares includes: (1) Transworld entering into the Merger
Agreement, (ii) Transworld purchasing the rights of the Company's senior
lenders, (iii) Transworld forbearing under the Credit Agreement for a specified
period of time (as discussed above), (iv) Transworld agreeing to extend
additional amounts (as discussed above) under the revolving credit facility,
subject to certain conditions and at Transworld's discretion, (v) Transworld
causing to be canceled certain warrants to purchase 5% of the outstanding stock
of the Company on a fully diluted basis, at an exercise price of $2.00 per
share, to which the Company's senior lenders were entitled, and (vi) $1.00 per
share of Common Stock. Of the $1.00 per share consideration, which aggregates
$8,964,292, a portion will be used to repay any amounts loaned to the Company
under the revolving credit facility subsequent to November 13, 1996 and interest
thereon. The option will have an exercise price of $1.00 per share and will have
a one-year term.
On November 13, 1996 the Company also entered into a Merger Agreement with
Transworld pursuant to which a newly formed subsidiary of Transworld will merge
into the Company and each stockholder of the Company will receive cash
consideration equal to $2.00 per share. The merger is subject to certain
conditions, which include, among others, approval by the Company's stockholders,
the expiration or termination of any applicable waiting period under the
Hart-Scott- Rodino Antitrust Improvements Act of 1976, as amended, and final
court approval of the Proposed Settlement. The Company believes the conditions
of the merger could be satisfied by Spring, 1997. Either party may terminate
the Merger Agreement if the merger is not consummated by June 30, 1997.
Because various conditions to closing the Transworld transactions have not yet
been satisfied, the Company can give no assurances that the transactions
contemplated by the Stock Purchase Agreement and/or the Merger Agreement will be
consummated in their entirety or in the manner contemplated by the Stock
Purchase Agreement and/or the Merger Agreement.
Significant Litigation. The Company has been named as a defendant in a
consolidated stockholder class action lawsuit and as a nominal defendant in two
derivative suits. No assurances can be given as to the outcome of such
litigation and the effects on the financial condition or future results of
operations of the Company. With respect to the consolidated stockholder class
action lawsuit, the Company entered into a Stipulation of Partial Settlement
with the plaintiffs' counsel and on September 18, 1996 such Stipulation of
Partial Settlement received preliminary court approval (the "Original
Settlement"). The Original Settlement provided for, among other things, the
payment by the Company of $2,000,000 in cash, the issuance of 2,200,000 million
shares of Common Stock and warrants to purchase 2,200,000 million of Common
Stock. As a condition to Transworld's obligation to close the Stock
4
<PAGE>
Purchase Agreement and the Merger Agreement, preliminary court approval and
final court approval, respectively, is required with respect to a modified
settlement providing for a $7,200,000 cash payment in lieu of the consideration
provided in the Original Settlement to be paid after the merger is consummated.
An Amended Stipulation of Partial Settlement to this effect was executed on
December 19, 1996, preliminary approval by the U.S. District Court for the
Eastern District of New York thereof was granted on December 20, 1996 and a
hearing for final approval is currently scheduled for March 14, 1997. (See Part
II, Item 1, "Legal Proceedings"). The Company is in the process of negotiating
with its directors and officers liability insurance carrier with respect to
coverages for damages in connection with the stockholder class action lawsuit
and any payments received from such carrier will reduce the Company's liability
with respect to such suits.
Changes in Management. Effective May 1, 1996, W. James Nicol, an experienced
health care executive, was named President and Chief Executive Officer of the
Company, succeeding the office of the Chief Executive Officer of the Company
which was formed when Clifford E. Hotte resigned in February 1996. James R.
Mieszala, formerly of Caremark, Inc., who became president of Homecare
Management, Inc., a wholly-owned operating subsidiary of the Company, in January
1996, was named Chief Operating Officer of the Company effective May 10, 1996.
Paul S. Jurewicz, formerly of Caremark, Inc., who became Chief Financial Officer
of the Company in December 1995 was also named the Executive Vice President of
the Company in April 1996. The Company has experienced substantial turnover of
its senior management group over the past twelve months and several of the
Company's executive officers have been in their current positions for only a
limited period of time. The Company's future growth and success depends, in
large part, upon its ability to obtain, retain and expand its staff of executive
and professional personnel. The Company's ability to successfully conclude the
Transworld transaction may likewise depend on its ability to retain its key
personnel to manage through the transition. On December 13, 1996, Mr. Jurewicz
submitted notice of his intent to resign, effective January 31, 1997, to assume
a new position. The Company expects that Mr. Nicol will thereafter assume, on an
interim basis, the additional duties of Chief Financial Officer. There can be no
assurances that the Company will be successful in its efforts to attract and
retain such personnel.
Goodwill and Other Long Lived Assets. At October 31, 1996, the Company had
goodwill of approximately $33.4 million, or 37% of its assets. A significant
portion of the Company's goodwill relates to the Clozaril Patient Management
Business ("CPMB") (See "Introduction of New Antipsychotic Drugs"). It is the
Company's policy to review the recoverability of goodwill and other long-lived
assets quarterly to determine if any impairment indicators are present. The
5
<PAGE>
evaluation of the recoverability of goodwill is significantly affected by
estimates of future cash flows from each of the Company's market areas. If
estimates of future cash flows from operations decrease, the Company may be
required to write down its goodwill and other long- lived assets in the future.
Any such write-down could have a material adverse effect on the financial
position and results of operations of the Company.
Business Strategy. The Company's strategy, which it has been in the process of
implementing since May 1996, is focused on the basic factors that could improve
profitability: revenue generation, cost reduction, quality improvement and cash
collections. To generate increased revenue, the Company is directing its
marketing efforts towards improving its referral relationships in addition to
developing new programs, expanding relationships with payor organizations
(including managed care organizations) and forging relationships with
pharmaceutical companies requiring services such as clinical management,
marketing, reimbursement and other services. Cost reduction efforts are focused
on the integration of the Company's pharmacy locations and increasing
efficiencies in reimbursement and distribution services. Management is also
focused on improved cash collections through an emphasis on enhancing systems
capabilities within the Company. However, much of senior management's attention
this fiscal year has been focused on the normally routine task of sourcing
product from its suppliers and this distraction was heightened substantially
following the bankruptcy filing, on August 27, 1996, by its principal
wholesaler. Additionally, concerns about the Company's financial condition may
result in declining customer referrals. While management believes the
commencement of its business strategy has improved and will continue to improve
the Company's operations and financial performance, no assurances can be given
to its ultimate success.
Introduction of New Antipsychotic Drugs. In October, 1996, Olanzapine, a
new antipsychotic agent for the treatment of schizophrenia, was introduced
into the market. The Company also expects several additional antipsychotic
drugs to be introduced in the next year. The Company anticipates providing these
new drugs to schizophrenic patients as it broadens its Lifecare(TM) Program. To
date, management believes that the introduction of Olanzapine has been a factor
in the recent decline of the Company's Clozapine customer base as physicians
preferentially prescribe Olanzapine for treatment of schizophrenia. Because
Olanzapine does not require weekly blood monitoring, and therefore is less
costly than Clozapine, and because the relative efficacy of Olanzapine is still
uncertain, the Company cannot predict the ultimate effect on its customer base
and, in turn, its financial condition from the introduction of Olanzapine. The
Company also cannot predict the effect on its financial condition of the
introduction of other antipsychotic drugs.
Dilution. The Company's issuance of 8,964,292 shares of Common Stock to
Transworld under the Stock Purchase Agreement and up to an additional 746,713
shares of Common Stock pursuant to an option to be issued in connection with the
Stock Purchase Agreement, will result in substantial dilution of the Company's
outstanding shares. Additionally, the Caremark Convertible Subordinated Note to
be acquired by Hyperion, the principal and accrued interest of which may be
converted into shares of Common Stock at Hyperion's option, if converted could
also result in additional dilution to the Company's outstanding
shares. Based on the Company's calculations, the Note is currently convertible
into approximately 256,185 shares of Common Stock.
RESULTS OF OPERATIONS
Three months ended October 31, 1996 versus October 31, 1995
The Company's revenues were $39,740,053, an increase of $465,265 or 1.2% over
revenues of 39,274,787 for the quarter ended October 31, 1995. The increase was
derived from internal growth resulting from the ongoing patient referrals from
existing referral sources and the addition of new referral sources over the
quarter.
Gross profit margins were 20.3% for the quarter ended October 31, 1996, as
compared to 23.3% for the quarter ended October 31, 1995. The gross profit rate
in the quarter ended October 31, 1996 was negatively impacted by the following
factors: i) a one-time payment to Caremark, Inc. of approximately $525,000 to
account for a working capital adjustment relating to the Company's acquisition
of the Clozaril Patient Management Business, ii) a two month delay in gaining
approval for increased Medicare pricing for an immunosuppressant drug widely
distributed by the Company and servicing its organ transplant patients for which
the drug manufacturer raised prices, and iii) lost purchase discounts associated
with drug purchases due to more unfavorable terms under which vendors recently
placed the Company.
Operating expenses for the quarter ended October 31, 1996 were $9,501,858, an
increase of $1,238,351 or 15% over the quarter ended October 31, 1995. This was
primarily attributable to increased legal fees, audit fees, tax return
preparation fees and consulting fees.
Loss from operations for the quarter ended October 31, 1996 was $1,428,378
compared to a $891,534 profit for the quarter ended October 31, 1995. The
charges for the estimated costs of settlement of the stockholder class action
litigation and the estimated costs associated with
7
<PAGE>
overpayments from New York State Medicaid together with the increased legal
fees, audit fees, tax return preparation fees and consulting fees were the
primary reasons for the operating loss in the quarter.
Interest expense for the quarter ended October 31, 1996 was $723,694, an
increase of $71,768, or 11.0% over the quarter ended October 31, 1995. The
increase is attributable to increased borrowings under the Company's line of
credit partially offset by reduced interest expense related to the Company's
term loan.
Loss before income taxes for the quarter ended October 31, 1996 was $10,752,072
compared to a $239,608 profit for the quarter ended October 31, 1995. Expenses
related to the estimated costs of settlement of the stockholder class action
litigation of $7.2 million and estimated costs associated with overpayments from
New York State Medicaid of $1.4 million together with the increased legal fees,
audit fees, tax return preparation fees and consulting fees were the primary
reasons for the loss.
Income taxes for the three months ended October 31, 1996 are less than the
statutory rate since the Company, in accordance with generally accepted
accounting principles, did not record the benefit, if any, of the potential net
operating loss carryforward because of the uncertainty of future realizations.
The loss of $10,621,418 for the quarter ended October 31, 1996 compared to net
income of $139,522 for the quarter ended October 31, 1995. The net loss was
primarily a result of the settlement charges previously described.
Primary and fully diluted loss per common share for the quarter ended October
31, 1996 was $1.14 compared to earnings per common share of $.01 for the quarter
ended October 31, 1995. The weighted average number of shares outstanding used
in the calculation of primary and fully diluted earnings per share were both
9,328,240 for the quarter ended October 31, 1996 and 9,405,222 for the quarter
ended October 31, 1995.
Six Months Ended October 31, 1996 versus October 31, 1995
Revenues for the six months ended October 31, 1996 were $80,262,962, an increase
of $2,694,145 or 3.5% in comparison to revenues for the six months ended October
31, 1995. The increase in revenues was derived from internal growth from ongoing
patient referrals from existing referral sources and the addition of new
referral sources.
Gross profit margins were 23.2% for the six months ended October 31, 1996, as
compared to 27.0% for the comparable period in the prior year. Gross profit
margins were negatively impacted by the following: 1) a one-time payment to
Caremark, Inc. of approximately $525,000 to account for a working capital
adjustment relating to the Company's acquisition of the Clozaril Patient
Management Business, 2) the delay in updated Medicare pricing for an
immunosuppressant drug widely distributed by the Company and servicing its organ
transplant patients for which the drug manufacturer raised prices, and lost
purchase discounts associated with drug purchases due to more unfavorable terms
under which vendors recently placed the Company.
Operating expenses for the six months ended October 31, 1996 were $18,859,389,
an increase of $1,876,716 or 11.2% over the comparable period last year. This
was primarily attributable to increased legal fees, audit fees, tax return
preparation fees and consulting fees.
8
<PAGE>
Loss from operations for the six months ended October 31, 1996 was $4,342
loss compared to a 4,202,714 profit in the comparable period last year. The
primary reasons for the loss are the decline in gross profits and the increased
operating expenses described above.
Interest expense for the six months ended October 31, 1996 was $1,463,231, an
increase of $200,369 or 15.9% over the six months ended October 31, 1995. The
increase was driven by increased borrowings under the Company's line of credit
partially offset by reduced interest expense related to the Company's term loan.
The net loss for the six months ended October 31, 1996 was $10,189,530 compared
to net income of $1,728,260 for the period ended October 31, 1995. The net loss
was primarily a result of the settlement charges of $7.2 million, estimated
costs associated with overpayments from New York State Medicaid of $1.4 million
and the increased operating expenses previously discussed. Income taxes for the
six months ended October 31, 1996 are less than the statutory rate since the
Company, in accordance with generally accepted accounting principles, did not
record the benefit, if any, of the potential net operating loss carryforward
because of the uncertainty of its future realization.
Primary and fully diluted loss per common share for the six months ended October
31, 1996 were $1.09 compared to earnings per common share of $0.18 for the six
months ended October 31, 1995. The weighted average number of shares outstanding
used in the calculation of primary and fully diluted earnings per share were
9,328,240 for the six months ended October 31, 1996 and 9,425,071 for the six
months ended October 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The net decrease of $1,965,901 in the Company's cash and cash equivalents to
$1,314,294 at October 31, 1996 was attributable to cash used in operating
activities.
Working capital at October 31, 1996 was a negative $6,675,274, a decrease of
$9,166,893 from April 30, 1996. Current assets decreased $5,250,451 due to a
decrease in cash and cash equivalents of $1,965,901, an increase on accounts
receivable of $2,533,227, an increase in inventories of $331,569, a decrease in
tax refund receivable of $6,710,637, an increase in deferred tax assets of
$1,110,000 and a decrease in prepaid assets of $548,709.
Current liabilities increased $3,916,442 from April 30, 1996 principally due to
an increase of $6,051,446 in accrued unusual charges and a decrease in accounts
payable of $1,827,217. This increase is a result of the accrual of $7.2 million
for the settlement of the stockholder class action litigation and the accrual of
$1.4 million to settle overpayments from New York State Medicaid.
On November 13, 1996, Transworld acquired the Company's outstanding bank debt,
agreed to forbear until December 12, 1996 from exercising any remedies under
such bank debt and agreed in its discretion to loan the Company up to an
additional $3 million under its revolving credit facility. As of December 12,
1996, the forbearance agreement was further extended until December 23, 1996 and
the availability under the revolving line of credit was increased by up to an
additional $2 million, subject to certain conditions and at the discretion of
Transworld.
