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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
XX Annual Report Pursuant to Section 13 or 15(d) of the Securities and
- ------- Exchange Act of 1934 for the fiscal year ended April 30, 1996.
- ------- Transition report pursuant to Section 13 of 15(d) of the Securities
Exchange Act of 1934 for transition period from ______ to ______.
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 (I.R.S. Employer
incorporation or organization) Identification No.)
1371-A Abbott Court, Buffalo Grove, Illinois 60089
(Address of principal executive offices)
Registrant's telephone number, including area code: (847) 913-2700
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
Common Stock, $.03 par value per share
Indicate by check mark whether the Registrant has (1) filed all
reports required to be filed by Section 12 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) been subject to such
filing requirements for the past 90 days.
Yes X No
------- -------
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K.
As of July 23, 1996, the closing price of the Registrant's common
stock quoted on the NASDAQ National Market was $4.50. The aggregate market
value of the voting stock held by non-affiliates of the Registrant was
$33,138,437. As of July 23, 1996, there were 9,330,182 shares of common stock,
$.03 par value, outstanding. For purposes of the computation of the number of
shares of the Registrant's common stock held by non-affiliates, the shares of
common stock held by directors, officers and principal shareholders that filed
a Schedule 13G were deemed to be stock held by affiliates. As of July 23, 1996,
there were 1,966,085 shares of common stock outstanding held by such affiliates.
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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; competitive factors; the ability of the
Company adequately to defend or reach a settlement of outstanding litigations
and investigations involving the Company or its management; changes in labor,
equipment and capital costs; changes in regulations affecting the Company's
business; future acquisitions or strategic partnerships; 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.
PART I
Item 1. Business
Health Management, Inc. (formerly Homecare Management, Inc., which
together with its subsidiaries is referred to herein as the "Company) was
founded in 1986 as a home health care provider. In 1989, the Company made a
strategic shift and began to concentrate on the provision of post-surgical
pharmaceutical products and services to organ transplant patients. Currently,
the Company is focused on the provision of integrated pharmaceutical management
services to patients with chronic medical conditions which may be complicated
by a higher risk of patient non-compliance with the prescribed pharmaceutical
regimen, and to the health care professionals, pharmaceutical manufacturers and
third-party payors involved in the care of such patients. Services offered
include the distribution of prescription drugs, drug utilization review,
patient compliance monitoring, psychosocial support and assistance in insurance
coverage, verification and reimbursement. The Company has expanded its business
primarily through acquisitions to include the oncology, HIV/AIDS, infertility,
multiple sclerosis, schizophrenia and neurology markets.
Lifecare(TM) Program
Through its Lifecare(TM) Program, the Company provides integrated
pharmaceutical management programs servicing specific patient populations which
can benefit from a highly focused approach to health care delivery. These
services include patient education programs, the preparation, delivery and
administration of prescribed outpatient drug therapies, patient compliance
programs and data management. The Company provides continuity of care to
patients as they move from acute care hospital settings to home-based care
programs.
Pharmaceutical Therapies: The Company provides services to individuals
with chronic medical conditions who require at least one continual drug therapy
and may also require additional oral and/or
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injectable drug therapies. For example, organ transplant recipients require a
continual drug therapy consisting of immunosuppressants and other drugs in
order to prevent rejection of the transplanted organ. These individuals also
require other oral and, on occasion, injectable drug therapies to combat or
control other conditions arising from transplant surgery, the disease or
medical condition that led to the transplant or side effects of the
immunosuppressant drugs. The Company can supply the total pharmaceutical needs
for each of these patients.
Given the medical condition of these patients, timely and accurate
availability of medications and use that is consistently compliant with
physician instructions can mean the difference between a successful outcome and
a costly complication. The Company's licensed pharmacists and other health care
professionals are available via a toll-free number 24 hours per day, seven days
per week, for assistance or consultation. The Company's pharmacists prepare and
dispense all drug therapies in compliance with the regimen prescribed by each
patient's physician. Most often, orders are received by telephone at one of the
Company's 23 pharmacy locations (in 19 states) and are then shipped directly or
via common carrier to ensure prompt delivery to the patient. The Company's
pharmacists serve the needs of the Company's patients by maintaining the
appropriate pharmaceuticals and medical supplies in inventory, and by having
experience with each of the chronic medical conditions being treated.
Drug Monitoring and Screening: A substantial portion of the costs
associated with treating the chronically ill is attributable to
hospitalizations and medical procedures necessitated by noncompliance and
adverse drug interactions. In addition to the direct costs associated with
noncompliance, including hospital admissions or organ rejections, there are
indirect costs associated with noncompliance which result from work disability
and deteriorated health status. To monitor patient compliance, the Company
maintains a proprietary patient database that contains complete patient
profiles, including demographics, comprehensive listings of all medications
with dosages and directions for use, laboratory results and drug delivery
schedules with the aim of enhancing compliance. A Company pharmacist consults
with the patient's physician or primary health care professional to determine
the patient's plan of treatment, including drug therapy, support services and
delivery requirements. Throughout the course of treatment, a Company pharmacist
appropriately reviews each patient's drug profile, evaluates patient compliance
with the physician's orders and screens for potential interactions among new
drug orders or with existing medications in the patient's profile. In order to
further improve its ability to monitor each patient's compliance with the
prescribed drug therapies, the Company continues to develop its proprietary
patient database. Clinical information for over 22,000 patients is currently
maintained through the system. The Company makes information from this database
and from drug utilization review data available to referral sources,
third-party payors and pharmaceutical manufacturers, in compliance with patient
confidentiality requirements.
Psychosocial Support: The Company has designed a regimen of support
services to meet the psychological and social needs of its patients and their
families. These services complement each patient's medical care program and
assist both the patient and the patient's family in managing the difficult
psychological and social challenges presented by the patient's chronic and
sometimes lifelong conditions. Such patients and their families need reliable
and immediate information, counseling on a wide range of concerns regarding
treatment, and assistance with insurance and financial matters. The support
services offered by the Company include: (1) education seminars and videotapes
for the patients
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and others involved in their care; (2) creation, direction and/or sponsorship
of patient support groups that provide patients with support and information
exchange; (3) newsletters containing medical and non-medical information
relevant to patients and health care professionals; and (4) a national,
toll-free, 24 hours per day and seven days per week telephone hotline providing
counseling and educational information to patients. These services provide
patients with the knowledge and support to enable them to comply with their
prescribed care programs. To provide these psychosocial services, the Company
retains a staff of social workers who are experienced in counseling patients
with these disorders and who assist in the formation and maintenance of support
groups.
Reimbursement: The Company offers billing and reimbursement services
to each of its patients. The Company accepts the benefits from, and the
responsibility for, the submission of reimbursement claims, and receives
reimbursement payments directly from the patients' insurance carriers or other
third-party payors. The Company's reimbursement specialists review each
prospective patient's insurance plan to analyze whether the plan provides
adequate coverage and to determine the scope and extent of this coverage and
lifetime maximum limits. If the coverage is limited or inadequate for the
required treatments, the Company's staff advises patients on the availability
of alternative and supplemental coverage, including Medicare, Medicaid or other
financial support programs. Additionally, the Company negotiates on behalf of
individual patients with health insurers, HMOs and other health care
reimbursement entities to aid in optimizing and facilitating coverage for
required drug therapies and supportive services.
Services Provided to Pharmaceutical Companies
The Company has several current contracts with pharmaceutical
companies to provide a variety of services such as health care reimbursement
investigation and verification for both patients and professionals, compliance
monitoring and data management services related to specific drugs or clinical
programs. The Company believes that these services will enable it to establish,
maintain and expand its relationships with pharmaceutical companies and to
become an integral component of any comprehensive disease management programs
these drug companies may develop in the future.
Markets
Organ Transplantation. There are approximately 270 organ transplant
centers in the United States. Currently, these centers perform approximately
20,000 transplants a year, of which an estimated 60% are kidney transplants. At
December 31, 1995, there were approximately 80,000 transplant patients in the
United States and an additional 46,500 patients on the national organ waiting
list according to United Network for Organ Sharing (UNOS). The annual number of
new transplant recipients continues to grow due to increasing public awareness
and participation in organ donation programs and the success of organ
transplant surgeries. Improvements in surgical, pharmaceutical, organ
preservation and tissue typing technologies have allowed more patients to
receive organ transplants each year and further enhance graft survival and
increase the life expectancy of these patients. The Company believes that the
incidence of organ transplantation will continue to expand because it
represents a cost-effective alternative to other therapies and results in a
higher quality of life. For example, the average annual cost of drug therapies
for kidney transplant patients is approximately
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$10,000, as compared to the average annual cost of hemodialysis, the principal
alternative therapy, which is approximately $25,000.
Once a transplant has been performed, transplant patients must receive
multiple medications for the rest of their lives because of the possibility of
organ rejection. Additionally, these patients are susceptible to complications
as a result of the transplantation. Based on the Company's experience, each
transplant patient requires medications costing an average of approximately
$10,000 per year. The Company believes that the organ transplant recipient
population spends in excess of $800 million per year on drug therapies and that
this market has increased substantially each year as the number and type of
transplants increase each year.
The Company currently serves approximately 6,700 transplant
recipients. In order to promote growth in the referrals of transplant
recipients, the Company selectively targets hospital-based transplant programs
that direct the outpatient care of their transplant recipients to outside,
third-party service groups. The Company has increased the number of transplant
programs which it serves from 25 at the end of fiscal year 1991 to 100 at the
end of fiscal year 1996. Furthermore, the Company has established contractual
arrangements with health care providers and payors to provide services at
negotiated rates. The Company also intends to continue to expand its
Lifecare(TM) Program by continuing to work with medical professionals and
organizations, such as the United Network for Organ Sharing (UNOS), to educate
the public on the need for organ donations.
Schizophrenia. Schizophrenia is a psychotic disorder which is
estimated to affect approximately one percent of the U.S. population, or 2.5
million people. The Company's services include distribution and monitoring of
antipsychotic medications including, clozapine and risperidone. Monitoring
services include data administration, phlebotomy services and laboratory
analysis. Clozapine is prescribed primarily for schizophrenia patients who have
not responded to first-line antipsychotic medications. Because of potentially
severe side effects associated with clozapine, patients receiving clozapine
require close weekly monitoring of their white blood cell levels. The Company
presently provides clozapine to approximately 6,800 schizophrenia patients at
an average cost per patient of between $6,000 and $8,000 per year depending
upon the dosage. The Company's Clozaril(R) Patient Management Business contains
multiple components including weekly blood draws to test for a side effect
associated with the drug clozapine. The Company understands that the FDA may be
contemplating a reduction in blood draw monitoring, which, with no other
changes in the way that the Company participates in this market, could have a
substantial negative impact on the Company's earnings and cash flow.
The Company expects several new 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 treat
additional mental health patients. The Company has existing relationships with
over 3,000 psychiatrists, various payors and state mental health and Medicaid
programs. New sales and marketing initiatives are being developed to take
advantage of new pharmaceutical products in this market.
Infertility. Today, there are an estimated 4.5 million women of
child-bearing age in the United States with reduced fertility, although of
those only 100,000 utilize methods available to treat infertility.
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The primary treatments for infertility are ovulatory induction and artificial
reproductive technology, often coupled with the use of fertility drugs to
maximize success rates. The average number of monthly cycles of treatment per
year for women seeking such treatment is approximately 2.5. In 1995, the total
U.S. market for drugs used in infertility treatment was approximately $300
million, and the average cost of treatment per cycle was between $2,000 and
$2,500. Currently, the Company provides services to approximately 300 new
individuals per month through its infertility program.
Neurology. The Company has initiated several programs in this growing
market. Target markets include amyotrophic lateral sclerosis (Lou Gehrig's
disease), multiple sclerosis, Alzheimer's Disease and Parkinson's Disease.
There are 250,000 individuals diagnosed with multiple sclerosis ("MS") in the
United States, of which 125,000 exhibit a form of MS evidenced by moderate
limitations in mobility, referred to as relapsing/remitting MS. Ten thousand
new cases of MS are diagnosed annually. Primary drug therapies for MS patients
are Betaseron(R) and Avonex(R). These drug therapies and related services are
currently being provided through the MS Lifecare(TM) Program to approximately
400 patients.
Oncology. The American Cancer Society estimates that over one million
new cases of cancer will be diagnosed in 1996. One out of every four deaths in
the United States is related to this group of diseases. The rising incidence of
cancer combined with higher survival rates for cancer patients has led to a
corresponding increase in the overall market for cancer therapies. The National
Cancer Institute estimates that $104 billion is spent on cancer patients of
which $35 billion is in direct medical costs. Drug therapies provided by the
Company include: oral medications such as etoposide, methotrexate, melphalan
and cyclophosphamide; intravenous therapies such as 5-flourouracil and
Taxol(R); and injectables such as Neupogen(R) and Intron-A(R). The cost of these
therapies range between $1,500 and $6,000 per annum. The Company currently
provides services to approximately 3,500 oncology patients.
HIV and AIDS. The Centers for Disease Control and Prevention estimates
that 650,000 to 900,000 Americans are living with HIV, the virus that causes
AIDS, and it reports that as many as 300,000 people have died of AIDS. In 1995,
nearly 75,000 new cases of AIDS were reported. It is estimated that over $15.2
billion was spent on HIV/AIDS care and treatment in 1995. Available drug
protocols believed to slow the progression of the disease include first line
drugs like AZT and the new protease inhibitors (Invirase(R), Norvir(R) and
Crixivan(R)). In addition, drugs like pentamidine, intravenous and oral
antibiotics, parenteral nutrition, Neupogen(R) and Doxil(R) are used to treat
opportunistic infections and counteract adverse reactions from the disease and
its therapies respectively. The Company presently provides pharmaceutical
products to approximately 200 HIV/AIDS patients. The pharmaceutical cost of
treatment to these patients varies between $5,000 and $10,000 per patient per
year depending on their individual symptoms and the therapeutic regimens.
Strategy for Growth and Expansion.
While the Company has historically grown through acquisitions, the
Company's current focus is on revenue generation through internal growth. The
Company's growth strategy is focused on four principal strategic objectives.
First, it seeks to increase the number of patients participating in its
Lifecare(TM) Program by continuing to develop strong working relationships with
medical centers,
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healthcare professionals and managed care organizations. Second, it plans to
continue to expand its Lifecare(TM) Program to patient populations with other
chronic medical conditions characterized by costly, long-term drug therapies
which can be administered at home or in other alternate settings. Third, it
intends to continue to increase its client base by expanding relationships with
payor organizations which may require specialized disease management. Finally,
it will seek growth through relationships with pharmaceutical companies which
require focused clinical management, marketing, reimbursement or other services
for their new or existing products.
The Company participates in clinical trials, including Phase IV
studies, in order to gain early access to new products for disorders it
presently focuses upon and also to take early advantage of emerging disease
management opportunities. A major pharmaceutical company has contracted with
the Company to provide services in connection with a Phase IV study for
Alzheimer's patients. These services provided by the Company include drug
distribution, clinical patient management, data management and coordination
with the contract research organization.
Acquisitions
The Company has made several acquisitions over the last few years.
Effective March 31, 1995, HMI Illinois, Inc., a Delaware corporation
wholly-owned by the Company ("HMI Illinois"), acquired certain assets
(including equipment, information and records, goodwill, the rights to proceeds
of accounts receivable generated after March 31, 1995 and the assignment of
certain real estate leases), subject to certain liabilities, of the Clozaril(R)
Patient Management Business ("CPMB") from Caremark, Inc., a California
corporation ("Caremark"). CPMB provides ongoing drug therapies and related
support services primarily to schizophrenic patient populations throughout the
United States. Other assets of CPMB, including inventory and provider
contracts, were transferred pursuant to a transition agreement, dated as of
March 31, 1995, between HMI Illinois and Caremark over a six-month period
commencing on March 31, 1995. The aggregate purchase price for the assets
acquired by HMI Illinois was approximately $23,260,000, consisting of
approximately $20,060,000 in cash, a $200,000 escrow deposit, and a $3,000,000
five-year convertible subordinated note with an annual interest rate of 8%
payable semi-annually. The source of funds for the cash portion of the
acquisition was bank financing provided pursuant to a Credit Agreement, dated
as of March 31, 1995, among the Company, Home Care Management, Inc., HMI
Pennsylvania, Inc., HMI Illinois, the Guarantors named therein, and Lenders
named therein (including Chemical Bank, The Chase Manhattan Bank, N.A. and
European American Bank), and Chemical Bank as agent.
In February 1995, the Company acquired substantially all of the
assets, subject to certain liabilities, of Arcade Pharmacy of Maryland, Inc., a
Maryland corporation ("Arcade") and Kaufmann's of Kenilworth Pharmacy, Inc., a
Maryland Corporation ("Kaufmann's"). The businesses acquired provide ongoing
drug therapies and related products primarily to persons afflicted with chronic
illnesses or infertility problems and also operate as retail pharmacies. The
aggregate purchase price of the acquired assets of Arcade consisted of
$1,812,500 in cash and cash equivalents and 26,002 newly-issued shares of
Common Stock of the Company. The aggregate purchase price for the assets of
Kaufmann's consisted of 82,755 newly-issued shares of Common Stock of the
Company.
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In June 1994, the Company acquired substantially all of the assets,
subject to certain liabilities, of Pharmaceutical Marketing Alliance, Inc., a
South Carolina corporation ("PMA"). The business acquired provides drug
therapies and reimbursement services to persons afflicted with multiple
sclerosis. The aggregate purchase price for the acquired assets consisted of
$355,000 in cash and cash equivalents and 20,000 newly-issued shares of Common
Stock of the Company. In March of 1996, the Company closed the operations of
HMI PMA, Inc. and consolidated its marketing initiatives to its Buffalo Grove,
Illinois headquarters. (See Notes 2 and 5 to the Consolidated Financial
Statements.)
Effective April 1, 1994, the Company acquired substantially all of the
assets, subject to certain liabilities, of Murray Pharmacy, Too, Inc., a
Pennsylvania corporation ("Murray Too"). The business acquired provides ongoing
drug therapies and related support services primarily to oncology, HIV/AIDS and
infertility patient populations in Western Pennsylvania. Also effective April
1, 1994, through HMI Retail Corporation, a Delaware corporation, a newly-formed
Delaware corporation wholly-owned by the Company, the Company acquired
substantially all the assets subject to certain liabilities of Murray Pharmacy,
Inc., a Pennsylvania corporation ("Murray Pharmacy") that is primarily engaged
in the retail pharmacy business. The aggregate purchase price for the acquired
assets of Murray Too consisted of $7,500,000 in cash and cash equivalents and
368,885 newly-issued shares of common stock of the Company. The aggregate
purchase price for the acquired assets of Murray Pharmacy consisted of 248,175
newly issued shares of common stock of the Company.
Marketing and Sales
The Company's 15 full-time sales personnel market the Lifecare(TM)
Program throughout the United States through presentations at national meetings
of health care professionals, through advertisements in professional journals
and through direct sales calls to physicians and other health care
professionals. Most of the Lifecare(TM) Program patients are initially referred
to the Company by health care professionals from hospitals at which they are
being treated. Other patients contact the Company directly or are referred to
the Company by family members.
The Company also markets itself to medical organizations, health
plans, national and local organizations which advance the interests of patients
with specific chronic disorders and patient groups. Another important element
of the Company's marketing effort is to provide information to referral sources
concerning the nature and availability of the services which the Company
offers, as well as the quality and cost-effectiveness of its programs. This
effort involves development and implementation of training programs for the
Company's sales representatives and field personnel. The Company intends to
intensify its marketing activities directed toward managed health care
organizations, employers and other third party payors, as these groups have
become increasingly involved in health care decision-making.
In order to remain current with information and issues related to
chronic illness disease state management, the Company supports and participates
in various local, state and national professional organizations and societies.
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Competition
The markets in which the Company operates are highly competitive and
are experiencing substantial consolidation. Although the Company believes that
its package of services distinguishes it from its competition, there are
several other companies that deliver prescription and non-prescription
medications to its patient populations. These companies include regional and
national pharmacies such as Chronimed Inc., Coram Healthcare Corp., Caremark
Inc., Quantum Health Resource Inc. (recently acquired by Olsten Kimberly
Quality Care, Inc.), Stadtlander Drug Company, Inc. (recently acquired by
Counsel Corp.) and Systemed, Inc. (recently acquired by Medco Containment
Services Inc.).
The competition is based on a number of factors, including price,
quality of care and service, reputation within the medical community, the
ability to develop and maintain relationships with patients and referral
sources and geographical scope. Competition has also been affected by the
decisions of third-party payors and case managers to become more active in
monitoring and directing the care delivered to their beneficiaries.
Relationships with such groups as well as inclusion within a contracted network
has affected and will continue to affect the Company's ability to serve many of
its patients. Similarly, the ability of the Company and its competitors to
align themselves with other health care service providers may increase in
importance. Managed care organizations may attempt to align themselves with
providers who offer a broader range of services than those currently offered
directly by the Company.
There are relatively few barriers to entry into the local markets
which the Company serves. Local and regional companies are currently competing
in many of the markets presently served by the Company and others may do so in
the future. The Company also expects competitors to develop new strategic
relationships with providers, referral sources and payors, which could result
in a rapid and dramatic increase in competition. The introduction of new
services, the enhancement of current services and the development of strategic
relationships by the Company's competitors could cause a significant decline in
sales, the loss of market acceptance of the Company's services, intense price
competition, or render the Company's services noncompetitive. The Company
expects to continue to encounter increased competition in the future, which, if
not matched by Company initiatives, could limit its ability to maintain or
increase its market share. Such increased competition could have a material
adverse effect on the business, financial condition and results of operations
of the Company.
Reimbursement
The Company provides comprehensive reimbursement services to each of
its patients. These services include: (1) insurance coverage verification, (2)
patient counseling regarding co-payment and deductible obligations, lifetime
maximums, prior authorizations and other limitations to patient benefits, (3)
recommendations for alternative and supplemental coverage for uninsured and
underinsured patients, (4) claim submission, (5) disputed claim resolution and
(6) general patient account management.
The Company bills for drug therapies, medical equipment and supplies
and certain support services. The Company works closely with the patients it
serves to obtain reimbursement from
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governmental and private third-party payors. Generally, the Company contacts
the third-party payor before delivering drug therapies in order to determine
the patient's coverage and the percentage of costs that the payor will
reimburse. The Company's reimbursement specialists review such issues as
lifetime limits, preexisting condition clauses, the availability of special
state programs and other reimbursement- related issues. The Company will often
negotiate with the third-party payor on the patient's behalf to help ensure
that coverage is available. In most cases, third-party payors pay the Company
directly for the reimbursable amounts of its charges. Once reimbursement
processing for these patients has been established by a payor, claims
processing and reimbursement tend to become routine, subject to continued
patient eligibility and coverage limitations. Co-payments and deductibles
pursuant to Medicare, Medicaid and private insurance are billed directly to the
patient.
The Company accepts direct assignment of claims for reimbursement from
Medicare and Medicaid, as well as from other third-party payors on behalf of
its patients. This means that the Company processes the claim for its
customers, accepts payment at the prevailing allowable rates and incurs the
risks of delay or nonpayment if services are determined to be improperly billed
or not medically necessary. Additionally, because Medicare and Medicaid
reimburse the Company only for patients who meet certain eligibility
requirements, the Company must rely upon its own internal controls to ensure
that it renders services to individuals eligible for reimbursement. (See "Item
1. Business--Regulation-Medicare and Medicaid".)
The Company also provides case management services to qualified
patients. The Company conducts negotiations with insurance companies, HMOs and
other health care reimbursement administrators in order to optimize service
levels to patients and payors.
Private payors traditionally reimburse a higher amount for a given
service and provide a broader range of benefits than governmental payors,
although net revenue and gross profits from private payors have been decreased
by their continuing efforts to contain or reduce the costs of health care. An
increasing percentage of the Company's revenue has been derived in recent years
from agreements with HMOs, PPOs and other managed care providers. Although
these agreements often provide for negotiated reimbursement at reduced rates,
they may also result in lower bad debts, provide for faster payment terms and
provide opportunities to generate greater volumes than traditional referral
sources.
Due to the acquisition of the Clozaril(R) Patient Management Business
at the end of fiscal 1995, the Company expected that its percentage of revenues
attributable to Medicaid reimbursement would increase during 1996. The Company
does not, however, believe this trend will continue to a significant degree in
future years since the Company's revenues now reflect a full year reporting of
the CPMB revenue.
The following table sets forth the approximate percentages of the
Company's revenue attributable to the stated payors for the periods noted:
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Fiscal Year Ended April 30,
1996 1995 1994
---- ---- ----
Commercial Insurance and other private payors 56% 60% 65%
Medicaid and other state programs 35% 26 23
Medicare and other federal programs 9% 14 12
TOTAL 100% 100% 100%
A majority of the Company's revenue is derived from third-party
payors, including private insurers, managed care organizations such as HMO's
and PPO's and governmental payors such as Medicare and Medicaid. Similar to
other medical service providers, the Company experiences lengthy reimbursement
periods as a result of third-party payment procedures. Consequently, management
of accounts receivable through effective patient registration, billing,
collection and reimbursement procedures is critical to financial success and
continues to be a high priority for management. The Company has developed
substantial expertise in processing claims and carefully screens new cases to
determine whether adequate reimbursement will be available.
To date, the Company's arrangements with managed care organizations
have mostly been on a discounted fee-for-service basis; the Company does not
currently have any significant capitated arrangements. In addition, the Company
has experienced downward pricing pressures and an inability to participate in
certain managed care networks and the Company may continue to experience these
pressures in the future.
Regulation
The health care field is subject to extensive and dynamic regulatory
change. Changes in the law or new interpretations of existing laws can have a
dramatic effect on permissible activities, the relative costs associated with
doing business and the amount of reimbursement by government and third-party
payors, such as Medicare and Medicaid. The Company is also subject to fraud and
abuse and self- referral laws which regulate the Company's business
relationships with physicians, other health care providers, referral sources
and government payors.
The federal government and all states in which the Company currently
operates regulate various aspects of its business. In particular, the
operations of the Company's branch locations are subject to federal and state
laws covering the repackaging and dispensing of drugs and regulating interstate
motorcarrier transportation. The Company's operations also are subject to state
laws governing pharmacies, nursing services and certain types of home health
agency activities. Certain of the Company's employees are subject to state laws
and regulations governing the ethics and professional practice of pharmacy and
social work. The failure to obtain, renew or maintain any of the required
regulatory approvals or licenses could adversely affect the Company's business
and could prevent the location involved from offering products and services to
patients. Any loss by the Company of its various federal certifications, its
authorization to participate in the Medicare and Medicaid programs or its
licenses under the laws of any state or other governmental authority from which
a substantial portion of its revenues are derived would have a material adverse
effect on its business. The health care
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services industry will continue to be subject to intense regulation at the
federal and state levels, the scope and effect of which cannot be predicted.
The Company regularly monitors legislative developments and would seek to
restructure a business arrangement if it was determined that any of its
business relationships placed it in material noncompliance with any statute. No
assurance can be given that the activities of the Company will not be reviewed
and challenged or that government sponsored health care reform, if enacted,
will not result in a material adverse change to the Company.
Medicare and Medicaid. Medicare is a federally funded insurance
program which provides health insurance coverage for certain disabled persons,
including persons eligible for most organ transplants, and persons age 65 and
older. The Company is an authorized supplier eligible to receive direct
reimbursement for outpatient services under Medicare.
Under previous Medicare regulations, certain transplant medications
were reimbursed by Medicare for a period of one year following the transplant
surgery. After one year, the responsibility for paying for such medication
shifted to the patient's third-party insurance carrier or to the patient
directly. Legislation has been enacted by Congress to increase this Medicare
coverage period to three years. This is being implemented in stages which have
already commenced and which will be completed in 1997.
Medicaid is a cooperative state-federal program for medical assistance
to the poor. States have great flexibility in determining eligibility for such
assistance and those services to be paid for under their Medicaid programs.
Beyond mandatory services, states can provide for a wide range of medical
services, including services not otherwise covered under Medicare, such as
long-term nursing, respiratory therapy, home medical equipment and infusion
therapy.
From time to time the Company is, as are all providers under the
program, subject to government audits of its Medicare and Medicaid
reimbursement claims. The Company has been audited in the past and an audit by
a major client state has recently been commenced. Medicare and Medicaid have
set stringent requirements for reimbursement of the costs of drugs, services,
equipment and supplies and rental of medical equipment. The Company believes
its pricing policies are within the limits established by Medicare and
Medicaid, and the drugs, services, equipment and supplies it provides are
ordered by a physician and documented as being "medically necessary" and,
therefore, reimbursable. However, if a Medicare or Medicaid audit of the
Company's records were to reveal reimbursement for services which are deemed
not to be medically necessary or costs in excess of current guidelines, those
amounts may be disallowed. In that event, the Company would either repay
Medicare or Medicaid, as applicable, or offset the deficiencies against amounts
owed to the Company. In addition, if the Medicare or Medicaid authorities were
to determine that the Company had intentionally violated Medicare or Medicaid
regulations, it may institute criminal or civil proceedings, including
proceedings to revoke the Company's status as a certified Medicare or Medicaid
provider.
