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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 13E-3
RULE 13E-3 TRANSACTION STATEMENT
(PURSUANT TO SECTION 13(e) OF
THE SECURITIES EXCHANGE ACT OF 1934)
HEALTH MANAGEMENT, INC.
(NAME OF THE ISSUER)
HEALTH MANAGEMENT, INC.
TRANSWORLD HEALTHCARE, INC.
IMH ACQUISITION CORP.
(NAME OF THE PERSONS FILING STATEMENT)
------------------------
COMMON STOCK, PAR VALUE $0.03 PER SHARE
(TITLE OF CLASS OF SECURITIES)
42219 B10
(CUSIP NUMBER OF CLASS OF SECURITIES)
------------------------
<TABLE>
<C> <C>
W. JAMES NICOL ROBERT W. FINE
CHIEF EXECUTIVE OFFICER AND PRESIDENT PRESIDENT AND CHIEF OPERATING OFFICER
HEALTH MANAGEMENT, INC. TRANSWORLD HEALTHCARE, INC.
1371-A ABBOT COURT 75 TERMINAL AVENUE
BUFFALO GROVE, IL 60089 CLARK, NEW JERSEY 07066
(800) 648-1975 (908) 340-1144
</TABLE>
(NAME, ADDRESS AND TELEPHONE NUMBER OF PERSONS AUTHORIZED TO RECEIVE NOTICES AND
COMMUNICATIONS ON
BEHALF OF PERSONS FILING STATEMENT)
COPY TO
<TABLE>
<C> <C>
CHERYL V. REICIN, ESQ. BRUCE L. LIEB, ESQ.
MCDERMOTT, WILL & EMERY PROSKAUER ROSE LLP
50 ROCKEFELLER PLAZA 1585 BROADWAY
NEW YORK, NEW YORK 10020-1605 NEW YORK, NEW YORK 10036-8299
(212) 547-5522 (212) 969-3320
</TABLE>
This statement is filed in connection with (check the appropriate box):
a. [X] The filing of solicitation materials or an information statement
subject to Regulation 14A, Regulation 14C or Rule 13(e)-3(c) under
the Securities Exchange Act of 1934.
b. [ ] The filing of a registration statement under the Securities Act of
1933.
c. [ ] A tender offer.
d. [ ] None of the above.
Check the following box if the solicitation materials or information statement
referred to in checking box (a) are preliminary copies: [X]
CALCULATION OF THE FILING FEE
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TRANSACTION VALUATION* AMOUNT OF FILING FEE
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$2,799,055 $560
* For purposes of calculating fee only. Pursuant to the
proposed merger, each holder (other than Transworld and
its subsidiaries), of common stock, $0.30 par value per
share, of Health Management, Inc. ("Shares") will become
entitled to receive $0.30 per Share in cash, without
interest, for each share held. Such holders hold 9,330,182
Shares, in the aggregate. The amount of the filing fee
calculated in accordance with Regulation 240.0-11 of the
Securities Exchange Act of 1934 equals 1/50 of one
percentum of the aggregate value of the merger
consideration.
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</TABLE>
[X] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
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Amount previously paid: $2,800 Filing Party: Health Management, Inc.
Form, schedule or registration statement no.: Schedule 14A Date Filed: February 6, 1997
</TABLE>
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INTRODUCTORY STATEMENT
This Rule 13e-3 Transaction Statement is being filed by Health Management,
Inc. (the "Company"), Transworld HealthCare, Inc., formerly Transworld Home
HealthCare, Inc. ("Transworld") and IMH Acquisition Corp., a wholly owned
subsidiary of Transworld ("IMH"), in connection with the proposed merger of IMH
with and into the Company. The Company is the issuer of the class of securities
which is the subject of the Rule 13e-3 transaction.
Concurrently with the filing of this Rule 13e-3 Transaction Statement, the
Company is filing with the Securities and Exchange Commission Amendment Number 2
to the Company's preliminary Proxy Statement relating to the solicitation of
proxies by the Company to consider and vote upon a proposal to adopt the
Agreement and Plan of Merger, dated November 13, 1996, as amended, among
Transworld, IMH and the Company, pursuant to which (a) IMH will merge with and
into the Company, which will become a wholly owned subsidiary of Transworld, and
(b) each holder (other than Transworld and its subsidiaries) of shares of common
stock, par value $0.30 per share, of the Company ("Shares") will become entitled
to receive $0.30 in cash, without interest, for each Share held.
A copy of the preliminary Proxy Statement is attached as Exhibit 17(d)
hereto. The information contained in the Proxy Statement is incorporated by
reference in answer to the items in this Rule 13e-3 Transaction Statement, and
the Cross Reference Sheet set forth below shows the location in the Proxy
Statement of the information required to be included in response to the items of
this Rule 13e-3 Transaction Statement.
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CROSS REFERENCE SHEET
(Pursuant to General Instruction F to Schedule 13E-3)
SCHEDULE 13E-3 ITEM
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NUMBER AND CAPTION CAPTION IN PROXY STATEMENT
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<S> <C> <C>
Item 1 ISSUER AND CLASS OF SECURITY SUBJECT
TO THE TRANSACTION
(a).................................. SUMMARY--The Special Meeting; Business of the
Company; INTRODUCTION--Matters to be Considered at
the Special Meeting.
(b).................................. SUMMARY--The Special Meeting; MARKET PRICES AND
DIVIDENDS.
(c).................................. SUMMARY--Market Prices; MARKET PRICES AND DIVIDENDS.
(d).................................. SUMMARY--Market Prices; MARKET PRICES AND DIVIDENDS.
(e).................................. Not Applicable.
(f).................................. INTRODUCTION--Matters to be considered at the Special
Meeting; SPECIAL FACTORS--Purpose and Effect of the
Merger; Background of the Merger.
Item 2 IDENTITY AND BACKGROUND
This Rule 13e-3 Transaction Statement is being filed by the Company, which is the issuer of the
classes of securities subject to the Rule 13e-3 transaction, Transworld and IMH; information with
respect to each of the filing persons may be found in the Proxy Statement under the captions listed
below.
(a).................................. MANAGEMENT OF THE COMPANY; MANAGEMENT OF TRANSWORLD
AND IMH.
(b).................................. MANAGEMENT OF THE COMPANY; MANAGEMENT OF TRANSWORLD
AND IMH.
(c).................................. MANAGEMENT OF THE COMPANY; MANAGEMENT OF TRANSWORLD
AND IMH.
(d).................................. MANAGEMENT OF THE COMPANY; MANAGEMENT OF TRANSWORLD
AND IMH.
(e), (f)............................. None of the persons with respect to whom information
is provided in response to this Item was, during the
last five years, convicted in a criminal proceeding
or a party to a civil proceeding of a judicial or
administrative body of competent jurisdiction which
resulted in the person being subject to a judgment,
decree or final order enjoining further violations
of, or prohibiting activities subject to, federal or
state securities laws or finding of any violation of
such law.
(g).................................. Each of the persons with respect to whom information
is provided in response to this Item is a citizen of
the United States of America.
Item 3 PAST CONTACTS, TRANSACTIONS OR
NEGOTIATIONS
(a)(1)............................... Not Applicable.
(a)(2)............................... INTRODUCTION--Matters to be Considered at the Special
Meeting; SPECIAL FACTORS--Purpose and Effect of the
Merger; Background of the Merger.
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(b)................................. INTRODUCTION--Matters to be Considered at the Special Meeting;
SPECIAL FACTORS--Purpose and Effect of the Merger; Background of
the Merger.
Item 4 TERMS OF THE TRANSACTION
(a)................................. SUMMARY--The Merger; Certain Conditions to the Consummation of the
Merger; INTRODUCTION--Matters to be Considered at the Special
Meeting; THE MERGER--Summary of the Merger Agreement.
(b)................................. SUMMARY--The Merger; Certain Conditions to the Consummation of the
Merger; INTRODUCTION--Matters to be Considered at the Special
Meeting; SPECIAL FACTORS--Interests of Certain Persons in the
Merger; THE MERGER--Summary of the Merger Agreement.
Item 5 PLANS OR PROPOSALS OF THE ISSUER OR
AFFILIATE
(a)................................. Not Applicable
(b)................................. Not Applicable
(c)................................. SPECIAL FACTORS--Purpose and Effect of the Merger.
(d)................................. Not Applicable
(e)................................. SPECIAL FACTORS--Purpose and Effect of the Merger.
(f)................................. SUMMARY--Effective Time; Surrender of Certificates; THE
MERGER--Summary of the Merger Agreement--Effective Time of the
Merger.
(g)................................. SUMMARY--Effective Time; Surrender of Certificates; THE
MERGER--Summary of the Merger Agreement--Effective Time of the
Merger.
Item 6 SOURCE AND AMOUNT OF FUNDS OR OTHER
CONSIDERATION
(a)................................. SUMMARY--Financing of the Merger; THE MERGER--Financing of the
Merger.
(b)................................. THE MERGER--Expenses--The Company; Transworld.
(c)................................. Not Applicable.
(d)................................. Not Applicable.
Item 7 PURPOSE(S), ALTERNATIVES, REASONS
AND EFFECTS
(a)................................. SUMMARY--The Merger; INTRODUCTION--Matters to be Considered at the
Special Meeting; SPECIAL FACTORS--Purpose and Effect of the
Merger.
(b)................................. SPECIAL FACTORS--Background of the Merger; Alternatives to the
Merger.
(c)................................. INTRODUCTION--Matters to be Considered at the Special Meeting;
SPECIAL FACTORS--Purpose and Effect of the Merger; Background of
the Merger.
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<CAPTION>
NUMBER AND CAPTION CAPTION IN PROXY STATEMENT
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<S> <C> <C>
(d)................................. SUMMARY--The Merger; Effective Time; Surrender of Certificates;
Tax Consequences; INTRODUCTION--Matters to be Considered at the
Special Meeting; SPECIAL FACTORS-- Purpose and Effect of the
Merger; THE MERGER--Summary of the Merger Agreement--Effective
Time of the Merger; Federal Income Tax Consequences.
Item 8 FAIRNESS OF THE TRANSACTION
(a)................................. SUMMARY--Recommendation of the Board of Directors of the Company;
SPECIAL FACTORS--Recommendation of the Board of Directors;
Fairness of the Merger.
(b)................................. SPECIAL FACTORS--Recommendation of the Board of Directors;
Fairness of the Merger.
(c)................................. SPECIAL FACTORS--Recommendation of the Board of Directors;
Fairness of the Merger.
(d)................................. SPECIAL FACTORS--Recommendation of the Board of Directors;
Fairness of the Merger.
(e)................................. SPECIAL FACTORS--Recommendation of the Board of Directors;
Fairness of the Merger.
(f)................................. SPECIAL FACTORS--Recommendation of the Board of Directors;
Fairness of the Merger; Alternatives to the Merger.
Item 9 REPORTS, OPINIONS, APPRAISALS AND
CERTAIN NEGOTIATIONS
(a)................................. SPECIAL FACTORS--Background of the Merger; The Company's Financial
Advisor; Transworld's Financial Advisor.
(b)................................. SPECIAL FACTORS--Background of the Merger; The Company's Financial
Advisor; Transworld's Financial Advisor.
(c)................................. Not Applicable.
Item 10 INTERESTS IN SECURITIES OF THE
ISSUER
(a)................................. SUMMARY--Vote Required; Appraisal Rights of Dissenting
Stockholders; INTRODUCTION--Matters to be Considered at the
Special Meeting; SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN
BENEFICIAL OWNERS.
(b)................................. SPECIAL FACTORS--Background of the Merger.
Item 11 CONTRACTS, ARRANGEMENT OR
UNDERSTANDINGS WITH RESPECT TO THE
ISSUER'S SECURITIES................. SUMMARY--Vote Required; Appraisal Rights of Dissenting
Stockholders; INTRODUCTION--Matters to be Considered at the
Special Meeting; SPECIAL FACTORS--Background of the Merger.
</TABLE>
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<TABLE>
<CAPTION>
NUMBER AND CAPTION CAPTION IN PROXY STATEMENT
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<S> <C> <C>
Item 12 PRESENT INTENTION AND RECOMMENDATION
OF CERTAIN PERSONS WITH REGARD TO THE
TRANSACTION
(a).................................. SUMMARY--Vote Required; Appraisal Rights of
Dissenting Stockholders; INTRODUCTION--Matters to be
Considered at the Special Meeting.
(b).................................. SUMMARY--Vote Required; Appraisal Rights of
Dissenting Stockholders; INTRODUCTION--Matters to be
Considered at the Special Meeting; SPECIAL
FACTORS--Recommendation of the Board of Directors;
Fairness of the Merger.
Item 13 OTHER PROVISIONS OF THE TRANSACTION
(a).................................. SUMMARY--Vote Required; Appraisal Rights of
Dissenting Stockholders; THE MERGER--Appraisal Rights
of Dissenting Stockholders.
(b).................................. Not Applicable.
(c).................................. Not Applicable.
Item 14 FINANCIAL INFORMATION
(a).................................. SUMMARY--Selected Historical Consolidated Financial
Information; SELECTED FINANCIAL DATA; AUDITED
FINANCIAL STATEMENTS; CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
(b).................................. Not Applicable.
Item PERSONS AND ASSETS EMPLOYED, RETAINED
15..... OR UTILIZED
(a).................................. SPECIAL FACTORS--Purpose and Effect of the Merger;
Interests of Certain Persons in the Merger.
(b).................................. SPECIAL FACTORS--Background of the Merger.
Item 16 ADDITIONAL INFORMATION Not Applicable.
Item 17 MATERIAL TO BE FILED AS EXHIBITS
(a).................................. Not Applicable.
(b).................................. Not Applicable.
(c).................................. Agreement and Plan of Merger, dated November 13,
1996, among Transworld Healthcare, Inc., IMH
Acquisition Corp. and Health Management, Inc.,
restated as of June 4, 1997, appears on Exhibit I to
the preliminary Proxy Statement filed as Exhibit
17(d) to this Rule 13e-3 Transaction Statement.
(d).................................. Letter to Stockholders, Notice of Special Meeting,
preliminary Proxy Statement and Form of Proxy.
(e).................................. Section 262 of the Delaware General Corporation Law
appears as Exhibit II to the preliminary Proxy
Statement filed as Exhibit 17(d) to this Rule 13e-3
Transaction Statement.
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NUMBER AND CAPTION CAPTION IN PROXY STATEMENT
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(f).................................. At this time no written instruction, form or other
material currently exists with respect to any oral
solicitation or recommendation that may be made on
behalf of the persons filing this statement to
security holders in connection with the Rule 13e-3
transaction. Should any such written instruction,
form or material be generated; it will be supplied to
the commission in a supplemental filing.
</TABLE>
Pursuant to Rule 12b-22 under the Securities Exchange Act of 1934, as
amended, Transworld and IMH hereby disclaim the status of affiliates of the
Company for the purposes of the requirements of this statement.
6
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SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
Date: June 4, 1997
HEALTH MANAGEMENT, INC.
By: /s/ W. JAMES NICOL
------------------------------------
W. James Nicol
Chief Executive Officer and
President
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SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
Date: June 4, 1997
TRANSWORLD HEALTHCARE, INC.
By: /s/ WAYNE A. PALLADINO
------------------------------------
Wayne A. Palladino
Senior Vice President and Chief
Financial Officer
IMH ACQUISITION CORP.
By: /s/ WAYNE A. PALLADINO
------------------------------------
Wayne A. Palladino
Senior Vice President and Chief
Financial Officer
8
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[HEALTH MANAGEMENT, INC. LETTERHEAD]
JUNE , 1997
Dear Stockholder:
The Board of Directors of Health Management, Inc., a Delaware corporation
(the "Company"), cordially invites you to attend a Special Meeting of
Stockholders of the Company to be held on July , 1997, as set forth in the
attached Notice of Special Meeting of Stockholders (the "Special Meeting"). At
the Special Meeting you will be asked to consider and vote upon the adoption of
an Agreement and Plan of Merger (the "Merger Agreement"), providing for the
merger of IMH Acquisition Corp., a wholly-owned subsidiary of Transworld
HealthCare, Inc., formerly Transworld Home HealthCare, Inc., a New York
corporation ("Transworld"), with and into the Company (the "Merger"), and to
transact such other business as may properly come before the Special Meeting or
any adjournment thereof. Details concerning the proposal to be presented at the
Special Meeting are set forth in the accompanying Notice of Special Meeting and
Proxy Statement. The Merger Agreement, which you will be asked to adopt, is set
forth as Annex I to the Proxy Statement.
Under the terms of the proposed Merger, the Company's stockholders (other
than Transworld and its subsidiaries) will be entitled to receive $0.30 in cash
for each share of the Company's common stock held (the "Merger Consideration").
In order to adopt the Merger Agreement, it will be necessary to obtain the
affirmative vote of the holders of a majority of the outstanding shares of the
common stock of the Company. IMH Acquisition Corp. owns 8,964,292 shares of
common stock of the Company, representing approximately 49% of the presently
outstanding shares, and has agreed to vote those shares in favor of the Merger.