9
<PAGE>
Also on November 13, 1996, the Company entered into a Stock Purchase Agreement
with Transworld, pursuant to which Transworld agreed to acquire 8,964,292 newly
issued shares of Common Stock, representing 49% of the outstanding Common Stock,
as well as an option to purchase an additional 2% of the Common Stock. The
closing of this transaction is currently scheduled to occur on or about December
23, 1996, subject to the satisfaction of certain conditions. The conditions to
closing the stock purchase transaction include, among others, approval of
Transworld's lenders and preliminary court approval of the Proposed Settlement.
The consideration for the Shares includes: (1) Transworld entering into the
Merger Agreement, (ii) Transworld purchasing the rights of the Company's senior
lenders, (iii) Transworld forbearing under the Credit Agreement for a specified
period of time (as discussed more fully above), (iv) Transworld agreeing to
extend additional amounts under the revolving credit facility, subject to
certain conditions and at Transworld's discretion, (v) Transworld causing to be
canceled certain warrants to purchase 5% of the outstanding stock of the Company
on a fully diluted basis, at an exercise price of $2.00 per share, to which the
Company's senior lenders were entitled, and (vi) $1.00 per share of Common
Stock. Of the $1.00 per share consideration, which aggregates $8,964,292, a
portion will be used to repay any amounts loaned to the Company under the
revolving credit facility subsequent to November 13, 1996 and interest thereon.
The option will have an exercise price of $1.00 per share and will have a
one-year term.
On November 13, 1996, the Company also entered into a Merger Agreement with
Transworld pursuant to which a newly formed subsidiary of Transworld will merge
into the Company and each stockholder of the Company will receive cash
consideration equal to $2.00 per share. The merger is subject to certain
conditions, which include, among others, approval by the Company's stockholders
of the merger, the expiration or termination of any applicable waiting period
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and
final court approval of the Proposed Settlement. The Company believes the
conditions of the merger could be satisfied by Spring, 1997. Either party may
terminate the Merger Agreement if the merger is not consummated by June 30,
1997.
Because various conditions to closing the Transworld transactions have not yet
been satisfied, the Company can give no assurances that transactions
contemplated by the Stock Purchase Agreement and/or the Merger Agreement will be
consummated in their entirety or in the manner contemplated by the Stock
Purchase Agreement and/or the Merger Agreement.
The Company purchases its pharmaceuticals from wholesalers and, to a lesser
degree, directly from pharmaceutical manufacturers. Its sources have established
credit limitations and a few suppliers are seeking to reduce their credit
limitations with the Company. The Company's primary supplier, Foxmeyer Drug
Company, filed for protection under the Federal Bankruptcy laws on August 27,
1996 and has subsequently been acquired by McKesson Drug Company. There has been
no improvement in the lines of credit available to the Company as a result of
entering into the Stock Purchase Agreement and Merger Agreement with Transworld.
Although the Company has been able to maintain adequate product supply within
the credit limitations, there can be no assurances that it will continue to do
so in the future. Such an inability would have a material adverse impact on the
Company if alternative sources of product supply were inadequate.
10
<PAGE>
If the Company is unsuccessful in consummating the Stock Purchase Agreement or
Merger Agreement with Transworld, or in continuing satisfactory relations with
its suppliers, it is likely that the Company will seek protection under the
Federal Bankruptcy laws.
11
<PAGE>
HEALTH MANAGEMENT, INC.
And Subsidiaries
Index to Condensed Consolidated Financial Statements
Page No.
--------
Balance Sheets as of October 31, 1996 (Unaudited)
and April 30, 1996 (Audited)....................................................
Statements of Operations for the Six Months Ended October 31, 1996
and October 31, 1995 and for the Three Months Ended October 31, 1996
and October 31, 1995 (Unaudited)................................................
Statements of Cash Flow for the Six Months Ended October 31,
1996 and October 31, 1995 (Unaudited)...........................................
Statement of Stockholders' Equity for the Six Months
Ended October 31, 1996 (Unaudited)..............................................
Notes to Financial Statements...................................................
12
<PAGE>
HEALTH MANAGEMENT, INC.
And Subsidiaries
Condensed Consolidated Balance Sheets
ASSETS
October 31, 1996 April 30, 1996
---------------- --------------
(Unaudited) (Audited)
CURRENT ASSETS:
Cash and cash equivalents $ 1,314,294 $ 3,280,195
Accounts Receivable, Less Allowance for
Doubtful Accounts 38,990,426 36,457,199
Inventories 7,132,389 6,800,820
Tax Refund Receivable 1,326,393 8,037,030
Deferred Taxes 2,917,000 1,807,000
Prepaid expenses and other 106,649 655,358
----------- -----------
Total Current Assets 51,787,151 57,037,602
IMPROVEMENTS and EQUIPMENT, Less
Accumulated Depreciation and
Amortization 3,647,030 3,825,974
Goodwill 33,414,092 34,008,496
OTHER 541,744 1,043,607
----------- -----------
$89,390,017 $95,915,679
=========== ===========
See Notes to Condensed Consolidated Financial Statements
13
<PAGE>
HEALTH MANAGEMENT, INC.
And Subsidiaries
Condensed Consolidated Balance Sheets
LIABILITIES AND STOCKHOLDERS' EQUITY
October 31, 1996 April 30, 1996
---------------- --------------
(Unaudited) (Audited)
CURRENT LIABILITIES:
Accounts Payable $ 18,887,619 $ 20,714,836
Accrued Unusual Charges 9,610,446 3,559,000
Accrued Expenses 1,213,994 1,526,119
Current Maturities of
Long Term Debt 28,750,366 28,746,028
------------ ------------
TOTAL CURRENT LIABILITIES 58,462,425 54,545,983
Long Term Debt, Less Current
Maturities 3,753,503 4,006,077
------------ ------------
TOTAL LIABILITIES 62,215,928 58,552,060
COMMITMENTS and CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred Stock-$.01 Par Value:
Shares Authorized - 1,000,000
Issued and Outstanding, none
Common Stock-$.03 Par Value:
Shares Authorized - 20,000,000
Issued and Outstanding-9,328,240 279,848 279,848
Additional Paid-in Capital 38,138,771 38,138,771
Accumulated Deficit (11,244,530) (1,055,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 27,174,089 37,363,619
------------ ------------
$ 89,390,017 $ 95,915,679
============ ============
See Notes to Condensed Consolidated Financial Statements
14
<PAGE>
HEALTH MANAGEMENT, INC.
And Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
October 31, October 31,
1996 1995 1996 1995
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues $ 39,740,052 $39,274,787 $ 80,262,962 $77,568,817
Costs of Sales 31,666,572 30,119,746 61,677,465 56,652,980
------------ ----------- ------------ -----------
Gross Profit 8,073,480 9,155,041 18,585,497 20,915,837
------------ ----------- ------------ -----------
Operating Expenses:
Selling 1,566,432 1,206,433 2,799,749 2,291,635
General and Administrative 7,935,426 7,057,074 15,790,090 14,421,488
------------ ----------- ------------ -----------
9,501,858 8,263,507 18,589,839 16,713,123
------------ ----------- ------------ -----------
Income (Loss) from
Operations (1,428,378) 891,534 ( 4,342) 4,202,714
Settlement and Other Costs 8,600,000 -- 8,600,000 --
Interest Expense 723,694 651,926 1,463,231 1,262,862
------------ ----------- ------------ -----------
Income (Loss) Before
Income Taxes (10,752,072) 239,608 (10,067,573) 2,939,852
Income Taxes (130,654) 100,086 (121,957) 1,211,592
------------ ----------- ------------ -----------
Net Income (Loss) ($10,621,418) $ 139,522 ($10,189,530) $ 1,728,260
============ =========== ============ ===========
Earnings (Loss) Per Common
Share:
Primary ($1.14) $0.01 ($1.09) $0.18
Fully Diluted ($1.14) $0.01 ($1.09) $0.18
Weighted Average
Shares Outstanding
Primary 9,328,240 9,405,222 9,328,240 9,425,071
Fully Diluted 9,328,240 9,405,222 9,328,240 9,425,071
</TABLE>
See Notes to Condensed Consolidated Financial Statements
15
<PAGE>
HEALTH MANAGEMENT, INC.
And Subsidiaries
Condensed Consolidated Statement of Cash Flow
For The Six Months Ended October 31
(Unaudited)
1996 1995
------------ ------------
Cash Flows from Operating
Activities:
Net Income (Loss) ($10,189,530) $ 1,728,260
Adjustments to Reconcile Net
Income (Loss) to Net Cash provided by (used in)
Operating Activities:
Depreciation & Amortization 1,293,581 1,302,574
Provision for Doubtful Accounts 3,428,929 3,429,901
Deferred Taxes (1,110,000) (351,168)
Increase (Decrease) in Cash Flows
From Changes in Operating Assets
and Liabilities:
Accounts Receivable (5,962,156) (12,802,321)
Inventory (331,569) (3,055,905)
Prepaid Expenses and Other 548,709 91,802
Other Assets 501,863 (12,535)
Accounts Payable (1,827,217) 6,209,920
Receivable from Seller - (403,000)
Accrued Expenses (312,125) 2,852,438
Accrued Unusual Charges 6,051,446 -
Tax Refund Receivable 6,711,637 (620,380)
------------ ------------
Net Cash Provided by (used in)
Operating Activities (1,196,432) (1,630,414)
Cash Flows from Investing Activities:
Capital Expenditures (520,233) (1,037,034)
------------ ------------
Net Cash (Used In) Investing Activities (520,233) (1,037,034)
Cash Flows from Financing Activities:
Increase in Bank Loan,
Borrowing on Credit Facility - 2,150,000
Principal Payments on Long-Term Debt (248,236) (3,266)
Proceeds from Exercise of Stock Options - 51,875
------------ ------------
Net Cash Used in Financing Activities (248,236) (2,198,609)
Net Decrease in Cash & Cash Equivalents (1,964,901) (468,839)
Cash and Cash Equivalents, at Beginning
of Period 3,280,195 4,562,712
------------ ------------
Cash and Cash Equivalents, at End
of Period $ 1,314,294 $ 4,093,873
============ ============
Supplemental Disclosures of Cash Flow
Information:
Cash Paid for Interest 1,177,870 924,511
Cash Paid (Refund) for Taxes (5,441,907) 2,202,380
See Notes to Condensed Consolidated Financial Statements
16
<PAGE>
HEALTH MANAGEMENT, INC.
And Subsidiaries
Condensed Consolidated Statement of Stockholders' Equity
Six Months Ended October 31, 1996
(Unaudited)
Common Stock
$.03 Par Value Additional
---------------------- Paid-in Accumulated
Shares Amount Capital Deficit
----------- -------- ----------- ------------
Balance, May 1, 1996 9,328,240 $279,848 $38,138,771 ($ 1,055,000)
Net Loss for the Six
Months Ended
October 31, 1996 (10,189,530)
----------- -------- ----------- ------------
Balance, October 31, 1996 9,328,240 $279,848 $38,138,771 ($11,244,530)
=========== ======== =========== ============
See Notes to Condensed Consolidated Financial Statements
17
<PAGE>
HEALTH MANAGEMENT, INC.
And Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Basis of Presentation
The condensed consolidated financial statements include Health Management, Inc.,
a Delaware corporation (the "Company"), and its wholly-owned subsidiaries,
including Homecare Management, Inc., a New York corporation, HMI Pennsylvania,
Inc., a Delaware corporation, HMI Retail Corp., Inc., a Delaware corporation,
HMI PMA, Inc., a Delaware corporation, Health Reimbursement Corp., a Delaware
corporation, HMI Maryland, Inc., a Delaware corporation, and HMI Illinois, Inc.,
a Delaware corporation. All intercompany accounts and transactions have been
eliminated in consolidation.
The Condensed Consolidated Financial Statements included herein are unaudited
and include all adjustments which, in the opinion of management, are necessary
for a fair presentation of the results of operations of the interim period
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These condensed financial statements should be
read in conjunction with the Company's Annual Report on Form 10-K for the year
ended April 30, 1996. The results of operations for the interim periods are not
necessarily indicative of the operating results for the whole year.
Note 2: Contingency
The Company and certain of its past and current officers and directors and its
outside auditors, BDO Seidman, LLP have been named as defendants in a
consolidated class action securities fraud lawsuit filed in the United States
District Court for the Eastern District of New York entitled In re Health
Management, Inc. Securities Litigation, Master File No. 96 Civ. 0889 (ADS). The
consolidated actions allege claims under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, arising out of alleged misrepresentations and
omissions by the Company in connection with certain of its previous securities
filings. The consolidated actions purport to represent a class of persons who
purchased the Company's common stock between August 25, 1994 and February 27,
1996, the date the Company announced that it would have to restate certain of
its financial statements. The consolidated actions seek unspecified monetary
damages reflecting the decline in the trading price of the Company's stock that
allegedly resulted from the Company's February 1996 announcements. Pursuant to
the Order of Consolidation, the Company will not be required to answer or
otherwise move in the action until January 6, 1997. The Company entered into a
Stipulation of Partial Settlement with the plaintiffs' counsel and on September
18, 1996 such Stipulation of Partial Settlement received preliminary court
approval (the "Original Settlement"). The Original Settlement provided for,
among other things, the payment by the Company of $2,000,000 in cash, the
issuance of 2,200,000 million shares of Common Stock and warrants to purchase
2,200,000 million of Common Stock. As a condition to Transworld's obligation to
close the Stock Purchase Agreement and the Merger Agreement, preliminary court
approval and final court approval, respectively, is required with respect to a
modified settlement providing for a $7,200,000 cash payment in lieu of the
consideration provided in the Original Settlement. An Amended Stipulation of
Partial Settlement to this effect was executed on December 19, 1996,
preliminary approval by the U.S. District Court for the Eastern District of
New York thereof was granted on December 20, 1996 and a hearing for final
approval is currently scheduled for March 14, 1997. The Company is in the
process of negotiating with its directors and officers liability insurance
carrier with respect to coverages for damages in connection with the
stockholder class action lawsuit and any payments received from such carrier
will reduce the Company's liability with respect to such suits.
Certain of the Company's current and former directors and officers, including
Messrs. Bergman, Hotte, Clifton and Dimitriadis and Ms. Belloise, have been
named as defendants, and the Company has been named as a nominal defendant, in a
consolidated derivative action filed in the United States District Court for the
Eastern District of New York entitled In re Health Management, Inc.
Stockholders' Derivative Litigation, Master File No. 96 Civ. 1208 (TCP). The
consolidated action alleges claims for breach of fiduciary duty and contribution
against the individual director defendants arising out of alleged
misrepresentations and omissions contained in certain of the Company's previous
securities filings. The consolidated action seeks unspecified monetary damages
on behalf of the Company as well as declaratory and injunctive relief. An
amended consolidated complaint was served on the Company on
18
<PAGE>
August 12, 1996. The Company's time to answer or move with respect to the
amended consolidated complaint has been extended pursuant to stipulation until
January 31, 1997.