Certain states require that the Company have a pharmacy located within
or near the borders of such states in order to qualify for reimbursement for
Medicaid claims filed by their residents. The Company has established certain
of its branch pharmacy facilities to comply with such requirements, and
believes that it is presently positioned to qualify for such reimbursement in
nearly all states.
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Medicare and Health Care Reform. Congress takes action in almost every
legislative session to modify the Medicare program for the purpose of reducing
the amount otherwise payable by the program to health care providers in order
to achieve deficit reduction targets, among other reasons. Legislation or
regulations may be enacted in the future that may substantially reduce the
amount paid for the Company's services. Further, statutes or regulations may be
adopted which would impose additional requirements in order for the Company to
be eligible to participate in the federal and state payment programs. Such new
legislation or regulations may adversely affect the Company's business
operations. There is significant national concern today about the availability
and rising cost of health care in the United States. It is anticipated that new
federal and/or state legislation will be passed and regulations adopted to
attempt to provide broader and better health care and to manage and contain its
cost. The Company is unable to predict the content of any legislation or what,
if any, changes may occur in the method and rates of this Medicare and Medicaid
reimbursement or in other government regulations that may affect it business,
or, whether such changes, if made, will have a material adverse effect on its
financial position and results of operations.
Fraud and Abuse Generally. As a supplier of services under the
Medicare and Medicaid programs, the Company is subject to the Medicare and
state health care program anti-kickback laws, which prohibit any remuneration
in return for the referral of Medicare, Medicaid or other state health program
patients, or for purchasing, leasing, ordering or arranging for, or
recommending the purchase, lease or ordering any good, facility, service or
item for which payment may be made under the Medicare, Medicaid or other state
health programs. In addition, several states in which the Company operates have
laws that prohibit certain direct or indirect payments as well as fee-splitting
arrangements. Possible sanctions for violation of these restrictions include
loss of licensure, and civil and criminal penalties. Although the Company
believes its operations as currently conducted are in material compliance with
existing applicable laws, certain aspects of the Company's business operations
have not been subject to state or federal regulatory interpretation. There can
be no assurance that review of the Company's business by courts or regulatory
authorities will not result in determinations that could adversely affect the
operations of the Company or that the health care regulatory environment will
not change so as to restrict the Company's existing operations or its
expansion.
Stark Amendment and Similar State Laws. Congress adopted legislation
in 1989 (effective January 1992, the "Stark Law") that generally prohibits or
restricts a physician from referring a Medicare beneficiary's clinical
laboratory services to any entity with which such physician has a financial
relationship, and prohibits such entity from billing for or receiving
reimbursement on account of such referral, unless a specified exception is
available. Additional legislation expanding the Stark Law to other physician
and health care business relationships was passed as part of the Omnibus Budget
Reconciliation Act of 1993 ("Stark II"). Stark II extends the Stark Law to
referrals of services eligible for Medicare or Medicaid reimbursement and
expand the provisions prohibiting physicians from making referrals to entities
with which they have financial relationships to all "designated health
services," including, among others, durable medical equipment and supplies;
parenteral and enteral nutrients; home health services; and outpatient
prescription drugs. Stark II took effect January 1, 1995.
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Many state jurisdictions have adopted practitioner self-referral
legislation modeled after the Stark Law, some of which apply to referral
sources, third party payors and services not otherwise covered by the federal
law. For instance, New York law prohibits any licensed health practitioner,
including, among others, physicians, nurses and physician assistants, from
referring Medicaid, Medicare or private- insured patients for clinical
laboratory, x-ray or pharmacy services if the referral is made to an entity
with which such practitioner has a financial relationship.
Numerous exceptions are allowed under the Stark Law, as amended, and
state laws for financial arrangement that would otherwise trigger the referral
prohibition. These vary from jurisdiction to jurisdiction, but generally
include exceptions for certain relationships involving rental of office space
and equipment, employment relationships, personal service arrangements,
payments unrelated to designated services and certain isolated transactions as
long as all of the statutorily required terms for the applicable exception are
met.
Although the Company believes its operations as currently conducted
are in material compliance with existing applicable laws, certain aspects of
the Company's business operations have not been subject to state or federal
regulatory interpretation. There can be no assurance that review of the
Company's business by courts or regulatory authorities will not result in
determinations that could adversely affect the operations of the Company or
that the health care regulatory environment will not change so as to restrict
the Company's existing operations or its expansion.
State Licensure and Notice Requirements. The Company must obtain and
maintain licensure from the various states' boards of pharmacy where they do
business in order to provide pharmacy services. In addition, several states
have enacted statutes or regulations which apply to pharmacies that engage in
the interstate distribution of prescription drugs. Some such states generally
permit such out-of-state pharmacies to operate in accordance with the laws of
the state in which they are located, but require them to register with the
state's board of pharmacy, follow certain procedures and make certain
disclosures. Other such states generally require out-of-state pharmacies to
obtain a license in those states and comply with local laws, as in-state
pharmacies must do. The Company believes that it is in substantial compliance
with the registration, disclosure and licensing requirements of those
jurisdictions in which it conducts its business. If the Company were found to
be in noncompliance with applicable laws and regulations, the Company might be
subject to sanctions and its operations in such states might be impaired,
interrupted, discontinued or prohibited.
Accreditation
The Company's New York and Pittsburgh facilities have received
accreditation by the Joint Commission on Accreditation of Healthcare
Organizations and the Company is in the process of making application for
accreditation for other facilities.
Sources and Availability of Product Supply
Approximately 18% of the Company's revenues are currently attributable
to sales of Sandimmune (also known as cyclosporine) and Neoral, the primary
immunosuppressive drugs used in
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the United States and approximately 28% of the Company's revenues are currently
attributable to sales of Clozaril(R) (also known as clozapine), an
anti-psychotic medication used in the treatment of schizophrenia. The Company
currently purchases Sandimmune(R) and Clozaril(R), drugs manufactured solely by
Sandoz, A.G., principally through wholesalers. If the Company were unable to
purchase Sandimmune or Clozaril(R) for any reason, its results of operations
would be materially and adversely affected. The patents on Sandimmune and
Clozaril(R) held by Sandoz, A.G. expired in September 1995 and September 1994,
respectively. The Company has to date experienced no material impact on its
business from the expiration of the patents and cannot predict with certainty
the effect the expiration may have in the future. No generic products have been
introduced to date and, to the Company's knowledge, none appears to be
imminent.
The three gonadotropins used in the treatment of infertility,
Pergonal, Metrodin and Humagon, have been in short supply in the general market
throughout 1995 and 1996. To date, the Company's infertility business has not
been materially affected by this shortage, but there can be no assurances that
it will not be affected in the future.
The Company distributes branded pharmaceutical products produced by
single manufacturers. If any of these manufacturers were to experience
disruptions in product availability, the Company's ability to deliver products
to its customers could be adversely affected.
The Company purchases most of its pharmaceuticals from regional and
national drug wholesalers and to a lesser degree directly from pharmaceutical
manufacturers. Its sources have established credit limitations and a few of
such suppliers are seeking to reduce their credit limitations with the Company.
Although the Company has been able to maintain adequate product supply within
these 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's relationship with its patients and referral sources and on its
liquidity . One supplier, Bindley Western Industries, Inc., a former supplier
of the Company, has initiated litigation against the Company regarding past due
amounts. (See "Item 3. Legal Proceedings".)
Employees
As of July 17, 1996, the Company employed 466 persons, of whom 363
were full-time employees. Of the full-time and part-time employees, 35 are
executive, corporate and administrative personnel, 18 were sales and marketing
personnel, and 413 were patient services, reimbursement and operating
personnel. The Company also employs contracted social workers, registered
nurses and other personnel on a case by case basis to deliver services in
localized areas. The Company's management believes that relations with its
employees are good. The employees are not represented by any union.
SEE THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR
INFORMATION CONCERNING THE COMPANY'S REVENUES, OPERATING PROFIT AND
LOSS OR IDENTIFIABLE ASSETS.
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<PAGE>
Item 2. Properties
In April 1996, the Company moved its executive offices to its 19,367
square feet facility in Buffalo Grove, Illinois. During the fiscal year ended
April 30, 1996, the monthly rent for this facility was $20,577. The lease for
this facility expires in August 2000. Also located at the facility are a
pharmacy and a substantial reimbursement operation.
The Company's former executive offices were located in an 18,500
square foot leased facility located in Holbrook, New York. The Company
continues to pay $15,383 per month as rent for this facility and is actively
trying to sublet this property. The lease for this facility expires in April
2000.
The Company also operates a substantial pharmacy, warehouse and
reimbursement operation in a 18,400 square feet leased facility located in
Ronkonkoma, New York. During the fiscal year ended April 30, 1996, the monthly
rent for this facility was $11,700. The lease for this facility expires in
April 2000.
The Company has two facilities in Pittsburgh, Pennsylvania, under two
separate leases each expiring March 31, 1997, covering an aggregate of 12,000
square feet of pharmacy, reimbursement and office space. The Company pays
$8,867 per month for these facilities. These leases were entered into in
connection with the acquisition of assets of Murray Pharmacy, Inc. and Murray
Pharmacy Too, Inc.
In addition to the above described properties, the Company has leased
the following regional offices:
Location Square Feet
- -------- -----------
Birmingham, Alabama 2,425
Torrance, California 4,070
Jackson County, Florida 2,600
Atlanta, Georgia 1,190
Kailua, Hawaii 1,475
Portland, Maine 2,300
Baltimore, Maryland 5,170
Townson, Maryland 3,042
Milford, Massachusetts 2,500
Livonia, Michigan 2,680
Arden Hills, Minnesota 4,170
Florissant, Missouri 2,000
Portland, Oregon 1,766
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<PAGE>
Location Square Feet
- -------- -----------
Wayne, Pennsylvania 2,240
Dallas, Texas 3,000
Columbia, South Carolina 3,850
Salt Lake City, Utah 1,400
Bothell, Washington 3,500
The aggregate monthly rents for the leased facilities listed above is
approximately $108,669.95.
Item 3. Legal Proceedings
The Company and certain of its past and current directors and officers
have been named as defendants in eleven class action securities fraud lawsuits
filed in the United States District Court for the Eastern District of New York.
These lawsuits will be consolidated shortly into one action entitled In re
Health Management, Inc. Securities Litigation, Master File No. 96 Civ. 0889
(ADS). These 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 disclosure
statements. These actions purport to represent a class of persons who purchased
the Company's common stock during a period ending February 27, 1996, the date
the Company announced that it would have to restate certain of its financial
statements. These actions seek unspecified monetary damages reflecting the
decline in the trading price of the Company's stock that allegedly resulted
from the Company's February 1996 announcements. Pursuant to the proposed Order
of Consolidation, the Company will not be required to answer or otherwise move
in the action until thirty days after it is served with an amended consolidated
complaint, which has not yet been served on the Company.
Certain of the Company's current and former officers and directors,
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
corporate filings, as more fully alleged in the above-described class action
lawsuit. The consolidated action seeks unspecified monetary damages on behalf
of the Company as well as declaratory and injunctive relief. Pursuant to the
Stipulation and Order of Consolidation, the Company is not required to answer
or otherwise move in the consolidated action until sixty days after it is
served with an amended consolidated complaint, which has not yet been served on
the Company.
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.
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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 corporate 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 indefinitely adjourned.
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 fully cooperating 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 alleges claims for breach of contract and accounts stated
arising out of a dispute regarding payment for certain goods. The action seeks
damages in the amount of $3,187,157.35 together with interest, costs and
disbursements. To date, the Company has answered the complaint, complied with
its automatic disclosure obligations and has continued regularly to reduce the
outstanding amount payable to approximately $2.1 million as of July 29, 1996.
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.
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<PAGE>
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.
The outcomes of certain lawsuits and the investigation are uncertain
and the ultimate outcomes could have a material adverse effect on the Company
and the viability of the Company going forward.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
The Registrant's Common Stock began trading on a limited basis in the
over-the-counter market on March 1, 1988, and was approved for quotation on
NASDAQ National Market effective May 24, 1990 under the trading symbol HMIS.
The Registrant's Common Stock has been included on the NASDAQ National Market
since June 5, 1992.
The following table sets forth the range of high and low bid prices of
the Common Stock for the periods indicated, as quoted by NASDAQ National
Market. These quotations represent prices between dealers in securities, do not
include retail mark-ups, mark-downs or commissions, and do not necessarily
represent actual transactions.
Fiscal Year Ended April 30, 1995: High Low
---- ---
First Quarter........................... 16 7/8 13
Second Quarter.......................... 17 1/4 12 1/2
Third Quarter........................... 20 15 1/8
Fourth Quarter.......................... 25 3/8 17 1/8
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Fiscal Year Ended April 30, 1996:
First Quarter............................ 18 3/8 10 5/8
Second Quarter........................... 14 3/4 11
Third Quarter............................ 14 1/2 10 3/4
Fourth Quarter........................... 12 3/8 2 3/8
As of July 23, 1996, there were 9,330,182 shares of Common Stock
outstanding. As of July 23, 1996, there were approximately 377 holders of
record of the Common Stock.
Holders of Common Stock are entitled to dividends when, as and if
declared by the Board of Directors out of funds legally available therefor. The
Registrant has never paid cash dividends on its Common Stock and management
intends, for the immediate future, to retain any earnings for the operation and
expansion of the Company's business. Any future determination regarding the
payment of dividends will depend upon results of operations, capital
requirements, the financial condition of the Company, restrictions in the
Company's loan documents, including without limitation, the Credit Agreement
and documents related thereto, and such other factors that the Board of
Directors of the Company may consider. If the Company issues preferred stock,
the Board of Directors will have the right to establish the rights,
designations and preferences thereof, including preferences as to payment of
dividends and liquidation proceeds.
Item 6. Selected Financial Data
The following selected financial information for the five fiscal years
ended April 30, 1996 is derived from the financial statements of the Company,
which statements were audited by BDO Seidman, LLP, independent certified public
accountants, whose report with respect to the more recent statements covering
the three fiscal years ended April 30, 1996 appears elsewhere in this Report.
This information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and notes thereto included elsewhere in this Annual
Report. As previously reported, the selected financial data for the year ended
April 30, 1995 has been restated. (See the Company's Amended Annual Report on
Form 10-K/A-3 for the year ended April 30, 1995 as filed with the Securities &
Exchange Commission on April 30, 1996.)
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HEALTH MANAGEMENT, INC.
(Consolidated)
Years Ended April 30,
-------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Income Statement Data (Amounts in Thousands except per share data)
Revenues $158,860 $88,456 $44,250 $26,393 $14,594
Gross profit(1) 38,636 24,748 15,606 9,023 4,822
Selling 4,650 2,898 1,847 1,324 642
G&A 30,639 18,627 7,209 4,163 2,224
Unusual Charges(1) 14,000 -- -- -- --
Total Operating expenses 49,289 21,525 9,056 5,661 3,019
Operating income (loss) (10,653) 3,223 6,549 3,362 1,803
Income (Loss) Before
Income Taxes (13,332) 3,287 6,752 3,488 1,831
Net income (loss) (10,927) 1,946 4,001 2,207 1,066
Net income (loss) per share
-primary (1.16) $0.21 $.54 $.38 $.23
-fully diluted (1.16) $0.21 $.53 .35 .22
Weighted Average number
of shares of Common
Stock outstanding
-primary 9,415 9,408 7,383 5,884 4,599
-fully diluted 9,415 9,421 7,594 6,309 5,076
(1) Unusual charges reflected in fiscal year 1996 include an $8.4 million
increase in allowance for doubtful accounts, $3.6 million for costs
associated with organizational consolidations and other cost reduction
programs and $2.0 million for professional fees recorded as operating
expenses. Additionally, a $2.8 million charge for the write-off of
medical device inventory was recorded to cost of sales thereby
reducing gross profit.
As of April 30,
-----------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Balance Sheet Data (Amounts in Thousands except per share data)
Total Assets $95,916 $88,690 $52,418 $17,158 $6,842
Working Capital 2,492 12,486 32,333 8,946 2,158
Long term debt, including
current maturities 32,752 26,326 256 521 730
Shareholders' equity 37,363 48,171 44,096 9,755 2,372
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Item 7. Management's Discussion and Analysis of Financial Conditions and
Results of Operations
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
this Item 7. ("Management's Discussion and Analysis of Financial Condition and
Results of Operations"). Others are presented elsewhere in this Annual Report.
RECENT EVENTS AND OTHER CONSIDERATIONS.
General. On February 27, 1996, the Company announced that in the
course of an internal investigation it had discovered certain accounting
irregularities, that it intended to write down accounts receivable and
inventory assets, that the Company may have to restate its financial statements
and that it had accepted the resignation of Clifford E. Hotte as Chairman of
the Board and Chief Executive Officer. Thereafter, on April 30, 1996 the
Company filed with the Securities and Exchange Commission restated financial
statements for the fiscal year ended April 30, 1995 and for each of the fiscal
quarters contained therein, including the fiscal quarters ending July 31, 1994,
October 31, 1994 and January 31, 1995; and for the fiscal quarters ended July
31, 1995 and October 31, 1995. As a result of having to restate the foregoing
reports, the Company filed its Quarterly Report on Form 10-Q for the fiscal
quarter ended January 31, 1996 on April 30, 1996.
Special Charges; Consolidation. The Company incurred a substantial
operating loss during the fiscal year 1996. This was a result of an unusual
charge recorded in the third quarter of 1996 which consisted of the following:
(1) an $8.4 million increase in the allowance for doubtful accounts; (2) a $3.6
million charge for costs associated with organizational consolidations and
other cost reduction programs; (3) a $2.8 million charge for the write-off of
medical device inventory; and (4) a $2.0 million charge for professional fees
associated with the Company's restatement and the litigation as described
above. Absent these charges, the Company would have recorded pretax profits of
approximately $3.5 million for fiscal 1996.
The Company has consolidated its corporate and administrative office
from Holbrook, New York and transferred those functions to its offices in
Buffalo Grove, Illinois. This consolidation, along with other cost reduction
efforts, is expected to yield approximately $1.5 million in annual cost
reductions.
Significant Litigation. The Company has been named as a defendant in
several class action lawsuits 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. (See "Item 3. Legal Proceedings".)
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
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<PAGE>
February 1996. James 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 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. There can be no
assurances that the Company will be successful in its efforts to attract and
retain such personnel.
Financial Condition. As a result of the restatements and special
charges, the Company recorded significant changes to its balance sheet
including reductions of the Company's working capital, retained earnings and
shareholder's equity. The Company is presently in default under its Credit
Agreement with Chase Manhattan Bank, N.A., as agent and lender. Accordingly,
all long term debt has been reclassified as a current liability on the
Company's balance sheet. The Company has executed a Forbearance Agreement dated
July 26, 1996 with its lenders which provides that, subject to certain
conditions, the lenders agree not to exercise their rights and remedies under
the Credit Agreement until November 15, 1996. Also, following the restatements,
the conversion feature of the $3 million Convertible Subordinated Note held by
Caremark, Inc. was triggered; however, Caremark, Inc. has not indicated an
intent to exercise its right to convert the note. The conversion of such note
is related to the price of the Company's Common Stock at the time of
conversion. In pursuance of additional financing to remedy the default
condition under the Credit Agreement, the Company has recently engaged National
Westminster Bank Plc to act as its financial advisor to explore a variety of
strategic and financial alternatives. The Company may engage in a public or
private offering of securities or a merger of the Company; however, there can
be no assurances that such an offering or merger will be consummated.
Furthermore, the successful consummation of such financing could result in
substantial dilution of the Company's existing shares and could involve a
higher cost of financing.
Goodwill and Other Long-Lived Assets. At April 30, 1996 the Company
had goodwill of approximately $34.0 million, or 35% of its assets. A
significant portion of the Company's goodwill relates to the Clorazil Patient
Management Business ("CPMB"). 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 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. (See Notes 1 and 2 to the Consolidated Financial Statements,
"Goodwill and Other Long-Lived Assets" and "Acquisitions" for information on
additions to goodwill in connection with the acquisition of the CPMB.)
Independent Auditors Opinion. The independent auditor's opinion on the
fiscal year-end financial statements contain a modification relating to the
Company's ability to continue as a going concern. This modification refers to
the default condition on the Company's Credit Agreement and the
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<PAGE>
litigation described in Item 3 of this Report ("Legal Proceedings"). The
Company intends to vigorously pursue financing alternatives during the period
of the Forbearance Agreement executed with its lenders. There can be no
assurances that any such financing will be successfully consummated.
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 lead to 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. (See "Item 1. Business--Strategy
for Growth and Expansion".) 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 concentrating on
improved cash collections through an emphasis on enhancing systems capabilities
within the Company. While management believes the commencement of this strategy
has improved and will continue to improve the Company's operations and
financial performance, no assurances can be given as to its ultimate success.
Internal Controls. The Company has initiated several actions to
improve its internal controls and to enhance its financial reporting and
analytical capabilities. These controls include the implementation on July 1,
1996 of a perpetual inventory system which management believes should provide
both better controls over the management of on-hand inventory and automate the
recording of cost of sales at time of product shipment.
Effective June 1, 1996, the Company transitioned to a single general
ledger system which is intended to improve control over the financial
consolidation process and increase the Company's ability to analyze its
business operations. The finance function of the Company has been consolidated
in its Buffalo Grove, Illinois facility as of July 1996. Management believes
that this consolidation will allow for improved communications, focused
management and better ability closely to monitor the financial operations of
the Company. The Company also plans to consolidate from the several accounts
receivable systems currently in place to a single system during the fiscal year
1997. With this new accounts receivable system, the Company expects to improve
the efficiency and effectiveness of its cash collection activities. There can
be no assurances of the impact of these internal controls on the Company or
whether they will be effective.
Potential Dilution. The Company may issue additional shares of the
Company's capital stock in order to obtain financing, in satisfaction of other
current or future liabilities of or litigation involving the Company, upon
conversion of the Convertible Subordinated Note held by Caremark, Inc. or
otherwise. These additional issuances could result in substantial dilution of
the Company's existing shares.
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<PAGE>
RESULTS OF OPERATIONS
Year ended April 30, 1996 as compared to year ended April 30, 1995
The Company's revenues were $158,859,638 for the year ended April 30,
1996, an increase of $70,403,610 or 79.6% over revenues of $88,456,028 for the
year ended April 30, 1995. Revenues generated from the Company's acquisition of
the Clozaril(R) Patient Management Business accounted for approximately
$47.0 million of the increase levels. Additional growth of approximately $6.0
million was generated from the acquisition of the Arcade and Kaufmann businesses
which were acquired on February 1, 1995 and therefore were reflected in the
Company's financial statements for the entire fiscal year of 1996 as compared to
only the fourth quarter of fiscal 1995. The remainder of the increase was
derived from internal growth through the expansion of the Lifecare(TM) Program
and new referral sources.
Gross profit margins were 24.3% for the year ended April 30, 1996, a
3.7 percentage-point decline from 28.0% for the preceding fiscal year. The
decrease in the gross profit rate was primarily attributable to the following
factors: (i) a $2.8 million charge was recorded in the third quarter of fiscal
1996 for the write-down of medical device inventory; (ii) a reduction in
reimbursement rates that occurs when the drug benefit is carved out of the
major medical benefit and is converted into a drug card; (iii) an increase in
the number of transplant patients requiring immunosuppressant drug benefits
which are covered under Medicare. Without the $2.8 million charge, the gross
profit margin would have been 26.1%. These decreases in gross profit margins
were partially offset by the Clozaril(R) Patient Management Business which
currently generates a higher gross profit margin.
Operating expenses for the fiscal year ended April 30, 1996 were
$49,288,793, an increase of $27,736,604 or 129.0%, over operating expenses of
$21,525,189 for the year ended April 30, 1995. $14.0 million of this increase
was attributable to an unusual charge recorded during the third quarter of
fiscal year 1996; $8.4 million of the charge was attributable to an increase in
the provision for doubtful accounts; $3.6 million of the charge was
attributable to costs associated with organizational consolidations and other
cost reduction programs; and $2.0 million was associated with professional fees
arising out of the Company's restatements, litigation, etc. Operating expenses
year over year were also affected by the inclusion for the full year in fiscal
1996 of the Clozaril(R) Patient Management Business versus one month in fiscal
year 1995 and by the inclusion for the full year in 1996 of the Arcade and
Kaufmann business versus three months in the fiscal year 1995. The Clozaril(R)
Patient Management Business was acquired on April 1, 1995. The full year
inclusion of the Clozaril(R) Patient Management Business resulted in an increase
in operating expenses of approximately $9.9 million.
The operating loss for the fiscal year 1996 was $10,652,683, a
$13,875,501 change from the operating profit of $3,222,818 for the fiscal year
1995. The unusual charge recorded in the third quarter of fiscal year 1996
resulted in the operating loss for the year. Absent the unusual charge, income
from operations would have been approximately $6.2 million.
Net interest expense for the year ended April 30, 1996 was $2,679,504
compared to net interest income of $63,761 in fiscal year 1995. The increase in
interest expense was driven by the outstanding
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term loans associated with the CPMB acquisition and the borrowings under the
Company's line of credit.
Income before income taxes for the year ended April 30, 1996 was a
($13,332,187) loss compared to a $3,286,579 income level for the year ended
April 30, 1995. The unusual charge of approximately $16.8 million recorded in
the third quarter resulted in the loss for fiscal 1996. Without this unusual
charge, income before income taxes for the year ended April 30, 1996 would have
been approximately $3.5 million.
The net loss for the year was ($10,927,341) compared to a net income
of $1,946,188 for the fiscal year ended April 30, 1995. The net loss for the
1996 fiscal year was a direct result of the unusual charge recorded in the
third quarter of this fiscal year. Also contributing to the net loss was a
valuation allowance of approximately $2.5 million to reserve for a deferred tax
asset. Given the circumstances that led to the modification of the independent
auditor's opinion, a valuation allowance was established for the deferred tax
asset. Absent the unusual charge, the valuation allowance of the deferred tax
asset and using a 41% effective tax rate, net income would have been
approximately $2.1 million.
Primary and fully diluted earnings per common share for the year ended
April 30, 1996 were both a ($1.16) loss compared to earnings of $0.21 for the
year ended April 30, 1995. The weighted average number of shares outstanding
used in the calculation of primarily and fully diluted earnings per share were
9,414,500 for the year ended April 30, 1996 and 9,408,300 and 9,420,816,
respectively, for the year ended April 30, 1995.
Year ended April 30, 1995 as compared to year ended April 30, 1994
The financial information for the 1995 fiscal year has been restated.
(See the Company's Amended Annual Report on Form 10-K/A-3 for the year ended
April 30, 1995 as filed with the Securities & Exchange Commission on April 30,
1996.)
The Company's revenues were $88,456,028 for the year ended April 30,
1995, an increase of $44,206,512 or 99.9%, over revenues of $44,249,516 for the
year ended April 30, 1994. Revenues generated through the Company's
acquisitions accounted for approximately $26,500,000 of the additional
revenues, of which approximately $20,000,000 is attributable to the acquisition
of the Murray Group. The balance of the increase in revenues was derived from
internal growth resulting from the expansion of the Lifecare Program into new
disease states and new referral sources.
Gross profit margins were 28.0% for the year ended April 30, 1995, as
compared to 35.3% for the year ended April 30, 1994. The decrease in gross
profit margin was primarily attributable to the following factors: (i)
increases in Betaseron revenues, which presently yields lower margins than have
been historically achieved by the Company for other disease management
programs; (ii) reductions in the fixed fee reimbursement rates from certain
state Medicaid programs (principally New York, which lowered its reimbursement
by 10%); (iii) an increase in the number of transplant patients receiving
immunosuppressant drug benefits under Medicare due to the extension of Medicare
coverage beyond
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the historical one year post-transplant period; (iv) and reduction of
reimbursement rates that occur when the drug benefit is carved out from the
major medical benefit and is switched to a drug card.
Operating expenses as a percentage of revenues increased to 24.3% for
the year ended April 30, 1995, as compared to 20.5% for the year ended April
30, 1994. Total operating expenses were $21,525,189 for the year ended April
30, 1995, an increase of $12,468,650 over the year ended April 30, 1994. The
increase was a result of the three factors. First, during the last quarter, the
Company consummated three acquisitions which resulted in approximately $550,000
of expenses which were one time charges to operations. Second, expenses to
increase the provision for doubtful accounts were approximately $5,800,000
higher for the fiscal year 1995. Third, to support the Company's continued
expansion, selling and marketing efforts, expenses increased by approximately
$1,051,000, while payroll related expense increased by approximately
$2,600,000, with the balance of the increase being general operating expenses.
Approximately $300,000 of the increased payroll expenses and approximately
$300,000 of the increased general operating expenses were attributable to
increased staffing, system development and training in the area of
reimbursement as the Company directed greater effort toward decreasing its days
sales outstanding.