Transworld has an option to purchase another 746,713 shares of the Company,
which, after giving effect to the exercise thereof, would result in Transworld
and IMH Acquisition Corp. collectively owning 51% of the outstanding shares of
the Company.
THE BOARD OF DIRECTORS OF THE COMPANY HAS UNANIMOUSLY APPROVED THE PROPOSED
MERGER AND RECOMMENDS THAT YOU VOTE IN FAVOR OF ADOPTION OF THE MERGER
AGREEMENT. The reasons for the Board's recommendation are set forth in the Proxy
Statement.
Regardless of the size of your holdings, it is important that your shares
be represented at the Special Meeting. You are, therefore, urged to fill in,
date, sign and return the enclosed proxy promptly. If you should decide to
attend the Special Meeting and wish to vote your shares personally, you may
revoke the proxy at that time.
Very truly yours,
W. JAMES NICOL
Chief Executive Officer and
President
PLEASE COMPLETE AND DATE AND SIGN THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY
IN THE ENCLOSED PREPAID ENVELOPE, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL
MEETING.
PLEASE DO NOT SEND IN ANY CERTIFICATES FOR YOUR SHARES AT THIS TIME.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF
SUCH TRANSACTION OR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED
IN THIS DOCUMENT. ANY REPRESENTATION TO THE CON TRARY IS UNLAWFUL.
<PAGE> 2
HEALTH MANAGEMENT, INC.
1371-A ABBOTT COURT
BUFFALO GROVE, ILLINOIS 60089
------------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD JULY , 1997
To the Stockholders of Health Management, Inc.:
A special meeting of stockholders (the "Special Meeting") of Health
Management, Inc., a Delaware corporation (the "Company"), will be held on [day],
July , 1997, at , at [ a.m.] local time, to consider and act upon the following
matters, as explained more fully in the attached Proxy Statement:
1. To consider and vote upon a proposal to adopt an Agreement and Plan of
Merger, dated November 13, 1996, as amended (the "Merger Agreement"),
among Transworld HealthCare, Inc., formerly Transworld Home HealthCare,
Inc., a New York corporation ("Transworld"), IMH Acquisition Corp., a
Delaware corporation and a wholly-owned subsidiary of Transworld
("IMH"), and the Company, pursuant to which (a) IMH will merge with and
into the Company, which will become a wholly-owned subsidiary of
Transworld, and (b) each holder (other than Transworld and its
subsidiaries) of shares of common stock, par value $.03 per share, of
the Company ("Shares") will become entitled to receive $0.30 in cash,
without interest, for each Share held, all as more fully described in
the attached Proxy Statement (the "Merger Consideration"). A copy of
the Merger Agreement is attached to the Proxy Statement as Annex I.
2. To transact any other business that may properly come before the
Special Meeting or any adjournment thereof.
Only holders of record of Shares at the close of business on June 6, 1997
are entitled to notice of and to vote at the Special Meeting. A proxy card for
your use in voting on these matters is enclosed.
ADOPTION OF THE MERGER AGREEMENT REQUIRES THE AFFIRMATIVE VOTE OF THE
HOLDERS OF A MAJORITY OF THE OUTSTANDING SHARES. TRANSWORLD, THROUGH ITS
WHOLLY-OWNED SUBSIDIARY IMH, OWNS 49% OF THE PRESENTLY OUTSTANDING SHARES AND
HAS AN OPTION TO PURCHASE AN ADDITIONAL 746,713 SHARES, WHICH IF EXERCISED,
WOULD RESULT IN TRANSWORLD OWNING 51% OF THE OUTSTANDING SHARES. TRANSWORLD HAS
AGREED TO VOTE ALL OF THE SHARES OWNED BY IT AND ITS SUBSIDIARIES IN FAVOR OF
THE ADOPTION OF THE MERGER AGREEMENT. DISSENTING STOCKHOLDERS WHO COMPLY WITH
THE PROCEDURAL REQUIREMENTS OF THE DELAWARE GENERAL CORPORATION LAW WILL BE
ENTITLED TO RECEIVE PAYMENT IN CASH OF THE FAIR VALUE OF THEIR SHARES IN LIEU OF
THE MERGER CONSIDERATION.
Shares can only be voted at the Special Meeting if the holder is present or
represented by proxy. Whether or not you expect to attend the Special Meeting,
you are urged to date and sign the enclosed proxy and return it in the
accompanying envelope promptly, so your Shares may be voted in accordance with
your wishes and the presence of a quorum may be assured. The giving of a proxy
does not affect your right to vote in person if you attend the Special Meeting.
By Order of the Board of Directors,
W. JAMES NICOL,
Chief Executive Officer and
President
June , 1997
<PAGE> 3
PROXY STATEMENT
OF
HEALTH MANAGEMENT, INC.
1371-A ABBOTT COURT
BUFFALO GROVE, ILLINOIS 60089
This proxy statement (this "Proxy Statement") is being furnished to the
stockholders of Health Management, Inc., a Delaware corporation (the "Company"),
in connection with the solicitation of proxies for use at the special meeting of
stockholders of the Company to be held on July , 1997 and any adjournment or
adjournments thereof (the "Special Meeting"). At the Special Meeting, the
stockholders of the Company will be asked to consider and vote upon a proposal
to adopt an agreement and plan of merger, dated November 13, 1996, as amended
(the "Merger Agreement"), among Transworld HealthCare, Inc., formerly Transworld
Home HealthCare, Inc., a New York corporation ("Transworld"), IMH Acquisition
Corp., a Delaware corporation and a wholly-owned subsidiary of Transworld
("IMH"), and the Company, pursuant to which, upon certain terms and conditions:
(a) IMH will merge with and into the Company, which will become a wholly-owned
subsidiary of Transworld (the "Merger"); and (b) each holder (other than
Transworld and its subsidiaries) of shares of common stock, par value $.03 per
share, of the Company ("Shares") will become entitled to receive $0.30 in cash,
without interest, for each Share held (the "Merger Consideration"). In addition,
stockholders of the Company will transact any other business that may properly
come before the Special Meeting.
Adoption of the Merger Agreement requires the affirmative vote of the
holders of a majority of the outstanding Shares. Transworld, through its
wholly-owned subsidiary IMH, owns 49% of the presently outstanding Shares and
has an option to purchase an additional 746,713 Shares, which, if exercised,
would result in Transworld owning 51% of the outstanding Shares. Transworld has
agreed to vote all of the Shares owned by it and its subsidiaries in favor of
the adoption of the Merger Agreement. Dissenting stockholders who comply with
the procedural requirements of the Delaware General Corporation Law will be
entitled to receive payment in cash of the fair value of their Shares in lieu of
the Merger Consideration.
All statements contained herein that are not historical facts, including,
but not limited to, statements regarding the Company's current business
strategy, the Company's projected sources and uses of cash, and the Company's
plans for future development and operations, are based upon current
expectations. These statements are forward-looking in nature and involve a
number of risks and uncertainties. Actual results may differ materially. Among
the factors that could cause actual results to differ materially are the
following: the availability of sufficient capital to finance the Company's
business plans on terms satisfactory to the Company; changes or conditions
affecting the transactions with Transworld described herein including its
willingness to continue extending the Forbearance Agreement (as hereinafter
defined); competitive factors; the ability of the Company adequately to defend
or reach a settlement of outstanding litigation and investigations involving the
Company or its prior management; changes in labor, equipment and capital costs;
changes in regulations affecting the Company's business; general businesses 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
cautions readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date made.
i
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TABLE OF CONTENTS
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NO.
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SUMMARY..................................................... iv
The Special Meeting.................................... iv
The Merger............................................. iv
Vote Required; Appraisal Rights of Dissenting
Stockholders.......................................... iv
Recommendation of the Board of Directors of the
Company............................................... iv
Effective Time; Surrender of Certificates.............. v
Interests of Certain Persons in the Merger............. v
Financing of the Merger................................ v
Certain Conditions to the Consummation of the Merger... v
Tax Consequences....................................... vi
Market Prices.......................................... vi
Selected Historical Consolidated Financial
Information........................................... vi
Business of the Company................................ viii
Business of Transworld and IMH......................... viii
INTRODUCTION................................................ 1
General................................................ 1
Matters to be Considered at the Special Meeting........ 1
SPECIAL FACTORS............................................. 2
Purpose and Effect of the Merger....................... 2
Background of the Merger............................... 3
Recommendation of the Board of Directors; Fairness of
the Merger............................................ 11
Alternatives to the Merger............................. 13
Potential Adverse Consequences of the Merger........... 14
The Company's Financial Advisor........................ 15
Transworld's Financial Advisor......................... 16
Interests of Certain Persons in the Merger............. 17
THE MERGER.................................................. 18
Summary of the Merger Agreement........................ 18
Financing of the Merger................................ 21
Expenses............................................... 21
Antitrust Matters...................................... 22
HealthCare Regulatory Approvals........................ 22
Appraisal Rights of Dissenting Stockholders............ 22
Federal Income Tax Consequences........................ 24
Accounting Treatment................................... 25
MARKET PRICES AND DIVIDENDS................................. 26
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL
OWNERS.................................................... 27
SELECTED FINANCIAL DATA..................................... 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 30
BUSINESS OF THE COMPANY..................................... 39
General................................................ 39
Lifecare(TM) Program................................... 39
Services Provided to Pharmaceutical Companies.......... 40
Markets................................................ 40
Company Strategy....................................... 42
Acquisitions........................................... 43
Marketing and Sales.................................... 44
Competition............................................ 44
Reimbursement.......................................... 45
Regulation............................................. 46
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Accreditation........................................................................................... 49
Sources and Availability of Product Supply.............................................................. 49
Employees............................................................................................... 49
Properties.............................................................................................. 49
Legal Proceedings....................................................................................... 50
MANAGEMENT OF THE COMPANY.................................................................................... 52
BUSINESS OF TRANSWORLD AND IMH............................................................................... 54
MANAGEMENT OF TRANSWORLD AND IMH............................................................................. 54
INDEPENDENT AUDITORS......................................................................................... 56
AVAILABLE INFORMATION........................................................................................ 56
OTHER BUSINESS AT THE SPECIAL MEETING........................................................................ 57
INDEX TO FINANCIAL STATEMENTS................................................................................ 58
AUDITED FINANCIAL STATEMENTS................................................................................. 58
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.................................................................. 58
ANNEXES
I Agreement and Plan of Merger
II Section 262 of the Delaware General Corporation Law
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SUMMARY
The following Summary is furnished to assist the Company's stockholders in
their review of this Proxy Statement and is intended only to highlight certain
information contained in this Proxy Statement. This summary is not intended to
be a complete statement of all material features of the proposed Merger and is
qualified in its entirety by the more detailed information contained elsewhere
in this Proxy Statement, in the Annexes hereto and in the other documents
referred to in this Proxy Statement. STOCKHOLDERS ARE URGED TO READ THIS PROXY
STATEMENT AND THE ANNEXES HERETO IN THEIR ENTIRETY.
THE SPECIAL MEETING
The Special Meeting will be held on [day], July , 1997, at
, at a.m. local time, to consider and vote upon a proposal
to adopt the Merger Agreement and to transact any other business that may
properly come before the meeting or any adjournment thereof. Only holders of
record of Shares at the close of business on June 6, 1997 are entitled to notice
of and to vote at the Special Meeting. As of that date, 18,294,474 Shares were
issued and outstanding. Each outstanding Share will be entitled to one vote and
stockholders may vote in person or by proxy. The presence, in person or by
proxy, of the holders of a majority of the outstanding Shares is necessary to
constitute a quorum to transact business. See "Introduction--General" and
"Introduction--Matters to be Considered at the Special Meeting".
THE MERGER
Pursuant to the Merger Agreement and subject to the conditions contained
therein (including the adoption of the Merger Agreement by the Company's
stockholders), (a) IMH will merge with and into the Company, which will become a
wholly-owned subsidiary of Transworld and (b) each holder of Shares, other than
Transworld and its subsidiaries, will become entitled to receive $0.30 in cash,
without interest, for each Share held. See "Introduction--Matters to be
Considered at the Special Meeting" and "The Merger".
VOTE REQUIRED; APPRAISAL RIGHTS OF DISSENTING STOCKHOLDERS
Adoption of the Merger Agreement requires the affirmative vote of the
holders of a majority of the outstanding Shares. Transworld, through its
subsidiary IMH, owns 49% of the outstanding Shares and has an option entitling
it to purchase an additional 746,713 Shares, which, if exercised, would result
in Transworld owning 51% of the outstanding Shares. If Transworld were to
exercise this option, it would have sufficient voting power to approve the
Merger Agreement without the vote of any other stockholder. Pursuant to the
Merger Agreement, Transworld has agreed to vote all of the Shares owned by it
and its subsidiaries in favor of the adoption of the Merger Agreement. See
"Special Factors--Background of the Merger" and "Security Ownership of
Management and Certain Beneficial Owners". Dissenting stockholders who comply
with the procedural requirements of the Delaware General Corporation Law will be
entitled to receive payment in cash of the fair value of their Shares in lieu of
the Merger Consideration. See "The Merger--Appraisal Rights of Dissenting
Stockholders".
RECOMMENDATION OF THE BOARD OF DIRECTORS OF THE COMPANY
The Board of Directors unanimously has determined that the terms of the
Merger Agreement and the transactions contemplated thereby are fair to the
Company's stockholders (other than Transworld and its affiliates). The Board of
Directors of the Company unanimously has approved the Merger Agreement and
recommends that stockholders vote FOR its adoption. The terms of the Merger
Agreement are the result of arms' length negotiations between the Company and
Transworld. If the Company is unsuccessful in consummating the Merger Agreement,
or in continuing satisfactory relationships with its suppliers, it is probable
that the Company will seek protection under the Federal bankruptcy laws. See
"Special Factors--Recommendation of the Board of Directors; Fairness of the
Merger" and "Special Factors--Interests of Certain Persons in the Merger".
iv
<PAGE> 7
EFFECTIVE TIME; SURRENDER OF CERTIFICATES
The Merger will become effective upon the filing of a Certificate of Merger
with the Secretary of State of Delaware (the "Effective Time"). It is intended
that the Effective Time will occur as soon as practicable after the adoption of
the Merger Agreement by the stockholders at the Special Meeting, provided that
the other conditions to the consummation of the Merger contained in the Merger
Agreement shall have been satisfied or waived prior to such time. Upon
consummation of the Merger, the Shares will no longer be quoted on the NASDAQ
SmallCap Market(SM), and the Company will cease to be a reporting company under
the Securities Exchange Act of 1934, as amended. See "The Merger--Summary of the
Merger Agreement". Instructions for the surrender of certificates, together with
a letter of transmittal to be used for this purpose, will be forwarded to the
stockholders of the Company promptly after the Effective Time. Stockholders
should surrender certificates for Shares only after receiving such instructions
and letter of transmittal. Stockholders should not send any certificates with
the enclosed Proxy Card. See "The Merger--Summary of the Merger
Agreement--Payment for Shares".
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Andre C. Dimitriadis, the Chairman of the Board of Directors, is a
defendant in a derivative suit 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). At the
time the January Amendment (as defined below) was being considered by the Board
of Directors of the Company (the "Board of Directors"), settlement discussions
were taking place, and a proposed settlement was being considered which would be
conditioned upon the consummation of the Merger. Prior to the date the Company
and Transworld executed the March Amendment (as defined below), the plaintiffs
indicated that they were no longer interested in proceeding with the previously
discussed settlement and subsequent settlement discussions have not
materialized. However, management believes that the plaintiffs may lose their
standing to pursue an action if the Merger is consummated because after the
Effective Time their sole rights as former stockholders may be to receive the
$0.30 per Share Merger Consideration or to seek appraisal rights. See "The
Merger--Summary of the Merger Agreement--Conditions, Representations and
Covenants" and "Business of the Company--Legal Proceedings".
For information concerning the employment arrangements of certain officers
of the Company in contemplation of and following the Merger and concerning
Transworld's agreement to indemnify directors and officers of the Company under
certain circumstances, see "Special Factors--Interests of Certain Persons in the
Merger".
FINANCING OF THE MERGER
Transworld will use available working capital to fund the Merger
Consideration. The Company will pay expenses relating to the Merger from
internally generated cash and, to the extent that is not sufficient, the Company
may be required to borrow additional amounts from Transworld. See "The
Merger--Financing of the Merger".