Under the Company's Certificate of Incorporation and Bylaws, certain officers
and directors may be entitled to indemnification, or advancement of expenses for
legal fees in connection with the above suits. The Company may be required to
make payments in respect thereof in the future.
BDO Seidman, LLP has been named as a defendant, and the Company has been named
as a nominal defendant, in a derivative lawsuit filed in the Supreme Court for
the State of New York, County of New York entitled Howard Vogel, et al. v. BDO
Seidman, LLP, et al., Index No. 96-603064. The complaint alleges claims for
breach of contract, professional malpractice, negligent misrepresentation,
contribution and indemnification against BDO Seidman arising out of alleged
misrepresentations and omissions contained in certain of the Company's previous
securities filings. BDO Seidman was the Company's auditor at the time those
filings were made and has continued to serve as such. The complaint seeks
unspecified monetary damages on behalf of the Company as well as declaratory and
injunctive relief. Pursuant to stipulation, the Company's time to answer or
otherwise move against the complaint in this action has been adjourned
indefinitely.
The enforcement division of the Securities and Exchange Commission has a formal
order of investigation relating to matters arising out of the Company's public
announcement on February 27, 1996 that the Company would have to restate its
financial statements for prior periods as a result of certain accounting
irregularities and the Company is fully cooperating with this investigation and
has responded to the commission's requests for documentary evidence.
As a result of a New York State Medicaid audit, the Company is in discussions
with the New York State Department of Social Services regarding certain
overpayments to the Company. The Company estimates that it will have to pay
approximately $1.4 million in respect thereof.
19
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company, certain of its past and current directors and officers and its
outside auditors, BDO Seidman, LLP have been named as defendants in a
consolidated class action securities fraud lawsuit filed in the United States
District Court for the Eastern District of New York entitled In re Health
Management, Inc. Securities Litigation, Master File No. 96 Civ. 0889 (ADS). The
consolidated actions allege claims under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, arising out of alleged misrepresentations and
omissions by the Company in connection with certain of its previous securities
filings. The consolidated actions purport to represent a class of persons who
purchased the Company's common stock between August 25, 1994 and February 27,
1996, the date the Company announced that it would have to restate certain of
its financial statements. The consolidated actions seek unspecified monetary
damages reflecting the decline in the trading price of the Company's stock that
allegedly resulted from the Company's February 1996 announcements. Pursuant to
the Order of Consolidation, the Company is required to answer or otherwise move
in the action on January 6, 1997. The Company entered into a Stipulation of
Partial Settlement with the plaintiffs' counsel and on September 18, 1996 such
Stipulation of Partial Settlement received preliminary court approval (the
"Original Settlement"). The Original Settlement provided for, among other
things, the payment by the Company of $2,000,000 in cash, the issuance of
2,200,000 million shares of Common Stock and warrants to purchase 2,200,000
million of Common Stock. As a condition to Transworld's obligation to close the
Stock Purchase Agreement and the Merger Agreement, preliminary court approval
and final court approval, respectively, is required with respect to a modified
settlement providing for a $7,200,000 cash payment in lieu of the consideration
provided in the Original Settlement. An Amended Stipulation of Partial
Settlement to this effect was executed on December 19, 1996, preliminary
approval by the U.S. District Court for the Eastern District of New York thereof
was granted on December 20, 1996 and a hearing for final approval is currently
scheduled for March 14, 1997. The Company is in the process of negotiating with
its directors and officers liability insurance carrier with respect to coverages
for damages in connection with the stockholder class action lawsuit and any
payments received from such carrier will reduce the Company's liability with
respect to such suits.
Certain of the Company's current and former officers and directors, including
Messrs. Bergman, Hotte, Clifton and Dimitriadis and Ms. Belloise, have been
named as defendants, and the Company has been named as a nominal defendant, in a
consolidated derivative action filed in the United States District Court for the
Eastern District of New York entitled In re Health Management, Inc.
Stockholders' Derivative Litigation, Master File No. 96 Civ. 1208 (TCP). The
consolidated action alleges claims for breach of fiduciary duty and contribution
against the individual director defendants arising out of alleged
misrepresentations and omissions contained in certain of the Company's previous
securities filings. The consolidated action seeks unspecified monetary damages
on behalf of the Company as well as declaratory and injunctive relief. An
amended consolidated complaint was served on the Company on August 12, 1996. The
Company's time to answer or move with respect to the amended consolidated
complaint has been extended pursuant to stipulation until January 31, 1997.
Under the Company's Certificate of Incorporation and Bylaws, certain officers
and directors may be entitled to indemnification, or advancement of expenses for
legal fees in connection with the above suits. The Company may be required to
make payments in respect thereof in the future.
BDO Seidman, LLP has been named as a defendant, and the Company has been named
as a nominal defendant, in a derivative lawsuit filed in the Supreme Court for
the State of New York, County of New York entitled Howard Vogel, et al. v. BDO
Seidman, LLP, et al., Index No. 96-603064. The complaint alleges claims for
breach of contract, professional malpractice, negligent misrepresentation,
contribution and indemnification against BDO Seidman arising out of alleged
misrepresentations and omissions contained in certain of the Company's previous
securities filings. BDO Seidman was the Company's auditor at the time those
filings were made and has continued to serve as such. The complaint seeks
unspecified monetary damages on behalf of the Company as well as declaratory and
injunctive relief. Pursuant to stipulation, the Company's time to answer or
otherwise move against the complaint in this action has been adjourned
indefinitely.
The enforcement division of the Securities Exchange Commission has a formal
order of investigation relating to matters arising out of the Company's public
announcement on February 27, 1996 that the Company would have to restate its
financial statements for prior periods as a result of certain accounting
irregularities. The Company is cooperating fully with this investigation and has
responded to the Commission's requests for documentary evidence.
The Company has been named as a defendant in an action pending in the United
States District Court for the Eastern District of New York entitled Bindley
Western Industries, Inc. v. Health Management, Inc., 96 Civ. 2330 (ADS). The
action alleged claims for breach of contract and accounts stated arising out of
a dispute regarding payment for certain goods and sought damages in the amount
of $3,187,157.35 together with interest, costs and disbursements.
20
<PAGE>
Hyperion Partners II, L.P., a major shareholder of Transworld, has purchased
Bindley Western's receivables and Bindley Western has agreed to dismiss the
suit.
On April 3, 1995, American Preferred Prescription, Inc. ("APP") filed a
complaint against the Company, Preferred Rx, Inc., Community Prescription
Services and Sean Strub in the New York Supreme Court for tortious interference
with existing and prospective contractual relationships, for lost customers and
business opportunities resulting from allegedly slanderous statements and for
allegedly false advertising and promotions. Four separate causes of action are
alleged, each for up to $10 million in damages. APP had previously filed a
similar suit in the United States Bankruptcy Court of the Eastern District of
New York, which was dismissed and the court abstained from exercising
jurisdiction. The Company has answered the complaint and counterclaimed for
libel and slander predicated upon a false press release issued by APP and added
as defendants the principals of APP. By stipulation dated January 29, 1996, the
Company discontinued its counterclaim against APP and its third-party claims
against the principals of APP. In addition, by motion dated March 12, 1996, APP
moved, in the Supreme Court of the State of New York, to amend its complaint to
add, among other things, a cause of action against the Company alleging that a
proposed plan of reorganization presented by the Company to the Bankruptcy Court
in APP's bankruptcy case was based on fraudulent financial statements and to add
certain other defendants. These defendants caused the removal of the state court
action to the Bankruptcy Court of the Eastern District of New York. By motion
dated April 12, 1996, APP requested that the Bankruptcy Court remand the action
to the State Court, which the Bankruptcy Court granted. The Company opposed this
motion, which is currently pending before the State Court. Management believes
APP's suit against it to be without merit, intends to defend the proceeding
vigorously and believes the outcome will not have a material adverse effect on
the Company's results of operations or financial position.
On or about August 4, 1995, APP commenced an action in the Supreme Court of the
State of New York, County of Nassau, against a former APP employee who is
currently employed by the Company, and Charles Hutson, Susan Hutson and Hutson
Consulting Services (collectively, the "Hutsons"). The Company is not named as a
defendant in this lawsuit. The complaint in this action alleges, among other
things, that the employee provided to the Hutsons, who formed and subsequently
discontinued a joint marketing venture with APP, confidential information which
was disclosed to competitors of APP. On September 1, 1995, the Hutsons removed
the action to the Bankruptcy Court. The employee answered the complaint on
December 27, 1995. No depositions have taken place, nor have any documents been
produced. APP moved to remand this case to the Supreme Court for the County of
Nassau. In a hearing which took place before the Bankruptcy Court on June 27,
1996, the Bankruptcy Court preliminarily ruled to grant APP's remand motion, but
provided the Hutsons a further opportunity to submit a written response to the
motion. After the Hutsons submitted a written response and a hearing was held,
the Bankruptcy Court granted APP's remand motion. The Hutsons have noticed their
appeal of this order.
The outcomes of certain lawsuits and the investigation are uncertain and the
ultimate outcomes could have a material adverse effect on the Company and the
viability of the Company going forward.
21
<PAGE>
Item 2. Change in Securities - None
Item 3. Default Upon Senior Securities
The Company is presently in default under its Credit Agreement with
Transworld Home HealthCare, Inc., as successor to Chase Manhattan Bank,
N.A., and European American Bank, for among other things, non-payment of
principal in the aggregate amount of $1,000,000. Interest on such
principal as of December 20, 1996 is $41,076. The Company executed a
Forbearance Agreement dated November 13, 1996 with Transworld which
provided that, subject to certain conditions, the lenders would not
exercise their rights and remedies under the Credit Agreement until
November 12, 1996. The parties amended this forbearance agreement as of
December 12, 1996 to extend the forbearance period until December 23,
1996.
Item 4. Submission of Matters to a Vote of Security Holders -- Not Applicable
Item 5. Other Information - None
Item 6. Exhibits and Reports of Form 8-K
(a) Exhibits
3.1 Certificate of Incorporation of the Company, as filed with
the Secretary of State of Delaware on March 25, 1986
(incorporated by reference to Registration Statement on
Form S-1, Registration No. 33-04485).
3.2 Certificate of Amendment to Certificate of Incorporation of
the Company, as filed with the Secretary of State of
Delaware on March 9, 1988 (incorporated by reference to
Form 10-K for year ended April 30, 1988).
3.3 Certificate of Amendment to Certificate of Incorporation of
the Company, as filed with the Secretary of State of
Delaware on March 31, 1992 (incorporated by reference to
Registration Statement on Form S-1, No. 33-46996).
3.4 Certificate of Amendment to Certificate of Incorporation of
the Company, as filed with the Secretary of State of
Delaware on October 27, 1994 (incorporated by reference to
Form 10-K for year ended April 30, 1995).
3.5+ Certificate of Amendment of Certificate of Incorporation of
the Company, as filed with the Secretary of State of
Delaware on November 8, 1996.
3.6 Amended and Restated By-Laws of the Company (incorporated
by reference to Form 10-Q or the quarter ended January 31,
1996).
4.1 Form of 10% Convertible Subordinated Debenture
(incorporated by reference to Form 8-K dated March 4,
1991).
4.2 Specimen Form of Certificate for Common Stock (incorporated
by reference to Registration Statement on Form S-1,
Registration No. 33-46996).
4.3 Form of Representatives' Purchase Warrant (incorporated by
reference to Amendment Number 2 to Registration Statement
on Form S-1, Registration No. 33-46996).
22
<PAGE>
4.4 Form of Selling Shareholders' Power of Attorney
(incorporated by reference to Registration Statement on
Form S-1, Registration No. 33-46996).
4.5 Form of Selling Shareholders' Custody Agreement
(incorporated by reference to Registration Statement on
Form S-1, Registration No. 33-46996).
10.1 Stock Purchase Agreement dated December 8, 1988
(incorporated by reference to Form 8-K dated December 23,
1988).
10.2 Addendum dated February 1, 1989 to Stock Purchase Agreement
dated December 23, 1988 (incorporated by reference to
Amendment Number 1 to Registration Statement on Form S-1,
Registration No. 33-46996).
10.3* 1989 Stock Option Plan (incorporated by reference to
Registration Statement on Form S-1, Registration No.
33-46996).
10.4 Lease dated April 20, 1990 on Company's Ronkonkoma, New
York facility between the Company and Four L Realty Co
(incorporated by reference to Registration Statement on
Form S-1, Registration No. 33-46996).
10.5 Amendment, dated March 16, 1992 to Lease dated April 20,
1990 on Company's Headquarters between the Company and Four
L Realty Co. (incorporated by reference to Form 10-K for
year ended April 30, 1992).
10.6* Company 401(k) Plan (incorporated by reference to Amendment
Number 1 to Registration Statement on Form S-1,
Registration No. 33-46996).
10.7* Employment Agreement, dated as of May 1, 1996, between the
Company and W. James Nicol (incorporated by reference to
Annual Report on Form 10-K for the fiscal year ended April
30, 1996).
10.8*+ Letter Agreement dated November 13, 1996, between W. James
Nicol and the Company and guaranteed by Transworld Home
Healthcare, Inc.
10.9* Employment Agreement, dated as of September 9, 1996,
between the Company and James R. Mieszala (incorporated by
reference to Current Report on Form 8-K dated September,
1996).
10.10*+ Letter Agreement dated November 13, 1996, between James R.
Mieszala and the Company and guaranteed by Transworld Home
HealthCare, Inc.
10.11* Employment Agreement, dated as of September 9, 1996,
between the Company and Paul S. Jurewicz (incorporated by
reference to Current Report on Form 8-K dated September,
1996).
10.12*+ Letter Agreement dated November 13, 1996, between Paul S.
Jurewicz and the Company and guaranteed by Transworld Home
HealthCare, Inc.
23
<PAGE>
10.13 Assets Purchase Agreement, dated as of March 27, 1994,
between the Registrant, Murray Pharmacy Too, Inc. and the
Shareholders named therein (incorporated by reference to
Current Report on Form 8-K dated April 1, 1994).
10.14 Assets Purchase Agreement, dated as of March 27, 1994,
between HMI Retail Corp., Murray Pharmacy, Inc. and the
Shareholders named therein (incorporated by reference to
Annual Report on Form 10-K filed August 2, 1994).
10.15 Asset Purchase Agreement, dated as of February 21, 1995,
between Caremark Inc. and Health Management, Inc.
(incorporated by reference to Current Report on Form 8-K
dated April 14, 1995).
10.16 First Amendment to Asset Purchase Agreement, dated as of
March 31, 1995, between Caremark Inc. and Health
Management, Inc. (incorporated by reference to Current
Report on Form 8-K dated April 14, 1995).