Operating income was $3,222,818 for the year ended April 30, 1995, a
decrease of $3,326,699 or 50.8%, compared to operating income of $6,549,517 for
the year ended April 30, 1994. This decrease is a result of decreases in gross
profit margins and increases in the provisions for doubtful accounts in spite of
significant revenue growth.
Income before taxes was $3,286,579 for the year ended April 30, 1995,
a decrease of $3,465,064 or 51.3%, compared to $6,751,643 for the year ended
April 30, 1994.
The effective tax rate for the year ended April 30, 1995 was 40.8%, an
increase of 0.1 percentage points, compared to 40.7% for the fiscal year ended
April 30, 1994.
Net income was $1,946,188 for the year ended April 30, 1995, compared
to $4,000,958 for the year ended April 30, 1994, a decrease of $2,054,770 or
51.4%.
Primary and fully diluted earnings per common share for the year ended
April 30, 1995 were $.21 and $.21, compared to $.54 and $.53 for the year ended
April 30, 1994. The weighted average number of shares outstanding used in the
calculation of fully diluted earnings per share was 9,420,816 and 7,593,465 for
the years ended April 30, 1995 and April 30, 1994, respectively.
INFLATION
Inflation did not have a material effect on the Company's results
during the periods discussed.
LIQUIDITY AND CAPITAL RESOURCES
The net decrease of $1,282,517 in the Company's cash and cash
equivalents to $3,280,195 at April 30, 1996 was attributable to cash used in
operating activities. Decreases in cash flow from the
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operating loss and non-cash adjustments along with increases in allowances for
doubtful accounts were offset by increases in accounts payable and decreases in
inventories.
Working capital at April 30, 1996 was $2,491,619, a decrease from a
$12,486,358 level at April 30, 1995. Current assets increased $7,223,579 due to
increases in accounts receivable of $5,117,390 due to a full year inclusion of
accounts receivable from the CPMB business offset by the increased provision on
the allowance for doubtful accounts, and increases in the tax refund receivable
of $6,210,030 created by the 1996 operating loss. Current assets were decreased
by lowered inventory levels of $986,841 and decreased tax deferred assets of
$1,326,300. Current liabilities increased $17,218,318, principally due to an
increase in accounts payable of $8,384,845 driven by the full year inclusion of
the CPMB business. Total accrued expenses increased $3,222,712 due to the
unusual charge. Current maturities of long-term debt increased to $28,746,028
due to increased borrowings under the Company's line of credit.
To facilitate the acquisition of the Clozaril(R) Patient Management
business, the Company borrowed $21,000,000 in the form of term loans and
delivered a $3,000,000 Convertible Subordinated Note to Caremark, Inc.. As of
April 30, 1996, $18,000,000 was outstanding on the term loan and approximately
$10,300,000 was outstanding on the Company's line of credit.
The Company is in default under the Credit Agreement. The Company has
executed a Forbearance Agreement with its lenders in which the lenders agree,
under certain conditions, not to exercise their rights under the original loan
through the period ended November 15, 1996. The Company needs to obtain
additional financing to resolve its default condition.
The Company has engaged National Westminster Bank Plc to act as its
financial advisor to explore a variety of strategic and financial alternatives.
The Company may engage in a public or private offering of securities or a
merger of the Company; however, there can be no assurance that such an offering
or merger will be consummated. Furthermore, the successful consummation of such
financing could result in substantial dilution of the Company's existing
shares.
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. Additionally, one supplier, Bindley Western
Industries, Inc., has initiated legal action against the Company regarding past
amounts due. (See "Item 3. Legal Proceedings".) Although the Company has been
able to maintain adequate product supply within the credit limitations, there
can be no assurances it will continue to do so in the future. Such an inability
would have a material adverse impact on the Company if alternative sources of
product supply were inadequate.
If the Company is unsuccessful in obtaining financing, in reaching a
successful outcome in its current litigation or in continuing good relations
with its suppliers, it may have to consider protection under the federal
bankruptcy laws.
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Stock-Based Compensation
The Financial Accounting Standards Board Issued Statement of Financial
Accounting Standard Number 123 "Accounting for Stock-Based Compensation" ("SFAS
Number 123") in October 1995. Statement Number 123 encourages companies to
recognize expense for stock options and other stock- based employee
compensation plans based on their fair value at the date of grant. As permitted
by Statement Number 123, the Company plans to continue to apply its current
accounting policy under APB Opinion Number 25 "Accounting for Stock Issued to
Employees" in 1996 and future years, and will provide disclosure of the pro
forma impact on the net income and earnings per share as if the fair value-
based method had been applied.
Item 8. Financial Statements
The Financial Statements for the fiscal year ended April 30, 1996 may
be found beginning on page F-1 hereof.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
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PART III
Item 10. Directors and Executive Officers of Registrant
The following table contains information concerning the Company's
directors and executive officers. It is expected that these persons will serve
in these offices until the next annual meeting or until their respective
successors are elected and qualified.
Name Age Position
Andre C. Dimitriadis........... 55 Chairman of the Board and Director
W. James Nicol. ............... 52 Chief Executive Officer, President and
Director
James R. Mieszala.............. 45 Chief Operating Officer
Paul S. Jurewicz............... 40 Chief Financial Officer, Executive Vice
President, Treasurer and Assistant
Secretary
Dr. Timothy Triche............. 52 Director
D. Mark Weinberg............... 43 Director and Secretary
Clifford E. Hotte.............. 49 Director
Virginia Belloise (1).......... 49 Director
(1) Virginia Belloise is the wife of Clifford E. Hotte.
W. James Nicol
Mr. Nicol was appointed to the offices of Chief Executive Officer and
President of the Company effective as of May 1, 1996. He was also named to the
Board of Directors of the Company in May 1996. Prior to joining the Company,
Mr. Nicol was a Senior Vice President and the Chief Financial Officer of
Careline, Inc. from May 1995 to October 1995. From 1990 until 1995, Mr. Nicol
served as Senior Vice President and Chief Financial Officer of Quantum Health
Resources, Inc. For 17 years prior to joining Quantum, Mr. Nicol held various
senior-level management positions with Comprehensive Care Corporation and was
its Chief Executive Officer and President from 1989-1990. Mr. Nicol also serves
on Comprehensive's Board of Directors and is a member of such board's audit and
compensation committees. Mr. Nicol graduated from Bradley University in 1969
with a B.S. in Political Science and Economics.
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<PAGE>
James R. Mieszala
Mr. Mieszala has been the Chief Operating Officer of the Company since
May 1996. Mr. Mieszala served as Acting President of the Company from February
to May 1996. Prior to joining the Company, from 1986 to 1996, Mr. Mieszala held
a variety of positions with Caremark, Inc., including Vice President and
General Manager of the Specialized Pharmaceutical Services Division. From 1978
to 1986, Mr. Mieszala was employed by Baxter International in various
management roles. Mr. Mieszala graduated from the University of Illinois in
1973 and has an M.B.A. from the Keller Graduate School of Management.
Paul S. Jurewicz
Mr. Jurewicz has been the Chief Financial Officer of the Company since
December 1995, an Executive Vice President of the Company since April 1996, the
Treasurer of the Company since February 1996 and the Assistant Secretary of the
Company since March 1996. Prior to joining the Company, Mr. Jurewicz held
several positions with Caremark, Inc. From September 1995 until he joined the
Company, Mr. Jurewicz was Chief Financial Officer at Caremark's North Suburban
Clinic, a multi-specialty physician clinic. From 1994 to September 1995, Mr.
Jurewicz served as Vice President of Shared Services of Caremark and from 1991
to 1994 he served as Vice President/Controller of Caremark, Inc.'s Health Care
Services Division. From 1980 to 1991, Mr. Jurewicz was employed by Baxter
International. Mr. Jurewicz earned a B.S. in accounting from DePaul University,
an M.B.A. from the Lake Forest Graduate School of Management and a C.P.A.
certificate in the State of Illinois.
Andre C. Dimitriadis
Mr. Dimitriadis was elected as a Director of the Company in October
1993. He became the Chairman of the Board of Directors of the Company in May
1996. Mr. Dimitriadis is the Chief Executive Officer and Chairman of LTC
Properties, Inc., Oxnard, California, a real estate investment trust that
invests in long-term care and other health care related facilities. Prior to
founding LTC Properties, Mr. Dimitriadis was Executive Vice President and Chief
Financial Officer of Beverly Enterprises, an owner/operator of nursing
facilities, from October 1989 to May 1992. From December 1984 to July 1989 he
was Executive Vice President, Chief Financial Officer and a Director of
American Medical, Inc., an owner/operator of hospitals. Mr. Dimitriadis is a
Director of Magellan Health Services, Inc. and Assisted Living Concepts, Inc.
Mr. Dimitriadis earned a B.S. in electrical engineering from Robert College,
Istanbul, Turkey, an M.S. in computer science from Princeton University and an
M.B.A. and Ph.D. from New York University.
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<PAGE>
D. Mark Weinberg
Mr. Weinberg was elected as a Director of the Company in November 1995
and was appointed to the office of Secretary in March 1996. Mr. Weinberg is the
President of the WellPoint Group's Unicare Businesses. Prior to that position,
from 1987 to 1996, Mr. Weinberg held a variety of executive management
positions with WellPoint Health Networks Inc. and its affiliates, including
Executive Vice President. Mr. Weinberg received a B.S. in 1975 from the
University of Missouri at Columbia.
Dr. Timothy Triche
Dr. Triche was elected as a Director of the Company in November 1995.
Dr. Triche is the Chairman of the Board and the Chief Executive Officer of
OncorMed, Inc., a clinical services company. He is also Pathologist-in-Chief
for the Children's Hospital of Los Angeles in Los Angeles, California and
Professor of Pathology and Pediatrics at, and Vice Chairman of, the University
of Southern California School of Medicine, Los Angeles, California. Prior to
June 1988, he was Chief of the Ultrastructural Laboratory of the Division of
Pathology at the National Cancer Institute of the National Institutes of Health
in Bethesda, Maryland. Dr. Triche is also a director of Oncor, Inc. Dr. Triche
received an A.B. from Cornell University in 1966 and in 1971 received both a
Ph.D. in Cell Biology and a M.D. from Tulane University.
Clifford E. Hotte
Clifford E. Hotte, Ph.D. who has been a director of the Company since
1988, founded Home Care Management, Inc., the Company's first operating
subsidiary in 1985. Clifford E. Hotte served as the Chief Executive Officer and
President of the Company from February 1988 to February 1996 and as Chairman of
the Company's Board of Directors from 1988 to February 1996. Clifford E. Hotte
is married to Ms. Belloise, who is also a director of the Company.
Virginia Belloise
Ms. Belloise has been a Director of the Company since March 1988. She
also served as Personnel and Human Services Director for the Company from 1988
until 1993 and was the Company's Secretary from March 1988 until December 1993
and for a period of time in 1996. Ms. Belloise previously held the position of
Clinical Laboratory Manager at Deepdale General Hospital, Little Neck, New
York, from March 1985 to October 1987. Ms. Belloise is married to Mr. Hotte,
who is also a director of the Company.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's executive officers and directors, and persons who own
more than ten percent of a registered class of the Company's equity securities,
to file reports of ownership and changes in ownership with the Securities and
Exchange Commission and the Nasdaq Stock Market. Executive officers, directors
and greater than
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ten percent stockholders are required by SEC regulation to furnish the Company
with copies of all Section 16(a) forms they may file.
Based solely on a review of the copies of such forms furnished to the
Company, or written representations from certain persons that no Forms 5 were
required, the Company believes that during the fiscal year ended April 30,
1996, no directors, officers or beneficial owners of more than 10% of the
Company's common stock, other than as described below, failed to file, on a
timely basis, reports required by Section 16(a) of the Securities Exchange Act
of 1934. Mr. Dimitriadis failed timely to file one Form 4 reflecting three
transactions and Messrs. Weinberg, Mieszala and Jurewicz and Dr. Triche each
failed timely to file one Form 3.
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Item 11. Executive Compensation
SUMMARY COMPENSATION TABLE
The following table summarizes compensation for services to the
Company in all capacities awarded to, earned by or paid to (i) the Company's
chief executive officers, (ii) the three other most highly compensated
executive officers who earned in excess of $100,000 in salary and bonus and
(iii) the one other executive officer of the Company who served during the
fiscal year ended April 30, 1996 but who no longer held such office as of April
30, 1996 and who earned in excess of $100,000 in salary and bonus, for each of
the three fiscal years ended April 30, 1996 (the "Named Executive Officers").
No other executive officer of the Company met the definition of "highly
compensated" within the meaning of the Securities and Exchange Commission's
executive compensation disclosure rules.
<TABLE>
<CAPTION>
Long Term Compensation
----------------------
Annual Compensation Awards Payouts
------------------- ------ -------
Options/ All Other
Name and Principal Position Year Salary(1) Bonus(1) SARs Compensation(2)
- --------------------------- ---- --------- -------- ---- ---------------
<S> <C> <C> <C> <C> <C>
W. James Nicol, Chief Executive
Officer and President(3)
Committee of the Office of the
Chief Executive Officer(4)
Clifford E. Hotte, Chief 1996 $277,408 -0- -0- $3,712
Executive Officer and 1995 $220,000 -0- 150,000 $2,382
President(5) 1994 $200,000 $100,000 -0- $2,171
Robert Clifton, Vice President 1996 $165,264 -0- -0- $3,059
1995 $149,600 -0- -0- $1,723
1994 $136,000 $ 47,600 75,000 $1,689
Lloyd N. Myers, Vice President 1996 $200,000 -0- -0- $1,933
Sales and Marketing(6) 1995 $200,000 -0- -0- $2,310
Michael R. Norman, Chief 1996 $151,000 -0- -0- $2,324
Operating Officer and 1995 $ 95,077 -0- 60,000 $ 409
Executive Vice President (7)
Drew Bergman, Chief Financial 1996 $187,500 -0- -0- $2,841
Officer and Chief Development 1995 $100,000 -0- 12,500 $ 489
Officer(8) 1994 $ 85,000 $ 21,250 62,500 $ 467
</TABLE>
(1) During the 1994 fiscal year, Clifford E. Hotte entered into a new
three-year employment agreement under which he was to receive a base salary
of $200,000 during its first year and a 10% increase commencing in fiscal
1995. The Board of Directors increased Clifford E. Hotte's salary to
$250,000 effective May 1, 1995. Messrs. Clifton and Bergman entered into
two-year employment agreements commencing May 1, 1993, under which they
receive base salaries of $136,000 and $85,000 respectively, and included a
10% increase for the period after April 30, 1994. The Board of Directors
increased Mr. Bergman's salary to 200,000 effective May 1, 1995. During
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<PAGE>
the 1994 fiscal year, Mr. Norman entered into a two-year employment
agreement, which expired on May 9, 1996 and was not renewed by the Company,
under which Mr. Norman received a base salary of $100,000 per year for the
first year of the term of the agreement which was increased by the Board of
Directors to $150,000 in the second year. During the 1996 fiscal year,
Messrs. Mieszala and Jurewicz entered into employment agreements, each with
terms in excess of two years, under which they receive $210,000 and $160,000,
respectively, during the first year of the terms of the agreements and 10%
increase commencing after May 1, 1997. The compensation of Messrs. Mieszala
and Jurewicz was reset by the Company's Executive Committee on April 3, 1993
to $225,000 and $180,000, respectively. Subsequent to the 1996 fiscal year,
Mr. Nicol entered into a three-year employment agreement under which he is to
receive $300,000 during the first year of the term of the agreement plus a
bonus to be determined in the future. (See "Item 11. Executive
Compensation--Employment Agreements and
Termination of Employment and Change in Control Arrangements".)
(2) All compensation listed herein consists of matching payments made
pursuant to the Company's 401(k) Plan.
(3) Mr. Nicol is presently the Chief Executive Officer and the President of
the Company. He was appointed to those positions by the Board of Directors
to replace the Committee of the Office of the Chief Executive Officer as of
May 1, 1996. Mr. Nicol received no compensation from the Company in the
fiscal year ended April 30, 1996. (See "Item 11. Executive
Compensation--Employment Agreements and Termination of Employment and Change
in Control Arrangements".)
(4) The Board of Directors of the Company established a committee on an
interim basis to fill the role of the office of the Chief Executive Officer
of the Company on February 26, 1996 to replace Clifford E. Hotte until a
permanent Chief Executive Officer was installed. The interim committee was
comprised of Messrs. Dimitriadis and Weinberg and Dr. Triche, all members of
the Board of Directors. The compensation authorized for, but not yet
received by, such persons consists of stock options, stock appreciation
rights and cash in consideration of their expanded roles as directors and
their participation in the interim Office of the Chief Executive Officer.
(See, "Item 11. Executive Compensation--Compensation of Directors".)
(5) Clifford E. Hotte was the Chief Executive Officer and the President of
the Company until February 26, 1996, when he was replaced as Chief Executive
Officer by a Committee of the office of the Chief Executive Officer and as
President by Mr. Mieszala, who served as Acting President of the Company
until May 1, 1996. Clifford E. Hotte's employment with the Company was
terminated on March 20, 1996 and he received compensation for a 30-day
period following such termination as well as $32,215 for accrued vacation
and personal days.
(6) Mr. Myers was appointed to the office of Vice President - Sales and
Marketing of the Company in May 1995. His employment with the Company ended
on July 9, 1996.
(7) Mr. Norman joined the Company in May 1994 and was Chief Operating
Officer of the Company until May 9, 1996. He was replaced as Chief Operating
Officer by Mr. Mieszala.
(8) Mr. Bergman served as Chief Financial Officer of the Company until
December 18, 1995 when he was appointed to the position of Chief Development
Officer and replaced as Chief Financial Officer by Mr. Jurewicz. Mr. Bergman
resigned as Chief Development Officer in February 1996 and received
compensation from the Company until March 29, 1996 as well as $2,885 for
accrued vacation days.
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OPTION GRANTS IN LAST YEAR
No options were granted to the Named Executive Officers during the
fiscal year ended April 30, 1996.
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<PAGE>
AGGREGATED OPTION EXERCISES DURING THE FISCAL YEAR ENDED APRIL 30, 1996 AND
FISCAL YEAR END OPTION VALUES
No options were exercised during the fiscal year ended April 30, 1996
by the Named Executive Officers.
The following table provides information relating to the number and
value of options held by such Executive Officers at fiscal year-end:
<TABLE>
<CAPTION>
Number of Unexercised Options/ SARs at Value of Unexercised in the Money
Fiscal Options/SARs at
Name Year End (#) Fiscal Year End ($)
---- ------------- -------------------
Exercisable/Unexercisable Exercisable/Unexercisable(1)
<S> <C> <C>
W. James Nicol 0/0 0/0
Committee of the Office of the Chief
Executive Officer(2) n/a(2) n/a(2)
Clifford E. Hotte 0/0(3) 0/0
Robert Clifton 45,000/30,000 n/a(4)
Lloyd N. Myers 0/0 0/0
Michael R. Norman 12,000/48,000 n/a(5)
Drew Bergman(6) 6,667/0(6) $5,834/0(6)
</TABLE>
(1) The value of unexercised options is determined by multiplying the number
of options held by the difference in the fair market value of the Common
Stock underlying the options at April 30, 1996 (as determined by the
closing sales price as reported by the NASDAQ National Market, which was
$5.375 per share) and the exercise price of the options granted.
(2) The Board of Directors of the Company established a committee on an
interim basis to fill the role of the office of the Chief Executive
Officer of the Company on February 26, 1996 to replace Clifford E. Hotte
until a permanent Chief Executive Officer was installed. The interim
committee was comprised of Messrs. Dimitriadis and Weinberg and Dr.
Triche, all members of the Board of Directors. The compensation authorized
for, but not yet received by, such persons consists of stock options,
stock appreciation rights and cash in consideration of their expanded
roles as directors and their participation in the interim Office of the
Chief Executive Officer. (See "Item 11. Executive
Compensation--Compensation of Directors".)
(3) Clifford E. Hotte's options to purchase 150,000 shares of Common Stock
terminated 30 days after his termination with the Company on March 20,
1996.
(4) Mr. Clifton's options have an exercise price of $10.375 per share; the
closing price per share of the Company's Common Stock on April 30, 1996
was $5.375 and, therefore, none of his options were in-the-money.
(5) Mr. Norman's options had an exercise price of $14.00 per share; the
closing price per share of the Company's Common Stock on April 30, 1996
was $5.375 and therefore none of his options were in-the-money.
(6) Mr. Bergman's options to purchase 62,500 shares of Common Stock terminated
30 days after the termination of his employment with the Company in
February 1996. Options to purchase 6,667 shares which were issued on June
4, 1992 pursuant to the Company's 1989 Stock Option Plan with an exercise
price of $4.50 per share terminated three months after the termination of
Mr. Bergman's employment with the Company, but were still in effect on
April 30, 1996.
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<PAGE>
LONG-TERM INCENTIVE PLAN AWARDS TABLE.
There were no long-term incentive plans awards granted by the Company
during the fiscal year ended April 30, 1996.
DEFINED BENEFIT OR ACTUARIAL PLAN DISCLOSURE.
The Company has no defined benefit or actuarial plans.
COMPENSATION OF DIRECTORS
Generally, outside directors receive $2,000 per year as a retainer, $1,000
per meeting of the Board of Directors attended in person, $1,000 per
Chairmanship of a committee of the Board of Directors, and $500 per meeting of
a committee of the Board of Directors attended in person. No such payments have
been made by the Company since August 31, 1995. Each outside director receives
an option to purchase 4,000 shares at the time of his or her election. Each
non-employee director also receives an annual automatic grant of options to
purchase 1,000 shares of common stock for each completed year of service. All
of the options mentioned above vest over a six month period. In addition, the
Board of Directors voted to award Mr. Dimitriadis 1,000 shares of Common Stock
on February 8, 1995 and on that same date awarded him 4,000 shares of Common
Stock to be issued to him on the fifth anniversary of the date that he was
elected to the Board of Directors, provided that if he resigns, retires or dies
prior to such date he is entitled only to the pro rata amount of such shares;
however, if he is terminated as a director, other than for cause, or if there
is a merger, consolidation, acquisition of substantially all of the assets,
reorganization or liquidation of the Company, he will be entitled to the full
4,000 shares. These awards of shares were in place of awards of 5,000 shares to
be made over a five-year period at the time of Mr. Dimitriadis' election to the
Board of Directors.
On April 3, 1996, the Executive Committee passed resolutions compensating
Messrs. Dimitriadis and Weinberg and Dr. Triche for their efforts serving on
various committees of the Board, including the Special Committee, and for
serving as the Office of the Chief Executive Officer. Each of Mr. Weinberg and
Dr. Triche were awarded options to purchase 7,500 shares of Company's Common
Stock, stock appreciation rights with respect to 22,500 shares of Common Stock
and $30,000 in cash, and Mr. Dimitriadis was awarded options to purchase 10,000
shares of Company's Common Stock, stock appreciation rights with respect to
30,000 shares of Common Stock and $40,000 in cash. The vesting schedule for the
exercisability of the stock options and for the stock appreciation rights were
one-half upon the appointment of the permanent Chief Executive Officer of the
Company and one-half upon the first anniversary of the date thereof. The
exercise price or strike price for these stock options and stock appreciation
rights was the average closing price of shares of Common Stock for the five
days preceding April 3, 1996 or $4.8375 per share. The foregoing awards of
stock options and stock appreciation rights were contingent upon Messrs.
Weinberg and Dimitriadis and Dr. Triche waiving their respective rights to any
remuneration to which they may be entitled from the Company for the period
beginning on February 18, 1996 through the date on which a permanent Chief
Executive Officer is appointed. In addition, Mr. Weinberg and Dr. Triche
relinquished their rights to receive the options for 4,000 shares normally
granted to new directors of the Company. These stock options and stock
appreciation rights have not yet been delivered to the grantees and, at the
Company's request, the grantees have agreed to defer such cash compensation
until the Company's liquidity situation improves.
Page 38
<PAGE>
In addition on May 6, 1996, the Board of Directors of the Company voted to
issue stock options for 30,000 shares of the Company's Common Stock for each
non-employee director and stock options for an additional 20,000 shares of the
Company's Common Stock to the Chairman of the Board, subject to shareholders
approval. The exercise price of these options is the average closing price of
the Company's Common Stock for the five trading days prior to May 6, 1995 or
$5.5875 per share and vest as follows: one third (1/3) on the first anniversary
of the next annual stockholders meeting, (1/3) one third on the second
anniversary of the next annual stockholders meeting, and one-third (1/3) on the
third anniversary of the next annual stockholders meeting. These options
terminate with respect to any unvested portion thereof if (i) the grantee is
not re-elected as a director at the next annual stockholders meeting, (ii)
during the one-year period preceding any given vesting date such grantee
attends less than 75% of the Board of Directors meetings to which he or she is
entitled to attend or (iii) the grantee voluntarily resigns as a director.
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
In May 1996 the Company entered into a three year employment agreement
with W. James Nicol to serve as Chief Executive Officer and President of the
Company. Pursuant to the terms of the employment agreement, Mr. Nicol receives
an annual base salary of $300,000. Mr. Nicol may also receive a performance
bonus in an amount to be determined under an Executive Incentive Compensation
Plan. The Board of Directors granted Mr. Nicol stock options to purchase
500,000 shares of the Company's Common Stock, subject to shareholder approval,
at an exercise price equal to the average closing price of shares of the
Company's Common Stock for the five days ended on April 19, 1996 or $5.375 per
share. Mr. Nicol's options will vest one-third on and after May 1 of each of
1997, 1998 and 1999. Pursuant to the employment agreement, if (i) the Company
terminates Mr. Nicol other than for disability or for cause or (ii) Mr. Nicol
resigns pursuant to the agreement upon a change of control of the Company or
upon a material reduction by the Company of Mr. Nicol's scope and/or authority,
then Mr. Nicol will be entitled to receive a severance payment equal to his
base salary for the remaining term of the agreement and all of the options
granted to Mr. Nicol's under the agreement shall become vested and immediately
exercisable. If the Company terminates Mr. Nicol other than for disability or
for cause, then Mr. Nicol will also be entitled to receive a prorated portion
of any bonus to which he may be entitled.
In January 1996, the Company, through its wholly-owned subsidiary Home
Care Management, Inc., a New York corporation ("HCM"), entered into an
employment agreement with Mr. Mieszala in connection with his position with,
and the services he renders to, the Company. Mr. Mieszala was given the title
of President of HCM. The term of Mr. Mieszala's employment ends on April 30,
1998. Mr. Mieszala also served as Acting President of the Company from February
26, 1996 until May 1, 1996 and on May 10, 1996, Mr. Mieszala became the Chief
Operating Officer of the Company. Pursuant to the terms of the employment
agreement, Mr. Mieszala is entitled to receive an annual base salary of
$210,000, with a ten percent increase in such amount for the period commencing
on May 1, 1997 and ending on April 30, 1998. Mr. Mieszala's base compensation
was increased to $225,000 per year effective April 3, 1996. Mr. Mieszala may
receive, at the sole discretion of HCM, a performance bonus of up to 33% of his
base annual salary. Pursuant to his employment agreement Mr. Mieszala was also
entitled to receive stock options to purchase 135,000 shares within 30 days of
the execution of the employment agreement; however, these options were never
delivered. On April 3, 1996, the Executive Committee of the Board of Directors
of the Company granted Mr. Mieszala and certain other employees of the Company
options with an exercise price of $4.975 per share, subject to a waiver of
previously granted options. Mr. Mieszala's option was with respect to 200,000
shares of Common
Page 39
<PAGE>
Stock. Pursuant to the employment agreement, if Mr. Mieszala is terminated
without cause by the Company, then Mr. Mieszala will be entitled to receive his
base salary for the period commencing on his date of termination and ending on
the later of six months from the date of termination and April 30, 1998.
In December 1995, the Company entered into an employment agreement with
Mr. Jurewicz to serve as Chief Financial Officer of the Company. The term of
Mr. Jurewicz's employment ends on April 30, 1998. Effective April 20, 1996, Mr.
Jurewicz was also named Executive Vice President of the Company. Pursuant to
the terms of the employment agreement, Mr. Jurewicz is entitled to receive to
an annual base salary of $160,000, with a ten percent increase in such amount
for the period commencing on May 1, 1997 and ending on April 30, 1998.
Effective April 3, 1996, the Board of Directors increased his compensation to
$180,000 per year. Mr. Jurewicz may receive, at the sole discretion of the
Company, a performance bonus of up to 33% of his base annual salary. Pursuant
to his employment agreement, Mr. Jurewicz was also entitled to receive stock
options to purchase 70,000 shares within 30 days of the execution of the
employment agreement. However, these options were never delivered. On April 3,
1996, the Executive Committee of the Board of Directors of the Company granted
Mr. Jurewicz and certain other employees of the Company options to purchase
shares of the Company's Common Stock subject to waiver of any rights to any
previously granted options. Mr. Jurewicz's option was with respect to 200,000
shares of Common Stock. Such options for 200,000 shares vest over a two year
period. Pursuant to the employment agreement, if Mr. Jurewicz is terminated
without cause by the Company, then Mr. Jurewicz will be entitled to receive his
base salary for the period commencing on his date of termination and ending on
the later of six months from the date of termination and April 30, 1998.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors has a compensation committee which consists of Mr.