CERTAIN CONDITIONS TO THE CONSUMMATION OF THE MERGER
It is a condition to the obligation of Transworld and IMH to consummate the
Merger that Transworld's lenders shall have consented to the Merger, shall have
amended Transworld's credit agreement to allow for the Merger and shall have
loaned to Transworld the funds necessary for Transworld to consummate the
Merger. It is also a condition to the consummation of the Merger that the
consolidated stockholder lawsuits pending against the Company shall have been
settled for a cash settlement not to exceed $4.55 million, and such settlement
shall have been approved by a court of final jurisdiction. The Merger is also
subject to the occurrence of a number of other conditions, including the
adoption of the Merger Agreement by the stockholders of the Company. There can
be no assurance that these conditions will be satisfied or waived or that the
Merger will be consummated. If the Merger is not consummated, Transworld and its
subsidiaries (a) will own 49% of the outstanding Shares and an option to
purchase an additional 746,713 Shares and (b) would, if it were to exercise its
option, be able to elect all of the members of the Board of Directors and to
v
<PAGE> 8
approve or disapprove any matter submitted to a vote of the stockholders,
including certain fundamental corporate transactions requiring stockholder
approval.
TAX CONSEQUENCES
In general, the receipt of the Merger Consideration for Shares will be a
taxable transaction for Federal income tax purposes (and may also be a taxable
transaction for state, local, foreign or other tax purposes). Each stockholder
will recognize gain or loss equal to the difference between his adjusted tax
basis for the Shares surrendered and the amount of cash received therefor. IN
VIEW OF THE INDIVIDUAL NATURE OF TAX CONSEQUENCES, EACH STOCKHOLDER IS URGED TO
CONSULT HIS OR HER OWN TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES OF THE
MERGER TO HIM OR HER, INCLUDING THE EFFECT AND APPLICABILITY OF FEDERAL, STATE,
LOCAL, FOREIGN AND OTHER TAX LAWS. See "The Merger--Federal Income Tax
Consequences".
MARKET PRICES
The following table sets forth the range of high and low bid prices of the
Shares for the periods indicated. The Shares were quoted on the NASDAQ National
Market System until March 11, 1997, on which date quotation of the Shares was
commenced on the NASDAQ SmallCap Market(SM), because the Company no longer met
the maintenance criteria for the NASDAQ National Market System.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Fiscal Year Ended April 30, 1996............................ 18 3/8 2 3/8
Fiscal Year Ended April 30, 1997............................ 6 1/4 5/32
Fiscal Year Ending April 30, 1998 (through June , 1997)... [] []
</TABLE>
The Company has never paid cash dividends on its Shares. On November 13,
1996, the last trading day prior to the announcement that the Company had
entered into the Merger Agreement, the closing price of the Shares was $2.25 per
Share. On January 13, 1997, the last trading day prior to the announcement that
the Company had entered into the January Amendment, the closing price of the
Shares was $1.25 per Share. On March 26, 1997, the last trading day prior to the
announcement that the Company had entered into the March Amendment, the closing
price of the Shares was $0.15625 per Share. The closing price of the Shares on
June [ ], 1997 was $ per Share.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The selected financial information set forth below is derived from the
financial statements of the Company contained elsewhere herein.
vi
<PAGE> 9
HEALTH MANAGEMENT, INC.
(CONSOLIDATED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JANUARY 31, YEARS ENDED APRIL 30,
-------------------- ------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues.................. $ 120,030 $118,370 $158,860 $88,456 $44,250 $26,393 $14,594
Gross Profit(1)........... 22,805 28,247 38,636 24,748 15,606 9,023 4,822
Selling.............. 4,190 3,627 4,650 2,898 1,847 1,324 642
Provision for
Doubtful
Accounts(1)(2)..... 15,493 13,267 14,715 7,978 1,781 705 132
G&A.................. 20,031 17,661 24,324 10,649 5,428 3,458 2,092
Unusual
Charges(1)(2)...... 4,213 5,600 5,600 -- -- -- --
Total Operating
Expenses................ 43,927 40,155 49,289 21,525 9,056 5,487 2,866
Operating Income (Loss)... (21,122) (11,908) (10,652) 3,223 6,549 3,536 1,956
Settlement Costs(3)....... 7,375 -- -- -- -- -- --
Income (Loss) Before
Income Taxes............ (31,251) (13,846) (13,332) 3,287 6,752 3,488 1,831
Net Income (Loss)......... (31,348) (8,175) (10,927) 1,946 4,001 2,207 1,066
Net Income (Loss) per
Share
--Primary............ $ (3.15) $ (0.87) $ (1.16) $ 0.21 $ .54 $ .38 $ .23
--Fully Diluted...... $ (3.15) $ (0.87) $ (1.16) $ 0.21 $ .53 $ .35 $ .22
Weighted Average Number of
Shares Outstanding
--Primary............ 9,940 9,400 9,415 9,408 7,383 5,884 4,599
--Fully Diluted...... 9,940 9,400 9,415 9,421 7,594 6,309 5,076
Book Value per Share...... $ 0.77 $ 4.30 $ 4.01 $ 5.17 $ 4.84 $ .161 $ .52
Ratio of Earnings (Losses)
to Fixed Charges(4)..... (10.3) (4.2) (2.8) 13.2 77.7 21.0 13.0
</TABLE>
- ---------------
(1) Unusual charges reflected in the fiscal year 1996 and nine months ended
January 31, 1996 include $3,600,000 for costs associated with organizational
consolidation and other cost reduction programs and $2,000,000 for
professional fees related to litigation and restatements of fiscal 1995
financial statements. Additionally, a $2,840,000 charge for the write-off of
medical device inventory was recorded to cost of sales, thereby reducing
gross profit, and an additional $8,400,000 increase was recorded to the
provision for doubtful accounts.
(2) Unusual charges for the nine months ended January 31, 1997 include
$1,400,000 for costs associated with overpayments from New York State
Medicaid and approximately $2,813,000 relating to costs and other expenses
related to the closing or sale of three retail pharmacies, including a
goodwill write-off of approximately $2,400,000. Additionally, the provision
for doubtful accounts was increased by $10 million.
(3) Settlement costs reflected in the nine months ended January 31, 1997 relate
to estimated costs for the proposed settlement of the stockholder class
action suit, $7,200,000, and the estimated costs associated with settlement
of the derivative actions, $175,000. There can be no assurance that such
litigation will be settled for such amount or that such reserves will be
sufficient to satisfy such liabilities. See Note 6 to the Condensed
Consolidated Financial Statements included elsewhere herein relating to a
subsequent proposed reduction in the stockholder class action settlement to
$4.55 million.
(4) Earnings (losses) were inadequate to cover fixed charges for the nine months
ended January 31, 1997 and January 31, 1996 and the fiscal year ended April
30, 1996 to the extent of $28.6 million, $11.2 million and
vii
<PAGE> 10
$9.8 million, respectively. These results arise from circumstances more
fully described in "Management's Discussion and Analysis of Financial
Condition and Results of Operation".
<TABLE>
<CAPTION>
AS OF AS OF APRIL 30,
JANUARY 31, ----------------------------------------------
1997 1996 1995 1994 1993 1992
----------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Total Assets.................... $ 78,455 $95,916 $88,690 $52,418 $17,158 $6,842
Working Capital................. (19,496) 2,492 12,486 32,013 8,946 2,158
Long term debt, including
current maturities............ 32,354 32,752 26,326 256 521 730
Stockholders' equity............ 14,104 37,363 48,171 44,096 9,755 2,372
</TABLE>
BUSINESS OF THE COMPANY
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, and assistance in insurance
coverage, verification and reimbursement and other specialized forms of patient
support. The address of the Company's principal executive office is 1371-A
Abbott Court, Buffalo Grove, Illinois 60089. See "Business of the Company".
BUSINESS OF TRANSWORLD AND IMH
Transworld is a regional provider of a broad range of alternate site health
care services and products. Transworld provides the following services and
products to patients in their homes or in an outpatient setting: (a) respiratory
therapy, home medical equipment and specialized mail-order pharmaceuticals and
medical supplies, including respiratory and diabetic medications and supplies,
wound care dressings and ostomy and orthotic products; (b) patients services,
including nursing and para-professional services and radiation therapy; and (c)
infusion therapy. IMH was incorporated solely for the purpose of consummating
the Merger. Other than 8,964,292 Shares (representing 49% of the presently
outstanding Shares), IMH has minimal assets and no business and has carried on
no activities that are not directly related to its formation and its execution
of the Merger Agreement. The address of the principal executive office of
Transworld and IMH is 75 Terminal Avenue, Clark, New Jersey 07066. See "Business
of Transworld and IMH".
viii
<PAGE> 11
INTRODUCTION
GENERAL
The Board of Directors has fixed the close of business on June 6, 1997 as
the record date (the "Record Date") for determining the holders of Shares
entitled to notice of, and to vote at, the Special Meeting. Only stockholders of
record as of the close of business on the Record Date will be entitled to vote
at the Special Meeting and any adjournments thereof. As of the Record Date,
18,294,474 Shares were issued and outstanding. Each outstanding Share will be
entitled to one vote and stockholders may vote in person or by proxy. Execution
of a proxy will not in any way affect a stockholder's right to attend the
Special Meeting and vote in person; any stockholder giving a proxy has the right
to revoke it at any time before it is exercised by written notice to the
Secretary of the Company. In addition, stockholders attending the Special
Meeting may revoke their proxies at that time. Unless so revoked, the Shares
represented by the proxies solicited by the Board of Directors will be voted in
accordance with the directions given therein by the stockholder.
All properly executed proxies which are returned in time to be cast at the
Special Meeting, if no contrary instruction is indicated, will be voted FOR the
adoption of the Merger Agreement. If any other matters are properly presented at
the Special Meeting, the persons named in the accompanying proxy will have
discretion to vote on such matters in accordance with their best judgment.
The presence, in person or by proxy, of the holders of a majority of the
outstanding Shares is necessary to constitute a quorum to transact business. If
a quorum is not present or represented at the Special Meeting, a majority of the
Shares represented at the Special Meeting may adjourn the Special Meeting from
time to time without notice other than an announcement until a quorum is present
or represented.
An automated system administered by the Company's transfer agent tabulates
the votes. Abstentions are included in the determination of the number of shares
present and voting and are counted as abstentions in tabulating the votes cast
on proposals presented to stockholders. Broker non-votes are not included in the
determination of the number of shares present and voting or as a vote with
respect to such proposals.
All expenses of this solicitation, including the cost of preparing and
mailing the proxy materials, will be borne by the Company. Certain officers and
employees of the Company, without extra remuneration, may solicit proxies by
telecopier, by telephone and in person. In addition to mailing copies of this
material to stockholders, the Company may request brokerage houses, custodians,
fiduciaries and nominees (and reimburse them for expenses in connection
therewith) who hold Shares in their names or custody or in the names of nominees
for others, to forward such material to those persons for whom they hold Shares
and to request the authority for execution of the proxies. This Proxy Statement
and form of proxy are first being sent to stockholders on or about June ,
1997.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
At the Special Meeting, the stockholders of the Company are being asked to
consider and to vote upon the adoption of the Merger Agreement pursuant to which
(a) IMH will merge with and into the Company, which will become a wholly-owned
subsidiary of Transworld and (b) each holder of Shares, other than Transworld
and its subsidiaries, will receive $0.30 in cash, without interest, for each
Share held, all subject to certain terms and conditions as more fully described
in this Proxy Statement. A copy of the Merger Agreement is attached to this
Proxy Statement as Annex I.
The proposed Merger is the second and final step in the acquisition of the
Company by Transworld. The first step was the purchase (the "Stock Purchase") as
of January 13, 1997 of 8,964,292 Shares for a purchase price which included,
among other things, $8,964,292 (including amounts previously advanced by
Transworld to the Company) pursuant to the Stock Purchase Agreement dated
November 13, 1996, as amended (the "Stock Purchase Agreement"), between the
Company and Transworld. In addition, pursuant to the Stock Purchase Agreement,
the Company granted Transworld an option entitling it to purchase up to an
additional 746,713 Shares at a cash purchase price of $1.00 per Share (the
"Transworld Option"), which, if exercised, would result in Transworld owning 51%
of the outstanding Shares. The Transworld Option expires on January 12, 1998.
1
<PAGE> 12
Adoption of the Merger Agreement requires the affirmative vote of a
majority of the outstanding Shares. Transworld, as owner (through its subsidiary
IMH) of 49% of the presently outstanding Shares and as the owner of the
Transworld Option, would, upon exercise of the Transworld Option, have
sufficient voting power to approve the Merger Agreement without the vote of any
other stockholder. Pursuant to the Merger Agreement, Transworld has agreed to
vote all of the Shares owned by it and its subsidiaries in favor of the adoption
of the Merger Agreement. See "Special Factors--Background of the Merger" and
"Security Ownership of Management and Certain Beneficial Owners". Dissenting
stockholders who comply with the procedural requirements of the Delaware General
Corporation Law will be entitled to receive payment in cash of the fair value of
their Shares in lieu of the Merger Consideration. See "The Merger--Appraisal
Rights of Dissenting Stockholders".
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND
RECOMMENDS THAT STOCKHOLDERS VOTE FOR ITS ADOPTION. See "Special
Factors--Recommendation of the Board of Directors; Fairness of the Merger" and
"Special Factors--Interests of Certain Persons in the Merger".
All information contained in this Proxy Statement concerning Transworld,
IMH, their respective directors, officers and affiliates, the financing for the
Stock Purchase and the Merger and the plans for the Company as the surviving
corporation of the Merger have been supplied by Transworld. Except as otherwise
indicated, all other information contained in this Proxy Statement has been
supplied by the Company.
The Company knows of no other matter to be presented at the Special
Meeting. If any other matter should be presented at the Special Meeting upon
which a vote properly may be taken, Shares represented by all proxies received
by the Company will be voted with respect thereto in accordance with the best
judgment of the persons named as proxies.
SPECIAL FACTORS
PURPOSE AND EFFECT OF THE MERGER
The principal purpose and effect of the Merger is to cause Transworld to
acquire the remaining equity of the Company not already owned by it. Upon the
effectiveness of the Merger, each Share (other than Shares owned by Transworld
and its subsidiaries and other than treasury shares) outstanding immediately
prior to the Effective Time will, by virtue of the Merger and without any action
on the part of the holder thereof, automatically be converted into the right to
receive $0.30 in cash, without interest thereon (payment will be made pursuant
to such right upon surrender of the certificate representing such Share), and
each Share held by the Company, Transworld or its subsidiaries immediately prior
to the Effective Time will, by virtue of the Merger, be cancelled without any
conversion thereof. Each share of common stock, par value $.01 per share,
of IMH issued and outstanding immediately prior to the Effective Time will, by
virtue of the Merger, be converted into one share of common stock of the
surviving corporation. At the Effective Time, the Company will become a
wholly-owned subsidiary of Transworld, will continue its corporate existence
under the laws of the State of Delaware and the separate corporate existence of
IMH will cease.
The Certificate of Incorporation and By-Laws of IMH will become the
Certificate of Incorporation and By-Laws of the surviving corporation except
that, effective as of the Effective Time, the Certificate of Incorporation of
IMH will be amended to change the name of the surviving corporation to "Health
Management, Inc."
As discussed in further detail below under the heading "--Background of the
Merger," on November 13, 1996, the Company entered into the Stock Purchase
Agreement and the original Merger Agreement with Transworld because of the
Company's immediate need for working capital funds, in light of, among other
things, its outstanding litigation, the need to refinance its Credit Agreement
dated March 31, 1995 (the "Credit Agreement") among the Company, Chase Manhattan
Bank, as agent, and the guarantors and lenders named therein (the "Lenders") and
the unwillingness of the Company's vendors to extend additional credit to the
Company.
2
<PAGE> 13
The acquisition of the Company by Transworld was structured as a two-step
transaction involving both the Stock Purchase and the Merger because the Company
determined that it needed a prompt cash infusion and the Company could not delay
the receipt of such funds until it had the opportunity to hold a meeting of the
stockholders to approve the Merger. Accordingly, the Company and Transworld
consummated the Stock Purchase on January 13, 1997 and the Company is now
proposing that the stockholders approve the Merger Agreement in order to
complete the second step of the transaction with Transworld. In the absence of
the Merger, the Company will likely seek protection under the Federal bankruptcy
laws.
After consummation of the Merger, Transworld will evaluate the desirability
and feasibility of integrating the Company into its existing lines of health
care services. For example, Transworld will consider combining the Company's
pharmaceutical management program with Transworld's specialized mail-order
pharmaceutical business. Through the acquisition of the Company, Transworld
hopes to gain access to the Company's developed markets for mental health and
organ transplant patients. In addition, Transworld hopes that the Merger will
strengthen its position in other chronic disease categories such as oncology and
HIV as well as infertility.
As a result of the Merger, the Company's directors will cease serving in
such capacity and, after a transition period, it is not expected that the
Company's current Chief Executive Officer will hold any position with the
surviving corporation or Transworld.