10.17 Transition Agreement, dated as of March 31, 1995, between
Caremark Inc. and HMI Illinois (incorporated by reference
to Current Report on Form 8-K dated April 14, 1995).
10.18 Credit Agreement, dated as of March 31, 1995 among, Health
Management, Inc., Home Care Management, Inc., HMI
Pennsylvania, Inc., HMI Illinois, Inc., Chemical Bank, and
the Guarantors and Lenders named therein (incorporated by
reference to Current Report on Form 8-K dated April 14,
1995).
10.19 Security Agreement, dated as of March 31, 1995, among
Health Management, Inc., Home Care Management, Inc., Health
Reimbursement Corporation, HMI Retail Corp., Inc., HMI
Pennsylvania, Inc. and HMI Maryland, Inc. and Chemical Bank
for itself and the Lenders named therein (incorporated by
reference to Current Report on Form 8-K dated April 14,
1995).
10.20 Security Agreement and Mortgage-Trademarks and Patent,
dated as of March 31, 1994, among Health Management, Inc.,
Home Care Management, Inc., Health Reimbursement
Corporation, HMI Retail Corp., Inc., HMI Pennsylvania, Inc.
and HMI Maryland, Inc. and Chemical Bank for itself and the
Lenders named therein (incorporated by reference to Current
Report on Form 8-K dated April 14, 1995).
10.21 Forbearance Agreement, dated July 26, 1996 among Health
Management, Inc., Home Care Management, Inc., HMI Illinois,
Inc., HMI Pennsylvania, Inc., Health Reimbursement
Corporation, HMI Retail Corp., Inc., HMI PMA, Inc., HMI
Maryland, Inc., Chase Manhattan Bank, as lender and agent,
and European American Bank, as lender (incorporated by
reference to Annual Report on Form 10-K for the fiscal year
ended April 30, 1996).
10.22 Agreement of Lease by and between Joseph M. Rosenthal and
the Company dated December 13, 1994 (incorporated by
reference to Form 10-K for the year ended April 30, 1995).
10.23 Lease by and between Irwin Hirsh and Lloyd N. Myers and HMI
Pennsylvania, Inc. dated March 27, 1994 (incorporated by
reference to Form 10-K for the year ended April 30, 1995).
24
<PAGE>
10.24 Lease by and between Irwin Hirsh and HMI Retail Corp., Inc.
dated March 27, 1994 (incorporated by reference to Form
10-K for the year ended April 30, 1995).
10.25 Lease Agreement by and between Domas Mechanical
Contractors, Inc. and the Company dated May 18, 1995
(incorporated by reference to Form 10-K for the year ended
April 30, 1995).
10.26 Stipulation of Partial Settlement dated September 16, 1996,
between the Company and the Representative Plaintiffs
(incorporated by reference to Form 8-K dated September,
1996).
10.27+ Amended Stipulation of Partial Settlement dated December
19, 1996, between the Company and the Representative
Plaintiffs.
10.28 Agreement and Plan of Merger among IMH Acquisition Corp.,
Transworld Home HealthCare, Inc. and the Company
(incorporated by reference to Form 8-K dated November 13,
1996).
10.29 Stock Purchase Agreement dated as of November 13, 1996,
between the Company and Transworld Home HealthCare, Inc.
(incorporated by reference to Form 8-K dated November 13,
1996).
10.30*+ 1996 Non-Employee Director Stock Option Plan.
11 Statement re Computation of Per Share Earnings
(incorporated by reference to Annual Report on Form 10-K/A
for the fiscal year ended April 30, 1996).
27+ Financial Data Schedule
* Management contract or compensatory plan or arrangement.
+ Filed with this Report.
(b) Reports on Form 8-K
The Company filed the following Current Report on Form 8-K during
the fiscal quarter ending October 31, 1996:
Current Report on Form 8-K dated September, 1996.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the County of Lake, State of
Illinois, on the 20th day of December, 1996.
HEALTH MANAGEMENT, INC.
(Registrant)
By: /s/ W. James Nicol
W. James Nicol
(Principal Executive Officer)
By: /s/ Paul S. Jurewicz
Paul S. Jurewicz
(Principal Financial Officer)
<PAGE>
INDEX TO EXHIBITS
No. Exhibit
- --- -------
3.1 Certificate of Incorporation of the Company, as filed with the
Secretary of State of Delaware on March 25, 1986 (incorporated by
reference to Registration Statement on Form S-1, Registration No.
33-04485).
3.2 Certificate of Amendment to Certificate of Incorporation of the
Company, as filed with the Secretary of State of Delaware on March 9,
1988 (incorporated by reference to Form 10-K for year ended April 30,
1988).
3.3 Certificate of Amendment to Certificate of Incorporation of the
Company, as filed with the Secretary of State of Delaware on March
31, 1992 (incorporated by reference to Registration Statement on Form
S-1, No. 33-46996).
3.4 Certificate of Amendment to Certificate of Incorporation of the
Company, as filed with the Secretary of State of Delaware on October
27, 1994 (incorporated by reference to Form 10-K for year ended April
30, 1995).
3.5+ Certificate of Amendment of Certificate of Incorporation of the
Company, as filed with the Secretary of State of Delaware on November
8, 1996.
3.6 Amended and Restated By-Laws of the Company (incorporated by
reference to Form 10-Q or the quarter ended January 31, 1996).
4.1 Form of 10% Convertible Subordinated Debenture (incorporated by
reference to Form 8-K dated March 4, 1991).
4.2 Specimen Form of Certificate for Common Stock (incorporated by
reference to Registration Statement on Form S-1, Registration No.
33-46996).
4.3 Form of Representatives' Purchase Warrant (incorporated by reference
to Amendment Number 2 to Registration Statement on Form S-1,
Registration No. 33-46996).
4.4 Form of Selling Shareholders' Power of Attorney (incorporated by
reference to Registration Statement on Form S-1, Registration No.
33-46996).
4.5 Form of Selling Shareholders' Custody Agreement (incorporated by
reference to Registration Statement on Form S-1, Registration No.
33-46996).
10.1 Stock Purchase Agreement dated December 8, 1988 (incorporated by
reference to Form 8-K dated December 23, 1988).
10.2 Addendum dated February 1, 1989 to Stock Purchase Agreement dated
December 23, 1988 (incorporated by reference to Amendment Number 1 to
Registration Statement on Form S-1, Registration No. 33-46996).
<PAGE>
10.3* 1989 Stock Option Plan (incorporated by reference to Registration
Statement on Form S-1, Registration No. 33-46996).
10.4 Lease dated April 20, 1990 on Company's Ronkonkoma, New York facility
between the Company and Four L Realty Co (incorporated by reference
to Registration Statement on Form S-1, Registration No. 33-46996).
10.5 Amendment, dated March 16, 1992 to Lease dated April 20, 1990 on
Company's Headquarters between the Company and Four L Realty Co.
(incorporated by reference to Form 10-K for year ended April 30,
1992).
10.6* Company 401(k) Plan (incorporated by reference to Amendment Number 1
to Registration Statement on Form S-1, Registration No. 33-46996).
10.7* Employment Agreement, dated as of May 1, 1996, between the Company
and W. James Nicol (incorporated by reference to Annual Report on
Form 10-K for the fiscal year ended April 30, 1996).
10.8*+ Letter Agreement dated November 13, 1996, between W. James Nicol and
the Company and guaranteed by Transworld Home Healthcare, Inc.
10.9* Employment Agreement, dated as of September 9, 1996, between the
Company and James R. Mieszala (incorporated by reference to Current
Report on Form 8-K dated September, 1996).
10.10*+ Letter Agreement dated November 13, 1996, between James R. Mieszala
and the Company and guaranteed by Transworld Home HealthCare, Inc.
10.11* Employment Agreement, dated as of September 9, 1996, between the
Company and Paul S. Jurewicz (incorporated by reference to Current
Report on Form 8-K dated September, 1996).
10.12*+ Letter Agreement dated November 13, 1996, between Paul S. Jurewicz
and the Company and guaranteed by Transworld Home HealthCare, Inc.
10.13 Assets Purchase Agreement, dated as of March 27, 1994, between the
Registrant, Murray Pharmacy Too, Inc. and the Shareholders named
therein (incorporated by reference to Current Report on Form 8-K
dated April 1, 1994).
10.14 Assets Purchase Agreement, dated as of March 27, 1994, between HMI
Retail Corp., Murray Pharmacy, Inc. and the Shareholders named
therein (incorporated by reference to Annual Report on Form 10-K
filed August 2, 1994).
10.15 Asset Purchase Agreement, dated as of February 21, 1995, between
Caremark Inc. and Health Management, Inc. (incorporated by reference
to Current Report on Form 8-K dated April 14, 1995).
<PAGE>
10.16 First Amendment to Asset Purchase Agreement, dated as of March 31,
1995, between Caremark Inc. and Health Management, Inc. (incorporated
by reference to Current Report on Form 8-K dated April 14, 1995).
10.17 Transition Agreement, dated as of March 31, 1995, between Caremark
Inc. and HMI Illinois (incorporated by reference to Current Report on
Form 8-K dated April 14, 1995).
10.18 Credit Agreement, dated as of March 31, 1995 among, Health
Management, Inc., Home Care Management, Inc., HMI Pennsylvania, Inc.,
HMI Illinois, Inc., Chemical Bank, and the Guarantors and Lenders
named therein (incorporated by reference to Current Report on Form
8-K dated April 14, 1995).
10.19 Security Agreement, dated as of March 31, 1995, among Health
Management, Inc., Home Care Management, Inc., Health Reimbursement
Corporation, HMI Retail Corp., Inc., HMI Pennsylvania, Inc. and HMI
Maryland, Inc. and Chemical Bank for itself and the Lenders named
therein (incorporated by reference to Current Report on Form 8-K
dated April 14, 1995).
10.20 Security Agreement and Mortgage-Trademarks and Patent, dated as of
March 31, 1994, among Health Management, Inc., Home Care Management,
Inc., Health Reimbursement Corporation, HMI Retail Corp., Inc., HMI
Pennsylvania, Inc. and HMI Maryland, Inc. and Chemical Bank for
itself and the Lenders named therein (incorporated by reference to
Current Report on Form 8-K dated April 14, 1995).
10.21 Forbearance Agreement, dated July 26, 1996 among Health Management,
Inc., Home Care Management, Inc., HMI Illinois, Inc., HMI
Pennsylvania, Inc., Health Reimbursement Corporation, HMI Retail
Corp., Inc., HMI PMA, Inc., HMI Maryland, Inc., Chase Manhattan Bank,
as lender and agent, and European American Bank, as lender
(incorporated by reference to Annual Report on Form 10-K for the
fiscal year ended April 30, 1996).
10.22 Agreement of Lease by and between Joseph M. Rosenthal and the Company
dated December 13, 1994 (incorporated by reference to Form 10-K for
the year ended April 30, 1995).
10.23 Lease by and between Irwin Hirsh and Lloyd N. Myers and HMI
Pennsylvania, Inc. dated March 27, 1994 (incorporated by reference to
Form 10-K for the year ended April 30, 1995).
10.24 Lease by and between Irwin Hirsh and HMI Retail Corp., Inc. dated
March 27, 1994 (incorporated by reference to Form 10-K for the year
ended April 30, 1995).
10.25 Lease Agreement by and between Domas Mechanical Contractors, Inc. and
the Company dated May 18, 1995 (incorporated by reference to Form
10-K for the year ended April 30, 1995).
10.26 Stipulation of Partial Settlement dated September 16, 1996, between
the Company and the Representative Plaintiffs (incorporated by
Reference to Form 8-K dated September, 1996).
<PAGE>
10.27+ Amended Stipulation of Partial Settlement dated December 19, 1996,
between the Company and the Representative Plaintiffs.
10.28 Agreement and Plan of Merger among IMH Acquisition Corp., Transworld
Home HealthCare, Inc. and the Company (incorporated by reference to
Form 8-K dated November 13, 1996).
10.29 Stock Purchase Agreement dated as of November 13, 1996, between the
Company and Transworld Home HealthCare, Inc. (incorporated by
reference to Form 8-K dated November 13, 1996).
10.30*+ 1996 Non-Employee Director Stock Option Plan.
11 Statement re Computation of Per Share Earnings (incorporated by
reference to Annual Report on Form 10-K/A for the fiscal year ended
April 30, 1996).
27+ Financial Data Schedule
* Management contract or compensatory plan or arrangement.
+ Filed with this Report.
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE CERTIFICATE OF INCORPORATION
OF HEALTH MANAGEMENT, INC.
Under Section 242 of the General Corporation Law
of the State of Delaware
Health Management, Inc., a Delaware corporation (the "Corporation"), hereby
certifies as follows:
1. The Certificate of Incorporation of the Corporation is hereby amended by
increasing the authorized capital stock of the Corporation from 21,000,000
shares of capital stock (consisting of 20,000,000 shares of Common Stock and
1,000,000 shares of preferred stock) to 40,000,000 shares of capital stock
(consisting of 39,000,000 shares of Common Stock and 1,000,000 shares of
preferred stock) so that, as amended, the first paragraph of Article FOURTH
shall be and read as follows:
FOURTH: That the total number of shares of all classes of stock which
the Corporation shall have authority to issue shall be
40,000,000 shares, of which 1,000,000 shall be preferred stock
of the par value of one cent each ($.01) (hereinafter called the
"Preferred Stock") and of which 39,000,000 shares shall be
common stock of the par value of three cents each ($.03)
(hereinafter called the "Common Stock").
2. The foregoing amendment to the Certificate of Incorporation has been duly
adopted in accordance with the provisions of Section 242 of the General
Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment to be signed by W. James Nicol, its President, and the undersigned
hereby affirms that this Certificate of Amendment is the act and deed of the
Corporation and that the facts stated herein are true and correct, all as of the
date set forth below.
HEALTH MANAGEMENT, INC.
Dated: November 8, 1996 By: /s/ W. James Nicol
W. James Nicol, President
<PAGE>
November 13, 1996
W. James Nicol
249 6th Street
Seal Beach, CA 90740
Dear Mr. Nicol:
Reference is made to the Employment Agreement between Health Management,
Inc. ("HMI") and W. James Nicol ("Nicol") entered into as of May 1, 1996 (the
"Employment Agreement").
Reference also is made to the merger (the "Merger") and other transactions
contemplated by (i) the Merger Agreement dated as of the date hereof between
HMI, Transworld Home HealthCare, Inc. ("Transworld") and a wholly-owned
subsidiary of Transworld, (ii) the Stock Purchase Agreement (the "Stock Purchase
Agreement") dated the date hereof between HMI and Transworld and (iii) the Debt
Purchase Agreement dated the date hereof between Transworld and HMI's senior
lenders.