Dimitriadis and Dr. Triche, with Dr. Triche serving as chairman. Mr.
Dimitriadis and Dr. Triche are independent non- employee directors and were
appointed by the Board of Directors to serve as members of the committee on
February 18, 1996. Prior to the resignations of J. Douglas Cox and David R.
Walker as directors of the Company on July 24, 1995 and as of December 31,
1995, respectively, each of Mr. Cox and Mr. Walker was on the compensation
committee.
On February 26, 1996, due to the resignation of Clifford E. Hotte as Chief
Executive Officer and President of the Company, a committee including Messrs.
Dimitriadis and Weinberg and Dr. Triche was formed to serve as the office of
the Chief Executive Officer until a successor to Clifford E. Hotte could be
appointed. Mr. Dimitriadis was appointed as Chair of this committee. This
committee was dissolved as of May 1, 1996 upon the appointment by the Board of
Directors of Mr. Nicol to the office of Chief Executive Officer. The
compensation received by Mr. Dimitriadis and Dr. Triche for their roles as such
is described above under "Item 11. Executive Compensation--Compensation of
Directors".
Report of the Compensation Committee of the Board of Directors on Executive
Compensation
Introduction
During the fiscal year ended April 30, 1996, the Compensation Committee
consisted of two independent non-employee directors, Dr. Triche and Mr.
Dimitriadis who were appointed on February 18, 1996. Prior to that time Douglas
Cox and David Walker comprised the Compensation Committees until Mr. Cox's
resignation from the Board of Directors on July 24, 1995 and Mr. Walker's
resignation
Page 40
<PAGE>
from the Board of Directors as of December 31, 1995, respectively. The
Compensation Committee is responsible for establishing executive compensation
for the Company's top level executives, administering the Company's current
long-term incentive program and implementing any additional short and long-term
compensation programs for executives which the Committee believes are
appropriate in the future. All decisions by the Compensation Committee are
subject to the approval of the Board of Directors or the Executive Committee
thereof. The Compensation Committee met twice during the fiscal year ended
April 30, 1996.
Philosophy
Generally, the compensation philosophy of the Company is to develop and
implement policies that will encourage and reward outstanding performance, seek
to increase the profitability of the Company, and maximize the Company's return
on equity so as to increase stockholder value. Maintaining competitive
compensation levels in order to attract and retain executives who bring
valuable experience and skills to the Company is also an important
consideration. The Company's executive compensation programs are designed to
attract and retain talented individuals and motivate them to achieve the
Company's business objectives and performance targets, including increasing
long-term stockholder value. Currently, the Company is focused on attracting
and retaining employees to a company that has recently undergone significant
change.
This year the Company had substantial change in management and increased
responsibilities of certain executives combined with reduced liquidity.
Accordingly, the Company made substantial demands on its new senior management
team. In order to properly attract and provide incentives to these executives,
the Company weighted executive compensation heavily towards stock options
grants determined on a discretionary basis. Short-term incentives consisted of
modest salary increases.
Compensation of the Chief Executive Officer
For the fiscal year ended April 30, 1996, Clifford E. Hotte, who served as
Chief Executive Officer until February 1996, received an annual base salary of
$250,000 and no bonus for that year. Clifford E. Hotte's base salary was set
well below the median salary levels for executives of comparable companies
within the health care industry due to the Company's performance-oriented
culture and the need to invest cash in the business to fund its rapid growth.
Mr. Nicol, who was appointed Chief Executive Officer as of May 1, 1996,
will receive an annual base salary of $300,000 in the fiscal year ending April
30, 1997 plus a bonus in an amount to be determined in the future and options
to purchase 500,000 shares of Common Stock. The Compensation Committee believes
that Mr. Nicol's salary is reasonable in light of the unusual demands which
will be placed on him during the upcoming year, that his compensation level
reflects the Compensation Committee's confidence in Mr. Nicol and the Company's
desire to attract and retain his talents, as the President and Chief Executive
Officer of the Company. (See "Item 11. Executive Compensation-- Employment
Agreements and Termination of Employment and Change in Control Arrangements".)
Executive Compensation for Fiscal Year 1997
In the fiscal year ending April 30, 1997, total compensation of top
executives will be targeted to a level between the median and 75th percentile
compensation levels paid by a peer group consisting of companies constituting
the Health Care Services in the NASDAQ National Market, which is the industry
index used in the Company's Stockholder Return Performance Graph. It is
anticipated that total
Page 41
<PAGE>
compensation will consist of base salary, annual incentives and grants of
long-term equity awards in the form of stock options. Stock option grants will
be based on a number of factors determined by the Committee, including the
executive's position within the Company, past and expected future contributions
to the Company's business, the targeted total compensation level for the
executive and for extraordinary efforts. The Committee continue to consider
annual bonuses based upon achievement of both individual and corporate goals.
Conclusion
The Compensation Committee believes that the compensation paid to its
executive officers is comparable to compensation paid by similar companies and
appropriate under the current circumstances.
This report by the Compensation Committee shall not be deemed to be
incorporated by reference by any general statement incorporating by reference
this Proxy Statement into any filing under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended, and shall not
otherwise be deemed filed under such Acts.
DR. TIMOTHY TRICHE, CHAIRMAN
STOCK PERFORMANCE CHART
The following graph compares cumulative total returns to the holders of
the Common Stock from May 24, 1990 (the date the Common Stock began trading on
NASDAQ National Market) through the end of the fiscal year ended April 30, 1996
to a peer group consisting of Health Care service companies listed on the
NASDAQ National Market, and to the NASDAQ Market Index. Total return values
were calculated based on the assumption of $100 invested and on cumulative
total return values assuming reinvestment of dividends. The stock price
performance shown on the graph below is not necessarily indicative of future
price performance.
Comparison of May 1, 1991 to April 30, 1996 Cumulative
Total Return
Among Health Management, Inc., Health Care Service Companies
Listed on the NASDAQ National Market, and the NASDAQ Index
[PERFORMANCE GRAPH]
1991 1992 1993 1994 1995 1996
Nasdaq National Market Index $100 $121.22 $139.38 $155.11 $180.32 $257.02
Nasdaq Market Index 100 130.37 135.85 172 175.13 272.96
Health Management, Inc. 100 616.88 1,076.25 1,745.62 1,903.13 564.38
The above stock price performance graph shall not be deemed to be
incorporated by reference by any general statement incorporating by reference
this Proxy Statement into any filing under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended, and shall not
otherwise be deemed filed under such Acts.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following information is submitted as of July 23, 1996 with respect to
the Company's voting securities owned beneficially by each person known by the
Company owning more than 5% of the Common Stock of the Company (this being the
only class of voting securities now outstanding), by Named Executive Officers
of the Company and by all directors, officers both individually and as a group:
Page 42
<PAGE>
<TABLE>
<CAPTION>
Amount
Beneficially Approx.
Name of Beneficial Owned Percent
Owner Address of Class
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Clifford E. Hotte 51 Prospect Rd. 1,006,432(1) 10.4%
Center Port, NY 11721
Putnam Investments, Inc. One Post Office Square 883,600(2) 9.1%
Boston, MA 02109
Lloyd N. Myers 11 Rosemont Lane 298,760(3) *
Pittsburgh, PA 15217
James R. Mieszala c/o 1371-A Abbott Court 66,666(4) *
Buffalo Grove, IL 60089
Paul Jurewicz c/o 1371-A Abbott Court 66,666(5) *
Buffalo Grove, IL 60089
Virginia Belloise 51 Prospect Road 62,053(6) *
Center Port, NY 11721
Robert C. Clifton c/o 1371-A Abbott Court 45,000(7) *
Buffalo Grove, IL 60089
Andre C. Dimitriadis c/o 1371-A Abbott Court 27,000(8) *
Buffalo Grove, IL 60089
Michael R. Norman 8 Old Field Woods Road 400(9) *
Seatauket, New York
11733
W. James Nicol c/o 1371-A Abbott Court -0-(10) *
Buffalo Grove, IL 60089
D. Mark Weinberg c/o 1371-A Abbott Court -0-(11)
Buffalo Grove, IL 60089
Dr. Timothy Triche c/o 1371-A Abbott Court -0-(12) *
Buffalo Grove, IL 60089
Drew Bergman 9 Cornell Place 1,016(13) *
Merrick, NY 11566
All Directors and Officers as a
Group (9 Persons) (1) (4) (5) (6) (7)
(8) (10) (11) (12) 1,273,817 13.1%
</TABLE>
*Less than one percent (1.0%)
(1) Does not include shares beneficially owned by Virginia Belloise, Clifford
E. Hotte's wife. Also, does not include unvested options authorized for
issuance to all non-
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<PAGE>
employee directors, which are subject to shareholder approval. (See "Item
11. Executive Compensation--Compensation of Directors".)
(2) Based solely upon the information contained in Amendment No. 3 to the
Schedule 13G filed with the Securities and Exchange Commission by Marsh &
McLennan Companies, Inc. ("M&MC"), Putnam Investments, Inc. ("PI"), Putnam
Investment Management, Inc. ("PIM") and The Putnam Advisory Company, Inc.
("PAC"), dated August 7, 1995. PI is a wholly-owned subsidiary of M&MC and
wholly owns PIM and PAC. Consists of 441,800 shares held by PI, 382,377
shares held by PIM and 59,426 shares held by PAC.
(3) Does not include 3,395 shares held by Benjamin Dines TTEE Lloyd E. Myers
Descendants Trust U/A dated September 13, 1994, in trust for Lauren Myers
and Zachary Myers.
(4) Includes 66,666 shares subject to presently exercisable options.
(5) Includes 66,666 shares subject to presently exercisable options.
(6) Includes 42,020 shares held in trusts for benefit of the minor children of
Clifford E. Hotte, and for benefit of nieces and nephews of Clifford E.
Hotte and Ms. Belloise, of which Ms. Belloise is trustee, with voting and
dispositive power. Also includes 7,000 shares subject to presently
exercisable options. Does not include shares beneficially owned by Ms.
Belloise's husband, Clifford E. Hotte. Also does not include unvested
options authorized for issuance to all non-employee directors, which are
subject to shareholder approval. (See "Item 11. Executive
Compensation--Compensation of Directors".)
(7) Includes 45,000 shares subject to presently exercisable options.
(8) Includes 6,000 shares subject to presently exercisable options. Does not
include 10,000 shares subject to options authorized for, but not yet
received by, Mr. Dimitriadis for his expanded role as a director since
February 18, 1996 and for his participation in the interim Office of the
Chief Executive Officer; the options, when issued, will be exercisable
with respect to one-half the shares, or 5,000 shares. Also does not
include unvested options authorized for issuance to all non-employee
directors, which are subject to shareholder approval. (See "Item 11.
Executive Compensation-- Compensation of Directors".)
(9) Based solely upon the information contained in Mr. Norman's most recent
Form 4 filed with the SEC. Mr. Norman's vested options to purchase 12,000
shares of the Company terminated within 30 days at the termination of his
employment on May 9, 1996 and are, therefore, not included herein.
(10) Does not include certain shares subject to options which are contingent on
approval by the Company's stockholders at the next annual meeting of the
stockholders. (See "Item 11. Executive Compensation--Employment Agreements
and Termination of Employment and Change in Control Arrangements".)
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<PAGE>
(11) Does not include 7,500 shares subject to options authorized for, but not
yet received by, Mr. Weinberg for his expanded role as a director since
February 18, 1996 and for his participation in the interim Office of the
Chief Executive Officer; the options, when issued, will be exercisable
with respect to one-half the shares, or 3,750 shares. Also does not
include unvested options authorized for issuance to all non-employee
directors, which are subject to shareholder approval. (See "Item 11.
Executive Compensation--Compensation of Directors".)
(12) Does not include 7,500 shares subject to options authorized for, but not
yet received by, Mr. Triche for his expanded role as a director since
February 18, 1996 and for his participation in the interim Office of the
Chief Executive Officer; the options, when issued, will be exercisable
with respect to one-half the shares, or 3,750 shares. Also does not
include unvested options authorized for issuance to all non-employee
directors, which are subject to shareholder approval. (See "Item 11.
Executive Compensation--Compensation of Directors".)
(13) All of Mr. Bergman's stock options have terminated.
Item 13. Certain Relationships and Related Transactions
On March 27, 1995, a subsidiary of the Company, HMI Pennsylvania, Inc.
("HMI Pennsylvania") entered into a lease with Messrs. Irwin Hirsh and Lloyd N.
Myers for a facility in Pittsburgh, Pennsylvania. On the same date, another
subsidiary of the Company, HMI Retail Corp., Inc., entered into a lease
agreement with Mr. Hirsh for an additional facility in Pittsburgh,
Pennsylvania. Until July 9, 1996, Mr. Hirsh was Vice President - Contracts
Administration of HMI Pennsylvania, Inc. and Mr. Myers was the Company's Vice
President - Sales and Marketing and Vice President - Program Development of HMI
Pennsylvania, Inc. The Company pays an aggregate of $8,867 per month for both
leases. Each lease has a term of three years and may be extended, at the option
of HMI Pennsylvania, Inc., for an additional two year term. The Company
believes that the terms of the leases are on an arms' length basis and are as
favorable to the Company as terms that could be obtained from unrelated third
parties.
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<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents Filed As A Part of This Report
(1) Financial Statements. The financial statements of Health Management,
Inc. and Subsidiaries for the year ended April 30, 1996, together with the
Report of Independent Certified Public Accountants, are set forth
beginning on page F-1 hereof.
(2) Financial Statement Schedules. Financial statement schedules required
by Items 8 and 14(d) of this Report are set forth following page S-1 of
the financial statements.
(b) Reports on Form 8-K
The Company filed four Current Reports on Form 8-K dated February 27,
1996, March 21, 1996, April 14, 1996 and April 15, 1996, respectively,
with the Securities and Exchange Commission, during the fourth quarter of
the fiscal year ended April 30, 1996. Each of the foregoing Forms 8-K
related to matters described under Item 5 thereof.
(c) 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 1O-K
for year ended April 30, 1995).
3.5 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).
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<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.
10.8* Employment Agreement, dated as of January 8, 1996, between
the Company and James R. Mieszala.
10.9* Employment Agreement, dated as of December 18, 1996, between
the Company and Paul S. Jurewicz.
10.10 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).
10.11 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).
10.12 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 47
<PAGE>
10.13 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).
10.14 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).
10.15 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).
10.16 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).
10.17 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).
10.18 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.
10.19 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).
10.20 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).
10.21 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).
10.22 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).
11 Statement re Computation of Per Share Earnings.
Page 48
<PAGE>
21 Subsidiaries of the Registrant (incorporated by reference to
Form 10-K for the year ended April 30, 1996).
23 Consent of BDO Seidman, LLP
27 Financial Data Schedule
* Management contract or compensatory plan or arrangement.
Page 49
<PAGE>
Health Management, Inc.
and Subsidiaries
================================================================================
Consolidated Financial Statements
Form 10-K - Item 8 and Item 14(a)(1) and (2)
Year ended April 30, 1996
<PAGE>
Health Management, Inc. and Subsidiaries
Index
================================================================================
Report of Independent Certified Public Accountants F-3
Consolidated balance sheets:
April 30, 1996 and 1995 F-4
Consolidated financial statements for the three years
ended April 30, 1996:
Statements of operations F-5
Statements of stockholders' equity F-6
Statements of cash flows F-7 - F-8
Notes to consolidated financial statements F-9 - F-31
F-2
<PAGE>
Report of Independent Certified Public Accountants
Health Management, Inc. and Subsidiaries
Buffalo Grove, Illinois
We have audited the consolidated balance sheets of Health Management, Inc. and
Subsidiaries as of April 30, 1996 and 1995 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended April 30, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of financial
statements. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Health Management,
Inc. and Subsidiaries at April 30, 1996 and 1995 and the results of their
operations and cash flows for each of the three years in the period ended April
30, 1996 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Notes 1 and 7
to the accompanying consolidated financial statements, the Company is not in
compliance with the provisions of certain loan agreements and is the defendant
in significant litigation. These matters raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are described in Notes 1 and 7. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
BDO Seidman, LLP
Mitchel Field, New York
July 22, 1996, except for Note 4(a)
which is as of July 26, 1996
F-3
<PAGE>
Health Management, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
======================================================================================
April 30, 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C>
Assets (Note 4(a))
Current:
Cash and cash equivalents $ 3,280,195 $ 4,562,712
Accounts receivable, less allowance for doubtful
accounts of approximately $10,070,000 and
$7,998,000 36,457,199 31,339,809
Inventories 6,800,820 7,787,661
Tax refund receivable (Note 6) 8,037,030 1,827,000
Deferred taxes (Note 6) 1,807,000 3,133,300
Prepaid expenses and other 655,358 1,163,541
- --------------------------------------------------------------------------------------
Total current assets 57,037,602 49,814,023
Improvements and equipment, less accumulated
depreciation and amortization (Notes 3 and 4) 3,825,974 2,136,062
Goodwill (Note 2) 34,008,496 35,464,260
Other 1,043,607 1,275,775
- --------------------------------------------------------------------------------------
$ 95,915,679 $ 88,690,120
======================================================================================
Liabilities and Stockholders' Equity
Current:
Accounts payable $ 20,714,836 $ 12,329,991
Accrued unusual charges (Note 5) 3,559,000 --
Accrued expenses 1,526,119 1,862,407
Current maturities of long-term debt (Note 4) 28,746,028 23,135,267
- --------------------------------------------------------------------------------------
Total current liabilities 54,545,983 37,327,665
Long-term debt, less current maturities (Note 4) 4,006,077 3,191,123
- --------------------------------------------------------------------------------------
Total liabilities 58,552,060 40,518,788
- --------------------------------------------------------------------------------------
Commitments and contingencies (Note 7)
Stockholders' equity (Note 8):
Preferred stock - $.01 par value - shares authorized
1,000,000; issued and outstanding, none --
Common stock - $.03 par value - shares authorized
20,000,000; issued and outstanding 9,328,240
and 9,316,017 279,848 279,481
Additional paid-in capital 38,138,771 38,019,510
Retained earnings (deficit) (1,055,000) 9,872,341
- --------------------------------------------------------------------------------------
Total stockholders' equity 37,363,619 48,171,332
- --------------------------------------------------------------------------------------
$ 95,915,679 $ 88,690,120
======================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
Health Management, Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
=============================================================================================
Year ended April 30, 1996 1995 1994
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 158,859,638 $ 88,456,028 $ 44,249,516
Cost of sales (including unusual charges of
$2,840,000 in 1996) (Note 5) 120,223,528 63,708,021 28,643,460
- ---------------------------------------------------------------------------------------------
Gross profit 38,636,110 24,748,007 15,606,056
- ---------------------------------------------------------------------------------------------
Operating expenses:
Selling 4,649,697 2,898,208 1,847,197
General and administrative 30,639,096 18,626,981 7,209,342
Unusual charges (Note 5) 14,000,000 -- --
- ---------------------------------------------------------------------------------------------
Total operating expenses 49,288,793 21,525,189 9,056,539
- ---------------------------------------------------------------------------------------------
Income (loss) from operations (10,652,683) 3,222,818 6,549,517
Interest expense (2,717,155) (269,316) (88,215)
Interest income 37,651 333,077 290,341
- ---------------------------------------------------------------------------------------------
Income (loss) before income taxes (13,332,187) 3,286,579 6,751,643
Income taxes (Note 6) (2,404,846) 1,340,391 2,750,685
- ---------------------------------------------------------------------------------------------
Net income (loss) $ (10,927,341) $ 1,946,188 $ 4,000,958
=============================================================================================
Earnings (loss) per share of common stock
- primary $ (1.16) $ .21 $ .54
=============================================================================================
- fully diluted $ (1.16) $ .21 $ .53
=============================================================================================
Weighted average shares outstanding
- primary 9,414,500 9,408,300 7,383,040
=============================================================================================
- fully diluted 9,414,500 9,420,816 7,593,465
=============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
Health Management, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Three Years Ended April 30, 1996 (Note 8)
================================================================================
<TABLE>
<CAPTION>
Common Stock Unearned
$.03 Par Value Retained Restricted
------------------------- Additional Earnings Stock
Shares Amount Paid-in Capital (Deficit) Compensation
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, May 1, 1993 6,076,063 $ 182,281 $ 5,647,475 $ 3,925,195 $ --
Common stock issued upon exercise of
stock options 2,833 85 12,663 -- --
Common stock issued upon exercise of
stock warrants 40,330 1,210 216,572 -- --
Common stock issued upon conversion
of subordinated debentures 357,145 10,715 364,288 -- --
Common stock issued upon public
offering 2,000,000 60,000 21,922,258 -- --
Common stock issued upon acquisition
of Murray Group 617,060 18,512 7,676,230 -- --
Restricted stock issued to consultants 11,000 330 113,795 -- (114,125)
Compensation under restricted stock -- -- -- -- 57,060
Net income for the year ended April 30,
1994 -- -- -- 4,000,958 --
- ------------------------------------------------------------------------------------------------------------------------------
Balance, April 30, 1994 9,104,431 273,133 35,953,281 7,926,153 (57,065)
Common stock issued upon acquisition
of:
Pharmaceutical Marketing Alliance 20,000 600 242,775 -- --
Maryland Pharmacies 108,757 3,263 1,356,112 -- --
Common stock issued upon exercise of
stock warrants 78,996 2,370 424,208 -- --
Common stock issued upon exercise of
stock options 2,833 85 24,414 -- --
Common stock issued to directors 1,000 30 18,720 -- --
Compensation under restricted stock -- -- -- -- 57,065
Net income for the year ended April 30,
1995 -- -- -- 1,946,188
- ------------------------------------------------------------------------------------------------------------------------------
Balance, April 30, 1995 9,316,017 279,481 38,019,510 9,872,341 --
Common stock issued upon exercise of
stock options 12,223 367 119,261
Net loss for the year ended April 30,
1996 (10,927,341)
- ------------------------------------------------------------------------------------------------------------------------------
Balance, April 30, 1996 9,328,240 $ 279,848 $ 38,138,771 $ (1,055,000) $ --
==============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
Health Management, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Note 9)
<TABLE>
<CAPTION>
======================================================================================================
Year ended April 30, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(10,927,341) $ 1,946,188 $ 4,000,958
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 2,127,400 846,869 453,149
Provision for doubtful accounts
receivable 14,714,606 7,978,189 1,781,000
Deferred taxes 1,326,300 (2,516,300) (701,315)
Write-off of improvements and
equipment 263,563
Write-off of goodwill 552,432
Write-off of organizational costs 134,161
Loss from disposition of rental
equipment -- 287,287 --
Compensation under restricted stock -- 57,065 57,060
Common stock issued to director -- 18,750 --
Increase (decrease) in cash flows from changes in
operating assets and liabilities, net of effects
of purchase of CPMB and other acquisitions in
1995 and Murray Group in 1994:
Accounts receivable (19,831,996) (16,706,549) (9,624,966)
Tax refund receivable (6,210,030) (1,827,000) --
Inventories 986,841 (1,826,911) 205,220
Prepaid expenses and other 508,183 (976,058) (205,307)
Other assets 98,008 (239,758) (249,281)
Accounts payable 8,384,845 4,870,054 99,675
Accrued unusual charges 3,559,000 -- --
Accrued expenses (336,288) 396,332 203,075
Income taxes payable (1,759,590) (1,759,590) 280,467
- ------------------------------------------------------------------------------------------------------
Net cash used in operating activities (4,650,316) (9,451,432) (3,700,265)
- ------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Cash used in acquisition of CPMB (324,366) (20,630,212) --
Cash used in acquisition of Murray Group -- -- (7,500,000)
Other acquisitions -- (2,167,500) (250,000)
Collection of receivable from the seller of
Murray Group -- 1,444,426 --
Capital expenditures (1,491,722) (948,368) (565,815)
Proceeds from sale of rental equipment -- 214,598 --
- ------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,816,088) (22,087,056) (8,315,815)
- ------------------------------------------------------------------------------------------------------
</TABLE>
F-7
<PAGE>
Health Management, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Note 9)
<TABLE>
<CAPTION>
=========================================================================================
Year ended April 30, 1996 1995 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from long-term debt 16,450,000 23,000,000 --
Principal payments on long-term debt (11,000,000) -- --
Net payment on capital leases (385,741) (123,357) (44,202)
Decrease in bank loan - net -- -- (200,000)
Proceeds from issuance of common stock -- -- 21,982,258
Cash paid for deferred borrowing fees -- (722,000) --
Proceeds from exercise of warrants -- 426,578 217,782
Proceeds from exercise of options 119,628 24,499 12,748
- -----------------------------------------------------------------------------------------
Net cash provided by financing
activities 5,183,887 22,605,720 21,968,586
- -----------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents (1,282,517) (8,932,768) 9,952,506
Cash and cash equivalents, beginning of
year 4,562,712 13,495,480 3,542,974
- -----------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 3,280,195 $ 4,562,712 $ 13,495,480
=========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
Health Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
1. Basis of Presentation
and Summary of
Accounting Policies
Organization and The consolidated financial statements include
Principles of Health Management, Inc. (formerly Homecare
Consolidation Management, Inc.) (the "Company"), (a Delaware
corporation), its wholly-owned subsidiaries Home
Care Management, Inc. (HMI-NY), HMI
Pennsylvania, Inc., HMI Retail Corp. Inc.,
Health Reimbursement Corp., HMI PMA Inc., HMI
Maryland Inc., and HMI Illinois, Inc. All
material intercompany accounts and transactions
have been eliminated in consolidation.
Basis of Presentation The Company's consolidated financial statements
have been presented on a going concern basis,
which contemplates the realization of assets and
satisfaction of liabilities in the normal course
of business. As more fully discussed in Note 4,
the Company is in violation of its loan
agreements resulting in the related debt being
classified as current liabilities. The Company
and its lenders have agreed to a forbearance
period during which management intends to
attempt to arrange for a refinancing of the
current debt. Also, as described in Note 7, the
Company is a defendant in significant litigation
and is the subject of an investigation by the
Enforcement Division of the Securities and
Exchange Commission. These matters raise
substantial doubt about the Company's ability to
continue as a going concern. The consolidated
financial statements do not include any
adjustments that might result from the outcome
of this uncertainty.
Use of Estimates In preparing financial statements in conformity
and Concentration with generally accepted accounting principles,
management is required to make estimates and
assumptions that affect the reported amounts of
assets and liabilities and the disclosure of
contingent assets and liabilities at the date of
the financial statements and revenues and
expenses during the reporting period. Actual
results could differ from those estimates.
Approximately 46% of the Company's revenues are
currently attributable to sale of two products
which are manufactured solely by one
pharmaceutical manufacturer. If the Company were
unable to purchase these two products, its
results of operations would be materially and
adversely affected.
F-9
<PAGE>
Health Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Credit Risk Financial instruments which potentially subject
the Company to concentrations of credit risk
consist principally of temporary cash
investments, tax-exempt obligations and trade
receivables. The Company places its temporary
cash investments with high credit quality
financial institutions and limits the amount of
credit exposure to any one financial
institution. At times, such cash investments
exceed the Federal Deposit Insurance Corp.
insurance limit. Concentrations of credit risk
with respect to trade receivables are limited
due to the diverse group of patients whom the
Company services. No single customer accounted
for a significant amount of the Company's sales
in the years ended April 30, 1996, 1995 and
1994. Approximately 44%, 40% and 35% of the
Company's revenues are reimbursed under
arrangements with Federal and State medical
assistance programs for the years ended April
30, 1996, 1995, and 1994. At April 30, 1996 and
1995, approximately 43%, and 36% of the
Company's accounts receivable are from Federal
and State medical assistance programs. The
Company establishes an allowance for doubtful
accounts based upon factors surrounding the
credit risk of specific customers, historical
trends and other information.
Inventories Inventories are valued at the lower of cost or
market. Cost is determined by the first-in,
first-out method (FIFO). Inventories are
principally comprised of prescription and
over-the-counter drugs.
Revenue Recognition Revenues are recognized on the date services and
related products are provided to patients and
are recorded at amounts estimated to be received
from patients or under reimbursement
arrangements with third party payors.
Cash and Cash The Company considers all highly liquid
Equivalents investments with a maturity of three months or
less when purchased to be cash equivalents.
Improvements and Improvements and equipment are stated at cost.
Equipment Depreciation of equipment and amortization of
leasehold improvements are computed over the
estimated useful lives of the assets and the
lease term, respectively, ranging from 3 to 7
years for equipment and 13 years for
improvements. Accelerated methods are used for
both book and tax purposes.
F-10
<PAGE>
Health Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Goodwill and Other Goodwill represents the excess of the purchase
Long-Lived Assets price over the fair value of net assets acquired
through business combination, accounted for as
purchases (see Note 2) and is amortized on a
straight-line basis over the estimated period to
be benefitted - thirty years. During the fiscal
year ended April 30, 1996, the Company elected
the early adoption of SFAS No. 121 "Accounting
for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." Prior to
the adoption of SFAS No. 121, the carrying value
of goodwill was reviewed periodically based on
the projected gross profits of the businesses
acquired over the remaining amortization period.