BACKGROUND OF THE MERGER
On February 18, 1996, the Board of Directors formed a special committee
(the "Special Committee"), comprised of Mr. Andre C. Dimitriadis, who was
elected as chair of the Special Committee, Dr. Timothy J. Triche and Mr. D. Mark
Weinberg, for the purpose of reviewing the financial statements of the Company
and its accounting practices. On February 27, 1996, the Company announced that,
in the course of the Special Committee's internal investigation it had
discovered certain accounting irregularities, that it intended to write down
certain accounts receivable and inventory and that the Company may have to
restate certain of its financial statements. On that same day, the Company also
announced that it had accepted the resignation of Clifford E. Hotte as Chairman
of the Board, Chief Executive Officer and President of the Company. A committee
composed of the three outside members of the Board, Messrs. Dimitriadis and
Weinberg and Dr. Triche, assumed the office of the Chief Executive Officer on an
interim basis, and commenced a search for a new Chief Executive Officer.
Shortly after such announcements, 13 separate stockholder class action
lawsuits were brought against the Company. These lawsuits were subsequently
consolidated into one action entitled In re Health Management, Inc. Securities
Litigation Master File No. 96 Civ. 0889 (ADS). In addition, certain of the
Company's former and current officers and directors were named as defendants,
and the Company was named as a nominal defendant, in several derivative actions
which were consolidated into one action entitled In re Health Management, Inc.
Stockholders Derivative Litigation, Master File No. 96 Civ. 1208 (TCP). The
Securities and Exchange Commission also commenced an investigation into the
Company following the February 27, 1996 announcement. See "Business of the
Company--Legal Proceedings".
On April 30, 1996, the Company filed with the Securities and Exchange
Commission restated consolidated financial statements for the fiscal year ended
April 30, 1995 and for each of the fiscal quarters contained therein, including
the fiscal quarters ended 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 the restatements and special charges recorded in the Company's
financial statements for the fiscal years 1995 and 1996, the Company recorded
significant charges to its balance sheet including reductions in the Company's
working capital, retained earnings and stockholders' equity. Also, as a result
of the above stated events, among others, the Company was in default under the
Credit Agreement and most long term debt of the Company under the Credit
Agreement was reclassified as a current liability on the Company's balance
sheet.
In addition, the Company incurred a substantial operating loss during the
fiscal year ended April 30, 1996. This was a result of unusual and other charges
recorded in the third quarter of 1996 which consisted of the following: (a) an
$8,400,000 increase in the allowance for doubtful accounts; (b) a $3,600,000
charge for
3
<PAGE> 14
costs associated with organizational consolidations and other cost reduction
programs, which charge includes severance costs of approximately $1.3 million, a
goodwill writedown charge of approximately $550,000, a charge for the write-off
of assets of approximately $1 million and the accrual of lease termination costs
of approximately $750,000; (c) a $2,840,000 charge for the write-off of medical
device inventory; and (d) a $2,000,000 charge for professional fees associated
with the Company's restatement of its financial statements and the litigation
relating thereto. The independent auditor's report on the Company's financial
statements for the fiscal year ended April 30, 1996 contains a qualification
concerning the Company's ability to continue as a going concern, relating to
defaults under the Credit Agreement and the litigation involving the Company.
On May 1, 1996, W. James Nicol was hired to serve as the Chief Executive
Officer and President of the Company, and assumed the tasks, among others, of
settling the stockholders litigation, developing a strategy for the Company and
refinancing the Company's bank debt.
On May 9, 1996, Bindley Western Industries, Inc., one of the Company's
suppliers of pharmaceutical products, initiated legal action against the Company
regarding past due amounts.
During May and June 1996, the Company had preliminary discussions with
certain companies in the health care industry regarding such companies' interest
in becoming a strategic partner with the Company or in acquiring the Company or
certain of its assets. In addition, the Company commenced discussions with
National Westminster Bank Plc ("NatWest Markets") concerning the possibility of
assisting the Company in connection with a possible refinancing.
On July 26, 1996, the Company and the Lenders entered into an agreement
(the "Forbearance Agreement"), pursuant to which the Lenders agreed to forbear
from exercising their default remedies under the Credit Agreement until November
15, 1996. On November 1, 1996, the Lenders reinstated $1 million of the
Company's revolving credit facility and made additional loans to the Company
under the Credit Agreement. The Forbearance Agreement, however, continued to
have an expiration date of November 15, 1996 and the Lenders stressed that they
were not inclined to extend the expiration date. In consideration of the
additional loans, the Company agreed to grant to the Lenders a warrant to
purchase 5% of the outstanding Shares, on a fully diluted basis, at an exercise
price of $2.00 per Share (the "Lenders' Warrants"). The Lenders also required at
that time that the Company retain bankruptcy counsel and prepare itself for an
orderly bankruptcy filing.
Also, in July 1996, the New York Department of Social Services commenced a
Medicaid audit (the "Medicaid Audit") of Home Care Management, Inc., a
wholly-owned subsidiary of the Company ("Home Care"). The Medicaid Audit
subsequently resulted in the execution of a Settlement Agreement, dated as of
March 31, 1997, between Home Care and the New York Department of Social
Services, pursuant to which the Company agreed to pay the New York Department of
Social Services approximately $1.4 million to reimburse the New York Department
of Social Services for certain overpayments made to Home Care. See "Business of
the Company -- Regulation -- Medicare and Medicaid".
In addition, on August 27, 1996, the Company's primary supplier of
pharmaceutical products, Foxmeyer Drug Company, filed for protection under the
Federal bankruptcy laws. This event along with the lawsuit brought by Bindley
Western Industries, Inc. and the Company's defaults under the Credit Agreement
adversely affected the Company's ability to purchase adequate inventory supply
on satisfactory credit terms (the "Wholesale Supply and Credit Issues"), which
in turn had a material adverse effect on the Company's cash flow.
On July 9, 1996, the Company retained NatWest Markets to act as the
Company's financial advisor to explore strategic and financial alternatives,
including interim and long term financing, a possible sale or merger of the
Company or a sale of some or all of its assets. For several months, the Company
primarily, but not exclusively, focused its efforts on a private placement of
securities. However, due to the uncertainties relating to the Company's business
at that time, particularly those stemming from the Medicaid Audit and the
Wholesale Supply and Credit Issues and in view of the fact that the Forbearance
Agreement expired on November 15, 1996 and the Company expected that the senior
lender would resist strongly any further extension of credit or time, the
Company ultimately concluded that it would exhaust its available funds and
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<PAGE> 15
credit and would probably be required to file for bankruptcy before such a
placement of securities or other refinancing could be effected. In mid-October
1996, the Company's focus turned exclusively to finding a strategic partner or
acquiror for the Company. The Company and NatWest Markets developed a list of 27
prospects, consisting of (a) health care providers operating in competitive or
related markets or health care companies that had expressed an interest in
entering such markets, (b) financial investors seeking investments in health
care companies or distressed companies, or (c) other companies suggested by the
Company's management. Companies that were known to be engaged in major
transactions and, therefore, were unlikely to be able to complete a transaction
with the Company in a timely manner and companies that were creditors of the
Company and therefore might have a conflict of interest, were removed from the
list. The remaining 20 prospects were then contacted by NatWest Markets or the
Company to explore their potential interest in a transaction with the Company.
The Company continued discussions and negotiations with 6 of these prospects
with which it had met earlier in the year and also had initial meetings with 5
other prospects. The other 9 prospects did not express an interest in pursuing a
transaction with the Company. The 11 potential acquirors with whom the Company
met, other than Transworld, consisted of (a) industry operators that could not
consummate a transaction on or before the expiration date of the Forbearance
Agreement and before the Company would no longer generate enough funds to cover
its expenses, (b) industry operators and financial investors that expressed an
interest in acquiring the Company only in the context of a Chapter 11 bankruptcy
reorganization and (c) those who elected not to pursue further discussions with
the Company.
On October 22, 1996, the Company first met with representatives of
Transworld. Possible structures of a transaction were discussed with them and
NatWest Markets. On October 28, 1996, a meeting with representatives of the
Company, Transworld, NatWest Markets and Transworld's financial advisor, UBS
Securities Inc. ("UBS") took place, followed later that day by on-site due
diligence at the Company's Ronkonkoma office and later that day at the Company's
Pittsburgh and Minneapolis locations. On October 30, 1996, the parties
reassembled at the Company's headquarters in Chicago to further explore
Transworld's interest in pursuing a transaction.
On October 30, 1996, representatives of Transworld indicated that
Transworld would consider making an offer to acquire the Company, if (a)
Transworld was able to purchase the Company's debt under the Credit Agreement at
a substantial discount of at least 40% of the face value and (b) the Company was
able to restructure the terms of the settlement of the consolidated stockholder
class action lawsuit to substantially reduce the cost to the Company.
Transworld's acquisition proposal called for the Company and Transworld to enter
into two agreements simultaneously: (a) a stock purchase agreement under which
Transworld could relatively quickly infuse needed equity capital into the
Company at $1.00 per Share and as a result of which Transworld would own Shares
and/or options for Shares representing 51% of the outstanding Shares of the
Company and (b) a merger agreement under which Transworld would acquire all
outstanding Shares (other than those owned by Transworld) at a price higher than
$1.00 per Share. Transworld indicated that the price per Share it would be
prepared to offer to stockholders could not be determined until Transworld had
completed its due diligence, Transworld had completed negotiations with the
Lenders regarding the purchase of the Company's senior debt under the Credit
Agreement, and the Company had renegotiated the terms of its settlement of the
consolidated stockholder class action. However, Transworld indicated that the
price to be paid to Shareholders could be as high as $2.50 per Share.
There were several additional meetings and extensive negotiations with
Transworld over the following weeks regarding the structure of Transworld's
acquisition of the Company and the terms of the documents providing for the
Merger and related transactions, including the purchase price. The Company and
Transworld also engaged in negotiations with respect to the terms of loans to be
made by Transworld to the Company, which the Company needed in order to continue
its operations. In addition, during this period, Transworld continued its due
diligence review with respect to the proposed Merger. During that time the
Company continued discussions with the other potential acquirors, none of whom
made offers to acquire the Company. Several of the potential acquirors expressed
general interest in acquiring the Company in a bankruptcy scenario, but
indicated a low probability of any payment being made to existing stockholders.
On November 2, 1996, representatives of Transworld and UBS and Transworld's
counsel, Proskauer Rose LLP ("Proskauer") joined a meeting of the Board of
Directors, at which they gave background information
5
<PAGE> 16
regarding Transworld and their vision for the future of the Company and how the
businesses of the Company and Transworld might complement each other. The
general terms of Transworld's acquisition proposal (as described above) were
also outlined.
The Executive Committee of the Board of Directors, which was formed on
April 3, 1996 and consists of Messrs. Dimitriadis, Nicol and Weinberg and Dr.
Triche, and the Board of Directors met an aggregate of 17 times from October 17,
1996 until the date on which the Merger Agreement and the Stock Purchase
Agreement were signed (November 13, 1996), to discuss the proposals received
from Transworld as well as those of other prospects contacted, as well as other
alternatives available to the Company, including liquidation and the filing of a
voluntary petition for bankruptcy protection under Chapter 11 of the Federal
Bankruptcy Code. The filing of a petition for bankruptcy protection was
discussed by the Board, because of the Company's financial condition and the
belief by the Board that, in the absence of a potential purchaser for a
significant portion of the business of the Company or substantial additional
financing, such a filing would become the only alternative for the Company
because of (a) the Company's immediate need for working capital funds, (b) the
then existing default by the Company under the Credit Agreement and the
impending expiration of the Forbearance Agreement on November 15, 1996, (c) the
indication from the Lenders that they would not advance additional funds to the
Company or extend the expiration date of the Forbearance Agreement and a
requirement by the Lenders that the Company retain bankruptcy counsel and
prepare for a bankruptcy filing, and (d) the unwillingness of the Company's
vendors to extend credit to the Company. These discussions included an analysis
of outcomes under the possible bankruptcy scenarios. In evaluating the various
bankruptcy scenarios, the Board of Directors considered the possible effects on
stockholders, creditors, customers, referral sources and employees of the
Company.
During that time period, the Board of Directors consulted with its
financial advisors, NatWest Markets, Company counsel, McDermott, Will & Emery,
and Special Counsel to the outside directors, Latham & Watkins, in respect of
the proposed transaction with Transworld and the bankruptcy alternatives.
The Board of Directors reviewed the bankruptcy analysis several times at
different stages during the process of finding an acquiror. At all times
throughout the process, the unanimous view of the Board of Directors was as
follows:
(1) The stockholders were likely to receive less in a bankruptcy
scenario than Transworld would be willing to offer. The determination was
based on (a) the fact that potential acquirors that were proposing a
purchase of the Company through a bankruptcy scenario were basing their
proposal on the complete elimination of stockholder value; (b) the
Company's analysis that in a liquidation, the Company's stockholders would
not receive any value, and (c) the directors' belief that the Company's
business would deteriorate substantially in any type of bankruptcy filing
(see clauses (3), (4) and (5) below).
(2) The creditors were likely to receive greater payments in a merger
or acquisition than they would likely receive in a bankruptcy scenario
especially since Transworld and its affiliates were negotiating to purchase
the senior debt and the trade payables with the major creditors of the
Company. Moreover, in a liquidation scenario, the Company's assessment was
that the unsecured creditors would not receive any value.
(3) A bankruptcy filing would be likely to negatively affect the
Company's ongoing referral sources and customer base and jeopardize the
Company's ongoing operations.
(4) A bankruptcy filing would have a material adverse effect on the
morale of the Company's employees and lead to attrition of its workforce.
(5) A bankruptcy filing could make it difficult for the Company to
obtain supplies and deliver pharmaceuticals to patients whose health
depends upon timely receipt of pharmaceuticals by the Company.
On November 12, 1996, the Board of Directors considered resolutions to
adopt the Stock Purchase Agreement and the original Agreement and Plan of
Merger, which provided for a $2.00 per Share payment to stockholders. The
resolutions were unanimously adopted, with Mr. Nicol abstaining from the vote
because of a
6
<PAGE> 17
possible conflict arising from the letter agreement he entered into with the
Company in connection with the contemplated transactions. See "Interests of
Certain Persons in the Transactions -- Employment Agreements". At that time,
NatWest Markets rendered to the Board of Directors an opinion as to the fairness
of the $2.00 per Share cash consideration to be paid to stockholders in the
Merger, based on projections supplied by the Company at that time. See "The
Company's Financial Advisor" below.
On November 13, 1996, Transworld acquired the bank debt of the Company that
was outstanding under the Credit Agreement in the principal amount of
$28,300,000 for approximately $21 million, or 75% of its face value. Transworld
also extended the termination date of the Forbearance Agreement, which was to
terminate on November 15, 1996, to December 12, 1996, and, in addition, agreed
to lend up to an additional $3,000,000 to the Company under the Company's
revolving line of credit, subject to certain conditions and Transworld's
discretion. On that same day, the Company and Transworld entered into the Stock
Purchase Agreement and the Company, Transworld and IMH entered into the original
Merger Agreement. Under the Stock Purchase Agreement, Transworld agreed to
acquire 8,964,292 newly issued Shares (representing 49% of the outstanding
Shares), at a purchase price of $1.00 per Share, as well as an option to
purchase an additional 746,713 Shares at a purchase price of $1.00 per Share for
a one year period. The consummation of the Stock Purchase Agreement was subject
to the satisfaction of certain conditions including, among others, approval of
Transworld's lenders and preliminary court approval of a settlement of the
consolidated class action lawsuit for $7.2 million in cash, which preliminary
court approval was granted on December 20, 1996 (the "Proposed Settlement"). The
consideration for the Shares included: (a) the execution by Transworld of the
Merger Agreement, (b) the purchase by Transworld of the rights of the Company's
senior lenders under the Credit Agreement, (c) the extension by Transworld of
the expiration date of the Forbearance Agreement, (d) the agreement by
Transworld to lend additional amounts under the revolving credit facility,
subject to certain conditions and at Transworld's discretion, (e) the
cancellation by Transworld of the Lenders' Warrants, and (f) $1.00 per Share. Of
the $1.00 per Share consideration, or an aggregate of $8,964,292, for the Shares
purchased pursuant to the Stock Purchase Agreement, a portion was required to be
used to repay any amounts loaned to the Company under the revolving credit
facility subsequent to November 13, 1996 and interest thereon.
Based on the fact that the Company was in immediate need of funds and on a
determination by the Audit Committee of the Board of Directors that the
Company's financial viability would be jeopardized if the Company were required
to delay closing of the Stock Purchase Agreement in order to seek prior
stockholder approval as required by Rule 4460(i) of the NASD Manual, the Company
requested and was granted an exemption by the NASDAQ Stock Market, Inc.
("NASDAQ") from such requirement. On November 29, 1996, the Company mailed a
letter to its stockholders informing them of the impending closing of the Stock
Purchase Agreement and the grant of the exemption by NASDAQ.
Hyperion Partners II L.P., the principal stockholder of Transworld
("Hyperion"), acquired the obligations of the Company due to Foxmeyer Drug Co.
on November 19, 1996, Bindley Western, Inc. on December 20, 1996 and Caremark,
Inc. on December 23, 1996. The obligations of the Company due to such parties
were in the aggregate amount of approximately $18.2 million. Hyperion has agreed
to contribute to Transworld the obligations of the Company due to Foxmeyer Drug
Co. and Bindley Western, Inc. in the face amount of approximately $15.2 million
in exchange for stock in Transworld.