Nicol hereby agrees to continue to serve as President and Chief Executive
Officer of HMI through the effective date of the Merger. In consideration
thereof, (i) upon the closing under the Stock Purchase Agreement, HMI shall pay
to Nicol $50,000 by check and (ii) assuming consummation of the Merger, on June
30, 1997, HMI shall pay to Nicol $50,000 by check. If for any reason Nicol's
employment with HMI is terminated by HMI at any time, either prior to, on or
after the effective date of the Merger, or, if the Merger occurs, and Nicol
thereafter voluntarily elects to terminate his employment with HMI at any time
on or after the effective date of the Merger, HMI shall continue to pay Nicol an
amount equal to Nicol's base salary through June 30, 1998 (such amounts to be in
lieu of and not in addition to other amounts payable under the Employment
Agreement), payable in periodic installments in accordance with HMI's regular
payroll practices (it being understood that Nicol shall have no obligation to
seek or accept other work during this period and his acceptance of other work
shall not cause his payments to be reduced). Any payments to which Nicol is
entitled hereunder shall be subject to withholding, social security, payroll and
other applicable taxes and deductions. If the Merger occurs, after termination
of Nicol's employment the provisions of paragraph 18(a)(1) of the Employment
Agreement shall be deemed null and void and shall not be enforceable against
Nicol.
The employment situs provisions as set forth in paragraph 3 of the
Employment Agreement shall not be changed. Transworld and HMI shall require any
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all
<PAGE>
W. James Nicol Page 2
or substantially all of the business and/or assets of Transworld or HMI to
expressly assume and agree to perform its obligations under this Agreement.
Except as set forth above, the Employment Agreement shall remain in full
force and effect.
Very truly yours,
Health Management, Inc.
By: /s/ James R. Mieszala
Name: James R. Mieszala
Title: Chief Operating Officer
Accepted and agreed to:
W. James Nicol
/s/ W. James Nicol
<PAGE>
W. James Nicol Page 3
Guaranty
Transworld agrees that if the Merger occurs, Transworld will guarantee the
payment of all monies due or that may become due to Nicol from HMI hereunder.
Transworld Home HealthCare, Inc.
By: /s/ Vincent J. Caruso
Name: Vincent J. Caruso
Title: Executive Vice President
<PAGE>
November 13, 1996
James R. Mieszala
21335 Cliffside Drive
Kildeer, Illinois 60047
Dear Mr. Mieszala:
Reference is made to the Employment Agreement between Health Management,
Inc. ("HMI") and James R. Mieszala ("Mieszala") entered into as of September 9,
1996 (the "Employment Agreement").
This will confirm our agreement that the merger (the "Merger") and other
transactions contemplated by (i) the Merger Agreement dated as of the date
hereof between HMI, Transworld Home HealthCare, Inc. ("Transworld") and a
wholly-owned subsidiary of Transworld, (ii) the Stock Purchase Agreement (the
"Stock Purchase Agreement") dated the date hereof between HMI and Transworld and
(iii) the Debt Purchase Agreement dated the date hereof between Transworld and
HMI's senior lenders will not constitute a "Change in Control" as such term is
used in the Employment Agreement and will not constitute a material reduction in
the scope and/or authority of Mieszala's duties with HMI within the meaning of
the Employment Agreement, provided that notwithstanding all other agreements and
understandings, including those contained in the above documents, the following
conditions are met (all payments specified in clauses (i)-(iv) below are subject
to the requirement that Mieszala's employment shall not have been terminated
prior to the scheduled date of the payment by HMI for "cause" (as defined in the
Employment Agreement) or voluntarily by Mieszala and are in lieu of any
severance payments to which Mieszala would otherwise be entitled under the
Employment Agreement): (i) on January 2, 1997, HMI shall pay Mieszala $50,000 by
check; (ii) upon consummation of the Merger, Transworld shall issue to Mieszala
stock options for 50,000 shares of Transworld common stock at an exercise price
equal to the fair market value of Transworld's common stock on the effective
date of the Merger, which options will vest (provided that Mieszala is employed
by HMI on the applicable vesting date) one-third upon issuance, one-third on the
first anniversary of issuance and one-third on the second anniversary of
issuance; (iii) on June 30, 1997, HMI shall pay Mieszala $50,000 by check; (iv)
on January 2, 1998, HMI shall pay Mieszala $225,000 by check; (v) after
termination of Mieszala's employment, the provisions of paragraph 17(a)(1) of
the Employment Agreement shall be deemed null and void and shall not be
enforceable against Mieszala; (vi) Mieszala shall continue to receive during his
employment with HMI through June 30, 1998 the same base salary, bonus
eligibility and employee benefits as set
<PAGE>
James R. Mieszala Page 2
forth in the Employment Agreement; (vii) if Mieszala is employed by HMI through
June 30, 1998, and thereafter Mieszala's employment with HMI is terminated by
HMI or Mieszala voluntarily elects to terminate his employment with HMI, HMI
shall continue to pay Mieszala an amount equal to Mieszala's base salary for a
period of twelve months (in lieu of and not in addition to other amounts payable
under the Employment Agreement), payable in periodic installments in accordance
with HMI's regular payroll practices (it being understood that Mieszala shall
have no obligation to seek or accept other work during this period and his
acceptance of other work shall not cause his payments to be reduced); (viii) the
employment situs provisions as set forth in paragraph 3 of the Employment
Agreement shall not be changed; (ix) Transworld and HMI shall require any
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of
Transworld or HMI to expressly assume and agree to perform its obligations under
this Agreement; and (x) Mieszala will continue to serve as Chief Operating
Officer of HMI with the same duties and responsibilities such position had prior
thereto, and such duties and responsibilities shall not be reduced in scope or
authority. Any payments to which Mieszala is entitled hereunder shall be subject
to withholding, social security, payroll and other applicable taxes and
deductions.
Except as set forth above, the Employment Agreement shall remain in full
force and effect.
Very truly yours,
Health Management, Inc.
By: /s/ W. James Nicol
Name: W. James Nicol
Title: Chief Executive Officer
Accepted and agreed to:
James R. Mieszala
/s/ James R. Mieszala
<PAGE>
James R. Mieszala Page 3
Guaranty
Transworld agrees that if the Merger occurs, Transworld will guarantee the
payment of all monies due or that may become due to Mieszala from HMI hereunder.
Transworld Home HealthCare, Inc.
By: /s/ Vincent J. Caruso
Name: Vincent J. Caruso
Title: Executive Vice President
<PAGE>
November 13, 1996
Paul S. Jurewicz
2261 Churchill Lane
Libertyville, IL 60048
Dear Mr. Jurewicz:
Reference is made to the Employment Agreement between Health Management,
Inc. ("HMI") and Paul S. Jurewicz ("Jurewicz") entered into as of September 9,
1996 (the "Employment Agreement").
This will confirm our agreement that the merger (the "Merger") and other
transactions contemplated by (i) the Merger Agreement dated as of the date
hereof between HMI, Transworld Home HealthCare, Inc. ("Transworld") and a
wholly-owned subsidiary of Transworld, (ii) the Stock Purchase Agreement (the
"Stock Purchase Agreement") dated the date hereof between HMI and Transworld and
(iii) the Debt Purchase Agreement dated the date hereof between Transworld and
HMI's senior lenders will not constitute a "Change in Control" as such term is
used in the Employment Agreement and will not constitute a material reduction in
the scope and/or authority of Jurewicz's duties with HMI within the meaning of
the Employment Agreement, and Jurewicz agrees to remain employed with HMI
through June 30, 1998, provided that notwithstanding all other agreements and
understandings, including those contained in the above documents, the following
conditions are met (the payments specified in clauses (i), (ii) and (iii) below
are subject to the requirement that Jurewicz's employment shall not have been
terminated prior to the scheduled date of the payment by HMI for "cause" (as
defined in the Employment Agreement) or voluntarily by Jurewicz): (i) upon the
closing under the Stock Purchase Agreement, but in any event no later than
December 21, 1996, HMI shall pay Jurewicz $50,000 by check; (ii) on November 13,
1997, HMI shall pay Jurewicz $50,000 by check; (iii) upon consummation of the
Merger, Transworld shall issue to Jurewicz stock options for 50,000 shares of
Transworld common stock at an exercise price equal to the fair market value of
Transworld's common stock on the effective date of the Merger, which options
will vest (provided that Jurewicz is employed by HMI on the applicable vesting
date) one-third upon issuance, one-third on the first anniversary of issuance
and one-third on the second anniversary of issuance; (iv) after termination of
Jurewicz's employment, the provisions of paragraph 17(a)(1) of the Employment
Agreement shall be deemed null and void and shall not be enforceable against
Jurewicz; (v) Jurewicz shall continue to receive during his employment with HMI
through June 30, 1998 the same base salary, bonus eligibility and employee
benefits as set forth in the Employment Agreement; (vi) if for any reason
Jurewicz's employment with HMI is terminated by
<PAGE>
Paul S. Jurewicz Page 2
HMI without "cause" (as defined in the Employment Agreement) at any time, either
prior to, on or after June 30, 1998, or Jurewicz voluntarily elects to terminate
employment with HMI at any time on or after June 30, 1998 or at such earlier
time if there is a material reduction in the scope and/or authority of his
duties, HMI shall continue to pay Jurewicz an amount equal to Jurewicz's base
salary for a period of twelve months (such amounts to be in lieu of and not in
addition to other amounts payable under the Employment Agreement), payable in
periodic installments in accordance with HMI's regular payroll practices (it
being understood that Jurewicz shall have no obligation to seek or accept other
work during this period and his acceptance of other work shall not cause his
payments to be reduced); (vii) the employment situs provisions as set forth in
paragraph 3 of the Employment Agreement shall not be changed; (viii) Transworld
and HMI shall require any successor (whether direct or indirect, by purchase,
merger, consolidation or otherwise) to all or substantially all of the business
and/or assets of Transworld or HMI to expressly assume and agree to perform its
obligations under this Agreement; and (ix) Jurewicz will continue to serve as
Chief Financial Officer and Executive Vice President of HMI with the same duties
and responsibilities such position had prior thereto, and such duties and
responsibilities shall not be reduced in scope or authority. Any payments to
which Jurewicz is entitled hereunder shall be subject to withholding, social
security, payroll and other applicable taxes and deductions.
Except as set forth above, the Employment Agreement shall remain in full
force and effect.
Very truly yours,
Health Management, Inc.
By: /s/ W. James Nicol
Name: W. James Nicol
Title: Chief Executive Officer
Accepted and agreed to:
Paul S. Jurewicz
/s/ Paul S. Jurewicz
<PAGE>
Paul S. Jurewicz Page 3
Guaranty
Transworld agrees that if the Merger occurs, Transworld will guarantee the
payment of all monies due or that may become due to Jurewicz from HMI hereunder.
Transworld Home HealthCare, Inc.
By: /s/ Vincent J. Caruso
Name: Vincent J. Caruso
Title: Executive Vice President
<PAGE>
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
- ----------------------------------------X
IN RE HEALTH MANAGEMENT, INC. Master File No.
SECURITIES LITIGATION 96-CV-889 (ADS)
CLASS ACTION
- ----------------------------------------X
AMENDED STIPULATION OF PARTIAL SETTLEMENT
<PAGE>
This Amended Stipulation of Partial Settlement (the "Amended Stipulation"),
dated as of December 19, 1996, is made and entered by and among the following
parties to the above-entitled litigation: (i) the Representative Plaintiffs (on
behalf of themselves and each of the Settlement Class Members), by and through
their counsel of record in the litigation; and (ii) the Settling Defendant, by
and through its counsel of record in the litigation. The Amended Stipulation is
intended by the Settling Parties to fully, finally and forever resolve,
discharge and settle the Released Claims against the Settling Defendant only (as
defined herein) and its subsidiaries only, upon and subject to the terms and
conditions hereof. The terms of the Stipulation of Partial Settlement dated
September 16, 1996 are amended and restated as follows:
I. TERMS OF AMENDED STIPULATION AND AGREEMENT OF SETTLEMENT
NOW, THEREFORE, IT IS HEREBY STIPULATED AND AGREED by and among the
Representative Plaintiffs (for themselves and the Settlement Class Members), and
the Settling Defendant, by and through their respective counsel or attorneys of
record, that, subject to the approval of the Court, the Released Claims shall be
finally and fully compromised, settled and released, and the Released Claims
shall be dismissed on the merits and with prejudice, as to the Settling
Defendant only, upon and subject to the terms and conditions of the Amended
Stipulation, as follows:
1. Definitions
As used in the Amended Stipulation the following terms have the meanings
specified below:
<PAGE>
1.1 "Authorized Claimant" means any Settlement Class Member (or duly
authorized representative) who files a Proof of Claim and Release in such form
and manner, and within such time, as the Court prescribes.
1.2 "Claims Administrator" means the Garden City Group.
1.3 "Effective Date" means the first date by which all of the events and
conditions specified in paragraph 10.1 of the Amended Stipulation have been met
and have occurred.
1.4 "Escrow Agent" means Kaplan, Kilsheimer & Fox LLP.
1.5 "Final" means: (i) The date of final affirmance on an appeal from the
Judgment, the expiration of the time for a petition for a writ of certiorari to
review the Judgment and, if certiorari be granted, the date of final affirmance
of the Judgment following review pursuant to that grant; or (ii) the date of
final dismissal of any appeal from the Judgment or the final dismissal of any
proceeding on certiorari to review the Judgment; or (iii) if no appeal is filed,
the expiration date of the time for the filing or noticing of any appeal from
the Court's Judgment approving the Amended Stipulation substantially in the form
of Exhibit "B" hereto, i.e., thirty (30) days after entry of the Judgment or
such longer time as may be allowed by Court order extending the time for appeal.
Any proceeding or order, or any appeal or petition for a writ of certiorari
pertaining solely to any plan of allocation and/or application for attorneys'
fees, costs or expenses, shall not in any way delay or preclude the Judgment
from becoming Final.
-2-
<PAGE>
1.6 "Health Management" or the "Company" means Health Management, Inc.
1.7 "Judgment" means the judgment to be rendered by the Court,
substantially in the form attached hereto as Exhibit "B."
1.8 "Merger Effective Date" means the date upon which the merger between
Health Management and a wholly owned subsidiary of Transworld Home Healthcare,
Inc. ("Transworld") is effective.
1.9 "Non-Settling Defendants" means Clifford E. Hotte, Drew W. Bergman,
Virginia Belloise, Irwin Hirsh, Lloyd Myers and BDO Seidman LLP.
1.10 "Person" means an individual, corporation, partnership, limited
partnership, association, joint stock company, estate, legal representative,
trust, unincorporated association, government or any political subdivision or
agency thereof, and any business or legal entity and their spouses, heirs,
predecessors, successors, representatives, or assignees.