In accordance with SFAS No. 121 the carrying
value of long-lived assets will be reviewed for
impairment whenever events or changes in
circumstances indicate that the carrying amount
may not be recoverable. Long-lived assets
acquired in business combinations accounted for
using the purchase method includes the goodwill
that arose in those transactions allocated on a
pro rata basis using the relative fair values of
the long-lived assets and identifiable
intangibles acquired at the acquisition date.
Based on the Company's analysis under SFAS No.
121, the Company believes that, other than the
write-off of goodwill related to the
Pharmaceutical Marketing Alliance acquisition
(see Note 2) totalling $553,000, no impairment
of the carrying value of its long-lived assets
inclusive of allocated goodwill existed at April
30, 1996. The Company's analysis at April 30,
1996 has been based on an estimate of future
undiscounted net cash flows. Should the results
forecasted not be achieved, future analyses may
indicate insufficient future undiscounted net
cash flows to recover the carrying value of the
Company's long-lived assets inclusive of
allocated goodwill, in which case SFAS No. 121
would require the carrying value of such assets
to be written down to fair value if lower than
carrying value.
Income Taxes Deferred taxes are recorded to reflect the
temporary differences in the tax bases of assets
and liabilities and their reported amounts in
the financial statements. The differences relate
principally to the allowance for doubtful
accounts and unusual charges.
F-11
<PAGE>
Health Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Earnings Per Share Earnings per share are computed on the basis of
the weighted average number of common shares and
common stock equivalents outstanding during the
year. Fully diluted earnings per share results
mainly from considering the shares issuable upon
the conversion of the convertible subordinated
debentures and adjusting the net income by
adding back the after-tax effect of the interest
expense thereon.
Fair Value of The carrying amounts of certain financial
Financial instruments, including cash, accounts receivable
Instruments and accounts payable, approximate fair value as
of April 30, 1996 because of the relatively
short-term maturity of these instruments. The
carrying value of long-term debt, including the
current portion, approximates fair value as of
April 30, 1996 based upon the borrowing rates
currently available to the Company for bank
loans with similar terms and average maturities.
Stock-Based The Financial Accounting Standards Board Issued
Compensation Statement of Financial Accounting Standard
Number 123 "Accounting for Stock-Based
Compensation" ("SFAS Number 123") in October
1995. Statement Number 123 encourages companies
to recognize expense for stock options and other
stock-based employee compensation plans based on
their fair value at the date of grant. As
permitted by Statement Number 123, the Company
plans to continue to apply its current
accounting policy under APB Opinion Number 25
"Accounting for Stock Issued to Employees" in
1996 and future years, and will provide
disclosure of the pro forma impact on net income
and earnings per share as if the fair
value-based method had been applied.
2. Acquisitions (a) On March 31, 1995, HMI Illinois, a
wholly-owned subsidiary of the Company,
acquired certain assets subject to certain
liabilities of Caremark Inc.'s Clozaril
Patient Management Business ("CPMB"). The
aggregate purchase price was approximately
$23,260,000 consisting of $20,060,000 in
cash provided by bank financing, a $200,000
escrow deposit, and a $3,000,000 five year
subordinated note with an annual interest
rate of 8% payable semi-annually.
F-12
<PAGE>
Health Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
The acquisition has been accounted for by the
purchase method of accounting. The purchase
price has been allocated to the assets acquired
based on the estimated fair values of each asset
and liability. The purchased assets consist
primarily of inventory and equipment. The excess
of purchase price over fair value of the assets
acquired was approximately $22,860,000.
The unaudited pro-forma condensed combined
statement of income for the year ended April 30,
1995 giving effect to the acquisition of CPMB by
the Company as if it had occurred as of the
beginning of the year is as follows:
Year ended April 30, 1995
------------------------------------------------
(In thousands)
Revenues $133,178
------------------------------------------------
Income $ 6,237
------------------------------------------------
Net income $ 3,505
------------------------------------------------
Earnings Per Share
Primary $ .37
Fully Diluted $ .37
================================================
Pro-forma adjustments included in the pro-forma
condensed combined statement of income consisted
of amortization of goodwill of $666,000,
interest expenses of $2,340,000, allowance for
doubtful accounts of $634,000 and increase in
cost of sales of $500,000.
F-13
<PAGE>
Health Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
(b) On February 6, 1995, the Company acquired
substantially all of the assets, subject to
certain liabilities, of two specialty
pharmacies located in Maryland. Immediately
following this acquisition, the Company
contributed all of the acquired assets,
subject to assumed liabilities, to HMI,
Maryland, Inc., a newly formed subsidiary
wholly-owned by the Company ("HMI-
Maryland"). The aggregate purchase price for
the two specialty pharmacies approximated
$3,172,000 and consisted of $1,812,500 in
cash and cash equivalents and 108,757
newly-issued shares of common stock of the
Company discounted at 25% and valued at
$1,359,500.
The acquisition has been accounted for by
the purchase method of accounting. The
purchase price has been allocated to the
assets acquired based on the estimated fair
value of each asset. The excess of purchase
price over fair value of the assets was
approximately $2,454,000.
(c) On June 16, 1994, the Company acquired
certain assets of Pharmaceutical Marketing
Alliance, Inc. (PMA) for a total purchase
price of $598,375 which is comprised of cash
of $355,000 and 20,000 shares of common
stock. Immediately following this
acquisition, the Company contributed all of
the acquired assets, subject to assumed
liabilities to HMI-PMA, Inc., a newly-formed
wholly-owned subsidiary. The Company also
entered into a three-year employment
agreement with three employees of PMA at an
aggregate of $225,000 per annum.
The operations of HMI-PMA were closed during
fiscal year 1996. Costs associated with this
closure, including write-off of goodwill of
$553,000 and termination of employment
agreements were recorded in the year ended
April 30, 1996. The write-off and the
related charges were part of the $3,600,000
charge discussed in Note 5.
F-14
<PAGE>
Health Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
(d) On April 1, 1994, the Company acquired
substantially all of the net assets of
Murray Pharmacy, Inc. and Murray Pharmacy
Too, Inc. (collectively "Murray Group"), for
total consideration of up to $16,195,000,
comprised of cash of $7,500,000, 617,060
shares of non-registered common stock of the
Company, discounted at 25% and valued at
$7,695,000, and a $1,000,000 earn-out based
on performance of the companies for the year
ended April 30, 1995. The $1,000,000
earn-out was not recorded because the
specified performance level was not
achieved.
In connection with the acquisition, the
Company entered into employment agreements
with the two shareholders of the Murray
Group. The Company also entered into leases
for buildings owned by the two Murray
Group's shareholders (see Note 6(a)).
The acquisition has been accounted for by
the purchase method of accounting. The
purchase price has been allocated to the
assets acquired based on the estimated fair
value of each asset. The purchased assets
consist primarily of accounts receivable and
inventory. The excess of purchase price over
the fair value of the assets acquired was
approximately $10,100,000.
As a result of the above acquisitions, total
excess of purchase price in excess of net assets
acquired are as follows:
April 30, 1996 1995
------------------------------------------------
Goodwill resulting
from acquisition of:
CPMB $22,860,251 $22,535,855
Maryland pharmacies 2,453,959 2,453,959
PMA -- 581,507
Murray group 10,099,860 10,099,860
Other 250,000 250,000
------------------------------------------------
35,664,070 35,921,181
Less: accumulated
amortization 1,655,574 456,921
------------------------------------------------
$34,008,496 $35,464,260
================================================
F-15
<PAGE>
Health Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
3. Improvements and Improvements and equipment consist of the
Equipment following:
April 30, 1996 1995
---------------------------------------------------
Furniture and equipment $2,380,978 $1,575,503
Transportation equipment 104,090 88,906
Computer equipment 2,689,619 777,133
Leasehold improvements 365,743 491,108
---------------------------------------------------
5,540,430 2,932,650
Less accumulated depreciation
and amortization 1,714,456 796,588
---------------------------------------------------
$3,825,974 $2,136,062
===================================================
4. Long-Term Debt Long-term debt consists of the following:
<TABLE>
<CAPTION>
April 30, 1996 1995
------------------------------------------------------
<S> <C> <C>
Term loan (a) $18,000,000 $21,000,000
Revolving credit (a) 10,350,000 2,000,000
Subordinated note payable (b) 3,000,000 3,000,000
Capitalized leases and notes
payable requiring monthly
payments of $42,252
including assumed interest
ranging from 3.2% to 21%,
collateralized by equipment
with a book value of
$1,354,708. 1,402,105 326,390
------------------------------------------------------
32,752,105 26,326,390
Less current maturities 28,746,028 $23,135,267
------------------------------------------------------
$ 4,006,077 $ 3,191,123
======================================================
</TABLE>
F-16
<PAGE>
Health Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
(a) On April 4, 1995, the Company borrowed
$21,000,000 on a term loan to fund the cash
portion of the acquisition of CPMB (Note
2(a)). The term loan bears interest at a
rate of .5% above the Alternative Base Rate
(as defined by the Credit Agreement and was
8.75% at April 30, 1996) and is convertible
into Eurodollar loans. The principal was
payable over five years in quarterly
installment payments of $750,000 through
March 31, 1996; $1,000,000 through March 31,
1997, $1,250,000 through March 31, 1999 and
$1,000,000 through March 21, 2000.
The Credit Agreement provided for a
revolving credit facility of up to
$15,000,000, including up to a $1,000,000
letter of credit facility. This agreement
had an original expiration date of March
1997. Borrowings under this facility bear
interest at the Alternative Base Rate (as
defined in the Credit Agreement) and is
convertible into Eurodollar loans. At April
30, 1996, the Company had borrowings under
this line of credit of $10,350,000 bearing
interest at 8.25% on $6,350,000 and 7.5% on
$4,000,000.
The term loan and the revolving credit
facility are collateralized by an assignment
of a security interest in all assets of the
Company and its subsidiaries.
The agreements contains restrictions
relating to the payment of dividends, liens,
indebtedness, investments and capital
expenditures. In addition, the Company must
maintain certain financial ratios and a
minimum net worth. As a result of the
matters discussed in Note 7(d) and the
unusual charges described in Note 5, the
Company was in violation of certain
provisions of the Credit Agreement.
Accordingly, all borrowings under the term
loan and the revolving credit facility are
classified as current.
F-17
<PAGE>
Health Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
On July 26, 1996, the Company and the
lenders under the agreements entered into a
forbearance agreement covering the period
from July 26, to November 15, 1996. Under
this agreement, the lenders agreed subject
to certain conditions, to forbear from
exercising any of their legal, contractual
or equitable rights of remedies in respect
of any of the existing events of default
during the above forbearance period and the
Company agreed to certain revised financial
covenants and reporting requirements. The
forbearance agreement also reduced the
availability under the revolving credit
facility to a maximum of $1,800,000 over the
borrowings currently outstanding.
Concurrently, the Company engaged National
Westminster Bank PLC ("Nat West") to act as
its financial advisor to explore a variety
of strategic and financial alternatives. The
Company requires additional financing to
remedy the default condition of its term
loan and borrowings under revolving credit
facility. In order to satisfy such
obligations the Company may consider
engaging in a public or private offering of
securities of the Company. There is no
assurance that such financing can be
obtained.
(b) In connection with the CPMB acquisition (see
Note 2(a)), the Company is obligated on a
$3,000,000 unsecured subordinated note,
bearing interest at an annual rate of 8% and
maturing March 31, 2000.
As a result of the restatement of the
Company's April 30, 1995 financial
statements and the provision of unusual
charges (see Note 5), the Company did not
meet certain of the financial ratios as
required by the note. As a result, the note
became convertible into the Company's common
stock upon notice received from the holder
of the note. The conversion price is based
upon the average closing price of the
Company's common stock for the ten trading
days immediately proceeding the conversion
date and the ten trading days immediately
subsequent to the conversion date. The
Company has not received notice from the
noteholder for conversion.
F-18
<PAGE>
The maximum amount of short-term borrowings
outstanding during the years ended April 30,
1996, 1995 and 1994 was $10,350,000 $2,300,000
and $2,000,000, respectively. The average
amounts outstanding for the years ended April
30, 1996, 1995 and 1994 were $7,696,000,
$592,000 and $796,000, respectively. The average
borrowing rates were 8.37%, 8.875% and 7% for
the years ended April 30, 1996, 1995 and 1994,
respectively.
Long term debt matures as follows:
Year ended April 30,
------------------------------------------------
1997 $28,746,028
1998 377,771
1999 315,873
2000 3,245,162
2001 67,271
------------------------------------------------
$32,752,105
================================================
5. Unusual Charges The following unusual charges were incurred
during the year ended April 30, 1996:
Included in costs of sales:
Write-off of medical device
inventory $2,840,000
================================================
F-19
<PAGE>
Health Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Included in operating expenses:
o Additional provision reflecting
a change in the estimation of
the allowance for doubtful
accounts 8,400,000
o Cost associated with
organizational consolidation and
other cost reduction programs * 3,600,000
o Professional fees related to the
Company's litigation and
restatement of fiscal 1995
financial statements (see Note
7(d)) 2,000,000
------------------------------------------------
$14,000,000
================================================
* The organizational consolidation costs
include termination benefits accrued
totalling $1,271,000 related to the
Company's January 1996 plan of termination
of approximately 30 employees as part of the
consolidation of the Company's accounting
and executive offices in Buffalo Grove,
Illinois. Through April 30, 1996, $545,000
of such benefits had been paid leaving a
balance of $726,000.
The remaining organizational consolidation
costs and other cost reduction programs,
totalling $2,329,000, related to lease
termination costs, write off of related
fixed assets, and the write off of goodwill
and related long-lived assets relating to
the PMA acquisition (see Note 2). Through
April 30, 1996, write-off of fixed assets,
goodwill and related long lived assets
amounted to $950,000, leaving a balance of
$1,379,000.
The above remaining liabilities of $726,000
and $1,379,000 and the unpaid professional
fees of $1,454,000 as of April 30, 1996 were
included in accrued unusual charges.
F-20
<PAGE>
Health Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
<TABLE>
<CAPTION>
6. Income Taxes The income tax expenses (benefits) are comprised of the following:
Year ended April 30, 1996 1995 1994
-----------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $(4,398,902) $ 2,793,223 $ 2,640,000
State and local 667,756 1,063,468 812,000
-----------------------------------------------------------------
(3,731,146) 3,856,691 3,452,000
-----------------------------------------------------------------
Deferred
Federal 989,000 (1,851,000) (580,000)
State and local 337,300 (665,300) (121,315)
-----------------------------------------------------------------
1,326,300 (2,516,300) (701,315)
-----------------------------------------------------------------
Total income taxes $(2,404,846) $ 1,340,391 $ 2,750,685
=================================================================
The following reconciles the federal statutory tax rate with the
actual effective rate:
<CAPTION>
Year ended April 30, 1996 1995 1994
-----------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate (34%) 34% 34%
Increase (decrease) in tax rate
resulting from:
State and local taxes, net of
federal benefit 5% 7 7
Change in deferred tax assets
valuation allowance 11% -- --
-----------------------------------------------------------------
Effective rate (18%) 41% 41%
=================================================================
Deferred tax assets (liabilities) consist of the following:
<CAPTION>
April 30, 1996 1995
-----------------------------------------------------------------
Deferred tax assets resulting from:
Allowance for doubtful accounts $4,532,000 $3,163,000
Unusual charges 535,000 --
Deferred tax liability - difference in
carrying value of goodwill for book and
tax (734,000) (29,700)
-----------------------------------------------------------------
4,333,000 3,133,300
Valuation allowance (2,526,000) --
-----------------------------------------------------------------
$1,807,000 $3,133,300
=================================================================
</TABLE>
F-21
<PAGE>
Health Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
A valuation allowance for the deferred tax
assets was provided because of uncertainty as to
future realization of the deferred tax assets
(exclusive of the remaining carryback benefit)
as a result of the substantial doubt about the
Company's ability to continue as a going
concern.
As of April 30, 1996, the Company recorded a
$8,037,030 tax refund receivable, which
consisted of $1,344,000 of tax refund receivable
from amended 1995 tax returns as a result of the
restatement of fiscal 1995 financial statements,
$2,530,030 of excessive estimate taxes paid in
1996 and $4,163,000 estimated refund claim due
to 1996 net operating loss carryback.
7. Commitments and (a) Leases
Contingencies
The Company leases its offices, warehouse
and retail pharmacies under operating leases
expiring at various times through August
2002. The Company also leases data
processing equipment under agreements which
expire at various times through 2000. These
leases have been classified as capital
leases (Note 3).
As of April 30, 1996, future net minimum
lease payments under capital leases and
noncancellable operating lease agreements
are as follows:
Capital Operating
--------------------------------------------
1997 $416,241 $1,296,629
1998 389,908 1,088,500
1999 312,249 765,575
2000 227,870 680,728
2001 68,405 177,447
Thereafter -- 97,654
--------------------------------------------
Total minimum
lease payments 1,414,673 4,106,533
Less amounts
representing
interest 179,803 --
--------------------------------------------
Net minimum
lease payments $1,234,870 $4,106,533
============================================
F-22
<PAGE>
Health Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Rent expense for the years ending April 30,
1996, 1995, and 1994 amounted to $1,544,788,
$364,448 and $252,534, respectively which
included rent expense for the buildings owned by
the two Murray Group shareholders amounted to
$106,400, $106,410 for the years ended April 30,
1996 and 1995.
(b) Retirement plan
Effective August 1, 1990, the Company
established a 401(K) plan for eligible
salaried employees. The contribution for any
participant may not exceed statutory limits.
After one year of employment, the Company
will match 40% of each employee
participant's contributions up to the first
5% of compensation. The total matching
contributions charged against operations
amounted to $178,844, $71,281 and $22,935
for the years ended April 30, 1996, 1995 and
1994.
(c) Employment Agreements
The Company has in effect employment
agreements with certain key officers and
employees, which expire at various dates
through May, 1999. Total salaries under
these agreements amount to approximately
$900,000 annually.
F-23
<PAGE>
Health Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
(d) Litigation
(1) The Company and certain of its past and
current directors and officers have been
named as defendants in eleven class
action securities fraud lawsuits filed
in the United States District Court for
the Eastern District of New York. These
lawsuits will be consolidated shortly
into one action. These actions allege
claims under Sections 10(b) and 20(a) of
the Securities and Exchange Act of 1934,
arising out of alleged
misrepresentations and omissions by the
Company in connection with certain of
its disclosure statements. These actions
purport to represent a class of persons
who purchased the Company's common stock
during a period ending February 27,
1996, the date the Company announced
that it would have to restate certain of
its financial statements. These actions
seek unspecified monetary damages
reflecting the decline in the trading
price of the Company's stock that
allegedly resulted from the Company's
February 1996 announcements. Pursuant to
the proposed Order of Consolidation, the
Company will not be required to answer
or otherwise move in the consolidated
action until thirty days after it is
served with an amended consolidated
complaint, which has not yet been served
on the Company.
Certain of the Company's current and
former officers and directors have been
named as defendants, and the Company has
been named as a nominal defendant, in a
consolidated derivative action filed in
the United States District Court for the
Eastern District of New York. The
consolidated action alleges claims for
breach of fiduciary duty and
contribution against the individual
director defendants arising out of
alleged misrepresentations and omissions
contained in certain of the Company's
corporate filings, as more fully alleged
in the above-described class action
lawsuit. The consolidated action seeks
unspecified monetary damages on behalf
of the Company as well as declaratory
and injunctive relief. Pursuant to the
Stipulation and Order of Consolidation,
the Company is not required to answer or
otherwise move in the consolidated
action until sixty days after it is
served with an amended consolidated
complaint, which has not yet been served
on the Company.
F-24
<PAGE>
Health Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
The Company's auditors have been named
as a defendant, and the Company has been
named as a nominal defendant, in a
derivative lawsuit filed in the Supreme
Court for the State of New York, County
of New York. The complaint against the
Company's auditors alleges claims for
misrepresentations and omissions
contained in certain of the Company's
corporate filings. The complaint seeks
unspecified monetary damages on behalf
of the Company as well as declaratory
and injunctive relief. Pursuant to
stipulation, the Company's time to
answer or otherwise move against the
complaint in this action has been
indefinitely adjourned.
The enforcement division of the
Securities and Exchange Commission has a
formal order of investigation relating
to matters arising out of the Company's
public announcement on February 27, 1996
that the Company would have to restate
its financial statements for prior
periods as a result of certain
accounting irregularities and the
Company is fully cooperating with this
investigation and has responded to the
commission's requests for documentary
evidence.
(2) The Company has been named as a
defendant in an action pending in the
United States District Court for the
Eastern District of New York entitled
Bindley Western Industries, Inc. vs.
Health Management Inc., 96 Civ. 2330
(ADS). The action alleges claims for
breach of contract and accounts stated
arising out of a dispute regarding
payments for certain goods. The action
seeks damages in the amount of
$3,187,157.35 together with interest,
costs and disbursements. The Company has
answered the complaint, complied with
its automatic disclosures obligations
and has reduced the accounts payable to
approximately $2,100,000 as of July 29,
1996.
F-25
<PAGE>
Health Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
(3) On April 3, 1995, American Preferred
Prescription, Inc. ("APP") filed a
complaint against the Company, Preferred
Rx, Inc., Community Prescription
Services and Sean Strub in the New York
Supreme Court for tortious interference
with existing and prospective
contractual relationships, for lost
customers and business opportunities
resulting from allegedly slanderous
statements and for allegedly false
advertising and promotions. Four
separate causes of actions are alleged,
each for up to $10 million in damages.
APP had previously filed a similar suit
in the United States Bankruptcy Court of
the Eastern District of New York, which
was dismissed and the court abstained
from exercising jurisdiction. The
Company has answered the complaint and
counterclaimed for libel and slander
predicated upon a false press release
issued by APP and added as defendants
the principals of APP. By stipulation
dated January 29, 1996, the Company
discontinued its counterclaim against
APP and its third-party claims against
the principals of APP. In addition, by
motion dated March 12, 1996, APP moved,
in the Supreme Court of the State of New
York, to amend its complaint to add,
among other things, a cause of action
against the Company alleging that a
proposed plan of reorganization
presented by the Company to the
Bankruptcy Court in APP's bankruptcy
case was based on fraudulent financial
statements. The motion also seeks to
amend the state court complaint to add
certain other defendants. These proposed
defendants, by notice of removal dated
March 22, 1996, removed the state court
action to the Bankruptcy Court of the
Eastern District of New York. By motion
dated April 2, 1996, APP requested that
the Bankruptcy Court remand the action
to the State Court, which the Bankruptcy
Court granted. HMI opposed the motion to
amend the complaint in the State Court.
The motion is currently pending before
the State Court. Management believes
APP's suit against it to be without
merit, intends to defend the proceeding
vigorously and believes the outcome will
not have a material adverse effect on
the Company's results of operations or
financial position.
F-26
<PAGE>
Health Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
On or about August 4, 1995, APP
commenced an action in the Supreme Court
of the State of New York, County of
Nassau, against a former APP employee
who is currently employed by the
Company, and Charles Hutson, Susan
Hutson and Hutson Consulting Services
(collectively, the "Hutsons"). The
Company is not named as a defendant in
this lawsuit. The complaint in this
action alleges, among other things, that
the employee provided to the Hutsons,
who formed and subsequently discontinued
a joint marketing venture with APP,
confidential information which was
disclosed to competitors of APP. On
September 1, 1995, the Hutsons removed
the action to the Bankruptcy Court. The
employee answered the complaint on
December 27, 1995. No depositions have
taken place, nor have any documents been
produced. APP moved to remand this case
to the Supreme Court for the County of
Nassau. In a hearing which took place
before the Bankruptcy Court on June 27,
1996, the Bankruptcy Court preliminary
ruled to grant APP's remand motion, but
provided the Hutsons a further
opportunity to submit a written response
to the motion.
The Company is presently unable to determine
the possible outcome and costs of the final
resolution of the litigation discussed
above. Accordingly, it has not provided for
a possible loss. The resolution of these
matters could have a material adverse effect
on the Company's financial position and
future results of operations in the near
term.
F-27
<PAGE>
Health Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
8. Capital Transactions (a) Public Offerings
On November 18, 1993, the Company completed
a secondary public offering of 2,000,000
shares of stock at $12.00 per share.
Proceeds from this offering, net of expenses
of the offering of $2,017,742, were
$21,982,258.
(b) Options and warrants
Stock options and warrants activities are
shown below:
<TABLE>
<CAPTION>
Omnibus Incentive
Incentive Stock Stock Option Directors'
Option Plan (1) Plan (2) Warrants Options (3)
--------------------------------------------------------------------------------------
Shares covered 1,000,000 50,000 130,662 26,000
======================================================================================
<S> <C> <C> <C> <C>
Outstanding at May
1, 1993 -- 12,221 130,662 --
Granted 420,000 2,500 -- 19,000
Exercised -- (2,833) (40,330) --
Cancelled -- (833) -- --
--------------------------------------------------------------------------------------
Outstanding at April
30, 1994 420,000 11,055 90,332 19,000
Granted 132,500 -- -- 4,000
Exercised (2,000) (833) (78,996) --
Cancelled -- - -- --
--------------------------------------------------------------------------------------
Outstanding at April
30, 1995 550,500 10,222 11,336 23,000
Granted 709,000 -- -- 3,000
Exercised (11,000) (1,223) -- --
Cancelled (309,500)
--------------------------------------------------------------------------------------
Outstanding at April
30, 1996 939,000 8,999 11,336 26,000
======================================================================================
At April 30, 1996:
Price range $ 4.98 - $ .90 - $10.875 -
$ 10.38 $ 4.50 $ 5.40 $18.840
Shares exercisable 346,833 8,999 11,336 26,000
Available for grant -0- 5,669 -- --
</TABLE>
F-28
<PAGE>
Health Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
(1) On May 26, 1993 the Compensation Committee
authorized and on October 14, 1993, the
stockholders approved the establishment of
an omnibus incentive stock option plan to
provide incentives for key employees and
members of the Board of Directors. The
maximum number of shares issuable under the
plan is 10% of the outstanding shares up to
1,000,000 shares. The exercise period for an
option shall not exceed ten years from the
date of grant, except in the case of a more
than 10% stockholder such period shall not
exceed five years. The option price per
share shall be not less than the average
market value or, in the case of a 10%
stockholder with respect to incentive stock
options, 110% of fair value on the date of
grant.
(2) On February 16, 1990, the Company approved
the adoption of an incentive stock option
plan covering 50,000 common shares. The
options are exercisable over a ten year
period.
(3) During the years ended April 30, 1996, 1995
and 1994, the Company granted a total of
19,000, 4,000 and 3,000 options to its
outside directors at an exercise price of
$18.84, $16.77, and $10.875 to $12.088, the
market price on the date of the grant,
respectively.
(4) Pursuant to a special meeting of the
executive committee of the board of
directors on April 3, 1996, members of the
special committee of the board of directors
were granted a total of 25,000 options and
75,000 stock appreciation rights.
The per share exercise price for the stock
options and appreciation rights is a price
equal to the average closing price of the
shares for the five trading days preceding
April 3, 1996 or $4.8375. The vesting
schedule for each of the stock options and
stock appreciation rights is one-half upon
the appointment of the permanent Chief
Executive Officer and one-half on May 1,
1997.
At April 30, 1996, shares of the Company's
authorized and unissued common stock were
reserved for issuance upon exercise of options
and warrants, which included 1,009,335 shares
for outstanding options and warrants and 5,669
shares for options available for grant.
F-29
<PAGE>
Health Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
(d) Restricted stock
On May 1, 1993, the Company awarded 11,000
shares of restricted common stock to three
outside consultants. The shares awarded are
subject to certain restrictions and
forfeiture. Vesting occurs over a two year
period from the date the shares are awarded.
The shares were recorded at their quoted
market value at the date of grant of $10.375
per share, or $114,125. The compensation
element related to the awarding of such
shares is recognized ratably over the
two-year restriction period. Compensation
expense recognized related to such shares
for the years ended April 30, 1996, 1995 and
1994 were $-0-, $57,065 and $57,060,
respectively.
9. Supplemental Cash (a) Supplemental disclosures of cash flow
Flow Information information:
<TABLE>
<CAPTION>
Year ended April 30, 1996 1995 1994
--------------------------------------------------------------
<S> <C> <C> <C>
(1) Cash paid for
interest expense $2,381,667 $ 174,430 $ 94,468
(2) Cash paid for
income taxes $1,949,491 $7,745,067 $3,157,483
</TABLE>
(b) Supplemental disclosures of non-cash
investing and financing activities:
(1) The Company financed $1,361,455 and
$177,286 of new equipment during the
years ended April 30, 1996 and 1995.
(2) During the year ended April 30, 1995,
$3,000,000 of the purchase price of CPMB
was a five year subordinated note (Note
2(a)).