On December 12, 1996, Transworld extended the expiration date of the
Forbearance Agreement to December 23, 1996 and the availability under the
Company's revolving credit line was further increased by up to an additional
$2,000,000 subject to certain conditions and at the discretion of Transworld.
The extension of the Forbearance Agreement was granted by Transworld in
connection with an extension of the anticipated closing date for the Stock
Purchase Agreement to December 23, 1996. There were two further extensions of
the Forbearance Agreement, until the Stock Purchase Agreement was consummated as
of January 13, 1997. At the closing of the Stock Purchase Agreement, of the
$8,964,292 of cash proceeds, $4,649,285 was applied to repay all loans made by
Transworld to HMI from November 13, 1996 through January 13, 1997 and $107,248
was applied toward interest on amounts owed under the Credit Agreement.
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<PAGE> 18
Prior to the anticipated closing date for the Stock Purchase Agreement of
December 23, 1996, the Company informed Transworld that its Chief Financial
Officer and Executive Vice President, Paul Jurewicz, had resigned to accept a
new career opportunity. The Company also provided to Transworld a draft Form 10-
Q for the Company's fiscal quarter ended October 31, 1996, which disclosed,
among other things, that gross profit margins were lower than anticipated and
the negative effect of the introduction of Olanzapine, a new antipsychotic drug,
on the Company's Clozapine customer base. At such time, the Company also
disclosed that the introduction of Olanzapine was having a greater adverse
effect on the Company's business in the third quarter of fiscal 1997 than the
Company had originally anticipated.
In view of the disclosures, and following an assessment by Transworld of
the Company's recent adverse business results, including the Company's financial
results for the quarter ended October 31, 1996, Transworld informed the Company,
on or about December 23, 1996, that the cash consideration to be paid in the
Merger would have to be reduced by some amount as a condition to Transworld
proceeding with the Stock Purchase Agreement and the Merger Agreement.
On or about January 6, 1997, Transworld proposed that the cash
consideration to be paid in the Merger be reduced to between $1.00 and $1.25 per
Share. Transworld's proposal was based upon the adverse business conditions that
had been disclosed by the Company, including (a) the effect of the introduction
of Olanzapine on the Company's business prospects and the commencement of the
greater than anticipated loss of patients resulting from the introduction of
Olanzapine, (b) possible charges to the Company's balance sheet and statement of
operations, and (c) the negative effect of these conditions on the Company's
gross profit margins. Transworld also noted that a factor in its decision to
acquire the Company was the continued employment of the Company's management
team, and the impending loss of the Company's Chief Financial Officer also was
viewed by Transworld as a material adverse change. See "Management's Discussions
and Analysis of Financial Conditions and Results of Operations".
At a meeting of the Board of Directors held on January 7, 1997,
Transworld's proposal was discussed among the directors and their advisors,
including NatWest Markets, but was rejected by the Board. The Board of Directors
concluded that Transworld had the right to decline to consummate the Stock
Purchase Agreement and the Merger Agreement because of certain material adverse
changes in the Company's business and that without the cash infusion from the
stock purchase, the Company would have had to seek protection under the Federal
bankruptcy laws. Accordingly, the Board concluded that it was appropriate to
negotiate a reduction in the cash consideration payable to the stockholders in
the Merger. However, the consensus was that a cash price of $1.00 to $1.25 per
Share was too low. The Finance Committee of the Board of Directors had further
discussions with Transworld and proposed a $1.50 per Share price. Discussions
continued between the Company and Transworld throughout the week.
The Board of Directors met three times from January 8, 1997 to January 12,
1997 to discuss the proposed reduction in the cash consideration to be paid to
stockholders in the Merger and related issues and at the January 8th and January
9th meetings representatives of NatWest Markets reviewed the analysis it
performed in rendering its fairness opinion. See "The Company's Financial
Advisor" below. On January 12, 1997, the Board of Directors unanimously voted in
favor of an amendment to the Merger Agreement for the purposes, among others, of
reducing the cash consideration to be paid in the Merger to $1.50 per Share and
extending Transworld's financing contingency to the date of the Merger (the
"January Amendment"). At that time, NatWest Markets rendered to the Board of
Directors an opinion as to the fairness of the $1.50 per Share cash
consideration to be paid to stockholders in the Merger, based on projections
supplied by the Company at that time. See "The Company's Financial Advisor"
below.
On January 13, 1997, the January Amendment was executed and the
transactions contemplated by the Stock Purchase Agreement were consummated.
As a result of questions raised during a due diligence review by
Transworld, the Company reexamined its allowance for doubtful accounts and
increased the allowance by approximately $3 million at December 31, 1996. In
addition, in late January 1997, the Company engaged BDO Seidman, LLP ("BDO
Seidman") to commence a review of the Company's accounts receivable. In
mid-February, 1997, the Company was unable to correlate accounts payable
relating to inventory with the amounts the vendors claimed were owed to them
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<PAGE> 19
and with the expected gross profit for 1997 third quarter. The Company promptly
shared its concern regarding this issue with Transworld. The Company, along with
BDO Seidman and outside financial consultants retained by the Company, reviewed
the first and second quarter financial results and analyzed the Company's
accounts receivable and accounts payable related to inventory.
On March 8, 1997, the Audit Committee of the Board of Directors was
presented with a draft analysis of the reconciliations of the payables relating
to inventory and draft restatements of the statements of operations for the 1997
first and second fiscal quarters and an analysis of the proposed charges for the
third fiscal quarter.
On March 10, 1997, the Company met with Transworld and distributed the
analyses reviewed by the Board of Directors at its March 8, 1997 meeting. The
extent of the apparent errors in the Company's 1997 first and second quarter
financial statements and the proposed charges to be taken in the third quarter
were discussed. After a review of these matters, representatives of Transworld
advised the Company that they believed that the equity of the Company had no
value and if Transworld did not already have a significant equity investment in
the Company, it would no longer wish to pursue the Merger. Transworld indicated
that, in order to avoid a bankruptcy of the Company, it would consider
completing the Merger, but with only a nominal payment of $0.05 per Share to the
stockholders of the Company.
On March 11 and 12, 1997, Proskauer and McDermott, Will & Emery, on behalf
of Transworld and the Company, respectively, discussed the possibility of a
prepackaged bankruptcy filing under Chapter 11 of the Bankruptcy Code (a
"PrePack") as well as an asset sale pursuant to Section 363 of the Bankruptcy
Code in a voluntary Chapter 11 filing (a "Section 363 Sale") and the mechanics
of such filings.
At a meeting of the Board of Directors held on March 12, 1997, Transworld's
proposal of a nominal payment of $0.05 per Share was discussed. In addition, the
directors considered the other three alternatives available to the Company, all
involving filings under the Federal bankruptcy laws, including a PrePack, a
Section 363 Sale or a liquidation. The Board discussed various possible ways of
restructuring a deal with Transworld, including the possibility of Transworld
exchanging their debt for equity of the Company or a deal involving stock,
rather than cash, consideration.
At a meeting of the Board of Directors held on March 13, 1997, the Board
reviewed the proposed changes in the first and second quarter 1997 financial
statements and the proposed 1997 third quarter charges. NatWest Markets, whose
representatives were present at the meeting, were asked by the Board of
Directors to evaluate Transworld's proposal. NatWest Markets advised the Board
of Directors that it would be unable to deliver a fairness opinion on any
transaction with Transworld at this time, because it did not have a methodology
upon which to base an opinion. NatWest Markets explained that in order for it to
render a fairness opinion it had to be able to assume that the Company could
sustain itself as a going concern, which would require that additional funding
be available to the Company in the near term. NatWest Markets indicated that it
could no longer reasonably make such an assumption given the Company's current
rate of losses and the instability of the Company's operations. However, NatWest
Markets informed the Board of Directors that its inability to deliver a fairness
opinion should not be construed as NatWest Markets' opinion that any particular
merger consideration is not fair. In considering further modifications to the
Merger Agreement and the alternative bankruptcy scenarios, the Board of
Directors consulted with NatWest Markets, McDermott, Will & Emery and Latham &
Watkins. The Board of Directors discussed in detail the possible outcomes to the
Company's stockholders and creditors and also its employees, patients and
referral sources, in a bankruptcy scenario, and discussed the three types of
bankruptcy scenarios mentioned in the preceding paragraph. The Board of
Directors concluded that its earlier analysis of the possible outcomes in
various bankruptcy scenarios, which analysis was initially conducted prior to
entering into the Original Merger Agreement, continued to hold true and were now
even more dire. The directors then discussed possible counteroffers to
Transworld's proposal and there was a consensus to propose to Transworld $1.00
per Share as a negotiating posture.
Later that day, the Company conveyed to Transworld the Company's $1.00 per
Share proposal. Transworld rejected outright the $1.00 per Share proposal and
indicated that it was prepared to offer no more than $0.30 per Share and that it
was Transworld's last and final offer.
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<PAGE> 20
On March 14, 1997, Transworld's response was reported back to the Board of
Directors. The Board of Directors reviewed its earlier bankruptcy analysis. The
Board of Directors also discussed other terms of the Transworld deal. The
unanimous consensus of the Board of Directors was that the $0.30 per share offer
was in fact Transworld's last and final offer, and was acceptable in light of
the financial condition of the Company, the absence of other bidders for the
Company and the bankruptcy alternative.
Later that day, representatives of the Board of Directors conveyed to
Transworld the Board of Directors' willingness to accept a $0.30 per Share
proposal. Transworld also discussed several additional conditions to entering
into an amendment to the Merger Agreement, including restructuring the terms of
the settlement of the consolidated stockholder class action lawsuit to reduce
the cash settlement amount. Over the next several days, Transworld and the
Company focused on renegotiating the terms of the class action settlement.
On March 17, 1997, the Company announced that it planned to restate its
financial statements for the first and second quarters of its 1997 fiscal year
to correct certain errors relating to costs of goods sold, which were previously
understated by approximately $1.8 million and $800,000, respectively, and that
it planned to take a charge of approximately $13 million in the third quarter of
1997. The announcement detailed that the charge included a write-off of
approximately $2.4 million in goodwill and other costs associated with the sale
of retail pharmacies and an increase of approximately $10 million in the
provision for doubtful accounts.
Also on March 17, 1997 and on March 19, 1997, the Board of Directors met
for a status report on the progress of the negotiations of the stockholder class
action lawsuit, which remained the major open issue in finalizing an amendment
to the Merger Agreement with Transworld. It was reported that the attorneys (the
"Plaintiffs' Attorneys") representing the plaintiffs in the stockholder class
action had suggested reducing the cash consideration to be paid to the
stockholders below $0.30, in order to supplement the funds being offered to
them.
The Board of Directors met on March 22, 1997 and March 23, 1997 to discuss
upcoming filings with the SEC and on March 24, 1997, the Company filed a Form
10-Q/A for the fiscal quarter ended July 31, 1996, Form 10-Q/A-2 for the fiscal
quarter ended October 31, 1996, and the Form 10-Q for the fiscal quarter ended
January 31, 1997. The Company's press release relating to these filings also
described the status of its negotiations with Transworld.
On March 25, 1997, the Company, Transworld, subject to the approval of its
lenders, and the Plaintiffs' Attorneys agreed to further amend the Amended
Stipulation of Settlement to provide for a cash settlement of $4.55 million,
rather than $7.2 million. Transworld thereafter indicated to the Company its
intent to go forward with an amendment to the Merger Agreement, to reflect,
among other things, a reduction of cash consideration to be paid to stockholders
in the Merger to $0.30 from $1.50 per Share, and revision to the closing
condition relating to final settlement of the stockholders class action lawsuit,
to reflect a lower cash settlement of $4.55 million, rather than $7.2 million.
Transworld informed the Company that it was willing to extend the Forbearance
Agreement to March 31, 1997 but would defer discussions about further extensions
and additional cash advances to a later date.
On March 26, 1997, the Board of Directors met and was apprised of the
status of discussions with the Plaintiffs' Attorneys and Transworld. The Board
of Directors reviewed the advantages and disadvantages to the stockholders,
creditors, employees, patients and overall business of the Company of the
proposed revised Merger terms as compared to a bankruptcy of the Company.
Thereafter, the draft of an amendment to the Merger Agreement was discussed and
unanimously approved. Later that day an amendment to the Merger Agreement was
executed by the parties (the "March Amendment") and the following day it was
publicly announced.
Following the announcement of the March Amendment, the Company received
correspondence from a principal competitor of the Company expressing an interest
in discussing the acquisition of a primary line of the Company's business. On
May 8, 1997 counsel for the Company was contacted by a representative of this
competitor to express its interest in acquiring such line of business.
Representatives of the competitor indicated that a cash offer could be made, but
that the competitor would need to conduct a due diligence investigation before
it could make any type of proposal. The Board of Directors met on May 10, 1997
and
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<PAGE> 21
May 19, 1997 and considered, among other things, that (1) the competitor had
extensive discussions with the Company in July and November of 1996, and in each
case indicated that any transaction with it would yield no value to the
stockholders of the Company, (2) the Company's financial condition actually was
less favorable than presented in July and November, 1996, as indicated in part
by the restatements of the first and second quarter 1997 financial statements,
(3) the expression of intent was for a portion, not all, of the Company, (4) the
Merger Agreement contained provisions expressly limiting any discussions with
potential acquirors and Transworld had indicated that at that late date the
disclosure of confidential information to, and the Company's continuing
discussions with, the competitor would jeopardize the Merger, (5) the competitor
indicated that it would need to conduct a due diligence investigation before it
could make a proposal, and (6) the potential damage of providing additional
confidential information to a competitor of the Company and of jeopardizing the
Merger was greater than the possibility that a transaction with the competitor
would actually occur and would actually result in additional value to the
Company's stockholders and creditors.
RECOMMENDATION OF THE BOARD OF DIRECTORS; FAIRNESS OF THE MERGER
The Board of Directors unanimously has determined that the terms of the
Merger Agreement and the transactions contemplated thereby are fair to the
Company's stockholders (other than Transworld and its affiliates). The Board of
Directors has unanimously approved the Merger Agreement and recommends that
stockholders vote FOR approval of the Merger Agreement.
The terms of the Merger Agreement are the result of arms' length
negotiations between representatives of the Company and Transworld. The Board of
Directors believes that the Merger is in the best interests of the stockholders
of the Company. In arriving at its fairness determination and recommendation,
the Board of Directors considered a number of factors, including, without
limitation, the following:
Immediate Need for Funds. The Board of Directors, based on its familiarity
with the business of the Company and the Company's prospects and financial
condition, gave significant weight to the fact that the Company continued to be
in immediate need of funds. The Board of Directors noted that the Company was in
default under the Credit Agreement and that the Forbearance Agreement was being
extended by Transworld, in its sole discretion, in short term intervals. The
Board of Directors also considered that the outstanding litigation against the
Company and certain of its current and former officers and directors, including,
without limitation, the settlement of the stockholders class action lawsuit,
would require extraordinary cash outlays which the Company could not fund from
its operating activities.
Likelihood of Bankruptcy. Given the Company's financial state, the Board of
Directors noted the likelihood that the Company would be unable to continue its
current operations without seeking protection from its creditors under the
Federal bankruptcy laws. The Board of Directors gave significant weight to the
fact that seeking protection under the Federal bankruptcy laws would negatively
impact the Company's creditors and stockholders and negatively impact the
Company's relationship with patients, employees and referral sources, and
jeopardize its ability to continue operating.
Evaluation of the Merger and Bankruptcy Alternatives. The Board of
Directors compared the terms of the Merger Agreement and the consideration to be
received by stockholders and creditors pursuant thereto, with the likely results
in a Chapter 11 bankruptcy reorganization or a Chapter 7 liquidation. The Board
of Directors also gave significant weight to the fact that the Merger Agreement
provides for greater consideration to the creditors and stockholders than do the
results under the various bankruptcy scenarios. The Board of Directors'
comparison of a deal with Transworld to a bankruptcy scenario is described
above. See "Special Factors--Background of the Merger".
Certain Financial Analyses. The Board of Directors also considered, but
gave less weight to, certain analyses performed by NatWest Markets in rendering
its fairness opinion and certain financial forecasts prepared by Company
management at the time that each of the Original Merger Agreement and the
January Amendment were executed, including a review of various valuations of the
Company based on market earnings per share and EBITDA multiples and discounted
cash flows.
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While the first three factors were the focus of the discussions of the
Board of Directors and were given the greatest weight, in view of the many
different factors considered by the Board of Directors, the Board of Directors
did not assign relative weights to the various factors considered, and
individual directors may have given differing weights to different factors.