1.11 "Plaintiffs' Settlement Counsel" means the following counsel for
Representative Plaintiffs in the Litigation:
Kaplan, Kilsheimer & Fox LLP, Robert N. Kaplan, Frederic S. Fox, and Joel
B. Strauss, 685 Third Avenue, New York, New York, 10017, Telephone:
212/687-1980; Zwerling, Schachter & Zwerling, LLP, Jeffrey C. Zwerling, 767
Third Avenue, New York, New York, 10017, Telephone: 212/223-3900.
1.12 "Plan of Allocation" means the plan or formula of allocation of the
Settlement Fund as described in the Notice of Proposed Amended Partial
Settlement of Class Action and
-3-
<PAGE>
Settlement Hearing whereby the Settlement Fund shall be distributed to
Authorized Claimants after payment of expenses of notice and administration of
the settlement, any taxes, penalties or interest or tax preparation fees owed by
the Settlement Fund, and such attorneys' fees, costs, expenses and interest as
may be awarded by the Court. Any Plan of Allocation is not part of the Amended
Stipulation.
1.13 "Released Claims" means and includes any and all claims or causes of
action, demands, rights, liabilities, and causes of action of every nature and
description whatsoever, asserted or which could have been asserted by the
Representative Plaintiffs or the Settlement Class Members, or any of them,
against the Released Person based upon or related to both the purchase of Health
Management common stock by the Representative Plaintiffs or the Settlement Class
Members during the Settlement Class Period and the facts, transactions, events,
occurrences, disclosures, statements, acts or omissions or failures to act which
were alleged in the Litigation.
1.14 "Released Person" means the Settling Defendant and its subsidiaries,
successors or assigns.
1.15 "Representative Plaintiffs" means the lead plaintiffs as designated by
the Court in Pre-trial Order No. 1: Charles T. Labozzetta, Albert Buthman,
Michael Zurkan, Lillian Pfaender, Lewis Steven Cohen, Bharat Dave, Kurt W.
Grimm, Kenneth Holmes, Charles DiLustro, John Cappazzi and Thomas Druetzler.
-4-
<PAGE>
1.16 "Settlement Class" means all Persons (except the Settling Defendant or
the Non-Settling Defendants, members of their immediate families, any entity in
which any such defendant has a controlling interest, and their legal
representatives, heirs, successors or assigns) who purchased Health Management
common stock during the Settlement Class Period (the "Class"), excluding those
persons who timely and validly requested exclusion from the Settlement Class
pursuant to the Notice of Pendency and Partial Settlement of Class Action sent
to the Class on or about September 24, 1996.
1.17 "Settlement Class Member" or "Member of the Settlement Class" means a
Person who falls within the definition of the Settlement Class as set forth in
this Amended Stipulation.
1.18 "Settlement Class Period" means the period from August 25, 1994
through February 26, 1996, inclusive.
1.19 "Settlement Fund" means:
(a) A payment by the Settling Defendant to the Escrow Agent of $2
million;
(b) An additional payment by the Settling Defendant to the Escrow
Agent of $5,200,000 in replacement of the shares of common stock and
warrants that were to have been issued by the Settling Defendant pursuant
to the Stipulation of Partial Settlement dated September 16, 1996.
(c) A further payment by the Settling Defendant to the Escrow Agent to
the extent (if any) that the final price paid by Transworld for the stock
of Health Management
-5-
<PAGE>
exceeds $2.00 per share, in the amount of: [the excess of the merger price
per share over $2.00 times 2.2 million]; and
(d) The additional settlement costs associated with amending the
Stipulation of Settlement (such as notice and publication) will be paid
from the Settlement Fund; however, Health Management will deposit with
class counsel, upon preliminary approval of the Amended Stipulation of
Settlement, the sum of $28,000 for the funding of such costs, which sum
shall be deducted from the payments listed above.
1.20 "Settling Defendant" means Health Management only, and specifically
excludes any and all of the Non-Settling Defendants (and any members of any of
the Non-Settling Defendants' families and any Person or entity owned or
controlled by any of the Non-Settling Defendants), and any other Person.
1.21 "Settling Defendant's Counsel" means McDermott Will & Emery, John D.
Lovi, 50 Rockefeller Plaza, New York, New York 10020, (212) 547-5400.
1.22 "Settling Parties" means, collectively, the Settling Defendant and the
Representative Plaintiffs on behalf of themselves and the members of the
Settlement Class.
II. EVENTS LEADING TO THE AMENDED STIPULATION
2.1 On November 1, 1996 the Settling Defendant issued a press release which
stated, inter alia, that cash flow problems had forced it to consider options
for the Company including a
-6-
<PAGE>
sale, merger, or bankruptcy filing. Health Management common stock, which had
been trading for approximately $4-1/2 per share, lost 58 percent of its value
and closed that day at $1-15/16 per share.
2.2 Subsequently, on or about November 4, 1996 Settling Defendants Counsel
informed Plaintiffs Settlement Counsel that because of these developments the
Settling Defendant would be unable to fund the original settlement and, that
absent a sale of the Company, it would shortly file for bankruptcy protection.
2.3 By letter dated November 6, 1996, Plaintiffs Settlement Counsel
informed the Court that, because Health Management could not fund the original
settlement, Plaintiffs Settlement Counsel could no longer support the original
settlement and requested that the Court postpone the final approval hearing
which had been scheduled for November 8, 1996, so that Plaintiffs Settlement
Counsel could explore other possible alternatives for the Class.
2.4 Plaintiffs Settlement Counsel were informed that there was a company
that was interested in acquiring Health Management. The potential acquirer was
later identified as Transworld. Plaintiffs Settlement Counsel engaged in
extensive negotiations with counsel for Transworld and Health Management. Absent
an agreement, Health Management would file for bankruptcy protection.
2.5 On November 11, 1996, an agreement in principle was reached whereby
upon the completion of an acquisition of Health Management by Transworld,
Transworld would cause Health
-7-
<PAGE>
Management to pay plaintiffs and the Class $7.2 million cash in lieu of the $2
million in cash and approximately $14 million in stock and warrants to be issued
under the original settlement.
2.6 On or about November 14, 1996 Transworld acquired the senior debt of
Health Management and also announced that it had agreed to purchase 49% of the
common stock of Health Management. Health Management and Transworld also entered
into a merger agreement, pursuant to which a newly formed subsidiary of
Transworld will merge into Health Management. Health management shareholders
will receive cash consideration equal to $2.00 per share.
3. The Settlement Fund and Rights
With Respect Thereto
3.1 Subject to the satisfaction of all conditions set forth in paragraph
10, on the Merger Effective Date, the Settling Defendant shall transfer or cause
Transworld to transfer the Settlement Fund to the Escrow Agent.
3.2 In the event that all or part of the Settlement Fund is not transferred
to the Escrow Agent on the Merger Effective Date, interest shall begin to accrue
on the Merger Effective Date for the benefit of plaintiffs and the Class at the
then prevailing PrimeRate. In the event that the Settlement Fund is not
transferred to the Escrow Agent within thirty (30) days of the Merger Effective
Date plaintiffs may terminate this Amended Stipulation.
-8-
<PAGE>
4. Administration of The Settlement Fund
A. The Escrow Agent
4.1 The Escrow Agent shall invest the Settlement Fund in instruments backed
by the full faith and credit of the United States Government or fully insured by
the United States Government or an agency thereof and shall reinvest the
proceeds of these instruments as they mature in similar instruments at the
current market rates.
4.2 The Escrow Agent shall not disburse the Settlement Fund except as
provided in the Amended Stipulation, or by an Order of the Court.
4.3 Subject to such further order and direction by the Court as may be
necessary, the Escrow Agent is authorized to execute such transactions on behalf
of the Settlement Class Members as are consistent with the terms of the Amended
Stipulation.
4.4 All funds held by the Escrow Agent shall be deemed and considered to be
in custodia legis of the Court, and shall remain subject to the jurisdiction of
the Court, until such time as such funds shall be distributed pursuant to the
Amended Stipulation and/or further order(s) of the Court.
4.5 Upon payment of the Settlement Fund or any portion thereof to the
Escrow Agent, the Escrow Agent may transfer from the Settlement Fund money
sufficient to pay costs and expenses reasonably and actually incurred in
connection with providing notice to the Settlement Class, locating Settlement
Class
-9-
<PAGE>
members, soliciting Settlement Class claims, assisting with the filing of
claims, administering and distributing the Settlement Fund to the Members of the
Settlement Class, processing Proofs of Claim and Release and paying escrow fees
and costs, if any.
4.6 On the Effective Date, any balance (including interest) then remaining
in the Notice and Administration Fund, less expenses incurred but not yet paid,
shall be transferred by the Escrow Agent to, and deposited and credited as part
of, the Settlement Fund to be applied as set forth in paragraph 8.2 below. There
after, Plaintiffs' Settlement Counsel shall have the right to use such portions
of the Settlement Fund as are, in their exercise of reasonable judgment,
necessary to carry out the purposes set forth in paragraph 4.5.
B. Taxes
4.7 (a) The Settling Parties and the Escrow Agent agree to treat the
Settlement Fund as being at all times a "qualified settlement fund" within the
meaning of Treas. Reg. Section 1.468B-1. In addition, the Escrow Agent and, as
required, the Settling Defendant shall jointly and timely make the
"relation-back election" (as defined in Treas. Reg. Section 1.468B-1) back to
the earliest permitted date. Such election shall be made in compliance with the
procedures and requirements contained in such regulations. It shall be the
responsibility of the Escrow Agent to timely and properly prepare, and deliver
the necessary documentation for signature by all necessary parties, and
thereafter to cause the appropriate filing to occur.
-10-
<PAGE>
(b) For the purposes of Section 468B of the Internal Revenue Code of 1986,
and Treas. Reg. Section 1.468B-2(k)(3), the "administrator" shall be the Escrow
Agent. The Escrow Agent shall timely and properly file all informational and
other tax returns necessary or advisable with respect to the Settlement Fund
(including without limitation the returns described in Treas. Reg. Section
1.468B-2(l)). Such returns (as well as the election described in paragraph
4.7(a)) shall be consistent with this paragraph 4.7 and in all events shall
reflect that all taxes (including any estimated taxes, interest or penalties) on
the income earned by the Settlement Fund shall be paid out of the Settlement
Fund as provided in paragraph 4.7(c) hereof.
(c) All (i) taxes (including any estimated taxes, interest or penalties)
arising with respect to the income earned by the Settlement Fund, ("Taxes") and
(ii) expenses and costs incurred in connection with the operation and
implementation of this paragraph 4.7 (including, without limitation, expenses of
tax attorneys and/or accountants and mailing and distribution costs and expenses
relating to filing (or failing to file) the returns described in this paragraph
4.7) ("Tax Expenses"), shall be paid out of the Settlement Fund; in all events
the Settling Defendant shall not have any liability or responsibility for the
Taxes, the Tax Expenses, or the filing of any tax returns or other documents
with the Internal Revenue Service or any other state or local taxing authority.
The Escrow Agent shall indemnify and hold the Settling Defendant harmless for
Taxes and Tax Expenses
-11-
<PAGE>
(including, without limitation, Taxes payable by reason of any such
indemnification). Further, Taxes and the Tax Expenses shall be treated as, and
considered to be, a cost of administration of the settlement and shall be timely
paid by the Escrow Agent out of the Settlement Fund without prior order from the
Court, and the Escrow Agent shall be obligated (notwithstanding anything herein
to the contrary) to withhold from distribution to Authorized Claimants any funds
necessary to pay such amounts (as well as any amounts that may be required to be
withheld under Treas. Reg. Section 1.468B-2(1)(2)); the Settling Defendant is
not responsible and shall have no liability therefor, or for any reporting
requirements that may relate thereto. The Settling Parties hereto agree to
cooperate with the Escrow Agent, each other, and their tax attorneys and
accountants to the extent reasonably necessary to carry out the provisions of
this paragraph 4.7.
C. Termination
4.8 In the event that the Amended Stipulation is not approved, or is
terminated, cancelled, or fails to become effective for any reason, the
Settlement Fund (including accrued interest), less expenses actually incurred or
due and owing in connection with the settlement provided for herein, shall be
returned to the Settling Defendant within five (5) business days.
5. Additional Settlement Consideration
5.1 The Settling Defendant agrees to (i) maintain in the normal course of
business all relevant documents during the
-12-
<PAGE>
pendency of this litigation and to produce same to Plaintiffs' Settlement
Counsel upon request and (ii) to be otherwise subject to discovery by plaintiffs
under the Federal Rules of Civil Procedure as if it were still a party to the
litigation;
5.2 The Settling Defendant shall undertake reasonable efforts to
voluntarily make its employees, directors and others subject to its control
(other than any of the Non-Settling Defendants) available at reasonable times
and places for interviews with Plaintiffs' Settlement Counsel and will continue
to be reasonably available to Plaintiffs' Settlement Counsel on an ongoing basis
throughout the pendency of this litigation.
5.3 The Settling Defendant agrees to undertake reasonable efforts to have
its employees, directors and others under its control (other than any of the
Non-Settling Defendants) voluntarily appear at the trial of this action if
requested by Plaintiffs' Settlement Counsel at the sole cost and expense of the
Settling Defendant;
5.4 The Settling Defendant agrees to undertake reasonable efforts to make
its directors, employees and others under its control (other than any of the
Non-Settling Defendants) voluntarily available for depositions at the request of
Plaintiffs' Settlement Counsel who shall bear the costs and expenses of the same
exclusive of any legal fees and expenses; and
5.5 The Settling Defendants' failure to (1) deliver any portion of the
Settlement Fund when due or (2) prior to the
-13-
<PAGE>
Effective Date provide the Additional Settlement Consideration as set forth
above in this paragraph 5 shall be, after 10 days written notice and an
opportunity to cure, deemed a material breach of this agreement and grounds for
its termination by plaintiffs. In the event of any such material breach and
failure to cure any judgment entered in favor of the Settling Defendant shall,
at the option of Plaintiffs Settlement Counsel, be vacated, and at the option of
Plaintiffs Settlement Counsel, this agreement shall be terminated in accordance
with paragraph 10.5. If the Settling Defendant fails to continue to provide the
Additional Settlement Consideration after the Effective Date, after 10 days
written notice and an opportunity to cure, it shall be deemed a breach of this
agreement. This Court shall retain jurisdiction over the Settling Defendant with
respect to any action plaintiffs may commence for monetary or equitable relief.
6. Notice Order and Settlement Hearing
6.1 Promptly after execution of the Amended Stipulation, but in no event
later than fifteen (15) days after the Amended Stipulation is signed (unless
such time is extended by the written agreement of Plaintiffs' Settlement Counsel
and counsel for the Settling Defendant), the Settling Parties shall submit the
Amended Stipulation together with its Exhibits to the Court and shall jointly
apply for entry of an order (the "Notice Order"), substantially in the form of
Exhibit "A" hereto, requesting the preliminary approval of the settlement set
forth in the Amended Stipulation, and approval for the mailing and
-14-
<PAGE>
publication of a Notice of Partial Settlement of Class Action which shall
include the general terms of the settlement set forth in the Amended
Stipulation, the proposed Plan of Allocation, the general terms of the Fee and
Expense Application (as defined in paragraph 9.1) and the date of the Settlement
Hearing (as defined below in paragraph 6.2).