(3) During the year ended April 30, 1995,
the Company issued 128,757 shares of
non-registered common stock in
connection with the acquisition of
Maryland pharmacies and PMA (Note 2(b)
and (c)).
(4) During the year ended April 30, 1994,
holders of $374,999 of the Company's
convertible subordinated debentures
converted their debt into 357,145 shares
of common stock.
F-30
<PAGE>
Health Management, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
(5) During the year ended April 30, 1994,
the Company awarded 11,000 shares of
restricted common stock to three outside
consultants. (Note 7(d)).
(6) During the year ended April 30, 1994,
the Company issued 617,060 shares of
non-registered common stock in
connection with the Murray acquisition.
(Note 2(d)).
10. Quarterly Financial The following table summarizes quarterly results:
Information
(Unaudited, in
thousands, except
for per share data)
<TABLE>
<CAPTION>
Year Ended April First Second Third Fourth
30, 1996 Quarter Quarter Quarter Quarter Year
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue $ 38,294 $ 39,275 $ 40,801 $ 40,490 $ 158,860
Gross profit 11,761 9,155 7,331* 10,389 38,636
Income (loss)
before income
taxes 2,700 239 (16,786)* 514 (13,333)
Net income
(loss) 1,589 139 (9,904)* (2,751)** (10,927)
Earnings (loss)
per common
share .17 .01 (1.06) (.28) (1.16)
Year Ended April First Second Third Fourth
30, 1995 Quarter Quarter Quarter Quarter Year
----------------------------------------------------------------------------------
Revenue: 17,216 20,884 21,982 28,374 88,456
Gross profit: 4,986 6,103 6,813 6,846 24,748
Income (loss)
before income
taxes: 545 1,807 2,248 (1,313) 3,287
Net income
(loss): 304 1,044 1,455 (857) 1,946
Earnings (loss)
per common
share .03 .11 .15 (.09) .21
</TABLE>
* The Company incurred unusual charges of
$16,840,000 in the third quarter of fiscal
1996 (see Note 5).
** The Company provided an adjustment of
$2,526,000 to its valuation allowance for
deferred tax assets in the fourth quarter of
fiscal 1996 (see Note 6).
F-31
<PAGE>
Health Management, Inc.
and Subsidiaries
================================================================================
Form 10-K Item 14(d) -
Consolidated Financial Statement Schedule
April 30, 1996
<PAGE>
Health Management, Inc.
and Subsidiaries
Index to Consolidated Financial Statements Schedule
================================================================================
Report of independent certified public accountants S - 3
Schedule II - Valuation and qualifying accounts
and reserves S - 4
S - 2
<PAGE>
Report of Independent Certified Public Accountants
on Financial Statement Schedule
Health Management, Inc. and Subsidiaries
Buffalo Grove, Illinois
The audits referred to in our report dated July 22, 1996, except for Note 4(a)
which is as of July 26, 1996 relating to the consolidated financial statements
of Health Management, Inc. and subsidiaries, which is contained in Item 8 of
this Form 10-K, included the audit of the accompanying schedule of valuation and
qualifying accounts. This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion on this
financial statement schedule based upon our audits.
In our opinion such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
BDO Seidman, LLP
Mitchel Field, New York
July 22, 1996
S - 3
<PAGE>
Health Management, Inc.
and Subsidiaries
Schedule II - Valuation and Qualifying
Accounts and Reserves
<TABLE>
<CAPTION>
================================================================================================
Balance at Additions
Beginning of Charged to Balance at End of
Classification Year Operations Deductions Year
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
Year ended April 30, 1996 $7,998,000 $14,714,000 $12,642,000 $10,070,000
================================================================================================
Year ended April 30, 1995 $2,206,000 $ 7,978,000 $ 2,186,000 $ 7,998,000
================================================================================================
Year ended April 30, 1994 $ 925,000 $ 1,781,000 $ 500,000 $ 2,206,000
================================================================================================
</TABLE>
S - 4
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
HEALTH MANAGEMENT, INC.
July 29, 1996 /s/ W. James Nicol
-----------------------------------------------------------------
W. James Nicol, Chief Executive Officer and President
(Principal Executive Officer)
July 29, 1996 /s/ Paul S. Jurewicz
-----------------------------------------------------------------
Paul S. Jurewicz, Chief Financial Officer, Treasurer, Executive
Vice President and Treasurer (Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
July 29, 1996 /s/ W. James Nicol
-----------------------------------------------------------------
W. James Nicol, Chief Executive Officer, President and Director
July 29, 1996 /s/ Andre C. Dimitriadis
-----------------------------------------------------------------
Andre C. Dimitriadis, Director
July 29, 1996 By: /s/ D. Mark Weinberg
-----------------------------------------------------------------
D. Mark Weinberg, Secretary and Director
July 29, 1996 /s/ Dr. Timothy Triche
-----------------------------------------------------------------
Dr. Timothy Triche, Director
<PAGE>
INDEX TO EXHIBITS
Exhibit Page
------- ----
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 1O-K
for year ended April 30, 1995).
3.5 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.
10.8* Employment Agreement, dated as of January 8, 1996, between
the Company and James R. Mieszala.
10.9* Employment Agreement, dated as of December 18, 1996, between
the Company and Paul S. Jurewicz.
10.10 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).
10.11 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).
10.12 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).
10.13 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).
10.14 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).
10.15 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).
<PAGE>
10.16 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).
10.17 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).
10.18 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.
10.19 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).
10.20 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).
10.21 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).
10.22 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).
11 Statement re Computation of Per Share Earnings.
21 Subsidiaries of the Registrant (incorporated by reference to
Form 10-K for the year ended April 30, 1996).
23 Consent of BDO Seidman, LLP
27 Financial Data Schedule
* Management contract or compensatory plan or arrangement.
<PAGE>
HEALTH MANAGEMENT, INC.
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is entered into as of May
1, 1996, by and between Health Management, Inc., a Delaware corporation (the
"Company"), and W. James Nicol (the "Executive").
WHEREAS, the Company desires to employ the Executive as of May 1, 1996
(the "Effective Date") , and the Executive desires to accept employment with the
Company, on the terms and conditions set forth below.
NOW, THEREFORE, in consideration of the foregoing recital and the
respective covenants and agreements of the parties contained in this document,
the Company and the Executive agree as follows:
1. Employment and Duties. The Executive will serve as President and
Chief Executive Officer of the Company. The duties and responsibilities of the
Executive shall include the duties and responsibilities of the chief executive
officer of a company whose securities are publicly traded and as set forth in
the Company's Bylaws from time to time in effect and such other duties and
responsibilities as the board of directors of the Company (the "Board of
Directors") may from time to time reasonably assign the Executive, in all cases
to be consistent with the Executive's corporate offices and positions; provided,
however, that the Executive understands and agrees that the Board of Directors
shall direct any and all litigation arising from or related to the recent
restatement of the Company's financial statements. The Executive shall also
serve as an officer and/or director of affiliates of the Company, without
additional compensation, if requested to do so by the Board of Directors. The
Executive shall perform faithfully the executive duties assigned to him to the
best of his ability. At the next meeting of the Board of Directors, the
Executive will be nominated to serve as a director of the Company and, when
elected or appointed thereafter, the Executive shall serve in such capacity
without additional compensation.
2. Employment Period.
(a) Term. The term of Executive's employment shall be for a
period of three years beginning May 1, 1996, and continuing until April 30,
1999.
(b) Evergreen Extension of Agreement. This Agreement shall
continue in full force and effect, following the end of the three year term
hereof, for additional periods of one year if notice is not given by the Company
to Executive at least six months in advance of the termination date provided in
this Agreement that this Agreement will terminate on its termination date.
The term of this Agreement shall be the period of time
provided in paragraphs 2(a) and 2(b) hereof and herein shall be referred to as
the "Term."
<PAGE>
(c) Involuntary Termination. The Company may terminate the
Executive's employment at any time. If the Company terminates the Executive's
employment for any reason other than Cause or Disability, each as defined below,
the provisions of paragraphs 13(a)(i), 13(b) and 13(c) shall apply. Upon
termination of the Executive's employment with the Company, the Executive's
rights under any applicable benefit plans shall be determined under the
provisions of those plans.
(d) Death. The Executive's employment will terminate in the
event of his death. The Company shall have no obligation to pay or provide any
compensation or benefits under this Agreement on account of the Executive's
death, or for periods following the Executive's death, provided that the
Company's obligations applicable under such circumstance under paragraph
13(a)(iii) shall not be interrupted as a result of the Executive's death. The
Executive's rights under any applicable benefit plans of the Company in the
event of the Executive's death will be determined under the provisions of those
plans.
(e) Disability. The Company may terminate the Executive's
employment for Disability by giving the Executive thirty (30) days' advance
notice in writing. For all purposes under this Agreement, "Disability" shall
mean that the Executive, at the time notice is given, has been unable to
substantially perform his duties under this Agreement for a period of not less
than ninety (90) days due to physical or mental illness. The determination of
the Executive's Disability hereunder shall be made by a two-thirds (2/3)
majority of the Company's Board of Directors (excluding the Executive) and shall
be based upon advice from such medical professionals and upon such medical and
other records as the Company's Board of Directors may deem appropriate. In the
event that the Executive resumes the performance of substantially all of his
duties hereunder before the termination of his employment under this
subparagraph (e) becomes effective, the notice of termination shall
automatically be deemed to have been revoked. No compensation or benefits will
be paid or provided to the Executive under this Agreement on account of
termination for Disability, or for periods following the date when such a
termination of employment is effective. The Executive's rights under any
applicable benefit plans of the Company shall be determined under the provisions
of those plans.
(f) Cause. The Company may terminate the Executive's
employment for cause by giving the Executive notice in writing. For all purposes
under this Agreement, "Cause" shall mean (i) willful failure by the Executive to
perform his duties hereunder, other than a failure resulting from the
Executive's complete or partial incapacity due to physical or mental illness or
impairment, (ii) gross negligence by the Executive in performing his duties
hereunder, other than negligence resulting from the Executive's complete or
partial incapacity due to physical or mental illness or impairment, (iii) a
willful act by the Executive which constitutes gross misconduct and which is
injurious to the Company, (iv) a violation of a federal or state law or
regulation applicable to the business of the Company. No act, or failure to act,
by the Executive shall be considered "willful" unless committed without good
faith without a reasonable belief that the act or omission was in the Company's
best interest. The determination of Cause hereunder shall be made by a majority
of the Company's Board of Directors (excluding the Executive). No compensation
or benefits will be paid or provided to the Executive under this Agreement on
account of a termination for Cause. Executive's rights under any applicable
benefit plans of the Company shall be determined under the provisions of those
plans.
- 2 -
<PAGE>
(g) Resignation for Cause--Change in Control or Diminution in
Duties. In the event that there is a change in Control of the Company (as
defined in Section 6(b) hereof) or in the event that the Board of Directors
materially reduces the scope and/or authority of the Executive's duties as
President and Chief Executive Officer of the Company, then the Executive may
terminate his employment by giving the Company thirty (30) days advance written
notice. In such event, the provisions of paragraph 13(a)(ii) shall apply and the
Executive's rights under any applicable benefit plans of the Company shall be
determined under the provisions of those plans.
(h) Resignation without Cause. The Executive may terminate his
employment for reasons other than those referred to in paragraph 2(g) hereof by
giving the Company forty-five (45) days advance written notice; provided that in
such event, the Executive will cease his employment immediately or at any time
during such forty-five (45) day period, if so requested by the Board of
Directors . In such event, the provisions of paragraph 13(a)(iii) shall apply
and the Executive's rights under any applicable benefit plans of the Company
shall be determined under the provisions of those plans.
3. Place of Employment. The Executive's services shall be performed at
the Company's principal executive offices in the Chicago, Illinois area,
although the Executive understands that he is expected to travel extensively in
carrying out his duties as President and Chief Executive Officer of the Company.
The parties acknowledge, however, that the Executive's primary residence
currently is in Seal Beach, California and that although it is expected that
Executive will be required regularly to be present in the Company's executive
offices in Chicago, it is not anticipated that he will be required to move his
primary residence to Chicago, unless it becomes appropriate to do so based upon
the requirements of fulfilling Executive's employment obligations. If such a
move becomes appropriate, the Company will pay, or reimburse the Executive, for
all ordinary and reasonable expenses incurred in moving his household to the
Chicago area.
4. Base Salary. For all services to be rendered by the Executive
pursuant to this Agreement, the Company agrees to pay the Executive an annual
base salary ("the "Base Salary") of $300,000. The Base Salary shall be paid in
periodic installments in accordance with the Company's regular payroll
practices. The Company agrees to review Executive's Base Salary at least
annually as of the anniversary of his employment (beginning in 1997) and to make
such increases therein as the Board of Directors, in its sole discretion, may
approve.
5. Bonus. Beginning with the Company's 1997 fiscal year, and for each
fiscal year thereafter during the term of this Agreement, the Executive will be
eligible to receive an annual bonus (the "Bonus") based upon an Executive
Incentive Compensation Plan to be approved and adopted by the Board of
Directors. On or before August 31, 1996, the Executive shall prepare and submit
to the Board of Directors for approval an Executive Incentive Compensation Plan
that will include the terms, conditions and formula for computing bonuses for
the Company's executive officers for the Company's 1997 fiscal year. On or
before January 31, 1997 and each year thereafter, the Executive shall prepare
and submit to the Board of Directors for approval an update of the Executive
Incentive Compensation Plan that will include the terms, conditions and formula
for computing bonuses for the Company's executive officers for the Company's
1998 fiscal year and each year thereafter.
- 3 -
<PAGE>
6. Stock Options.
(a) Initial Option. Effective as of the Company's next Board
of Director's meeting hereafter, the Company shall grant the Executive options
(the "Executive Options") to purchase 500,000 shares of the Company's Common
Stock (the "Executive Option Shares") at $5-3/8 per share. Such options shall
be exercisable over a period of five years from the date of grant. The Executive
Options shall vest as described in paragraph 6(b) below and shall be subject to
such other terms and conditions as are described in paragraph 6(c) below.
(b) Vesting. The Executive Option Shares shall vest and become
exercisable in three equal annual installments beginning on the first (1st)
anniversary of the Effective Date and ending on the third (3rd) anniversary of
the Effective Date. In the event of a Change of Control (as defined below), the
unvested portion of the Executive Options shall automatically accelerate, and
the Executive shall have the right to exercise all or any portion of the
Executive Options, in addition to any portion of the Executive Option
exercisable prior to such event. For purposes of this Agreement, the term
"Change of Control" shall mean the occurrence of any of the following events
subsequent to the Effective Date:
(i) Any "person" (such as term is used in
Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, or securities of the Company
representing fifty percent (50%) or more of the total voting power represented
by the Company's then outstanding voting securities; or
(ii) Any merger or consolidation of the Company
with any other corporation, other than a merger or consolidation that would
result in the voting securities of the Company outstanding immediately prior
thereto continuing to represent fifty percent (50%) or more of the total voting
power represented by the Company's then outstanding voting securities (either by
remaining outstanding or by being converted into voting securities of the
Company or such other surviving entity outstanding immediately after such merger
or consolidation); or
(iii) A majority of the directors of the Company
which were not nominated by the Company's management (or were nominated by
management pursuant to an agreement with persons that acquired sufficient voting
securities of the Company to de facto control it) are elected to the Board of
Directors by the Company's shareholders; or
(iv) the shareholders of the Company approve a
plan of complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all the Company's assets.
(c) Option Provisions. The Executive Options shall be granted
under a new stock option plan to be adopted by the Company (the "Stock Plan"),
which Stock Plan must be approved by the Company's stockholders to become
effective, and, except as expressly provided otherwise in this paragraph 6,
shall be subject to the terms and conditions of the Stock Plan and form of
option agreement; provided, however, that the Company's Board of Directors may,
in its discretion, grant
- 4 -
<PAGE>
the Executive Options outside of the Stock Plan, and any such options shall
include such other terms as the Board of Directors may specify that are not
inconsistent with the terms hereof.
(d) Registration of Common Stock underlying the Executive
Options. The Company agrees that the Common Stock underlying the Executive
Options shall be salable concurrent with the Executive's exercise, in whole or
in part, of the Executive Options under an applicable Registration Statement to
be filed by the Company with respect to the Company's Stock Plan, or other
applicable Registration Statement if issued outside of the Stock Plan and that
it shall cause such Registration Statements to be in effect at the time that the
Executive exercises his Executive Options.
7. Lodging Expenses. On or before August 1, 1996, the Executive at his
sole cost shall provide himself with lodging at a location convenient to the
Company's executive offices in Chicago. Prior to such date, the Company will
provide local lodging to the Executive, or in the alternative, reimburse the
Executive for reasonable lodging expenses incurred by him.
8. Expenses. The Executive shall be entitled to reimbursement by the
Company for all reasonable, ordinary, and necessary travel, entertainment, and
other expenses incurred by the Executive during the term of this Agreement (in
accordance with the policies and procedures established by the Company for its
senior executive officers) in the performance of his duties and responsibilities
under this Agreement; provided, however, that the Executive shall properly
account for such expense in accordance with the Company's policies and
procedures.
9. Benefits. The Executive shall be entitled to participate in
employee benefit plans or programs of the Company, if any, to the extent that
his position, tenure, salary, age, health, and other qualifications make him
eligible to participate, subject to the rules and regulations applicable
thereto; provided, however, that the Company will use its best efforts to obtain
a waiver from the insurer of the three month waiting period provision in the
Company's Group Health Insurance Program, with the result that the Executive
will be covered by such Program commencing on the Effective Date. In addition,
the Executive shall be entitled to receive an annual physical examination at
Company expense; or at the Company's request, will take an a physical
examination annually and provide the results to the Company.
10. Vacations and Holidays. The Executive shall be entitled to
paid vacation time and Company holidays in accordance with the Company's
policies in effect from time to time for its senior executive officers.
11. Indemnification. The Company shall enter into an Officers and
Directors Indemnification Agreement with the Executive that shall provide the
Executive with the maximum amount of protection allowed under the laws of
Delaware to the extent that they are not inconsistent with the Company's
Certificate of Incorporation or Bylaws with respect to such subject matter.
12. Other Activities. The Executive shall devote substantially all of
his working time and efforts during the Company's normal business hours to the
business and affairs of the Company and to the diligent and faithful performance
of the duties and responsibilities duly assigned to him pursuant to this
Agreement, except for vacations, holidays and sickness. The Executive may,
however, devote a reasonable amount of his time, in general after the regular
business hours of the Company, to civic, community, or charitable activities
and, with the prior written approval of the
- 5 -
<PAGE>
Board of Directors, to serve as a director of other corporations and to other
types of business or pubic activities not expressly mentioned in this paragraph.
The Board hereby approves the Executive's serving as a director of Comprehensive
Care Corporation (a public company) and Laguna Medical Services (a private
company), so long as such companies do not engage in a business which is
competitive with the Company's business.
13. Termination Benefits. In the event the Executive's employment
terminates, then the Executive shall be entitled to receive severance and other
benefits as follows:
(a) Severance.
(i) Involuntary Termination. If the Company
terminates the Executive's employment other than for Disability or Cause, then
in lieu of any severance benefits to which the Executive may otherwise be
entitled under any Company severance plan or program, the Executive shall be
entitled to payment of his entire unpaid Base Salary for the remaining term of
this Agreement, which Base Salary shall be paid to him in periodic installments
in accordance with the Company's regular payroll practices; provided, however,
that the Company's obligations hereunder shall cease upon a breach by the
Executive of his obligations under paragraphs 14, 15, 18 and 20 hereof.
(ii) Resignation; Change in Control; Diminution
in Duties. If the Executive terminates his employment by resignation pursuant
to paragraph 2(g) hereof as a result of a Change in Control of the Company or as
a result of the Board of Directors materially reducing the scope and/or
authority of the Executive's duties as President and Chief Executive Officer of
the Company, then in lieu of any severance benefits to which the Executive may
otherwise be entitled under any Company severance plan or program, the Executive
shall be entitled to payment of his entire unpaid Base Salary for the remaining
term of this Agreement, which Base Salary shall be paid to him in periodic
installments in accordance with the Company's regular payroll practices;
provided, however, that the Company's obligations hereunder shall cease upon a
breach by the Executive of his obligations under paragraphs 14, 15, 18 and 20
hereof.
(iii) Other Termination. In the event the
Executive's employment terminates for any reason other than as described in
paragraph 13(a)(i) or 13(a)(ii) above, including by reason of the Executive's
death or disability or resignation pursuant to paragraph 2(h) hereof, then the
Executive shall be not be entitled to receive any severance payment or any other
benefits, except as are provided in the Company's severance and benefit plans
and policies at the time of such termination.
(b) Options. In the event the Executive's employment is
terminated by the Company as described in paragraph 13(a)(i) above or by the
Executive as described in paragraph 13(a)(ii) above, then the Executive shall be
deemed vested in the unvested portion of the Executive Options and the Executive
Options shall become immediately exercisable with respect to all shares subject
thereto. In the event the Executive's employment is terminated for reasons other
than as described in paragraphs 13(a)(i) and 13(a)(ii), then the unvested
portion of the Executive Options shall not vest and the Executive's interest
therein shall immediately cease.
(c) Bonuses. In the event the Executive's employment is
terminated by the Company as described in paragraph 13(a)(i) above, then the
Executive shall be entitled to receive
- 6 -
<PAGE>
a portion of the Bonus, computed under the Company's Executive Incentive
Compensation Plan referred to in paragraph 5, which Bonus will be determined,
after the end of the fiscal year, by multiplying the amount of the Bonus which
would have become payable to the Executive had he remained employed until the
end of the fiscal year, by a fraction, the numerator of which will be the number
of days in which the Executive was employed by the Company in such fiscal year,
and the denominator of which shall be the number of days in such fiscal year. In
the event the Executive's employment terminates for any other reason, then the
Executive shall not be entitled to any Bonus which has not accrued as of such
date.
14. Proprietary Information. The Executive shall not, without the prior
written consent of the Board of Directors, disclose or use for any purpose
(except in the course of his employment under this Agreement and in furtherance
of the business of the Company) any confidential information or proprietary data
of the Company. As an express condition of the Executive's employment with the
Company, the Executive agrees to execute confidentiality agreements as requested
by the Company, including but not limited to the Company's standard form of
employee proprietary information agreement.
15. Absence of Conflict. The Executive represents and warrants
that his employment by the Company as described herein shall not conflict with
and will not be constrained by any prior employment or consulting agreement or
relationship.
16. Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
Chicago, Illinois, in accordance with the rules of the American Arbitration
Association then in effect by an arbitrator selected by both parties within ten
(10) days after either party has notified the other in writing that it desires a
dispute between then to be settled by arbitration. In the event the parties
cannot agree on such arbitrator within such ten (10) day period, each party
shall select an arbitrator and inform the other party in writing of such
arbitrator's name and address within five (5) days after the end of such ten
(10) day period and the two arbitrators so selected shall select a third
arbitrator within fifteen (15) days thereafter; provided, however, that in the
event of a failure by either party to select an arbitrator and notify the other
party of such selection within the time period provided above, the arbitrator
selected by the other party shall be the sole arbitrator of the dispute. Each
party shall pay his or its own expenses associated with such arbitration,
including the expense of any arbitrator selected by such party and the Company
will pay the expenses of the jointly selected arbitrator. The decision of the
arbitrator or a majority of the panel of arbitrators shall be binding upon the
parties and judgment in accordance with that decision may be entered in any
court having jurisdiction thereover. Punitive damages shall not be awarded.
17. Applicable Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Illinois as applied to
agreements between Illinois residents entered and to be performed entirely
within Illinois.
18. Certain Covenants of the Executive.
(a) Covenants Against Competition. The Executive acknowledges
that (i) the
- 7 -
<PAGE>
principal business of the Company and its affiliates involves the distribution
of pharmaceuticals, the provision of drug therapies, reimbursement services,
physician networks and other related businesses which the Company and its
affiliates currently operate and which the Company and its affiliates may become
involved with during the Term (collectively, the "Company Business"); (ii) the
Company Business is national in scope; (iii) the Executive's work for the
Company will bring him into close contact with many confidential affairs not
readily available to the public; and (iv) the Company would not enter into this
Agreement but for the agreements and covenants of the Executive contained
herein. In order to induce the Company to enter into this Employment Agreement,
the Executive covenants and agrees that:
(1) Non-Compete. During the Term and for a
period of eighteen (18) months following the termination (whether for cause or
otherwise) of the Executive's employment with the Company or any of its
affiliates (the "Restricted Period"), the Executive shall not, in the United
States of America or in any foreign country, directly or indirectly, (i) engage
in the Company Business for his own account; (ii) enter the employ of, or render
any services to, any person engaged in such activities; or (iii) become
interested in any person engaged in the Company Business, directly or
indirectly, as an individual, partner, shareholder, officer, director,
principal, agent, employee, trustee, consultant or in any other relationship or
capacity; provided, however, that the Executive may own, directly or indirectly,
solely as an investment, securities of any person which are traded on any
national securities exchange or NASDAQ if the Executive (a) is not a controlling
person of, or a member of a group which controls, such person or (b) does not,
directly or indirectly, own 1% or more of any class of securities of such
person.
(2) Confidential Information. During and after
the Restricted Period, the Executive shall keep secret and retain in strictest
confidence, and shall not use for the benefit of himself or others except in
connection with the business and affairs of the Company, all confidential
matters of the Company and its affiliates. Such confidential matters include,
without limitation, trade secrets, customer lists, subscription lists, details
of consultant contracts, pricing policies, operational methods, marketing plans
or strategies, product development techniques or plans, business acquisition
plans, new personnel acquisition plans, methods of manufacture, technical
processes, designs and design projects, inventions and research projects of the
Company and its affiliates, learned by the Executive heretofore or hereafter
that are sufficiently secret to have the possibility, whether or not realized,
of deriving economic value from not being generally known to other persons who
can obtain economic value from their disclosure or use, and the Executive shall
not disclose them to anyone outside of the Company and its affiliates, either
during or after employment, by the Company or any of its affiliates, except as
required in the course of performing duties hereunder or with the Company's
express written consent. The Executive's obligations pursuant to this Employment
Agreement shall not extend to matters which are within the public domain or
hereafter enter the public domain through no fault or action or failure to act,
whether directly or indirectly, on the part of the Executive.
(3) Property of the Company. All memoranda,
notes, lists, records and other documents (and all copies thereof) made or
compiled by the Executive or made available to the Executive concerning the
business of the Company or any of its affiliates shall be the Company's property
and shall be delivered to the Company promptly upon the termination of the
Executive's employment with the Company or any of its affiliates or at any other
time on request.
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(4) Employees of the Company. During the
Restricted Period, the Executive shall not, directly or indirectly, hire,
solicit or encourage to leave the employment of the Company or any of its
affiliates, any employee of the Company or its affiliates or hire any such
employee who has left the employment of the Company or any of its affiliates
within one year of the termination of such employee's employment with the
Company or any of its affiliates.
(5) Consultants and Independent Contractors of
the Company. During the Restricted Period, the Executive shall not, directly or
indirectly, hire, solicit or encourage to cease to work with the Company or any
of its affiliates, any consultant, social worker, registered nurse, sales
representative or other person then under contract with the Company or any of
its affiliates.
(b) Rights and Remedies Upon Breach. If the Executive
breaches, or threatens to commit a breach of, any of the provisions of Section
18(a) (the "Restrictive Covenants"), the Company shall have the following rights
and remedies, each of which rights and remedies shall be independent of the
other and severally enforceable, and all of which rights and remedies shall be
in addition to, and not in lieu of, any other rights and remedies available to
the Company under law or in equity:
(1) Specific Performance. The right and remedy
to have the Restrictive Covenants specifically enforced by any court having
equity jurisdiction, it being acknowledged and agreed that any such breach or
threatened breach will cause irreparable injury to the Company and its
affiliates and that money damages will not provide an adequate remedy to the
Company.
(2) Accounting. The right and remedy to require
the Executive to account for and pay over to the Company all compensation,
profits, monies, accruals, increments or other benefits (collectively,
"Benefits") derived or received by the Executive as the result of any
transactions constituting a breach of any of the Restrictive Covenants, and the
Executive shall account for and pay over such Benefits to the Company.
(c) Severability of Covenants. If any court determines that
any of the Restrictive Covenants, or any parts thereof, are invalid or
unenforceable, the remainder of the Restrictive Covenants shall not thereby be
affected and shall be given full effect, without regard to the invalid portions.
(d) "Blue-Penciling". If any court construes any of the
Restrictive Covenants, or any part thereof, to be unenforceable because of the
duration of such provision or the area covered thereby, such court shall have
the power to reduce the duration or area of such provision and, in its reduced
form, such provision shall then be enforceable and shall be enforced.
(e) Enforceability in Jurisdictions. The parties intend to and
hereby confer jurisdiction to enforce the Restrictive Covenants upon the courts
of any jurisdiction within the geographical scope of such Restrictive Covenants.