Other Considerations. The Board of Directors evaluated and unanimously
recommended the Merger Agreement in light of certain other considerations
associated with the Merger, including, without limitation:
(1) Although NatWest Markets was not able to make a determination as
to the fairness of the Merger Consideration, the Board of Directors, based
on its familiarity with the Company's prospects and financial condition and
an evaluation of the available alternatives, concluded that the Merger was
the best option available to the Company.
(2) The Board of Directors did not consider the Company's book value
insofar as the Board of Directors was advised by NatWest Markets that a
purchaser would most likely focus on the Company's going concern value
(i.e., cash flows and income), as opposed to the Company's book value, when
determining the appropriate purchase price for the Company. The Company's
going concern value was the primary basis of NatWest Market's analysis of
the Company. The directors believed that the Company's going concern value
was less than its book value based upon the offers received for the
Company. The Company, however, did not write down its goodwill, because the
Company determined that the Company's losses stemmed mostly from its
original business operations, and no goodwill was recorded with respect to
such operations.
As noted above, in the absence of the Merger Agreement, the Company
would probably seek protection under the Federal bankruptcy laws, since
there was no proposal which did not contemplate a bankruptcy filing (except
for the late approach by a competitor of the Company relating to the
purchase of a portion of the Company's business). If the Company sought
such protection, the Board of Directors felt that many of the Company's
patients and referral sources would seek other health care providers,
significantly eroding the Company's goodwill. As a result, there would be a
substantial reduction in the Company's book value.
(3) Due to the extent and nature of the adverse business conditions
suffered by the Company and the restatement of its financial statements
since the Company and Transworld had entered into the Stock Purchase
Agreement and the original Merger Agreement, the Board of Directors did not
give any weight to the fact that price per Share paid by Transworld in the
Stock Purchase was greater than the $0.30 per Share Merger Consideration.
For the same reasons, the Board of Directors did not consider the
historical market prices of the Shares.
(4) Transworld, through its wholly-owned subsidiary IMH, owns 49% of
the presently outstanding Shares and has an option to acquire an additional
746,173 Shares, which, if exercised, would result in Transworld owning 51%
of the outstanding Shares. The Merger was not structured to require the
majority vote of non-affiliated stockholders. Transworld has agreed to vote
all of the Shares owned by it and its subsidiaries in favor of the Merger.
(5) The Board of Directors noted that at least two of the four
directors had possible conflicts of interest. First, simultaneously with
the execution of the original Merger Agreement, and as a condition to
Transworld entering into the original Merger Agreement and Stock Purchase
Agreement, Mr. Nicol entered into a letter agreement with the Company
pursuant to which Mr. Nicol agreed to continue to serve as Chief Executive
Officer and President of the Company through the Effective Time and the
Company agreed to pay make various payments to Mr. Nicol, some of which are
conditioned on the consummation of the Merger. In the absence of a
transaction with Transworld and the Merger, the Company would likely file
for bankruptcy. In advising the Board of Directors of the Company as to the
possible outcomes in a bankruptcy scenario, Company counsel had advised the
Board of Directors that the value of Mr. Nicol's employment agreement in a
bankruptcy scenario was dubious. Second, Andre C. Dimitriadis, the Chairman
of the Board of Directors, is a defendant in a derivative lawsuit. At the
time the January Amendment was being considered by the Board of Directors,
a proposed settlement of such
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derivative lawsuit was being considered which would be conditioned upon
consummation of the Merger. Prior to the date the Company and Transworld
executed the March Amendment, the plaintiffs indicated that they were no
longer interested in proceeding with the previously discussed settlement
and subsequent settlement discussions have not materialized; however,
management believes the plaintiffs may lose their standing to pursue an
action if the Merger is consummated since after the Effective Time
Transworld will be the sole stockholder of the surviving corporation. Mr.
Dimitriadis has certain rights to advancement of legal fees and
indemnification as a director of the Company; however, if the Company were
to file for bankruptcy, Mr. Dimitriadis' rights could be subordinate to
senior claims in a bankruptcy and would be at a substantial risk of
non-collection.
In addition, the Merger Agreement provides that from and after the
Effective Time, Transworld and the surviving corporation will jointly and
severally (to the same extent as the Company currently indemnifies its officers
and directors pursuant to the Company's Certificate of Incorporation and Bylaws)
indemnify the current officers and directors of the Company with respect to
damages and liabilities arising prior to the Effective Time. If the Company were
to file for bankruptcy, the rights of the Company's directors and officers to
indemnification by the Company could be subordinate to senior claims and
therefore would be at substantial risk of non-collection. For additional
information concerning these interests of directors in the Merger, as well as
certain information regarding the directors' beneficial ownership of Shares, see
"--Interests of Certain Persons in the Merger" and "Security Ownership of
Management and Certain Beneficial Owners".
In order to reduce these conflicts, as to the vote on the original Merger
Agreement, Mr. Nicol abstained. All of the other directors, including all three
non-employee directors, voted in favor of the original Merger Agreement. As to
the vote on the January Amendment and March Amendment, all directors voted in
favor thereof. The conflicts of interest were discussed in detail at several
meetings of the Board of Directors and considered prior to the votes of the
Board of Directors. In addition, each of the directors had ample opportunity to
discuss any concerns related to those conflicts separately with Special Counsel
to the outside directors as well as Company counsel.
Transworld and IMH. Transworld and IMH had no involvement in the Company's
evaluation of the fairness of the Merger to the Company's stockholders and have
not undertaken any formal evaluation of their own as to the fairness of the
Merger to the Company's stockholders. However, Transworld and IMH have reviewed
the factors considered by the Board of Directors in reaching its determination
as to the fairness of the Merger to the Company's stockholders and believe that
these factors provide a reasonable basis for Transworld and IMH to conclude, as
they do, that the Merger is fair to the Company's stockholders. This belief
should not, however, be construed as a recommendation by Transworld or IMH to
the Company's stockholders to vote to adopt the Merger Agreement. Transworld and
IMH have not assigned any specific relative weight to any of these factors.
Mr. Dimitriadis, the only director or officer of the Company who holds any
Shares, intends to vote his Shares in favor of the Merger. Mr. Dimitriadis is
making no specific recommendation as to the vote on the Merger other than as a
member of the Board of Directors.
ALTERNATIVES TO THE MERGER
As discussed above, during the period from May 1996 to mid-October 1996,
the Company pursued a variety of alternatives to obtain necessary funding for
the Company, including possible strategic alliances, a refinancing of the
Company's bank debt and a possible sale or merger of the Company or a sale of
some or all of its assets. For several months, beginning in July 1996 the
Company primarily, but not exclusively, focused its efforts on a private
placement of securities. However, due to the uncertainties relating to the
Company's business at that time, particularly those stemming from the Medicaid
Audit and the Wholesale Supply and Credit Issues and in view of the fact that
the Forbearance Agreement expired on November 15, 1996 and the Company expected
that the senior lender would resist strongly any further extension of credit or
time, the Company ultimately concluded that it would exhaust its available funds
and credit and would probably be required to file for bankruptcy before such a
placement of securities or other refinancing could be effected. In mid-October
1996, the Company's focus turned exclusively to finding a strategic partner or
acquiror for the
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<PAGE> 24
Company. As more fully described above, an extensive search was conducted; and
the only offer proposing a transaction outside of bankruptcy was that of
Transworld. See "--Background of the Merger" above.
The Board of Directors considered the bankruptcy alternative on a number of
occasions. Each time such alternative was discussed, the Board of Directors
unanimously concluded the Merger was preferable to the bankruptcy alternative
because:
(1) The Stockholders were likely to receive less in a bankruptcy
scenario than Transworld would be willing to offer. The determination was
based on (a) the fact that potential acquirors that were proposing a
purchase of the Company through a bankruptcy scenario were basing their
proposal on the complete elimination of stockholder value; (b) the
Company's analysis that in a liquidation of the Company the Company's
stockholders would not receive any value; and (c) the directors belief that
the Company's business would deteriorate substantially in any type of
bankruptcy filing (see clauses (3), (4) and (5) below).
(2) The creditors were likely to receive greater payments in a merger
or acquisition than they would likely receive in a bankruptcy scenario
especially since Transworld and its affiliates were negotiating to purchase
the senior debt and the trade payables with the major creditors of the
Company. Moreover, in a liquidation scenario, the Company's assessment was
that the unsecured creditors would not receive any value.
(3) A bankruptcy filing would be likely to negatively affect the
Company's ongoing referral sources and customer base and jeopardize the
Company's ongoing operations.
(4) A bankruptcy filing would have a material adverse effect on the
morale of the Company's employees and lead to attrition of its workforce.
(5) A bankruptcy filing could make it difficult for the Company to
obtain supplies and deliver pharmaceuticals to patients whose health
depends upon timely receipt of pharmaceuticals by the Company.
The only non-bankruptcy alternative (other than Transworld's proposal) that
was presented to the Company was an expression of interest from a principal
competitor of the Company in acquiring a primary line of the Company's business,
made after the March Amendment was executed. The Board decided not to pursue
further discussion with the competitor for the following reasons: (1) the
competitor had extensive discussions with the Company in July and November of
1996, and in each case indicated that any transaction with it would yield no
value to the stockholders of the Company, (2) the Company's financial condition
actually was less favorable than that presented in July and November, 1996, as
indicated in part by the restatements of the first and second quarter 1997
financial statements, (3) the expression of interest was for a portion, not all,
of the Company, (4) the Merger Agreement contained provisions expressly limiting
any discussions with potential acquirors and Transworld had indicated that at
that late date the disclosure of confidential information to, and the Company's
continuing discussions with, the competitor would jeopardize the Merger, (5) the
competitor indicated that it would need to conduct a due diligence investigation
before it could make a proposal, and (6) the potential damage of providing
additional confidential information to a competitor of the Company and of
jeopardizing the Merger was greater than the possibility that a transaction with
the competitor would actually occur and would actually result in additional
value to the Company's stockholders and creditors.
POTENTIAL ADVERSE CONSEQUENCES OF THE MERGER
The Board of Directors based its recommendation and fairness determination
upon its evaluation of the Company's prospects and financial condition. Such
evaluation was the product of months of meetings with the Company's management
and outside advisors. However, the Board of Directors' recommendation and
fairness determination was made, for the reasons discussed under the heading
"The Company's Financial Advisor," without the benefit of a fairness opinion.
Accordingly, there is no independent confirmation of the Board of Directors'
fairness determination.
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<PAGE> 25
In the absence of the Merger, the Company would probably seek protection
under the Federal bankruptcy laws. The Board of Directors, based on its
knowledge of the Company and the indications of interest from potential bidders
who wished to acquire the Company in a bankruptcy scenario, concluded that the
Merger provides the stockholders with greater value than a bankruptcy scenario.
There can be no assurance, however, that the stockholders could not ultimately
receive greater value in a bankruptcy scenario.
As a result of the Merger, Transworld will be the sole stockholder of the
Company. The Shares held by the Company's other stockholders will be converted
into the right to receive the $0.30 per Share Merger Consideration (subject to
the exercise of appraisal rights). The stockholders of the Company (other than
Transworld and its affiliates) will not have any other rights with respect to
the Company, and will not participate in any future profitability or growth of
the business of the Company.
THE COMPANY'S FINANCIAL ADVISOR
The Company engaged NatWest Markets as its financial advisor to render
certain financial advisory services to the Company concerning the Merger.
NatWest Markets is an internationally recognized investment banking firm with
experience in the valuation of businesses and their securities in connection
with mergers, acquisitions, sales and distributions of listed and unlisted
securities, private placements and valuations for corporate and other purposes.
NatWest Markets has significant experience in providing investment banking
services to companies in the health care industry.
At the time that the Merger Agreement was originally executed, NatWest
Markets rendered to the Board of Directors its written opinion as to the
fairness of the $2.00 per Share cash consideration to be paid to stockholders in
the Merger, based on projections supplied by the Company at that time.
At the time the January Amendment was executed, NatWest Markets rendered to
the Board of Directors its written opinion as to the fairness of the $1.50 per
Share cash consideration to be paid to stockholders in the Merger, based on
projections supplied by the Company at that time.
In arriving at such fairness opinions, NatWest Markets examined and
reviewed, among other information, (a) the Merger Agreement, (b) certain
historical information with respect to the Company, (c) certain internal
business plans and financial and operating forecasts with respect to the
Company, (d) certain publicly available information concerning other companies
engaged in businesses similar to the business of the Company, (e) the terms, to
the extent publicly available, of certain transactions NatWest Markets believed
comparable to the Merger and (f) the market price and trading activities for the
Shares. NatWest Markets compared the Company, from a financial point of view, to
certain other companies engaged in businesses similar to those of the Company
and compared the $2.00 per Share and the $1.50 per Share cash consideration,
respectively, with the consideration paid by the acquiror in comparable
transactions reviewed by NatWest Markets. NatWest Markets also met and had
discussions with management of the Company concerning the Company's financial
condition, business, operations and prospects, and conducted such other analyses
and examinations as NatWest Markets deemed relevant to form a basis for the
fairness opinions. The fairness opinions did not address the Company's
underlying decision to proceed with the Merger and were provided at the request
and for the information of the Board of Directors in evaluating the merger
consideration only.
In connection with its analysis and the fairness opinions, NatWest Markets
performed a variety of financial and comparative analyses at the time the
Original Merger Agreement and at the time the January Amendment were executed,
including those described below:
Discounted Cash Flow Analysis. NatWest Markets analyzed the valuation of
the Company based upon a discounted cash flow analysis of the projected
financial performance of the Company, after giving pro forma effect to the
purchase of the 8,964,292 Shares by Transworld, as presented in the business
plan prepared by the Company's management.
Selected Company Analysis. NatWest Markets reviewed and compared selected
historical, current and projected financial and operating data of the Company to
the corresponding publicly available information, as of the dates of the
respective opinions, of the following companies in the healthcare industry:
Chronimed, Inc.,
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<PAGE> 26
Coram Healthcare Corp., American HomePatient, Inc., Express Scripts, Inc. and
Owen Healthcare, Inc. (the "Selected Companies"). Historical and current
financial data compared included total capitalization, market equity
capitalization, revenue, operating income, net income, earnings per share,
operating margin and net income margin. Estimates for 1997 earnings for the
Selected Companies were derived from published equity research reports on those
companies from several investment banking firms.
Net Income Multiple Analysis. NatWest Markets applied multiples based on
current market valuations of the Selected Companies to the Company's projected
1997 earnings, excluding non-recurring items.
Cash Flow Multiple Analysis. NatWest Markets applied multiples based on
current market valuations of the Selected Companies to the Company's projected
1997 EBITDA excluding non-recurring items, discounted to present value using
discount rates reflecting current market rates of return and risk premium based
on the distressed nature of the Company.
After being informed of the restatement of the 1997 first and second fiscal
quarter financial statements and the loss in the 1997 fiscal third quarter
financial statements, reflecting year-to-date substantial operating losses even
after excluding unusual and other charges, and the fact that the Company's
recent financial statements had changed and the Company's projections which it
previously supplied to NatWest Markets were no longer valid, NatWest Markets
advised the Board that its earlier analyses and, in turn, fairness opinions,
were no longer applicable or relevant. Also, NatWest Markets indicated that it
no longer believed that the Company was comparable to the companies used in the
selected company analysis. NatWest Markets explained that in order for it to
render a fairness opinion it had to be able to assume that the Company could
sustain itself as a going concern, which would require that additional funding
be available to the Company in the near term. NatWest Markets indicated that it
could no longer reasonably make such an assumption given the Company's current
rate of losses and the instability of the Company's operations. Therefore,
NatWest Markets was unable to perform the tests necessary in order to evaluate
whether or not the $0.30 per Share Merger Consideration is fair from a financial
point of view to the Company's stockholders. However, NatWest Markets informed
the Board of Directors that NatWest Markets' inability to conduct such tests
upon which to base a fairness opinion should not be construed as NatWest
Markets' opinion that any particular merger consideration is not fair.
The Company has paid fees to NatWest Markets in the total amount of
$600,000, $500,000 of which was paid at the time NatWest Markets rendered a
fairness opinion at the time the Original Merger Agreement was being considered
on November 12, 1996 and $100,000 of which was paid at the time NatWest Markets
rendered a fairness opinion at the time the January Amendment was being
considered on January 13, 1997. (See "--Background of the Merger" above in this
section.) NatWest Markets is entitled to receive for its financial advisory
services an additional $400,000 upon consummation of the Merger. The fees
heretofore paid to NatWest Markets were not conditioned upon the consummation of
the Merger. The Company has agreed to indemnify NatWest Markets against certain
expenses and liabilities in connection with its engagement.
Other than as described above, NatWest Markets has had no other
relationship with the Company, Transworld or their affiliates during the past
two years nor is any such relationship mutually understood to be contemplated.
TRANSWORLD'S FINANCIAL ADVISOR
Transworld engaged UBS as its financial advisor to render certain financial
advisory services to Transworld concerning the Merger. UBS, as part of its
investment banking business, is continually engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, secondary distributions of listed and unlisted
securities, private placements and valuation for corporate and other purposes.