6.2 The Settling Parties shall request that, after notice is given, the
Court hold a Hearing (the "Settlement Hearing"). At or after the Settlement
Hearing, Representative Plaintiffs' counsel also will request that the Court
approve the proposed Plan of Allocation and the Fee and Expense Application.
6.3 The Notice Order shall specifically include provisions that, among
other things, will:
(a) Certify the Settlement Class solely for purposes of this
settlement;
(b) Preliminarily approve the Amended Stipulation and the settlement
set forth herein as being fair, reasonable and adequate;
(c) Approve the form of Notice of Amended Partial Settlement of Class
Action (the "Notice") (substantially in the form of Exhibit "A-1" hereto) for
mailing to members of the Class and the form of summary notice ("Summary
Notice") (substantially in the form of Exhibit "A-2" hereto) for publication;
(d) Direct Plaintiffs' Settlement Counsel to mail or cause to be
mailed by first class mail the Notice to those Persons in the Class who can be
identified through reasonable
-15-
<PAGE>
effort, on or before the date to be specified in the Notice Order;
(e) Direct Plaintiffs' Settlement Counsel to cause the Summary Notice
to be published once in the national edition of The New York Times;
(f) Request that nominees who purchased Health Management common stock
during the Settlement Class Period either (i) send the Notice to all beneficial
owners of such Stock within ten (10) days after receipt of the Notice or (ii)
send a list of the names and addresses of such beneficial owners to Plaintiffs'
Settlement Counsel within ten (10) days of receipt of the Notice and, in the
event of the latter, direct Plaintiffs' Settlement Counsel to send the Notice to
all beneficial owners identified by the nominee within ten (10) days after
receipt of the list from the nominee;
(g) Provide that Class Members who wish to participate in the
settlement provided for in this Amended Stipulation shall complete and file a
Proof of Claim and Release form pursuant to the instructions contained therein
if they have not already done so;
(h) Find that the notice given pursuant to subparagraphs (d) through
(f), above, constitutes the best notice practicable under the circumstances,
including individual notice to all Persons in the Class who can be identified
upon reasonable effort, and constitutes valid, due and sufficient notice to all
Persons in the Class, complying fully with the requirements of
-16-
<PAGE>
Rule 23 of the Federal Rules of Civil Procedure, the Constitution of the United
States, and any other applicable law;
(i) Schedule and hold the Settlement Hearing to consider and determine
whether (i) the proposed settlement of the litigation against the Settling
Defendant as contained in the Amended Stipulation should be approved as fair,
reasonable and adequate; and (ii) the Judgment approving the settlement,
including the bar order, should be entered;
(j) Provide that at or after the Settlement Hearing, the Court shall
determine whether the proposed Plan of Allocation should be approved;
(k) Provide that at or after the Settlement Hearing, the Court shall
determine and enter an order regarding whether and in what amount attorneys'
fees and reimbursement of expenses should be awarded to the Representative
Plaintiffs' counsel;
(l) Provide that pending final determination of whether the settlement
contained in the Amended Stipulation should be approved, neither the
Representative Plaintiffs, nor any Settlement Class Member, either directly,
representatively, or in any other capacity shall commence or prosecute any
action or proceeding in any court or tribunal asserting any of the Released
Claims against the Released Person;
(m) Provide that any objections to (i) the proposed settlement
contained in the Amended Stipulation; (ii) entry of the Judgment approving the
settlement, including the bar order; (iii) the proposed Plan of Allocation; and
(iv) the
-17-
<PAGE>
Representative Plaintiffs' Counsel's Fee and Expense Application, shall be heard
and any papers submitted in support of said objections shall be received and
considered by the Court at the Settlement Hearing only if, on or before a date
to be specified in the Notice Order, Persons making objections shall file and
serve on all parties notice of their intention to appear (which shall set forth
each objection and the basis therefor) and copies of any papers in support of
their position as set forth in the Notice Order;
(n) Provide that the Settlement Hearing may, from time to time and
without further notice to the Class, be continued or adjourned by Order of the
Court.
7. Releases
7.1 Upon the Effective Date, the Representative Plaintiffs shall and each
of the Settlement Class Members shall be deemed to have, and by operation of the
Judgment shall have, fully, finally, and forever released, relinquished and
discharged all Released Claims against the Released Person, whether or not such
Settlement Class Member executes and delivers the Proof of Claim and Release.
7.2 Upon the Effective Date, the Released Person shall be deemed to have,
and by operation of the Judgment shall have, fully, finally, and forever
released, relinquished and discharged each and all of the Representative
Plaintiffs, the Settlement Class Members, and counsel to the Representative
Plaintiffs from all claims, arising out of, relating to, or in connection with
-18-
<PAGE>
the institution, prosecution, assertion or resolution of the litigation or the
Released Claims.
7.3 Only those Settlement Class Members filing valid and timely Proofs of
Claim and Release shall be entitled to participate in the settlement and receive
any distributions from the Settlement Fund. The Proofs of Claim and Release to
be executed by the Settlement Class Members shall release all Released Claims
against the Released Person. All members of the Settlement Class shall be bound
by the releases set forth therein whether or not they submit a valid and timely
Proof of Claim and Release.
8. Administration And Calculation Of Claims,
Final Awards And Supervision And Distribution
Of Settlement Fund
8.1 Plaintiffs' Settlement Counsel, or their authorized agents, acting on
behalf of the Settlement Class, and subject to the supervision, direction and
approval of the Court, shall administer and calculate the claims submitted by
Settlement Class Members and shall oversee distribution of that portion of the
Settlement Fund that is finally awarded by the Court to the Settlement Class
Members.
8.2 The Settlement Fund shall be applied as follows:
(i) To pay all unpaid costs and expenses reasonably and actually
incurred in connection with providing notice to the Settlement Class including:
locating Settlement Class members, soliciting Settlement Class claims, assisting
with the filing of claims, administering and distributing the Settlement Fund to
the
-19-
<PAGE>
Settlement Class, processing Proofs of Claim and Release, and paying escrow fees
and costs, if any;
(ii) To pay Taxes and Tax Expenses;
(iii) To pay counsel to Representative Plaintiffs' attorneys' fees,
expenses and costs, with interest thereon, if and to the extent allowed by the
Court; and
(iv) To distribute the balance of the Settlement Fund (the "Net
Settlement Fund") to Authorized Claimants as allowed by the Amended Stipulation,
the Plan of Allocation or the Court.
8.3 After the Effective Date and subject to such further approval and
further order(s) of the Court as may be required, the Net Settlement Fund shall
be distributed to Authorized Claimants, subject to and in accordance with the
following:
(a) Each person claiming to be an Authorized Claimant shall be
required to submit to the Claims Administrator a separate completed Proof of
Claim and Release, signed under penalty of perjury and supported by such
documents as specified in the Proof of Claim and Release and as are reasonably
available to the Authorized Claimant.
(b) Except as otherwise ordered by the Court, all Settlement Class
Members who fail to timely submit a valid Proof of Claim and Release within such
period, or such other period as may be ordered by the Court, or who have not
already done so, shall be forever barred from receiving any payments of money
pursuant to the Amended Stipulation and the settlement set forth herein, but
will in all other respects be subject to and bound by
-20-
<PAGE>
the provisions of the Amended Stipulation, the settlement and releases contained
herein, and the Judgment.
(c) The Net Settlement Fund shall be distributed to the Authorized
Claimants in accordance with and subject to the Plan of Allocation to be
described in the Notice mailed to Settlement Class Members. The proposed Plan of
Allocation shall not be a part of the Amended Stipulation.
8.4 The Settling Defendant shall not have any responsibility for, interest
in, or liability whatsoever with respect to the investment or distribution of
the Settlement Fund, the Plan of Allocation, the determination, administration
of taxes, or any losses incurred in connection therewith. No Person shall have
any claim of any kind against the Settling Defendant or its counsel with respect
to the matters set forth in this paragraph; and the Settlement Class Members and
Plaintiffs' Settlement Counsel release the Settling Defendant from any and all
liability and claims arising from or with respect to the investment or
distribution of the Settlement Fund.
8.5 No Person shall have any claim against Plaintiffs' Settlement Counsel,
the Claims Administrator, or any other agent designated by Plaintiffs'
Settlement Counsel or the Settling Defendant or its counsel, based on the
distributions made substantially in accordance with the Amended Stipulation and
the settlement contained herein, the Plan of Allocation or further orders of the
Court.
-21-
<PAGE>
8.6 It is understood and agreed by the Settling Parties that any
proposed Plan of Allocation of the Net Settlement Fund, including, without
limitation, any adjustments to an Authorized Claimant's claim set forth therein
is not a part of the Amended Stipulation and is to be considered by the Court
separately from the Court's consideration of the fairness, reasonableness and
adequacy of the settlement set forth in the Amended Stipulation, and any order
or proceedings relating to the Plan of Allocation shall not operate to terminate
or cancel the Amended Stipulation or affect the finality of the Court's Judgment
approving the Amended Stipulation and the settlement set forth herein, or any
other orders entered pursuant to the Amended Stipulation.
9. Representative Plaintiffs' Counsel's
Attorneys' Fees And Reimbursement Of Expenses
9.1 The Representative Plaintiffs or their counsel may submit an
application or applications (the "Fee and Expense Application") for
distributions to them from the Settlement Fund for: (i) an award of attorneys'
fees in an amount up to 33-1/3 percent of the Settlement Fund; plus (ii)
reimbursement of all expenses and costs, including the fees of any experts or
consultants incurred in connection with prosecuting the Litigation, plus
interest on such attorneys' fees, costs and expenses at the same rate and for
the same periods as earned by the Settlement Fund (until paid), as may be
awarded by the Court.
9.2 The attorneys' fees, expenses and costs, including the fees of experts
and consultants, as awarded by the Court (the "Fee and Expense Award"), shall be
transferred to Plaintiffs'
-22-
<PAGE>
Settlement Counsel from the Settlement Fund, within three (3) business days
after the Merger Effective Date. Plaintiffs' Settlement Counsel shall thereafter
allocate the Fee and Expense Award amongst Representative Plaintiffs' Counsel in
a manner in which Plaintiffs' Settlement Counsel in good faith believe reflects
the contributions of such counsel to the prosecution and settlement of the
Litigation.
9.3 The Settling Defendant shall have no responsibility for, and no
liability whatsoever with respect to, the allocation among Plaintiffs'
Settlement Counsel, and any other Person who may assert some claim thereto, of
any Fee and Expense Awards that the Court may make in this litigation.
9.4 The procedure for and the allowance or disallowance by the Court of any
applications by any of the counsel to the Representative Plaintiffs for
attorneys' fees, costs and expenses, including the fees of experts and
consultants, to be paid out of the Settlement Fund, are not part of the
settlement set forth in the Amended Stipulation, and are to be considered by the
Court separately from the Court's consideration of the fairness, reasonableness
and adequacy of the settlement set forth in the Amended Stipulation, and any
order or proceedings relating to the Fee and Expense Application, or any appeal
from any order relating thereto, shall not operate to terminate or cancel the
Amended Stipulation, or affect or delay the finality of the Judgment approving
the Amended Stipulation and the settlement of the Litigation set forth herein.
-23-
<PAGE>
10. Conditions Of Settlement, Effect Of
Disapproval, Cancellation Or Termination
10.1 The Effective Date of the Amended Stipulation shall be conditioned on
the occurrence of all of the following events:
(i) The Settling Defendant shall have timely transferred or caused to
be timely transferred all of the Settlement Fund to the Escrow Agent;
(ii) The Settling Defendant shall not be in breach of any of its
obligations set forth in Section 5 of this Agreement;
(iii) The Court has entered the Notice Order, as required by Section 6
of this Agreement;
(iv) The Court has entered the Judgment, or a judgment, including a
bar order, substantially in the form of Exhibit "B"; and
(v) The Judgment has become Final.
10.2 Upon the occurrence of all of the events referenced in paragraph 10.1
above, any and all remaining interest or right of the Settling Defendant to the
Settlement Fund shall be absolutely and forever extinguished.
10.3 Neither a modification nor reversal on appeal of any Plan of
Allocation or of any amount of attorneys' fees, costs, expenses and interest
awarded by the Court to any of the Representative Plaintiffs' counsel shall
constitute grounds for cancellation and termination of the Amended Stipulation.
10.4 If all of the conditions specified in paragraph 10.1 are not met, then
the Amended Stipulation may be terminated by Plaintiffs unless Plaintiffs'
Settlement Counsel and Settling Defendant's
-24-
<PAGE>
Counsel mutually agree in writing to proceed with the Amended Stipulation.
10.5 Unless otherwise ordered by the Court, in the event the Amended
Stipulation shall terminate, or be canceled, or shall not become effective for
any reason, within five (5) business days after written notification of such
event is sent by Settling Defendant's Counsel or Plaintiffs' Settlement Counsel
to the Escrow Agent, the Settlement Fund, less expenses and any costs which have
either been disbursed pursuant to paragraphs 4.5 or 4.6 hereto, shall be
refunded by the Escrow Agent pursuant to written instructions from the Settling
Defendant or its counsel. In such event the Settling Defendant shall be entitled
to any tax refund owing to the Settlement Fund. At the request of the Settling
Defendant or Settling Defendant's Counsel, the Escrow Agent or its designee
shall apply for any such refund and pay the proceeds to the Settling Defendant,
less the cost of obtaining the tax refund.
10.6 In the event that the Amended Stipulation is not approved by the Court
or the settlement set forth in the Amended Stipulation is terminated or fails to
become effective in accordance with its terms, the Settling Parties shall be
restored to their respective positions in the litigation as of the date of this
Agreement. In such event, the terms and provisions of the Amended Stipulation,
shall have no further force and effect with respect to the Settling Parties and
shall not be used in this litigation or in any other proceeding for any purpose,
and any
-25-
<PAGE>
Judgment or Order entered by the Court in accordance with the terms of the
Amended Stipulation shall be treated as vacated, nunc pro tunc. No order of the
Court or modification or reversal on appeal of any order of the Court concerning
the Plan of Allocation or the amount of any attorneys' fees, costs, expenses and
interest awarded by the Court to the Representative Plaintiffs or any of their
counsel shall constitute grounds for cancellation or termination of the Amended
Stipulation.
10.7 If the Effective Date does not occur, or if the Amended Stipulation is
terminated pursuant to its terms, neither the Representative Plaintiffs nor any
of their counsel shall have any obligation to repay any amounts actually and
properly disbursed. In addition, any expenses already incurred and properly
chargeable pursuant to paragraph 4.5 hereof at the time of such termination or
cancellation but which have not been paid, shall be paid by the Escrow Agent in
accordance with the terms of the Amended Stipulation prior to the balance being
refunded in accordance with paragraph 10.5 above.