If the courts of any one or more of such jurisdictions hold the Restrictive
Covenants wholly unenforceable by reason of the breadth of such scope or
otherwise, it is the intention of the parties that such determination not bar or
in any way affect the Company's right to the relief provided above in the courts
of any other jurisdiction within the geographical scope of such Restrictive
Covenants, as to breaches of such Restrictive Covenants
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in such other respective jurisdictions, such Restrictive Covenants as they
relate to each jurisdiction being, for this purpose, severable into diverse and
independent covenants.
19. Successors. The Company will 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 the Company to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. Failure of the Company to obtain such assumption agreement
prior to the effectiveness of any such succession shall entitle the Executive to
the benefits described in paragraphs 13(a)(i), 13(b) and 13(c) of this
Agreement, subject to the terms and conditions therein.
20. Assignment. This Agreement and all rights under this Agreement
shall be binding upon and inure to the benefit of and be enforceable by the
parties hereto and their respective personal or legal representatives,
executors, administrators, heirs, distributees, devisees, legatees, successors
and assigns. This Agreement is personal in nature, and, except as provided in
paragraph 19 hereof, neither of the parties to this Agreement shall, without the
written consent of the other, assign or transfer this Agreement or any right or
obligation under this Agreement to any other person or entity. If the Executive
should die while any amounts are still payable to the Executive hereunder, all
such amounts, unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to the Executive's devisee, legatee, or other
designee or, if there be no such designee, to the Executive's estate.
21. Notices. For purposes of this Agreement, notices and other
communications provided for in this Agreement shall be in writing and shall be
delivered personally or sent by United States certified mail, return receipt
requested, postage prepaid, addressed as follows:
If to the Executive: W. James Nicol
249 Sixth Street
Seal Beach, California 90740
If to the Company: Health Management, Inc.
1371-A Abbott Court
Buffalo Grove, Illinois 60089
Attention: Chairman of the Board
of Directors
with a copy to:
Cheryl Reicin
McDermott, Will & Emery
1211 Avenue of the Americas
New York, New York 10036
or to such other address or the attention of such other person as the recipient
party has previously furnished to the other party in writing in accordance with
this paragraph. Such notices or other communications shall be effective upon
delivery or, if earlier, three (3) days after they have been mailed as provided
above.
22. Waiver. Failure or delay on the part of either party hereto
to enforce any right,
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<PAGE>
power, or privilege hereunder shall not be deemed to constitute a waiver hereof.
Additionally, a waiver by either party or a breach of any promise hereof by the
other party shall not operate as or be construed to constitute a waiver of any
subsequent waiver by such other party.
23. Severability. Whenever possible, each provision of this Agreement
will be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be invalid, illegal, or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality, or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed, and enforced in such jurisdiction as if such invalid,
illegal, or unenforceable provision had never been contained herein.
24. Right to Advice of Counsel. The Executive acknowledges that
he has consulted with counsel and is fully aware of his rights and obligations
under this Agreement.
25. Counterparts. This Agreement may be executed in one or more
counterparts, none of which need contain the signature of more than one party
hereto, and each of which shall be deemed to be an original, and all of such
together shall constitute a single agreement.
26. Integration. This Agreement represents the entire agreement and
understanding between the parties as to the subject matter hereof and supersedes
all prior or contemporaneous agreements whether written or oral. No waiver,
alteration, or modification of any of the provisions of this Agreement shall be
binding unless in writing and signed by duly authorized representatives of the
parties hereto.
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in
the case of the Company by its duly authorized officer, on the day set opposite
its name below.
Date Agreement Executed "COMPANY"
Health Management, Inc.
May ____, 1996 By:/s/Andre C. Dimitriadis
Andre C. Dimitriadis, Chairman
of the Board
"EXECUTIVE"
May ____, 1996 /s/ W. James Nicol
W. James Nicol
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<PAGE>
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT dated as of January 8, 1996, between Home Care
Management, Inc., a New York corporation (the "Company"), and James R. Mieszala
(the "Executive").
WHEREAS, the Company wishes to employ the Executive; and
WHEREAS, the Executive wishes to be employed by the Company.
NOW, THEREFORE, the parties agree as follows:
1. Employment, Duties and Acceptance.
1.1 Employment by the Company. The Company employs the
Executive, for itself and its affiliates, to render exclusive and full time
services in such capacities as the Company's Board of Directors (which is
currently composed of Dr. Clifford E. Hotte) may assign and, in connection
therewith, to perform such duties as the Executive shall reasonably be directed
to perform by the Company's Board of Directors. The Executive shall be the
President of the Company.
1.2 Acceptance of Employment by the Executive. The Executive
accepts such employment and shall render the services described above. In
addition to being the President of the Company, the Executive shall also serve
during all or any part of the Term as an officer of the Company and any of its
affiliates, without any compensation therefor other than as specified in this
Employment Agreement, if so elected by the directors of the Company or any of
its affiliates, as applicable.
<PAGE>
1.3 Place of Employment. The Executive's principal place of
employment shall be the Chicago, Illinois metropolitan area, subject to such
reasonable travel as the rendering of the services hereunder may require.
2. Term of Employment. The term of the Executive's employment
under this Employment Agreement (the "Term") shall commence on the date hereof
and shall end on April 30, 1998, unless sooner terminated as herein provided.
Notwithstanding the foregoing, if the Company does not intend to extend the
Executive's employment with the Company beyond April 30, 1998, then the Company
must give the Executive no less than three (3) months prior written notice
thereof, and to the extent the Company does not give such three (3) months prior
written notice, then the Company must continue to pay the Executive his
compensation as provided herein until the earlier of (i) six (6) months from the
date notice thereof is actually given or (ii) six (6) months from the end of the
Term.
3. Compensation.
3.1 Base Salary. As compensation for all services to be
rendered pursuant to this Employment Agreement, the Company shall pay the
Executive, during the Term, a salary of $210,000 per annum, with a 10% increase
for the period from May 1, 1997 through April 30, 1998 (the "Annual Salary"),
payable in accordance with the payroll policies of the Company as from time to
time in effect, less such deductions as shall be required to be withheld by
applicable law and regulations.
3.2 Performance Bonus. In addition to the Annual Salary
to be paid pursuant to Section 3.1 above, at the end of each of the Company's
fiscal years during the Term, the Executive shall also be entitled to an annual
performance bonus of up to 33% of the amount of
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<PAGE>
the Annual Salary (which for the fiscal year ended April 30, 1996 shall be made
on a pro rata basis), which will be at the sole discretion of the Company.
3.3 Stock Options. The Executive shall receive within 30 days
of the execution of this Agreement, non-qualified options to purchase 135,000
shares of Common Stock, par value $.03 per share (the "Shares"), of Health
Management, Inc., a Delaware corporation which owns all of the outstanding
shares of the Company (the "Options"). The form of the Options shall be
substantially in the form issued to other employees of the Company and its
affiliates. The per Share exercise price of the Options shall be the average
closing price of a Share as shown in the Wall Street Journal for the twenty full
trading days preceding the date of this Agreement. The Options shall vest when
the average closing price of a Share as represented in the Wall Street Journal
equals or exceeds the average share price indicated in the following table for a
60 consecutive day period:
Average Share Price # Options Vested
------------------- ----------------
13 10,000
15 10,000
17 10,000
19 10,000
21 12,500
23 12,500
25 15,000
27 15,000
29 20,000
31 20,000
------
135,000
3.4 Limitations Imposed by Law. The provisions of this
Employment Agreement relating to the compensation to be paid to the Executive
shall be subject to any
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<PAGE>
limitations provided by law or regulation which may from time to time limit the
compensation payable to the Executive.
3.5 Participation in Employee Benefit Plans. The Executive
shall be permitted during the Term, if and to the extent eligible, to
participate in any group life, hospitalization or disability insurance plan,
health program, pension plan or similar benefit plan of the Company, and shall
be entitled to such vacation and personal time, which may be available to other
comparable executives of the Company and generally on the same terms as such
other executives.
3.6 Expenses. Subject to such policies as may from time to
time be established by the Company's Board of Directors, the Company shall pay
or reimburse the Executive for all reasonable expenses actually incurred or paid
by the Executive during the Term in the performance of the Executive's services
under this Employment Agreement upon presentation of expense statements or
vouchers or such other supporting information as it may require.
4. Termination.
4.1 Termination upon Death. If the Executive dies during the
Term, this Employment Agreement shall terminate, except that the Executive's
legal representatives shall be entitled to receive the compensation herein
provided for a period ending on the last day of the month in which the
Executive's death occurs.
4.2 Termination upon Disability. If, during the Term, the
Executive becomes physically or mentally disabled, whether totally or partially,
so that the Executive is unable substantially to perform his services hereunder
for (i) a period of three consecutive months, or (ii) for shorter periods
aggregating three months during any six month period, the Company may
4
<PAGE>
at any time after the last day of the three consecutive months of disability or
the day on which the shorter periods of disability equal an aggregate of three
months, by written notice to the Executive, terminate the Term of the
Executive's employment hereunder. Nothing in this Section 4.2 shall be deemed to
extend the Term.
4.3 Termination for Cause. If the Executive neglects his
duties hereunder, is convicted of any crime or offense, fails or refuses to
comply with the reasonable oral or written policies or directives of the
Company's Chief Executive Officer, if any, or Board of Directors, is guilty of
misconduct in connection with the performance of his duties hereunder,
materially breaches affirmative or negative covenants or undertakings hereunder
or is guilty of any other conduct which would make his continued employment by
the Company prejudicial to the best interests of the Company, the Company may at
any time by written notice to the Executive terminate the Term of the
Executive's employment hereunder and the Executive shall have no right to
receive any compensation or benefit hereunder on and after the effective date of
such notice; provided, however, that in the case of neglect of duties, the
Executive shall be given written notice thereof and reasonable opportunity to
cure, which in no event shall exceed 30 days.
4.4 Termination Without Cause. The Company retains the right
to terminate the Executive without cause at any time provided the Executive is
continued to be paid based on his compensation as provided herein for a period
beginning on the date of his termination and ending on April 30, 1998, or if
such date is less than (3) months from the date of termination, then six (6)
months from the date of termination. After the date of termination, the
Executive will not be required to provide any regular services to the Company
other than with respect to
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<PAGE>
certain litigation matters involving the Company, if any, and, at the Company's
request, with respect to transition matters.
5. Certain Covenants of the Executive.
5.1 Covenants Against Competition. The Executive acknowledges
that (i) the principal business of the Company and its affiliates is the
distribution of pharmaceuticals, provision of drug therapies, reimbursement
services, physician networks and other related businesses which the Company and
its affiliates are in currently and which the Company and its affiliates may
become involved with during the Term (collectively, the "Company Business");
(ii) the Company Business is national in scope; (iii) his work for the Company
will bring him, into close contact with many confidential affairs not readily
available to the public; and (iv) the Company would not enter into this
Agreement but for the agreements and covenants of the Executive contained
herein. In order to induce the Company to enter into this Employment Agreement,
the Executive covenants and agrees that:
5.1.1 Non-Compete. During the Term and
for a period of eighteen (18) months following the termination (whether for
cause or otherwise) of the Executive's employment with the Company or any of its
affiliates, (the "Restricted Period"), the Executive shall not, in the United
States of America or in any foreign country, directly or indirectly, (i) engage
in the Company Business for his own account; (ii) enter the employ of, or render
any services to, any person engaged in such activities; and (iii) become
interested in any person engaged in the Company Business, directly or
indirectly, as an individual, partner, shareholder, officer, director,
principal, agent, employee, trustee, consultant or in any other relationship or
capacity; provided, however, that the Executive may own, directly or indirectly,
solely as an
6
<PAGE>
investment, securities of any person which are traded on any national securities
exchange or the NASDAQ National Market System if the Executive (a) is not a
controlling person of, or a member of a group which controls, such person or (b)
does not, directly or indirectly, own 1% or more of any class of securities of
such person.
5.1.2 Confidential Information. During
and after the Restricted Period, the Executive shall keep secret and retain in
strictest confidence, and shall not use for the benefit of himself or others
except in connection with the business and affairs of the Company, all
confidential matters of the Company and its affiliates. Such confidential
matters, include, without limitation, trade secrets, customer lists,
subscription lists, details of consultant contracts, pricing policies,
operational methods, marketing plans or strategies, product development
techniques or plans, business acquisition plans, new personnel acquisition
plans, methods of manufacture, technical processes, designs and design projects,
inventions and research projects of the Company and its affiliates, learned by
the Executive heretofore or hereafter that are sufficiently secret to have the
possibility, whether or not realized, of deriving economic value from not being
generally known to other persons who can obtain economic value from their
disclosure or use, and the Executive shall not disclose them to anyone outside
of the Company and its affiliates, either during or after employment, by the
Company or any of its affiliates, except as required in the course of performing
duties hereunder or with the Company's express written consent. The Executive's
obligations pursuant to this Employment Agreement shall not extend to matters
which are within the public domain or hereafter enter the public domain through
no fault or action or failure to act, whether directly or indirectly, on the
part of the Executive.
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<PAGE>
5.1.3 Property of the Company. All
memoranda, notes, lists, records and other documents (and all copies thereof)
made or compiled by the Executive or made available to the Executive concerning
the business of the Company or any of its affiliates shall be the Company's
property and shall be delivered to the Company promptly upon the termination of
the Executive's employment with the Company or any of its affiliates or at any
other time on request.
5.1.4 Employees of the Company. During
the Restricted Period, the Executive shall not, directly or indirectly hire,
solicit or encourage to leave the employment of the Company or any of its
affiliates, any employee of the Company or its affiliates or hire any such
employee who has left the employment of the Company or any of its affiliates
within one year of the termination of such employee's employment with the
Company or any of its affiliates.
5.1.5 Consultants and Independent
Contractors of the Company. During the Restricted Period, the Executive shall
not, directly or indirectly, hire, solicit or encourage to cease to work with
the Company or any of its affiliates, any consultant, social worker, registered
nurse, sales representative and other person then under contract with the
Company or any of its affiliates.
5.2 Rights and Remedies Upon Breach. If the Executive
breaches, or threatens to commit a breach of, any of the provisions of Section
5.1 (the "Restrictive Covenants"), the Company shall have the following rights
and remedies, each of which rights and remedies shall be independent of the
other and severally enforceable, and all of which rights and remedies shall
8
<PAGE>
be in addition to, and not in lieu of, any other rights and remedies available
to the Company under law or in equity:
5.2.1 Specific Performance. The right and
remedy to have the Restrictive Covenants specifically enforced by any court
having equity jurisdiction, it being acknowledged and agreed that any such
breach or threatened breach will cause irreparable injury to the Company and its
affiliates and that money damages will not provide an adequate remedy to the
Company.
5.2.2 Accounting. The right and remedy to
require the Executive to account for and pay over to the Company all
compensation, profits, monies, accruals, increments or other benefits
(collectively, "Benefits") derived or received by the Executive as the result of
any transactions constituting a breach of any of the Restrictive Covenants, and
the Executive shall account for and pay over such Benefits to the Company.
5.3 Severability of Covenants. If any court determines that
any of the Restrictive Covenants, or any parts thereof, are invalid or
unenforceable, the remainder of the Restrictive Covenants shall not thereby be
affected and shall be given full effect, without regard to the invalid portions.
5.4 "Blue-Pencilling". If any court construes any of the
Restrictive Covenants, or any part thereof, to be unenforceable because of the
duration of such provision or the area covered thereby, such court shall have
the power to reduce the duration or area of such provision and, in its reduced
form, such provision shall then be enforceable and shall be enforced.
9
<PAGE>
5.5 Enforceability in Jurisdictions. The parties intend to and
hereby confer jurisdiction to enforce the Restrictive Covenants upon the courts
of any jurisdiction within the geographical scope of such Restrictive Covenants.
If the courts of any one or more of such jurisdictions hold the Restrictive
Covenants wholly unenforceable by reason of the breadth of such scope or
otherwise, it is the intention of the parties that such determination not bar or
in any way affect the Company's right to the relief provided above in the courts
of any other jurisdiction within the geographical scope of such Restrictive
Covenants, as to breaches of such Restrictive Covenants in such other respective
jurisdictions, such Restrictive Covenants as they relate to each jurisdiction
being, for this purpose, severable into diverse and independent covenants.
6. Indemnification. The Company shall indemnify the Executive if the
Executive is made a party, or threatened to be made a party, to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that the Executive is or
was an officer or director of the Company or any of its affiliates, in which
capacity the Executive is or was serving at the Company's request, against
expenses (including reasonable attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by him in connection with
such action, suit or proceeding to the fullest extent and in the manner set
forth in and permitted by the general corporation law of the state of
incorporation of the Company, and any other applicable law, as from time to time
in effect. The provisions of this paragraph shall survive the Term.
10
<PAGE>
7. Other Provisions.
7.1 Notices. Any notice or other communication required or
which may be given hereunder shall be in writing and shall be delivered
personally, or sent by certified, registered or express mail, postage prepaid,
and shall be deemed given when so delivered personally, or if mailed, two days
after the date of mailing, as follows:
(i) if to the Company:
Home Care Management, Inc.
4250 Veterans Memorial Highway
Suite 400 West
Holbrook, NY 11741
Attention: Clifford E. Hotte, Ph.D.
and
with a copy to:
McDermott, Will & Emery
1211 Avenue of the Americas, 43rd Floor
New York, NY 10036
Attention: Cheryl V. Reicin, Esq.
(ii) if to the Executive, to:
Mr. James R. Mieszala
21335 Cliffside Drive
Kildeer, IL 60047
7.2 Entire Agreement. This Employment Agreement contains
the entire agreement between the parties with respect to the subject matter
hereof and supersedes all prior agreements, written or oral, with respect
thereto.
7.3 Waivers and Amendments. This Employment Agreement
may be amended, modified, superseded, cancelled, renewed or extended, and the
terms and conditions
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<PAGE>
hereof may be waived, only by a written instrument signed by the parties or, in
the case of a waiver, by the party waiving compliance. No delay on the part of
any party in exercising any right, power or privilege hereunder shall operate as
a waiver thereof, nor shall any waiver on the part of any party of any right,
power or privilege hereunder, nor any single or partial exercise of any right,
power or privilege hereunder preclude any other or further exercise thereof or
the exercise of any other right, power or privilege hereunder.
7.4 Governing Law. This Employment Agreement shall be
governed by and construed in accordance with the laws of the State of New York
applicable to agreements made and to be performed entirely within such State.
7.5 Assignment. This Employment Agreement, and the Executive's
rights and obligations hereunder, may not be assigned by the Executive. The
Company may assign this Employment Agreement and its rights, together with its
obligations hereunder, in connection with any sale, transfer or other
disposition of all or substantially all of its assets or business, whether by
merger, consolidation or otherwise.
7.6 Counterparts. This Employment Agreement may be executed in
two or more counterparts, each of which shall be deemed an original but all of
which together shall constitute one and the same instrument.
7.7 Headings. The headings in this Employment Agreement are
for reference purposes only and shall not in any way affect the meaning or
interpretation of this Employment Agreement.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Employment
Agreement as of the date first above written.
HOME CARE MANAGEMENT, INC.
By /s/ Clifford E. Hotte
Dr. Clifford E. Hotte
Director
/s/ James R. Mieszala
James R. Mieszala
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<PAGE>
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT dated as of December 18, 1995, between
Health Management, Inc., a Delaware corporation (the "Company"), and Paul S.
Jurewicz (the "Executive").
WHEREAS, the Company wishes to employ the Executive; and
WHEREAS, the Executive wishes to be employed by the Company.
NOW, THEREFORE, the parties agree as follows:
1. Employment, Duties and Acceptance.
1.1 Employment by the Company. The Company employs the
Executive, for itself and its affiliates, to render exclusive and full time
services in such capacities as the Company's Chief Executive Officer may assign
and, in connection therewith, to perform such duties as the Executive shall
reasonably be directed to perform by the Company's Chief Executive Officer. The
Executive shall be the Chief Financial Officer of the Company.
1.2 Acceptance of Employment by the Executive. The Executive
accepts such employment and shall render the services described above. In
addition to being the Chief Financial Officer of the Company, the Executive
shall also serve during all or any part of the Term as an officer of the Company
and of any of its affiliates, without any compensation therefor other than as
specified in this Employment Agreement, if so elected by the directors of the
Company or any of its affiliates, as applicable.
1.3 Place of Employment. The Executive's principal place of
employment shall be the Chicago, Illinois metropolitan area, subject to such
reasonable travel as the rendering of the services hereunder may require.
<PAGE>
2. Term of Employment. The term of the Executive's employment under
this Employment Agreement (the "Term") shall commence on the date hereof shall
end on April 30, 1998, unless sooner terminated as herein provided.
Notwithstanding the foregoing, if the Company does not intend to extend the
Executive's employment with the Company beyond April 30, 1995, then the Company
must give the Executive no less than three (3) months prior written notice
thereof, and to the extent the Company does not give such three (3) months prior
written notice, then the Company must continue to pay the Executive his
compensation as provided herein until the earlier of (i) six (6) months from the
date notice thereof is actually given or (ii) six (6) months from the end of the
Term.
3. Compensation.
3.1 Base Salary. As compensation for all services to be
rendered pursuant to this Employment Agreement, the Company shall pay the
Executive, during the Term, a salary of $160,000 per annum, with a 10% increase
for the period from May 1, 1997 through April 30, 1998 (the "Annual Salary"),
payable in accordance with the payroll policies of the Company as from time to
time in effect, less such deductions as shall be required to be withheld by
applicable law and regulations.
3.2 Performance Bonus. In addition to the Annual Salary to be
paid pursuant to Section 3.1 above, at the end of each of the Company's fiscal
years during the Term, the Executive shall also be entitled to an annual
performance bonus of up to 33% of the amount of the Annual Salary (which for the
fiscal year ended April 30, 1996 shall be made on a pro rata basis), which will
be at the sole discretion of the Company.
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3.3 Stock Option. The Executive shall receive with 30 days of
the execution of this Agreement, non-qualified options to purchase 70,000 shares
of Common Stock, par value $.03 per share (the "Shares"), of the Company (the
"Options"). The form of the Options shall be substantially in the form issued to
other employees of the Company. The per Share exercise price of the Options
shall be the average closing price of a Share as shown in the Wall Street
Journal for the twenty full trading days preceding the date of this Agreement.
The Options shall vest when the average closing price of a Shares as represented
in the Wall Street Journal equals or exceeds the average share price indicated
in the following table for a 60 consecutive day period:
Average Share Price # Options Vested
------------------- ----------------
13 5,000
15 5,000
17 5,000
19 5,000
21 7,500
23 7,500
25 7,500
27 7,500
29 10,000
31 10,000
------
70,000
3.4 Limitations Imposed by Law. The provisions of this
Employment Agreement relating to the compensation to be paid to the Executive
shall be subject to any limitations provided by law or regulation which may from
time to time limit the compensation payable to the Executive.
3.5 Participation in Employee Benefit Plans. The
Executive shall be permitted during the Term, if and to the extent eligible, to
participate in any group life, hospitalization or
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disability insurance plan, health program, pension plan or similar benefit plan
of the Company, and shall be entitled to such vacation and personal time, which
may be available to other comparable executives of the Company and generally on
the same terms as such other executives.
3.6 Expenses. Subject to such policies as may from time to
time be established by the Company's Board of Directors, the Company shall pay
or reimburse the Executive for all reasonable expenses actually incurred or paid
by the Executive during the Term in the performance of the Executive's services
under this Employment Agreement upon presentation of expense statements or
vouchers or such other supporting information as it may require.
4. Termination.
4.1 Termination upon Death. If the Executive dies during the
Term, this Employment Agreement shall terminate, except that the Executive's
legal representatives shall be entitled to receive the compensation herein
provided for a period ending on the last day of the month in which the
Executive's death occurs.
4.2 Termination upon Disability. If, during the Term, the
Executive becomes physically or mentally disabled, whether totally or partially,
so that the Executive is unable substantially to perform his services hereunder
for (i) a period of three consecutive months, or (ii) for shorter periods
aggregating three months during any six month period, the Company may at any
time after the last day of the three consecutive months of disability or the day
on which the shorter periods of disability equal an aggregate of three months,
by written notice to the Executive, terminate the Term of the Executive's
employment hereunder. Nothing in this Section 4.2 shall be deemed to extend the
Term.
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4.3 Termination for Cause. If the Executive neglects his
duties hereunder, is convicted of any crime or offense, fails or refuses to
comply with the reasonable oral or written policies or directives of the
Company's Chief Executive Officer or Board of Directors, is guilty of misconduct
in connection with the performance of his duties hereunder, materially breaches
affirmative or negative covenants or undertakings hereunder or is guilty of any
other conduct which would make his continued employment by the Company
prejudicial to the best interests of the Company, the Company may at any time by
written notice to the Executive terminate the Term of the Executive's employment
hereunder and the Executive shall have no right to receive any compensation or
benefit hereunder on and after the effective date of such notice; provided,
however, that in the case of neglect of duties, the Executive shall be given
written notice thereof and reasonable opportunity to cure, which in no event
shall exceed 30 days.
4.4 Termination Without Cause. The Company retains the right
to terminate the Executive without cause at any time provided the Executive is
continued to be paid based on his compensation as provided herein for a period
beginning on the date of his termination and ending on April 30, 1998, or if
such date is less than (3) months from the date of termination, then six (6)
months from the date of termination. After the date of termination, the
Executive will not be required to provide any regular services to the Company
other than with respect to certain litigation matters involving the Company, if
any, and, at the Company's request, with respect to transition matters.
5. Certain Covenants of the Executive.
5.1 Covenants Against Competition. The Executive
acknowledges that (i) the principal business of the Company and its subsidiaries
is the distribution of pharmaceuticals,
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provision of drug therapies, reimbursement services, physician networks and
other related businesses which the Company and its subsidiaries are in currently
and which the Company and its subsidiaries may become involved with during the
Term (collectively, the "Company Business"); (ii) the Company Business is
national in scope; (iii) his work for the Company will bring him, into close
contact with many confidential affairs not readily available to the public; and
(iv) the Company would not enter into this Agreement but for the agreements and
covenants of the Executive contained herein. In order to induce the Company to
enter into this Employment Agreement, the Executive covenants and agrees that:
5.1.1 Non-Compete. During the Term and for a period
of eighteen (18) months following the termination (whether for cause or
otherwise) of the Executive's employment with the Company or any of its
affiliates, (the "Restricted Period"), the Executive shall not, in the United
States of America or in any foreign country, directly or indirectly, (i) engage
in the Company Business for his own account; (ii) enter the employ of, or render
any services to, any person engaged in such activities; and (iii) become
interested in any person engaged in the Company Business, directly or
indirectly, as an individual, partner, shareholder, officer, director,
principal, agent, employee, trustee, consultant or in any other relationship or
capacity; provided, however, that the Executive may own, directly or indirectly,
solely as an investment, securities of any person which are traded on any
national securities exchange or the NASDAQ National Market System if the
Executive (a) is not a controlling person of, or a member of a group which
controls, such person or (b) does not, directly or indirectly, own 1% or more of
any class of securities of such person.
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5.1.2 Confidential Information. During and after
the Restricted Period, the Executive shall keep secret and retain in strictest
confidence, and shall not use for the benefit of himself or others except in
connection with the business and affairs of the Company, all confidential
matters of the Company and its affiliates. Such confidential matters, include,
without limitation, trade secrets, customer lists, subscription lists, details
of consultant contracts, pricing policies, operational methods, marketing plans
or strategies, product development techniques or plans, business acquisition
plans, new personnel acquisition plans, methods of manufacture, technical
processes, designs and design projects, inventions and research projects of the
Company and its affiliates, learned by the Executive heretofore or hereafter
that are sufficiently secret to have the possibility, whether or not realized,
of deriving economic value from not being generally known to other persons who
can obtain economic value from their disclosure or use, and the Executive shall
not disclose them to anyone outside of the Company and its affiliates, either
during or after employment by the Company or any of its affiliates, except as
required in the course of performing duties hereunder or with the Company's
express written consent. The Executive's obligations pursuant to this Employment
Agreement shall not extend to matters which are within the public domain or
hereafter enter the public domain through no fault or action or failure to act,
whether directly or indirectly, on the part of the Executive.
5.1.3 Property of the Company. All memoranda,
notes, lists, records and other documents (and all copies thereof) made or
compiled by the Executive or made available to the Executive concerning the
business of the Company or any of its affiliates shall be the Company's property
and shall be delivered to the Company promptly upon the termination of
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the Executive's employment with the Company or any of its affiliates or at any
other time on request.
5.1.4 Employees of the Company. During the
Restricted Period, the Executive shall not, directly or indirectly hire, solicit
or encourage to leave the employment of the Company or any of its affiliates,
any employee of the Company or its affiliates or hire any such employee who has
left the employment of the Company or any of its affiliates within one year of
the termination of such employee's employment with the Company or any of its
affiliates.
5.1.5 Consultants and Independent Contractors of the
Company. During the Restricted Period, the Executive shall not, directly or
indirectly, hire, solicit or encourage to cease to work with the Company or any
of its affiliates, any consultant, social worker, registered nurse, sales
representative and other person then under contract with the Company or any of
its affiliates.