At the time that the Merger Agreement originally was executed on November
13, 1996, UBS rendered to Transworld its written opinion as to the fairness,
from a financial point of view, to Transworld of the total consideration to be
paid by Transworld in connection with the Merger and certain related
liabilities, based, in part, on financial data supplied by the Company at that
time. UBS conducted its analysis and rendered its
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<PAGE> 27
opinion prior to the date of the restatement by the Company of its financial
statements as of and for the fiscal quarter ended July 31, 1996 and the release
by the Company of its financial statements as of and for the fiscal quarters
ended October 31, 1996 and January 31, 1997, during which the Company incurred a
net loss, including substantial operating losses for the nine-month period ended
January 31, 1997, even after excluding unusual and other charges.
UBS was not retained to render any opinion as to the consideration to be
paid to stockholders of the Company in the Merger.
Accordingly, the analysis conducted by UBS and the opinion it rendered are
not relevant or materially related to the current transaction between the
Company and Transworld.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Settlement of Derivative Lawsuit. Andre C. Dimitriadis, the Chairman of the
Board of Directors, is a defendant in a derivative suit 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). At the time the January Amendment was being considered by the Board
of Directors, settlement discussions were taking place and a proposed settlement
was being considered which would be conditioned upon consummation of the Merger.
Prior to the date the Company and Transworld executed the March Amendment, the
plaintiffs indicated that they were no longer interested in proceeding with the
previously discussed settlement and subsequent settlement discussions have not
materialized; however, the plaintiffs may lose their standing to pursue such
action if the Merger is consummated because after the Effective Time their sole
rights as former stockholders may be to receive the $0.30 per Share Merger
Consideration or to seek appraisal rights. Mr. Dimitriadis has certain rights to
advancement of legal fees and indemnification as a director of the Company;
however, if the Company were to file for bankruptcy, these rights could be
subordinate to senior claims in a bankruptcy and would be at substantial risk of
non-collection. Moreover, it is uncertain whether the Company's directors and
officers liability insurance policy would cover his claims. See "The
Merger--Summary of the Merger Agreement--Conditions, Representations and
Covenants" and "Business of the Company--Legal Proceedings".
Employment Agreements. On November 13, 1996, in connection with the
execution of the Merger Agreement and the Stock Purchase Agreement, the Company
entered into letter agreements (collectively, the "Letter Agreements"), amending
the existing agreements, with W. James Nicol and James R. Mieszala relating to
their employment by the Company. On the same date, the Company also entered into
an agreement with its former Chief Financial Officer, Paul S. Jurewicz, with
respect to his employment by the Company. Mr. Jurewicz received $50,000 from the
Company pursuant to that agreement on December 20, 1996; however, Mr. Jurewicz
resigned, in order to pursue another career opportunity, effective January 10,
1997, thereby terminating his rights to receive further benefits thereunder. The
Company's obligations under the Letter Agreements will be guaranteed by
Transworld upon consummation of the Merger.
Pursuant to the Letter Agreement with Mr. Nicol, he agreed to continue to
serve as Chief Executive Officer and President of the Company through the
Effective Time and the Company agreed to pay to Mr. Nicol $50,000 upon the
closing under the Stock Purchase Agreement (which the Company has paid) and
$50,000 on June 30, 1997 if the Merger has been consummated by such date. If Mr.
Nicol's employment is terminated by the Company prior to or after the Effective
Time, or if Mr. Nicol voluntarily elects to terminate his employment after the
Effective Time, Mr. Nicol's Letter Agreement provides that the Company will
continue to pay Mr. Nicol his base salary, which is $300,000 per annum through
June 30, 1998 (in lieu of other amounts payable under his employment agreement).
In the absence of the Letter Agreement, Mr. Nicol's employment agreement with
the Company provides that, upon the occurrence of a change in control of the
Company (such as the closing of the Stock Purchase Agreement), Mr. Nicol would
be entitled to resign and to be paid his base salary in periodic installments
through the end of the term of his employment agreement on April 30, 1999.
Pursuant to the Letter Agreement with Mr. Mieszala, the transactions
contemplated by the Merger Agreement, the Stock Purchase Agreement and the
assumption by Transworld of the Company's senior debt
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will not constitute a change of control under Mr. Mieszala's employment
agreement provided (a) the Company pay Mr. Mieszala $50,000 on January 2, 1997
(which the Company has paid), $50,000 on June 30, 1997 and $225,000 on January
2, 1998, (b) Transworld issues to Mr. Mieszala, upon consummation of the Merger,
stock options for 100,000 shares of Transworld common stock at an exercise price
equal to the fair market value of the Transworld common stock at the Effective
Time, which stock options will vest over a two year period, and (c) the Company
pays him an amount equal to twelve months of his base salary upon termination of
his employment, provided such termination occurs after June 30, 1998. In the
absence of the Letter Agreement, Mr. Mieszala's employment agreement with the
Company provides that, upon the occurrence of a change in control of the Company
(such as the closing of the Stock Purchase Agreement), Mr. Mieszala would be
entitled to resign and to be paid his base salary in periodic installments
through the end of the term of his employment agreement on April 30, 1998.
Indemnification. The Merger Agreement provides that, from and after the
Effective Time, Transworld and the Surviving Corporation will jointly and
severally (to the same extent as the Company currently indemnifies its officers
and directors pursuant to the Company's Certificate of Incorporation and Bylaws)
indemnify the present officers and directors of the Company against all damages
or liabilities arising out of actions or omissions occurring at or prior to the
Effective Time that are based on or arising out of the fact that such person is
or was a director or officer of the Company prior to the Effective Time,
including, without limitation, damages or liabilities arising out of the Merger
Agreement, the Stock Purchase Agreement or the Registration Rights Agreement or
the transactions contemplated thereby.
THE MERGER
SUMMARY OF THE MERGER AGREEMENT
The following description sets forth all the material terms of the Merger
Agreement. It does not, however, purport to be a complete description of the
terms of the Merger Agreement and is qualified in its entirety by reference to
the full text of Merger Agreement, a copy of which is attached hereto as Annex
I. Stockholders are urged to read carefully the Merger Agreement.
Effective Time of the Merger. The Merger will become effective upon the
delivery and filing of a Certificate of Merger with the Secretary of State of
the State of Delaware. It is intended that the Effective Time will occur as soon
as practicable after the adoption of the Merger Agreement by the stockholders at
the Special Meeting, provided that the other conditions to the consummation of
the Merger contained in the Merger Agreement have been satisfied or waived prior
to such time. Upon consummation of the Merger, the Shares will no longer be
quoted on the NASDAQ SmallCap Market(SM), and the Company will cease to be a
reporting company under the Securities Exchange Act of 1934, as amended.
Options and Restricted Shares. The Merger Agreement provides that,
immediately following the Effective Time, each outstanding stock option granted
under the Company's stock option plans, whether or not then vested or
exercisable, will be converted into the right to receive an amount equal to the
product of (a) the number of Shares subject to the option and (b) the excess, if
any, of $0.30 over the exercise price per Share of such option. Currently there
are no outstanding stock options with an exercise price of less than $0.30 and
the Merger Agreement prohibits further grants of options.
Conditions, Representations and Covenants. The obligations of each of
Transworld, IMH and the Company to effect the Merger are subject to the
satisfaction or waiver, where permissible, prior to the Effective Time, of
certain conditions, including without limitation: (a) the Merger Agreement shall
have been approved and adopted by the requisite vote of the stockholders of the
Company; (b) there shall be no effective injunction, writ or preliminary
restraining order or any order of any nature issued by a court or governmental
agency of competent jurisdiction directing that the transactions provided for in
the Merger Agreement not be consummated as provided in the Merger Agreement; (c)
with regard to the obligations of the Company, IMH and Transworld in all
material respects shall have performed the obligations to be performed by them
under the Merger Agreement on or prior to the Effective Time, and the
representations and warranties of Transworld and IMH shall be true and correct
in all material respects at and as of the Effective Time; (d) with regard to
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the obligations of IMH and Transworld, the Company in all material respects
shall have performed the obligations to be performed by it under the Merger
Agreement on or prior to the Effective Time, and the representations and
warranties of the Company shall be true and correct in all material respects at
and as of the Effective Time; (e) the Company's stock option plans shall have
been terminated or arrangements for termination reasonably acceptable to
Transworld shall have been made; (f) the Amended Stipulation of Partial
Settlement of the consolidated class actions under the caption In re Health
Management, Inc. Securities Litigation (See "Business of the Company--Legal
Proceedings") shall have been further amended (the "Restated Stipulation of
Settlement") to provide for the settlement of such class actions for a reduced
settlement amount not to exceed $4,550,000, and at or prior to the Effective
Time, such Restated Stipulation of Settlement shall have been finally approved
by the United States District Court, and all appeals therefrom shall have been
exhausted or applicable waiting periods for any such appeals shall have expired
without an appeal having been filed; and (g) Transworld's lenders shall have
consented to the Merger, shall have agreed to amendments to Transworld's credit
agreement to permit the Merger and shall have loaned Transworld the funds
necessary for Transworld to consummate the Merger.
The Merger Agreement provides that, among other things, prior to the
Effective Time, unless otherwise consented to in writing by Transworld, the
Company will conduct its business in a manner consistent with past practice and
that it will not, among other things: (a) amend its Certificate of Incorporation
or By-Laws; (b) issue or sell (i) any shares of capital stock of any class, or
any options, warrants, convertible securities, subscriptions or other rights of
any kind to acquire any shares of capital stock, or any other ownership interest
or equity equivalent, of the Company or any of its subsidiaries (including,
without limitation, stock appreciation rights) or (ii) any material assets of
the Company or any of its subsidiaries, except for sales of goods or services in
the ordinary course of business and in a manner consistent with past practice;
(c) declare or pay any dividend or other distribution, payable in cash, stock,
property or otherwise, with respect to any of its capital stock, any other
ownership interest or equity equivalent or any other securities, or reclassify,
combine, split, subdivide, redeem, purchase or otherwise acquire any such
capital stock, ownership interest, equity equivalent, or other securities, or
adopt a plan of complete or partial liquidation or other reorganization or,
except to the extent required by fiduciary obligations under applicable law, a
merger or consolidation; (d) (i) except in the ordinary course of business and
consistent with past practice, issue any debt securities or assume, guarantee or
endorse the obligations of any other person, except for immaterial amounts; (ii)
except in the ordinary course of business and consistent with past practice,
make any loans, advances or capital contributions to, or investments in, any
other person (other than to or in the Company or its subsidiaries or customary
loans or advances to employees in amounts not material to the maker of such loan
or advance); (iii) pledge or otherwise encumber shares of capital stock of or
other ownership interests or equity equivalents in the Company or any of its
subsidiaries; or (iv) except in the ordinary course of business and consistent
with past practice, mortgage or pledge any of its material assets, tangible or
intangible, or create or suffer to exist any material lien thereupon; (e) with
certain exceptions, acquire, sell, license, lease or dispose of any assets
outside the ordinary course of business which in the aggregate are material to
the Company; (f) change any of the accounting principles or practices used by
it; (g) (i) acquire (by merger, consolidation or acquisition of stock or assets)
any corporation, partnership or other business organization or division thereof
or any interest therein; (ii) enter into any partnership, joint venture or
similar agreement or arrangement or any contract or agreement other than in the
ordinary course of business consistent with past practice; (iii) authorize any
new capital expenditure(s) which, individually, is in excess of $50,000 or, in
the aggregate, are in excess of $100,000; or (iv) amend or modify any material
existing agreement, arrangement, or understanding which would increase the
obligations or impair or diminish the rights of the Company or any of its
subsidiaries in any material respect; and (h) with certain exceptions, pay,
discharge or satisfy any claims, liabilities, or obligations (absolute, accrued,
asserted or unasserted, contingent or otherwise), other than in the ordinary
course of business consistent with past practice.
The Merger Agreement further provides that the Company will not solicit,
initiate or encourage submission of, proposals or offers from any person
relating to any acquisition or purchase of all or a substantial portion of the
assets of, or any equity interest in, the Company or any of its subsidiaries or
any business combination with the Company or any of its subsidiaries or, except
to the extent required by fiduciary obligations under applicable law,
participate in any negotiations regarding, or furnish to any other person any
19
<PAGE> 30
information with respect to, or encourage, any effort or attempt by any other
person to do so or seek any of the foregoing.
Termination; Amendment. The Merger Agreement may be terminated at any time
prior to the Effective Time, whether prior to or after approval by the
stockholders of the Company: (a) by mutual written consent duly authorized by
the Boards of Directors of Transworld and the Company; (b) by the Board of
Directors acting on behalf of the Company, if (a) a corporation, partnership,
person or other entity or group shall have made a bona fide proposal that the
Board of Directors believes, in good faith after consultation with its outside
legal counsel and financial advisors, is more favorable to the Company's
stockholders than the Merger (a "Superior Proposal") and (b) Transworld does not
make, within five business days of Transworld's receiving notice of such
third-party proposal, an offer that the Board of Directors believes, in good
faith after consultation with its outside legal counsel and financial advisors,
is at least as favorable to the Company's stockholders as such Superior
Proposal; (c) by Transworld if the Board of Directors shall have withdrawn or
modified in a manner adverse to Transworld or IMH its approval or recommendation
of the Merger Agreement or the Merger or shall have approved or recommended
another offer or proposal; (d) by either Transworld or the Company if the Merger
shall not have been consummated by July 15, 1997; (e) by either Transworld or
the Company, if at the Special Meeting, the stockholders of the Company fail to
approve and adopt the Merger Agreement and the Merger; (f) by either Transworld
or the Company if a United States or state governmental authority, agency or
commission or United States or state court of competent jurisdiction shall have
issued an order, decree or ruling permanently restraining, enjoining or
otherwise prohibiting the Merger, and such order, decree, ruling or action shall
have become final and non-appealable; (g) by Transworld, if the Company shall
breach or fail to perform in any material respect any of its material covenants
or agreements contained in the Merger Agreement, or by the Company, if
Transworld or IMH shall breach or fail to perform in any material respect any of
their respective material covenants or agreements contained in the Merger
Agreement and (h) by Transworld, whether prior to or after approval by the
stockholders of the Company, if Transworld's lenders shall not have approved the
Merger and loaned to Transworld the funds necessary for Transworld to consummate
the Merger by July , 1997.
The Merger Agreement may be amended by the parties thereto by action taken
by or on behalf of their respective Boards of Directors at any time prior to the
Effective Time; provided, however, that, after approval of the Merger Agreement
by the stockholders of the Company, no amendment may be made which would change
the Merger Consideration into which each Share shall be converted upon
consummation of the Merger. If the Company were to amend the Merger
Consideration, it would resolicit stockholder approval of the Merger Agreement.
Payment for Shares. Prior to the Effective Time, Transworld will designate
a commercial bank or trust company to act as agent (the "Paying Agent") for the
purpose of receiving certificates representing Shares and paying the Merger
Consideration therefor. At or prior to the Effective Time, Transworld will
deposit in trust with the Paying Agent the funds necessary to pay the Merger
Consideration for Shares converted by reason of the Merger. Promptly after the
Effective Time, the Company, as the surviving corporation, will cause the Paying
Agent to send to each holder of record of Shares at the Effective Time a letter
of transmittal in customary form for use in such exchange.
Each holder of Shares that have been converted into a right to receive the
Merger Consideration, upon surrender to the Paying Agent of a certificate or
certificates representing such Shares, together with a properly completed letter
of transmittal covering such Shares, will be entitled to receive the Merger
Consideration payable in respect of such Shares. After the Effective Time, each
such certificate will, until so surrendered, represent for all purposes only the
right to receive such Merger Consideration.
If any portion of the Merger Consideration is to be paid to a person other
than the registered holder of the Shares represented by the certificate or
certificates in exchange therefor, it is a condition to such payment that the
certificate or certificates surrendered will be properly endorsed or otherwise
be in proper form for transfer and that the person requesting such payment will
pay to the Paying Agent any transfer or other taxes required as a result of such
payment to a person other than the registered holder of such Shares or establish
to the satisfaction of the Paying Agent that such tax has been paid or is not
payable.
20
<PAGE> 31
After the Effective Time, there will be no further registration of
transfers of Shares outstanding prior to the Effective Time. If, after the
Effective Time, certificates representing Shares outstanding prior to the
Effective Time are presented to the Company, as the surviving corporation, they
will be cancelled and exchanged for the Merger Consideration.
Any portion of the funds deposited with the Paying Agent that remains
unclaimed by the holders of Shares one year after the Effective Time will be
returned to the Company, as the surviving corporation, upon demand, and any such
holder who has not exchanged his Shares for the Merger Consideration prior to
that time will thereafter look only to the Company for payment of the Merger
Consideration in respect of his Shares, but shall have those rights against the
Company as may be accorded to general creditors under applicable law. Any
portion of the funds remaining unclaimed by holders of Shares as of a date which
is immediately prior to such time as such portion would otherwise escheat to or
become property of any governmental entity will, to the extent permitted by
applicable law, become the property of the Company free and clear of any claims
or interest of any person previously entitled thereto.