10.8 If a case is commenced in respect to the Settling Defendant under
Title 11 of the United States Code (Bankruptcy), or a trustee, receiver or
conservator is appointed under any similar law, and in the event of the entry of
a final order of a court of competent jurisdiction determining the transfer of
the Settlement Fund, or any portion thereof, by or on behalf of the Settling
Defendant to be a preference, voidable transfer, fraudulent conveyance or
similar transaction, then the releases
-26-
<PAGE>
given and Judgment entered in favor of the Settling Defendant pursuant to this
Amended Stipulation shall be null and void.
11. Miscellaneous Provisions
11.1 The Settling Parties (a) acknowledge that it is their intent to
consummate this agreement; and (b) agree to cooperate to the extent necessary to
effectuate and implement all terms and conditions of the Amended Stipulation and
to exercise their best efforts to accomplish the foregoing terms and conditions
of the Amended Stipulation.
11.2 The Settling Defendant will warrant that, at the time of the payment
of the Settlement Fund provided for herein is made, the Settling Defendant is
not insolvent and that the payment will not render it insolvent.
11.3 The Settling Defendant agrees that the amount of the Settlement Fund,
as well as the other terms of the settlement provided for herein reflect a good
faith settlement of Representative Plaintiffs' and the Settlement Class' claims,
reached voluntarily after consultation with experienced legal counsel. Neither
the Amended Stipulation nor the settlement contained therein, nor any act
performed or document executed pursuant to or in furtherance of the Amended
Stipulation or the settlement: (i) is or may be deemed to be or may be used as
an admission of, or evidence of, the validity of any Released Claim, or of any
wrongdoing or liability of the Released Person, or (ii) is or may be deemed to
be or may be used as an admission of, or evidence of, any fault or omission of
any Released Person in any
-27-
<PAGE>
civil, criminal or administrative proceeding in any court, administrative agency
or other tribunal. The Released Person may file the Amended Stipulation and/or
the Judgment from this action in any other action that may be brought against
them in order to support a defense or counterclaim based on principles of res
judicata, collateral estoppel, release, good faith settlement, judgment bar or
reduction or any theory of claim preclusion or issue preclusion or similar
defense or counterclaim.
11.4 All of the Exhibits to the Amended Stipulation are material and
integral parts hereof and are fully incorporated herein by this reference.
11.5 The Amended Stipulation may be amended or modified only by a written
instrument signed by or on behalf of all Settling Parties or their
successors-in-interest.
11.6 The Amended Stipulation and the Exhibits attached hereto constitute
the entire agreement among the Settling Parties hereto and no representations,
warranties or inducements have been made to any party concerning the Amended
Stipulation or its Exhibits other than the representations, warranties and
covenants contained and memorialized in such documents. Except as otherwise
provided herein, each party shall bear its own costs.
11.7 Plaintiffs' Settlement Counsel, on behalf of the Settlement Class, are
expressly authorized by the Representative Plaintiffs to take all appropriate
action required or permitted to be taken by the Settlement Class pursuant to the
Amended Stipulation to effectuate its terms and also are expressly
-28-
<PAGE>
authorized to enter into any modifications or amendments to the Amended
Stipulation on behalf of the Settlement Class which they deem appropriate.
11.8 Each counsel or other Person executing the Amended Stipulation or any
of its Exhibits on behalf of any party hereto hereby warrants that such person
has the full authority to do so.
11.9 The Amended Stipulation may be executed in one or more counterparts.
All executed counterparts and each of them shall be deemed to be one and the
same instrument. Counsel for the parties to the Amended Stipulation shall
exchange among themselves original signed counterparts and a complete set of
original executed counterparts shall be filed with the Court.
11.10 The Amended Stipulation shall be binding upon, any entity which
acquires ownership or control of more than 51 percent of the outstanding stock
of Health Management by any means, including but not limited to Transworld and
inure to the benefit of, the successors and assigns of the Settling Parties
hereto.
11.11 The Court shall retain jurisdiction with respect to implementation
and enforcement of the terms of the Amended Stipulation, and the Settling
Parties submit to the jurisdiction of the Court for purposes of implementing and
enforcing the settlement embodied in the Amended Stipulation.
11.12 The Amended Stipulation and the Exhibits hereto shall be considered
to have been negotiated, executed and delivered, and to be wholly performed, in
the State of New York, and the
-29-
<PAGE>
rights and obligations of the parties to the Amended Stipulation shall be
construed and enforced in accordance with the laws of the State of New York
without giving effect to that State's choice of law principles.
IN WITNESS WHEREOF, the Settling Parties hereto have caused the Amended
Stipulation to be executed, by their duly authorized attorneys, as of the date
first written above.
McDERMOTT, WILL & EMERY
By: /s/ John D. Lovi
John D. Lovi (JL-5928)
1211 Avenue of the Americas
New York, NY 10020
(212) 547-5400
Attorneys for Defendant
Health Management, Inc.
KAPLAN, KILSHEIMER & FOX LLP
By: /s/ Frederic S. Fox
Frederic S. Fox (FF-9102)
685 Third Avenue
New York, NY 10017
(212) 687-1980
ZWERLING, SCHACHTER & ZWERLING, LLP
By: /s/ Jeffrey C. Zwerling
Jeffrey C. Zwerling (JZ-7924)
767 Third Avenue
New York, NY 10017
(212) 223-3900
Plaintiffs' Settlement Counsel
-30-
<PAGE>
TABLE OF CONTENTS
Page
----
I. THE LITIGATION......................................................... 1
II. PRETRIAL PROCEEDINGS AND DISCOVERY IN THE LITIGATION................... 2
III. SETTLING DEFENDANT'S STATEMENT AND DENIALS OF
WRONGDOING AND LIABILITY............................................... 2
IV. CLAIMS OF THE REPRESENTATIVE PLAINTIFFS AND BENEFITS OF SETTLEMENT..... 3
V. TERMS OF STIPULATION AND AGREEMENT OF SETTLEMENT....................... 4
1. Definitions........................................................ 4
2. Administration of The Settlement Fund.............................. 14
A. The Escrow Agent................................................ 14
B. Taxes........................................................... 15
C. Termination..................................................... 17
3. Rights With Respect To The Settlement Stock and Warrants
4. Consent To Jurisdiction Of Magistrate Judge........................ 18
5. Notice Order and Settlement Hearing................................ 18
6. Releases........................................................... 19
7. Administration And Calculation Of Claims, Final Awards And
Supervision And Distribution Of Settlement Fund.................... 20
8. Representative Plaintiffs' Counsel's Attorneys' Fees And
Reimbursement Of Expenses.......................................... 23
-i-
<PAGE>
9. Conditions Of Settlement, Effect Of Disapproval, Cancellation
Or Termination..................................................... 26
10. Miscellaneous Provisions........................................... 29
-ii-
<PAGE>
HEALTH MANAGEMENT, INC.
1996 STOCK OPTION PLAN
FOR NONEMPLOYEE DIRECTORS
1. Purpose. The purpose of the Health Management, Inc. 1996 Stock Option
Plan for Nonemployee Directors (the "Plan") is to encourage directors who are
not officers or full- time employees of Health Management, Inc. (the "Company")
or any of its subsidiaries ("Nonemployee Directors") to become stockholders in
the Company thereby giving them a stake in the growth and profitability of the
Company, to enable them to represent the viewpoint of the stockholders of the
Company more effectively and to encourage them to continue serving as directors.
2. Shares Reserved. There is hereby reserved for issuance under the Plan an
aggregate of 250,000 shares of Common Stock which may be newly-issued or
treasury shares. If there is a lapse, expiration, termination or cancellation of
any option granted under this Plan, all unissued shares subject to the option
may again be used for new options granted under this Plan.
3. Grant of Options. Each person who is or becomes a Nonemployee Director
of the Company on the date of the 1996 annual meeting of stockholders and who
has not previously been granted a stock option by the Company while serving as a
Nonemployee Director shall be granted an option to purchase 10,000 shares of
Common Stock on the first business day after the date of the annual meeting.
Each person who becomes a Nonemployee Director after the date of the 1996 annual
meeting
<PAGE>
shall be granted an option to purchase 10,000 shares of Common Stock on the
first business day after the date of the first annual meeting which occurs
during the director's period of service.
Each Nonemployee Director who was previously granted a stock option by the
Company while serving as a Nonemployee Director or who is granted an initial
option to purchase 10,000 shares of Common Stock hereunder shall be granted an
additional option to purchase 2,500 shares of Common Stock on the first business
day after the date of each succeeding annual meeting of stockholders on which
the Nonemployee Director is a member of the Board.
4. Option Price. The option price for each option granted to Nonemployee
Directors shall be 100% of the fair market value of the shares subject to option
on the date of option grant. The option price may be paid by check or by the
delivery of shares of Common Stock then owned by the participant (or
certification of such ownership).
5. Term; Termination of Service. The option term shall be ten years. All
options granted to Nonemployee Directors shall become exercisable in four equal
annual installments on the first four anniversaries of the date of option grant.
All options shall also become fully exercisable upon the death or retirement of
a director or upon a Change in Control of the Company (as defined in Section 8
of the Health Management, Inc. 1996 Stock Option Plan). Each option shall expire
three months after the date of optionee's termination of service for any
-2-
<PAGE>
reason other than death, retirement or Change of Control. In the event of death,
each option shall be exercisable for a period of two years after death. In the
event of retirement or termination following Change of Control, each option
shall be exercisable for the balance of its term. For these purposes, retirement
shall mean termination of service on the Board of Directors after the
Nonemployee Director has attained age 65 and completed at least five years of
service as a member of the Board or otherwise with the consent of the Board.
Except in the case of death, retirement or termination following Change of
Control, any option granted to a Nonemployee Director may be exercised during
the indicated period following termination only to the extent the option was
exercisable on the date of termination.
6. Nontransferability. Any option granted under this Plan shall not be
transferable other than by will or the laws of descent and distribution and
shall be exercisable during the Nonemployee Director's lifetime only by the
director or the director's guardian or legal representative. If a director dies
during the option period, any option granted to the director may be exercised by
his or her estate or the person to whom the option passes by will or the laws of
descent and distribution. Notwithstanding the foregoing, any option granted
hereunder may be transferred to the director's immediate family or trusts or
family partnerships for the benefit of such persons.
7. Administration. This Plan is intended to be self-governing and requires
no discretionary action by any administrative body with respect to any
transaction under the
-3-
<PAGE>
Plan. All grants of options to directors under the Plan shall be automatic and
nondiscretionary and shall be made strictly in accordance with the terms of the
Plan. To the extent, if any, that questions of administration arise, they shall
be resolved by the entire Board of Directors.
8. Adjustment Provisions.
(a) If the Company shall at any time change the number of issued shares of
Common Stock without new consideration to it (such as by stock dividends, stock
splits or similar transactions), the total number of shares reserved for
issuance under this Plan and the number of shares covered by each outstanding
option shall be adjusted so that the aggregate consideration payable to the
Company and the value of each option shall not be changed.
(b) In the case of any merger, consolidation or combination of the Company
with or into another corporation, other than a merger, consolidation or
combination in which the Company is the continuing corporation and which does
not result in the outstanding Common Stock being converted into or exchanged for
different securities, cash or other property, or any combination thereof (an
"Acquisition"), any Nonemployee Director to whom an option has been granted
under the Plan shall have the right during the remaining term of such option, to
receive upon exercise thereof the Acquisition Consideration (as defined below)
receivable upon such Acquisition by a holder of the number of shares of Common
Stock which might have been obtained upon exercise of
-4-
<PAGE>
such option or portion thereof, as the case may be, immediately prior to such
Acquisition. The term "Acquisition Consideration" shall mean the kind and amount
of shares of the surviving or new corporation, cash, securities, evidence of
indebtedness, other property or any combination thereof receivable in respect of
one share of Common Stock of the Company upon consummation of an Acquisition.
9. Registration and Legal Compliance. The grant of any option under the
Plan may also be subject to other provisions as counsel to the Company deems
appropriate including, without limitation, provisions to comply with federal and
state securities laws and stock exchange requirements. The Company shall not be
required to issue or deliver any certificate for Common Stock purchased upon the
exercise of any option granted under this Plan prior to the admission of such
shares to listing on any stock exchange on which Common Stock of the Company may
at that time be listed. If the Company shall be advised by its counsel that the
shares deliverable upon exercise of an option are required to be registered
under the Securities Act of 1933, as amended (the "Act") or any state securities
law or that delivery of such shares must be accompanied or preceded by a
prospectus meeting the requirements of such Act, the Company will use its best
efforts to effect such registration or provide such prospectus not later than a
reasonable time following each exercise of such option, but delivery of shares
by the Company
-5-
<PAGE>
may be deferred until such registration is effective or such prospectus is
available.
10. Amendment, Suspension and Termination of Plan. The Board of Directors
may suspend or terminate the Plan at any time and may amend it from time to time
in such respects as the Board of Directors may deem advisable in order that any
grants thereunder shall conform to or otherwise reflect any change in applicable
laws or regulations or to permit the Company or the Nonemployee Directors to
enjoy the benefits of any change in applicable laws or regulations; provided,
however, that no amendment shall, without stockholder approval, increase the
number of shares of Common Stock which may be issued under the Plan. No
amendment, suspension or termination shall impair the rights of Nonemployee
Directors under any outstanding options.
10. Stockholder Approval. This Plan was adopted by the Board of Directors
of the Company on September 16, 1996. The Plan shall be null and void if
stockholder approval is not obtained at the 1996 annual meeting of stockholders.
-6-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE OCTOBER
31, 1996 FINANCIAL STATEMENTS OF THE COMPANY AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-END> OCT-31-1996
<CASH> $1,314,294
<SECURITIES> 0
<RECEIVABLES> 44,517,660
<ALLOWANCES> 5,527,234
<INVENTORY> 7,132,389
<CURRENT-ASSETS> 51,787,151
<PP&E> 6,060,663
<DEPRECIATION> 2,413,632
<TOTAL-ASSETS> 89,390,017
<CURRENT-LIABILITIES> 58,462,425
<BONDS> 32,503,869
0
0
<COMMON> 279,848
<OTHER-SE> 26,894,241
<TOTAL-LIABILITY-AND-EQUITY> 89,390,017
<SALES> 0
<TOTAL-REVENUES> 80,262,962
<CGS> 0
<TOTAL-COSTS> 61,677,465
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3,428,929
<INTEREST-EXPENSE> 1,463,231
<INCOME-PRETAX> (10,067,573)
<INCOME-TAX> 121,957
<INCOME-CONTINUING> (10,189,530)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,189,530)
<EPS-PRIMARY> (1.09)
<EPS-DILUTED> (1.09)
</TABLE>