5.2 Rights and Remedies Upon Breach. If the Executive
breaches, or threatens to commit a breach of, any of the provisions of Section
5.1 (the "Restrictive Covenants"), the Company shall have the following rights
and remedies, each of which rights and remedies shall be independent of the
other and severally enforceable, and all of which rights and remedies shall be
in addition to, and not in lieu of, any other rights and remedies available to
the Company under law or in equity:
5.2.1 Specific Performance. The right and remedy to
have the Restrictive Covenants specifically enforced by any court having equity
jurisdiction, it being acknowledged and agreed that any such breach or
threatened breach will cause irreparable injury to the
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Company and its affiliates and that money damages will not provide an adequate
remedy to the Company.
5.2.2 Accounting. The right and remedy to require
the Executive to account for and pay over to the Company all compensation,
profits, monies, accruals, increments or other benefits (collectively,
"Benefits") derived or received by the Executive as the result of any
transactions constituting a breach of any of the Restrictive Covenants, and the
Executive shall account for and pay over such Benefits to the Company.
5.3 Severability of Covenants. If any court determines that
any of the Restrictive Covenants, or any parts thereof, are invalid or
unenforceable, the remainder of the Restrictive Covenants shall not thereby be
affected and shall be given full effect, without regard to the invalid portions.
5.4 "Blue-Pencilling". If any court construes any of the
Restrictive Covenants, or any part thereof, to be unenforceable because of the
duration of such provision or the area covered thereby, such court shall have
the power to reduce the duration or area of such provision and, in its reduced
form, such provision shall then be enforceable and shall be enforced.
5.5 Enforceability in Jurisdictions. The parties intend to and
hereby confer jurisdiction to enforce the Restrictive Covenants upon the courts
of any jurisdiction within the geographical scope of such Restrictive Covenants.
If the courts of any one or more of such jurisdictions hold the Restrictive
Covenants wholly unenforceable by reason of the breadth of such scope or
otherwise, it is the intention of the parties that such determination not bar or
in any way affect the Company's right to the relief provided above in the courts
of any other
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jurisdiction within the geographical scope of such Restrictive Covenants, as to
breaches of such Restrictive Covenants in such other respective jurisdictions,
such Restrictive Covenants as they relate to each jurisdiction being, for this
purpose, severable into diverse and independent covenants.
6. Indemnification. The Company shall indemnify the Executive if the
Executive is made a party, or threatened to be made a party, to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that the Executive is or
was an officer or director of the Company or any of its affiliates, in which
capacity the Executive is or was serving at the Company's request, against
expenses (including reasonable attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by him in connection with
such action, suit or proceeding to the fullest extent and in the manner set
forth in and permitted by the general corporation law of the state of
incorporation of the Company, and any other applicable law, as from time to time
in effect. The provisions of this paragraph shall survive the Term.
7. Other Provisions.
7.1 Notices. Any notice or other communication required or
which may be given hereunder shall be in writing and shall be delivered
personally or sent by certified, registered or express mail, postage prepaid,
and shall be deemed given when so delivered personally or if mailed, two days
after the date of mailing, as follows:
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(i) if to the Company:
Health Management, Inc.
4250 Veterans Memorial Highway
Suite 400 West
Holbrook, NY 11741
Attention: Clifford E. Hotte, Ph.D.
and with a copy to:
McDermott, Will & Emery
1211 Avenue of the Americas, 43rd Floor
New York, NY 10036
Attention: Cheryl V. Reicin, Esq.
(ii) if to the Executive, to:
Mr. Paul S. Jurewicz
2261 Churchill Lane
Libertyville, IL 60048
7.2 Entire Agreement. This Employment Agreement contains
the entire agreement between the parties with respect to the subject matter
hereof and supersedes all prior agreements, written or oral, with respect
thereto.
7.3 Waivers and Amendments. This Employment Agreement may be
amended, modified,superseded, cancelled, renewed or extended, and the terms and
conditions hereof may be waived, only by a written instrument signed by the
parties or, in the case of a waiver, by the party waiving compliance. No delay
on the part of any party in exercising any right, power or privilege hereunder
shall operate as a waiver thereof, nor shall any waiver on the part of any party
of any right, power or privilege hereunder, nor any single or partial exercise
of any right, power or privilege hereunder preclude any other or further
exercise thereof or the exercise of any other right, power or privilege
hereunder.
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7.4 Governing Law. This Employment Agreement shall be
governed by and construed in accordance with the laws of the State of New York
applicable to agreements made and to be performed entirely within such State.
7.5 Assignment. This Employment Agreement, and the Executive's
rights and obligations hereunder, may not be assigned by the Executive. The
Company may assign this Employment Agreement and its rights, together with its
obligations hereunder, in connection with any sale, transfer or other
disposition of all or substantially all of its assets or business, whether by
merger, consolidation or otherwise.
7.6 Counterparts. This Employment Agreement may be executed in
two or more counterparts, each of which shall be deemed an original but all of
which together shall constitute one and the same instrument.
7.7 Headings. The headings in this Employment Agreement are
for reference purposes only and shall not in any way affect the meaning or
interpretation of this Employment Agreement.
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IN WITNESS WHEREOF, the parties have executed this Employment Agreement
as of the date first above written.
HEALTH MANAGEMENT, INC.
By /s/ Clifford E. Hotte
Dr. Clifford E. Hotte
President
/s/ Paul S. Jurewicz
Paul S. Jurewicz
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July 26, 1996
Health Management, Inc.
and the other Loan Parties
under and as defined in the
Credit Agreement referred to below
1371-A Abbott Court
Buffalo Grove, Illinois 60089
Attention: Mr. Paul Jurewicz
Re: HMI Senior Credit Facility
Ladies and Gentlemen:
Reference is made to the Credit Agreement dated as of March 31, 1995
(as heretofore and hereafter amended, restated, supplemented or otherwise
modified, the "Credit Agreement") among Health Management, Inc., Home Care
Management, Inc., HMI Illinois, Inc., HMI Pennsylvania, Inc., the Guarantors
named therein, the Lenders named therein and The Chase Manhattan Bank (formerly
known as Chemical Bank), as Agent. Capitalized terms used herein and not
otherwise defined shall have the meanings assigned to them in the Credit
Agreement.
I. Forbearance
You have advised the Agent and the Lenders and acknowledge that the
following Events of Default (the "Existing Events of Default") have occurred and
are continuing under the Credit Agreement: (i) an Event of Default under clause
(b) of Article VIII thereof arising by virtue of the failure of the Borrowers to
make payment of the $1,000,000 installment due on June 30, 1996 in respect of
the Term Loan, (ii) an Event of Default under clause (d) of Article VIII thereof
arising by virtue of HMI's sale of biojector and syringe inventory to Bioject,
Inc. outside the ordinary course of business in contravention of Section 7.05 of
the Credit Agreement (the "Bioject Sale"), (iii) an Event of Default arising
under clause (m) of Article VIII thereof arising by virtue of the failure of Dr.
Clifford Hotte to be president and chief executive officer of each of the Loan
Parties, (iv) an Event of Default under clause (d) of Article VIII thereof
arising by virtue of the failure to have furnished to the Agent and the Lenders
financial statements for the fiscal quarter ended January 31, 1996 in the form
and at the time required under Sec-tion 6.05(b) of the Credit Agreement, (v)
Events of Default for possible breaches of representations and warranties under
Sections 4.05 (material adverse change since April 30, 1994), 4.06 (unscheduled
litigation (but copies of which have been delivered to the Lenders)), 4.07 (fair
presentation of past
<PAGE>
financial statements delivered by the Company through the period ended October
31, 1995), 4.11 (material misstatements as to the financial statements referred
to in Section 4.07 above), 4.17 (in respect of clause (d) thereof -- as to
current litigation (which has been disclosed to the Lenders)), 4.20 (changes in
collection policies of the Company since April 30, 1994 (which have been
disclosed to the Lenders)) and (vi) Events of Default for breaches of covenants
under Sections 6.02 (Business and properties as to compliance with laws and
regulations (which has been disclosed to the Lenders)), 6.06 (prompt written
notice of litigation (which has been disclosed to the Lenders), 6.08
(maintaining records in accordance with accepted financial practices as to the
financial statements referred to in Section 4.07 above), as well as the
financial covenants set forth in Sections 7.08 (Net Worth for the period ended
April 30, 1996 (which was not less than $37,363,619)), 7.09 (Debt Service
Coverage Ratio for the period ended April 30, 1996 (which was not less than
0:1.00)), 7.10 (Total Unsubordinated Liabilities to Net Worth Ratio for the
period ended April 30, 1996 (which was not more than 1.49:1.00)), 7.12
(Consolidated Current Ratio for the period ended April 30, 1996 (which was not
less than 1.05:1.00)), 7.13 (Tangible Net Worth for the period ended April 30,
1996 (which was not less than $3,355,123)) and 7.14 (Receivables for the period
ended April 30, 1996 in excess of 120 days (which was not more than 54.7% of the
total of receivables)).
Pursuant to Article VIII of the Credit Agreement, and without limiting
any legal, contractual or equitable rights or remedies of the Agent and the
Lenders, during the continuance of an Event of Default the Agent may, and upon
the direction of the Required Lenders shall, by written notice (or facsimile
notice promptly confirmed in writing) to the Borrowers, declare the Notes, any
amounts then owing to the Agent or the Lenders on account of drawings under any
Letters of Credit (including payments made in respect of any indemnity described
in clause (iii) of the definition of "Letter of Credit Usage" contained in the
Credit Agreement) and all other Obligations to be forthwith due and payable.
You have requested that the Agent and each of the Lenders agree to
forbear from exercising any of their legal, contractual or equitable rights or
remedies in respect of any of the Existing Events of Default during the period
commencing on the date hereof through November 15, 1996 (the "Forbearance
Period"). Subject to the agreement of the Loan Parties to the terms and
conditions set forth herein as evidenced by their signature below, the Agent and
the Lenders agree to forbear during the Forbearance Period from exercising any
of their legal, contractual or equitable rights or remedies in respect of any of
the Existing Events of Default.
The agreement of the Agent and the Lenders to forbear as provided above
is subject, inter alia, to compliance with the following covenants and
conditions:
(1) The Loan Parties shall provide to the Agent and the
Lenders no later than the 15th day following each of July 31, 1996,
August 31, 1996, September 30, 1996 and October 31, 1996 a report in
form, scope and
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substance satisfactory to the Agent indicating HMI's Consolidated gross
sales revenues exceeded $12,000,000 for each of July, 1996, August,
1996, September, 1996 and October, 1996, each such report to be
certified as true and correct by your Financial Officer.
(2) The Loan Parties shall provide to the Agent and the
Lenders no later than the 15th day following each of July 31, 1996,
August 31, 1996, September 30, 1996 and October 31, 1996 a report in
form, scope and substance satisfactory to the Agent indicating that the
aggregate dollar amount of all accounts receivable of HMI and its
Consolidated subsidiaries that were outstanding as of the last day of
such month for 120 days or less exceeded $22,500,000.
(3) The Loan Parties shall provide to the Agent and the
Lenders no later than the 10th day following the end of each calendar
week a "flash" report prepared by Ernst & Young, LLP, outside business
consultant to HMI, each such report to be substantially similar in form
and scope to the "flash" reports previously furnished to the Agent and
the Lenders by Ernst & Young, LLP with respect to HMI and its
subsidiaries.
(4) The Loan Parties shall provide to the Agent and the
Lenders no later than September 15, 1996 an annual business plan for
HMI and its Consolidated subsidiaries for the twelve month period
ending April 30, 1997, indicating balance sheet and statements of cash
flow and income on a quarterly basis and on a comparative basis to the
immediately preceding twelve month period, in each case in form, scope
and substance satisfactory to the Agent and the Lenders and including,
without limitation, all material assumptions made in developing such
business plan.
(5) The Loan Parties have entered into a letter agreement with
National Westminster Bank Plc New York Branch ('NatWest") dated July 9,
1996 ("Financial Services Agreement") pursuant to which NatWest will be
providing certain financial services, a true and complete copy of which
has been delivered to each Lender. The Loan Parties shall furnish to
the Agent and the Lenders copies of all correspondence and other
written communications and materials received from or delivered to them
by NatWest; and the Loan Parties shall furnish to the Agent and the
Lenders no later than the 7th day following the end of each calendar
week a report in form and scope satisfactory to the Agent summarizing
generally the status of the financial services being provided.
Termination of the Financial Services Agreement by any party for any
reason shall constitute an Event of Default under Article VIII.
(6) The Agent, the Lenders and the Loan Parties shall, as soon
as practicable after the effectiveness of this letter agreement, agree
upon a form of
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intercreditor agreement acceptable in form, scope and substance to the
Agent and the Lenders with respect to the attachment, perfection and
priority of the Liens of the Agent and McKesson Drug Company and/or
Foxmeyer Health Corporation on inventory of the Loan Parties (and with
respect to such other matters as such parties may agree); and as soon
as practicable thereafter, such intercreditor agreement shall be
executed and delivered by McKesson Drug Company and/or Foxmeyer Health
Corporation. The granting of a junior Lien on inventory (but not
proceeds) in favor of McKesson Drug Company and/or Foxmeyer Health
Corporation shall not be deemed a default under Section 7.01 of the
Credit Agreement so long as an intercreditor agreement in form, scope
and substance acceptable to the Agent and the Lenders remains in effect
in accordance with its terms.
(7) The Loan Parties shall execute, acknowledge, deliver and
cause to be duly filed all such instruments and other documents, and
shall take all such actions, as the Agent and each of the Lenders may
from time to time reasonably request to assure the attachment,
perfection and first priority of the Agent's existing Lien on (i) all
income tax refunds to which any of them is now or hereafter entitled,
including without limitation the HMI Income Tax Refund (as defined in
II. below) and (ii) any and all payment obligations (evidenced by
promissory notes and other instruments or otherwise) received by any of
them in connection with the Bioject Sale.
(8) Notwithstanding anything to the contrary contained in
Section 7.05 of the Credit Agreement or elsewhere, no Loan Party shall
sell, assign, transfer or otherwise dispose of any of its assets except
for sales of inventory in the ordinary course of business and no Loan
Party shall enter into or commit for a Permitted Acquisition.
(9) The Loan Parties shall pay to the Agent for the pro rata
account of the Lenders a fee immediately upon the earlier to occur of
(i) the repayment or prepayment of all or any Obligations utilizing
funds not generated through internal operations of the Loan Parties in
the ordinary course of their business and (ii) the consummation of any
issuance of debt or equity securities of HMI or any other Loan Party.
The amount of such fee shall be $500,000 if pursuant to the preceding
sentence it is to be paid on or prior to September 15, 1996, $550,000
if pursuant to the preceding sentence it is to be paid on or prior to
October 15, 1996 and $650,000 if pursuant to the preceding sentence it
is to be paid at any time after October 15, 1996.
(10) On or prior to the date of this letter agreement the
Agent and the Lenders shall have received a letter or other writing
from BDO Seidman addressed to them and otherwise in form, scope and
substance satisfactory to them confirming that BDO Seidman estimates
that the HMI Income Tax Refund will exceed $800,000.
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(11) The Agent and the Lenders shall have received a copy of
the filed HMI Tax Return (as defined below) executed by both HMI, as
taxpayer and BDO Seidman, as preparer, contemporaneously upon its being
filed with the Internal Revenue Service, but in no event later than
August 30, 1996, which copy shall be certified by HMI's chief financial
officer to be a true and complete in all respects.
(12) No later than two weeks after the effectiveness of this
letter agreement, the Agent and the Lenders shall have received weekly
cash flow projections in form, scope and substance satisfactory to them
for HMI and its Consolidated subsidiaries covering the period from the
date hereof to the date of such delivery and thereafter each week
ending on or prior to November 15, 1996, certified as true and correct
by your Financial Officer.
(13) On or prior to the date of this letter agreement: (a) the
Agent shall have received from the Loan Parties a restructuring fee for
the pro rata account of the Lenders in the amount of $25,000, (b) Kaye,
Scholer, Fierman, Hays & Handler, LLP, counsel to the Agent, shall have
received payment in full of all legal fees charged, and all costs and
expenses incurred, by such counsel through such date in connection with
such representation and (c) European American Bank shall have received
a documentation fee in the amount of $2,500.
(14) Notwithstanding anything to the contrary contained in
Section 2.09(c) of the Credit Agreement, 100% of the net proceeds of
any issuance of any debt or equity securities shall be applied to
reduce the Obligations until all Obligations have been repaid in full.
(15) Notwithstanding the definition of Required Lenders
contained in Article I of the Credit Agreement, Required Lenders from
and after the date hereof shall mean Lenders having 100% of the
outstanding Loans and Letters of Credit.
(16) The Agent and the Lenders shall have received and had an
opportunity to review copies of the pleadings and related docket sheets
in the consolidated action commenced against the Loan Parties.
II. Additional Revolving Credit Loans
You have advised the Agent and the Lenders and acknowledge that a
material adverse change in the business, assets and financial condition of HMI
and the other Loan Parties has occurred by virtue of substantial operating
losses incurred by HMI and the other Loan Parties during their fiscal quarter
ended January 31, 1996 and
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substantial adjustments to the equity of HMI and the other Loan Parties to be
made effective as of January 31, 1996.
Pursuant to Section 5.01 of the Credit Agreement, the obligation of the
Agent and the Lenders to make Loans and to issue or cause to be issued Letters
of Credit is subject, inter alia, to the conditions precedent that (i) no Event
of Default shall have occurred and be continuing and (ii) no material adverse
change in the business, assets, operations or financial condition of any
Borrower or any of its subsidiaries shall have occurred since April 30, 1994.
You have advised the Agent and the Lenders that BDO Seidman is in the
process of preparing federal, state and local income tax returns for HMI and its
Consolidated subsidiaries for the period ended April 30, 1996, amended returns
for the period ended April 30, 1995 and a refund claim due to a net operating
loss carryback for the periods ending April 30, 1993, 1994 and 1995 (such
returns, together with all related schedules and exhibits thereto, herein
referred to as the "HMI Tax Return"). You have further advised the Agent and the
Lender that pursuant to the HMI Tax Return HMI expects to claim a refund (the
"HMI Income Tax Refund") of more than $800,000. You shall take all necessary
steps to have the HMI Income Tax Refund payable to you delivered directly to the
Agent and your failure to do so shall constitute an Event of Default under
Article VIII of the Credit Agreement.
Notwithstanding the failure to have satisfied all applicable conditions
precedent set forth in Sections 5.01(b) and 5.01(c) of the Credit Agreement by
virtue of the occurrence of the material adverse change described above and the
continuance of the Existing Events of Default, you have requested that: (i) upon
the effectiveness of this letter agreement and prior to the date that a copy of
the HMI Tax Return is required to be delivered to the Agent and the Lenders
pursuant to this letter agreement (whether or not so delivered), the Lenders
make Revolving Credit Loans to the Borrowers up to a maximum aggregate amount
equal to $800,000 and (ii) on and after the date that a copy of the HMI Tax
Return is required to be delivered to the Agent and the Lenders pursuant to this
letter agreement (and only if so delivered), the Lenders make additional
Revolving Credit Loans to the Borrowers up to a maximum aggregate amount which,
when taken together with the aggregate amount of Revolving Credit Loans
described in the preceding clause (i), equals (A) in the event that the HMI
Income Tax Refund does not exceed $1,600,000, $800,000 and (B) in the event that
the HMI Income Tax Refund exceeds $1,600,000, the lesser of (x) 50% of the HMI
Income Tax Refund and (y) $1,500,000. Notwithstanding the failure to satisfy the
conditions precedent set forth in Sections 5.01(b) and 5.01(c) by virtue of such
material adverse change and the continuance of the Existing Events of Default,
the Lenders are willing to make Revolving Credit Loans to the Borrowers from
time to time during the Forbearance Period in accordance with the terms and
conditions of the foregoing request, subject, however, to (i) satisfaction of
all other applicable conditions precedent set forth in Section 5.01 of the
Credit Agreement with respect to each such Revolving Credit Loan and (ii) the
agreement of the Loan Parties, evidenced by their signature below, that none of
the proceeds of any such Revolving Credit Loan shall be
6
<PAGE>
utilized for a Permitted Acquisition and each such Revolving Credit Loan shall
be (and shall remain) an Alternate Base Loan. Except for the foregoing Revolving
Credit Loans in accordance with the foregoing terms and conditions, you agree
and acknowledge that the Total Commitment and the obligations of the Agent and
the Lenders to issue or cause to be issued Letters of Credit are hereby
terminated.
III. Miscellaneous
Except to the extent otherwise expressly set forth in Schedule III
annexed hereto, each of the Loan Parties reaffirms and restates the
representations and warranties set forth in Article IV of the Credit Agreement,
and all such representations and warranties are true and correct in all material
respects on the date hereof with the same force and effect as if made on such
date (except to the extent that they relate expressly to an earlier date in
which case they were true and correct as of such date). In addition, each of the
Loan Parties represents and warrants (which representations and warranties shall
survive the execution and delivery hereof) to the Agent and the Lenders that:
(a) it has the power and authority to execute, deliver and
carry out the terms and provisions of this letter agreement and the
transactions contemplated hereby and has taken or caused to be taken
all necessary actions to authorize the execution, delivery and
performance of this letter agreement and the transactions contemplated
hereby;
(b) no consent of any other person (including, without
limitation, shareholders or creditors of any Loan Party) is required to
be obtained by any Loan Party and no action of, or filing with, any
governmental or public body or authority is required to be obtained by
any Loan Party to authorize, or is otherwise required in connection
with the execution, delivery and performance of this letter agreement
or the consummation of the transactions contemplated hereby;
(c) this letter agreement has been duly executed and delivered
by or on behalf of it and constitutes its legal, valid and binding
obligation enforceable in accordance with its terms, subject to
bankruptcy, reorganization, insolvency, moratorium and other similar
laws affecting the enforcement of creditors' rights generally and the
exercise of judicial discretion in accordance with general principles
of equity;
(d) the execution, delivery and performance of this letter
agreement will not violate any law, statute or regulation, or any order
or decree of any court or governmental instrumentality applicable to
it, or conflict with, or result in the breach of, or constitute a
default under any of its contractual obligations; and
7
<PAGE>
(e) as of the date hereof there exists no Default or Event of
Default other than the Existing Events of Default.
Each of the Loan Parties confirms in favor of the Agent and the Lenders
that it has no defense, offset, claim, counterclaim or recoupment, whether with
respect to any of its obligations or liabilities under the Credit Agreement
(including, without limitation, the payment when due of all fees, interest,
principal and other Obligations), any Note, any other Loan Document or
otherwise.
This letter agreement constitutes a Loan Document and a default by the
Loan Parties with respect to any of their obligations hereunder (which are joint
and several), including, without limitation, under any covenant contained in I.
above, shall constitute an immediate Event of Default.
The Credit Agreement and each of the other Loan Documents is hereby
ratified and confirmed in all respects and except with respect to the
conditional waiver contained in II. above, all of the representations,
warranties, terms, covenants and conditions of the Credit Agreement and each of
the other Loan Documents shall remain unamended, unwaived and in effect in
accordance with their respective terms. The conditional waiver set forth in II.
above shall be limited precisely as provided for herein and shall not be deemed
to be an amendment or consent to, or waiver or modification of, any term or
provision of any Loan Document or any other document or instrument referred to
herein or therein or of any transaction or further or future action on the part
of any of the Loan Parties requiring the consent of the Agent and/or any Lender.
Without limiting the generality of the foregoing, nothing herein shall
constitute or be deemed to constitute: a consent to the issuance of any debt
securities by any Loan Party to the extent not permitted under the applicable
provisions of the Credit Agreement or to the payment of any principal amount in
respect of the Seller Note (as defined in the Acquisition Agreement) during the
existence of an Event of Default; or a waiver of any Existing Event of Default
or any other past, present or future Default or Event of Default, or a waiver of
any legal, contractual or equitable right or remedy available to the Agent or
any Lender as a result of same or a waiver of the quarterly installment to be
paid on the Term Loans on September 30, 1996. Please be advised that the Agent
and the Lenders reserve all legal, contractual and equitable rights and remedies
available to them as a result of any past, present or future Default or Event of
Default (subject only to their conditional agreement contained herein to
temporarily forbear from exercising such rights and remedies).
Notwithstanding anything to the contrary contained herein, the
conditional agreements of the Agent and the Lenders contained herein to forbear
temporarily from exercising remedies and to waive certain conditions precedent
with respect to certain Revolving Credit Loans shall terminate automatically and
without further action upon the occurrence of any Default or Event of Default
(other any
8
<PAGE>
Existing Event of Default), including, without limitation, any Event of Default
caused by a default hereunder.
Except as expressly set forth in II. above, nothing herein shall
constitute or be deemed to constitute a waiver of any condition precedent set
forth in Section 5.01 of the Credit Agreement with respect to any Credit Event.
This letter agreement shall be governed by the laws of the State of New
York (other than the conflicts of laws principles thereof). This letter
agreement may be executed in counterparts and shall become effective upon the
Agent's receipt of copies hereof (which may include facsimile copies) executed
by the Agent and each Lender, and acknowledged and agreed to by each Loan Party.
Very truly yours,
THE CHASE MANHATTAN BANK (formerly known as
Chemical Bank), as a Lender and as Agent
By:
-----------------------------------
Name:
Title:
9
<PAGE>
EUROPEAN AMERICAN BANK, as a Lender
By:
-----------------------------------
Name:
Title:
Acknowledged and agreed:
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.
By:
--------------------------------
Name:
Title:
10
<PAGE>
SCHEDULE III
4.05 material adverse change since April 30, 1994
4.06 unscheduled litigation but disclosed to the Lenders and copies delivered
4.07 fair presentation of past financial statements delivered by Company
through the period ended October 31, 1995
4.11 material misstatements in past as to the financial statements referred to
in 4.07 above
4.17 in respect of clause (d) thereof -- as to current litigation (which has
been disclosed to the Lenders)
4.20 changes in collection policies of the Company since April 30, 1994 (which
have been disclosed to the Lenders)
<PAGE>
Health Management, Inc.
and Subsidiaries
Computation of Earnings (Loss) Per Share
<TABLE>
<CAPTION>
========================================================================================
Year ended April 30, 1996 1995 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) - primary $(10,927,341) $ 1,946,188 $ 4,000,958
Addback:
Interest from subordinated debentures
(net of tax effect) -- -- 9,587
- ----------------------------------------------------------------------------------------
Net income (loss) - fully diluted $(10,927,341) $ 1,946,188 $ 4,010,545
========================================================================================
Weighed average shares outstanding
Common stock 93,220,004 9,194,816 7,236,147
Common stock equivalents 92,496 213,484 146,893
- ----------------------------------------------------------------------------------------
Primary 9,414,500 9,408,300 7,383,040
Additional common stock equivalents -- 12,516 --
Shares issuable upon conversion of
convertible debentures -- -- 210,425
- ----------------------------------------------------------------------------------------
Fully diluted 9,414,500 9,420,816 7,593,465
========================================================================================
Earnings (loss) per share of common stock
- primary $ (1.16) $ .21 $ .54
- fully diluted $ (1.16) $ .21 $ .53
</TABLE>
<PAGE>
Consent of BDO Seidman,LLP
Independent Certified Public Accountants
Health Management, Inc.
We hereby consent to the incorporation by reference in the Company's
Registration Statement on Form S-8 (Registration No. 33-90130) filed with the
Securities and Exchange Commission on March 8, 1995 of our reports dated July
22, 1996, except for Note 4(a) which is as of July 26, 1996, relating to the
consolidated financial statements and schedule of Health Management, Inc.
appearing in this Annual Report on Form 10-K for the year ended April 30, 1996.
Our reports contain an explanatory paragraph regarding the Company's ability to
continue as a going concern.
BDO Seidman, LLP
Mitchel Field, New York
July 29, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
APRIL 30, 1996 FINANCIAL STATEMENTS OF THE COMPANY AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1996
<PERIOD-END> APR-30-1996
<CASH> 3,280,195
<SECURITIES> 0
<RECEIVABLES> 46,527,199
<ALLOWANCES> 10,070,000
<INVENTORY> 6,800,820
<CURRENT-ASSETS> 57,037,602
<PP&E> 5,540,430
<DEPRECIATION> 1,714,456
<TOTAL-ASSETS> 95,915,679
<CURRENT-LIABILITIES> 54,545,983
<BONDS> 32,752,105
0
0
<COMMON> 279,848
<OTHER-SE> 37,083,771
<TOTAL-LIABILITY-AND-EQUITY> 95,915,679
<SALES> 158,859,638
<TOTAL-REVENUES> 158,859,638
<CGS> 120,223,528
<TOTAL-COSTS> 169,512,321
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 14,714,606
<INTEREST-EXPENSE> 2,717,155
<INCOME-PRETAX> (13,332,187)
<INCOME-TAX> (2,404,846)
<INCOME-CONTINUING> (10,927,341)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,927,341)
<EPS-PRIMARY> (1.16)
<EPS-DILUTED> (1.16)
</TABLE>