FINANCING OF THE MERGER
Transworld will use available working capital to fund the Merger
Consideration of approximately $2.8 million in the aggregate and expenses of
approximately $1.7 million relating to the Merger. The Company will pay the
approximately $1.6 million (including $1 million payable to NatWest, $600,000 of
which has already been paid) in expenses relating to the Merger from internally
generated cash and, to the extent that is not sufficient, the Company may be
required to borrow additional amounts from Transworld.
It is a condition to the obligation of Transworld and IMH to effect the
Merger that Transworld's lenders shall have consented to the Merger, shall have
amended Transworld's credit agreement to permit the Merger and shall have loaned
to Transworld the funds necessary for Transworld to consummate the Merger. The
consummation of the Merger Agreement is also subject to a number of other
conditions. See "Conditions, Representations and Covenants" above in this
section. There can be no assurance that these conditions will be satisfied or
waived or that the Merger will be consummated. If the Merger is not consummated,
Transworld and its subsidiaries (a) will own 49% of the outstanding Shares and
an option which entitles it to purchase an additional 746,713 Shares and (b)
would, if it were to exercise its option, be able to elect all of the members of
the Board of Directors and to approve or disapprove any matter submitted to a
vote of the stockholders, including certain fundamental corporate transactions
requiring stockholder approval.
EXPENSES
If the Merger Agreement is terminated for any reason other than (a) by
mutual agreement, (b) a governmental order or decree prohibiting the Merger, (c)
a failure by Transworld to satisfy the financing condition or (d) a material
breach of the Merger Agreement by Transworld or IMH, then the Merger Agreement
provides that the Company will reimburse Transworld and IMH for all reasonable
out-of-pocket expenses and fees in connection with any of the transactions
contemplated between Transworld and the Company. If the Merger Agreement is
terminated as a result of a material breach by Transworld or IMH, and the
Company is not in material breach of the Merger Agreement, the Merger Agreement
provides that Transworld will reimburse the Company for all reasonable
out-of-pocket fees and expenses in connection with the Merger. Other than as
specified in the preceding two sentences, the Merger Agreement provides that all
costs and expenses incurred in connection with the Merger and other transactions
will be paid by the party incurring them.
The Company
The Company estimates that it will incur approximately $ million in
expenses in connection with the Merger, including: investment banking fees of $1
million ($600,000 of which has already been paid); Securities and Exchange
Commission filing fees of $2,800; Federal Trade Commission ("FTC") filing fees
of $45,000; legal fees and expenses of $ ; accounting fees of
$ ; and printing and mailing costs of $ .
21
<PAGE> 32
Transworld
Transworld estimates that it will incur approximately $1.7 million in
expenses in connection with the Merger, including: investment banking fees of
$650,000; FTC filing fees of $45,000; legal fees of approximately $750,000; and
accounting fees of approximately $250,000.
ANTITRUST MATTERS
The Merger is subject to the requirements of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, which provides that certain acquisition
transactions may not be consummated until certain information has been furnished
to the Antitrust Division of the Department of Justice ("Antitrust Division")
and the FTC, and specified waiting period requirements have been satisfied. On
May 29, 1997, the FTC notified the Company and Transworld that the termination
of such waiting period became effective as of that date.
HEALTHCARE REGULATORY APPROVALS
New applications or notifications to the Boards of Pharmacies will be
required in most states in connection with the issuance by the Company to
Transworld of 49% of the outstanding Shares and/or in connection with the
consummation of the Merger. In addition, upon consummation of the Merger, the
Company will be required to notify certain state Medicaid agencies, as well as
the federal Medicare agency, in order to re-apply for new state Medicaid
provider numbers and Medicare licensure, respectively. The Company is also
required to notify the Drug Enforcement Agency and the National Association of
Boards of Pharmacy.
APPRAISAL RIGHTS OF DISSENTING STOCKHOLDERS
Record holders of Shares are entitled to appraisal rights under Section 262
("Section 262") of the Delaware General Corporation Law (the "DGCL") in
connection with the Merger. The following discussion is not a complete statement
of the law pertaining to appraisal rights under the DGCL and is qualified in its
entirety by reference to the full text of Section 262, which is reprinted in its
entirety as Annex II to this Proxy Statement. Except as provided by Section 262,
holders of Shares will not be entitled to appraisal rights in connection with
the Merger. Any stockholder of record who wishes to exercise appraisal rights
should review the following discussion and Annex II carefully, because failure
to comply in a timely and proper manner with the procedures specified in Section
262 may result in the loss of appraisal rights under the DGCL. Any stockholder
having questions in respect of his rights under Section 262 should consult with
his legal counsel.
Under the DGCL, if the Merger is consummated, record holders of Shares who
follow the procedures set forth in Section 262 and who have not voted in favor
of the Merger will be entitled to have their Shares appraised by the Court of
Chancery of the State of Delaware (the "Court") and to be paid, in lieu of the
Merger Consideration, the "fair value" of such shares, exclusive of any element
of value arising from the accomplishment or expectation of the Merger, together
with a fair rate of interest, as determined by the Court.
Stockholders of record who desire to exercise their appraisal rights must
satisfy all of the following conditions. Holders of Shares are not required to
vote such shares against the Merger in order to obtain rights of appraisal with
respect to such Shares but such stockholders must not vote their Shares in favor
of the Merger Agreement. A holder of Shares wishing to exercise appraisal rights
must deliver to the Company, before the vote on the adoption of the Merger
Agreement at the Special Meeting, a written demand for appraisal of such
holder's Shares. This written demand for appraisal of Shares must be in addition
to and separate from any proxy or vote against, or abstention from voting with
respect to, the Merger Agreement. Voting against or abstaining from voting on,
failing to return a proxy with respect to, or failing to vote on the Merger
Agreement will not constitute a demand for appraisal within the meaning of
Section 262.
A stockholder must not vote for adoption of the Merger Agreement if he
intends to preserve his appraisal rights. A vote in favor of the adoption of the
Merger Agreement will constitute a waiver of any previously filed demand for
appraisal. Thus, holders of Shares who sign and return the proxy card enclosed
with this Proxy Statement with instructions to vote in favor of the adoption of
the Merger Agreement or, since proxy cards
22
<PAGE> 33
returned without instructions will be voted in favor of the adoption of the
Merger Agreement, with no instruction to vote against or abstain from voting
with respect to the Merger will not be entitled to appraisal rights with respect
to such Shares. A stockholder's failure to vote against the adoption of the
Merger Agreement will not constitute a waiver of his appraisal rights.
A holder of Shares wishing to exercise appraisal rights must hold such
Shares of record on the date the written demand for appraisal is made and must
continue to hold such Shares through the Effective Time. Only a holder of record
of Shares is entitled to assert appraisal rights for the Shares registered in
that holder's name. A demand for appraisal should be executed by or on behalf of
the holder of record fully and correctly, as the holder's name appears on the
stock certificate(s).
If Shares are owned of record in a fiduciary capacity, such as by a
trustee, guardian or custodian, execution of the demand for appraisal should be
made in that capacity, and if the Shares are owned of record by more than one
person, as in a joint tenancy or tenancy in common, the demand should be
executed by or for all joint owners. However, absent an indication to the
contrary, the Company will consider a demand executed by or for one joint owner
to be effective with respect to all joint owners. An authorized agent, including
one for two or more joint owners, may execute the demand for appraisal on behalf
of a stockholder of record; however, the agent must identify the record owner or
owners and expressly disclose the fact that, in executing the demand, he or she
is acting as agent for such owner or owners. A record holder such as a broker
who holds Shares as nominee for several beneficial owners may exercise appraisal
rights with respect to the Shares held for one or more beneficial owners while
not exercising such rights with respect to the Shares held for other beneficial
owners. In such case, the written demand should set forth the number of Shares
as to which appraisal is sought. Where no number of Shares is expressly
mentioned, the demand will be presumed to cover all Shares held in the name of
the record owner. Holders who hold their Shares in brokerage accounts or other
nominee forms and who wish to exercise appraisal rights are urged to consult
with their brokers to determine the appropriate procedures for the making of a
demand for appraisal by such nominee.
All written demands for appraisal of Shares should be sent or delivered to
Health Management, Inc., 1371-A Abbott Court, Buffalo Grove, Illinois 60089,
Attention: Secretary, so as to be received before the vote on the adoption of
the Merger Agreement at the Special Meeting.
Within 10 days after the Effective Time, the Company, as the surviving
corporation, must send a notice as to the effectiveness of the Merger to each
person who has satisfied the appropriate provisions of Section 262. Within 120
days after the Effective Time, but not thereafter, the Company, as the surviving
corporation, or any holder of Shares entitled to appraisal rights under Section
262 who has complied with the foregoing procedures, may file a petition in the
Court demanding a determination of the value of the Shares held by all such
stockholders. The Company is not under any obligation, and has no present
intention, to file a petition with respect to the appraisal of the value of the
Shares. Accordingly, it is the obligation of the stockholders to initiate all
necessary action to perfect their appraisal rights within the time prescribed in
Section 262. If no stockholder were to file such petition within the period
specified, all rights to appraisal would cease, and all holders of Shares (other
than Transworld and its subsidiaries) would thereupon be entitled to receive the
Merger Consideration.
Within 120 days after the Effective Time, any record holder of Shares who
has complied with the requirements for exercise of appraisal rights will be
entitled, upon written request, to receive from the Company, as the surviving
corporation, a statement setting forth the aggregate number of Shares not voted
in favor of the Merger and with respect to which demands for appraisal have been
received and the aggregate number of holders of such Shares. Such written
statement must be mailed within 10 days after a written request therefor has
been received by the Company or within 10 days after expiration of the period
for delivery of appraisal demands, whichever is later.
Upon the filing of any petition by a stockholder in the Court, service of a
copy thereof must be made upon the Company, and the Company must, within 20 days
after such service, file in the office of the Register in Chancery of the State
of Delaware (the "Register in Chancery") in which the petition was filed a duly
verified list containing the names and addresses of all stockholders who have
demanded payment for the Shares and with whom agreements as to the value of
their Shares have not been reached by the Company. If a petition for
23
<PAGE> 34
appraisal is timely filed, the Court will fix a time and place for the hearing
of such petition, and, if so ordered by the Court, the Register in Chancery will
give notice of such hearing to the Company and the stockholders shown on the
verified list provided by the Company. Such notice shall also be given by one or
more publications at least one week before the day of the hearing, in a
newspaper of general circulation published in the City of Wilmington, Delaware
or such publication as the Court deems advisable. At the hearing on such
petition, the Court will determine the holders of Shares who have complied with
Section 262 and who have become entitled to appraisal rights. The Court may
require such stockholders to submit the certificates evidencing their Shares to
the Register in Chancery for notation thereon of the pendency of the appraisal
proceedings. If any stockholder fails to comply with this direction, the Court
may dismiss the proceedings as to him.
After determining the stockholders entitled to an appraisal, the Court will
appraise the Shares, determining the "fair value" of the Shares, exclusive of
any element of value arising from the accomplishment or expectation of the
Merger, together with a fair rate of interest, if any, to be paid upon the
amount determined to be the fair value. In determining the fair value, the Court
may consider all relevant factors, including the rate of interest which the
Company would have had to pay to borrow money during the pendency of the
proceeding. The Company will be required to make payment of the appraised value
of the Shares, together with interest, if any, to the stockholders entitled
thereto upon the surrender to it of the certificate or certificates evidencing
the Shares. Holders considering seeking appraisal should be aware that the fair
value of their Shares as determined under Section 262 could be more than, the
same as or less than the value of the Merger Consideration that they would
otherwise receive if they did not seek appraisal of their Shares. The Company
reserves the right to assert in any appraisal proceeding that, for purposes of
Section 262, the "fair value" of the Shares is less than the Merger
Consideration.
The costs of the appraisal proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable. Upon application of a
stockholder entitled to appraisal, the Court may also order that all or a
portion of the expenses incurred by any holder of Shares in connection with an
appraisal, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts utilized in the appraisal proceeding, be charged
pro rata against the value of all of the Shares entitled to appraisal. No
appraisal proceeding in the Court will be dismissed with respect to any
stockholder without the approval of the Court, and such approval may be
conditioned upon such terms as the Court deems just.
Any holder of Shares who has duly demanded an appraisal in compliance with
Section 262 will not, after the Effective Time, be entitled to vote the Shares
subject to such demand for any purpose or be entitled to receive payment of
dividends or other distributions on those shares (except dividends or other
distributions payable to holders of record of Shares as of a date prior to the
Effective Time).
If any holder of Shares who demands appraisal under Section 262 fails to
perfect, or effectively withdraws or loses, the right to appraisal, as provided
in the DGCL, the Shares of such holder will be converted into the right to
receive the Merger Consideration in accordance with the Merger Agreement. A
holder of Shares entitled to appraisal will fail to perfect, or effectively
lose, the right to appraisal if no petition for appraisal is filed within 120
days after the Effective Time. A holder may withdraw a demand for appraisal by
delivering to the Company a written withdrawal of the demand for appraisal and
acceptance of the Merger at any time within 60 days after the Effective Time or
after such 60-day period with the written approval of the Company.
FAILURE TO FOLLOW THE STEPS REQUIRED BY SECTION 262 OF THE DGCL FOR
PERFECTING APPRAISAL RIGHTS MAY RESULT IN THE LOSS OF SUCH RIGHTS.
FEDERAL INCOME TAX CONSEQUENCES
The receipt of Merger Consideration for Shares will be a taxable
transaction for Federal income tax purposes (and may also be a taxable
transaction for state, local, foreign or other tax purposes). Each stockholder
will recognize gain or loss equal to the difference between his adjusted tax
basis for the Shares surrendered and the amount of cash received therefor. In
general, if the Shares are held as capital assets in the hands of the
stockholder, such gain or loss will be capital gain or loss, and will be
long-term capital gain or loss if the stockholder has a holding period for its
Shares of more than one year as of the Effective Time. The
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<PAGE> 35
foregoing may not apply to Shares acquired upon the exercise of employee stock
options or otherwise as compensation.
Unless a holder of Shares entitled to receive the Merger Consideration
complies with certain reporting and certification procedures, or otherwise
demonstrates to the satisfaction of the Paying Agent that it is an exempt
recipient under applicable withholding provisions of the Internal Revenue Code
and the Treasury regulations promulgated thereunder, such holder may be subject
to Federal backup withholding at the rate of 31% with respect to the Merger
Consideration that such holder is entitled to receive. Backup withholding is not
an additional tax. Rather, the tax liability of persons subject to 31% backup
withholding will be reduced by the amount of tax withheld.
THE TAX DISCUSSION SET FORTH ABOVE IS FOR GENERAL INFORMATION ONLY. IN VIEW
OF THE INDIVIDUAL NATURE OF TAX CONSEQUENCES, EACH STOCKHOLDER IS URGED TO
CONSULT HIS OWN TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES OF THE MERGER
TO HIM, INCLUDING THE EFFECT AND APPLICABILITY OF FEDERAL, STATE, LOCAL, FOREIGN
AND OTHER TAX LAWS.
ACCOUNTING TREATMENT
The Company has been advised by Transworld that the Merger will be
accounted for by Transworld as a "purchase" under generally accepted accounting
principles.
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<PAGE> 36
MARKET PRICES AND DIVIDENDS
The following table sets forth the range of high and low bid prices of the
Shares for the periods indicated, as quoted on NASDAQ. The Shares were quoted on
the NASDAQ National Market System until March 11, 1997, on which date quotation
of the Shares was commenced on the NASDAQ SmallCap Market(SM), because the
Company no longer met the maintenance criteria for the NASDAQ National Market
System.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
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
Fiscal Year Ended April 30, 1997:
First Quarter............................................. 6 1/4 2 13/16
Second Quarter............................................ 5 1/4 2 7/8
Third Quarter............................................. 2 3/16 5/8
Fourth Quarter............................................ 1 1/4 5/3
Fiscal Year Ending April 30, 1998:
First Quarter (through June , 1997)..................... [ ] [ ]
</TABLE>
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 Company
has never paid cash dividends on its Common Stock. The Company's Credit
Agreement restricts the ability of the Company to pay dividends on the Shares
and the Merger Agreement provides that the Company will not, prior to the
Effective Time of the Merger, declare or pay any cash or stock dividends. See
"The Merger--Summary of the Merger Agreement-Conditions, Representations and
Covenants". On November 13, 1996, the last trading day prior to the announcement
that the Company had entered into the Merger Agreement, the closing price of the
Shares was $2.25 per Share. Under the Merger Agreement executed on November 13,
1996, the cash consideration to be paid to the stockholders of the Company upon
consummation of the Merger was $2.00 per Share. On January 13, 1997, the last
trading day prior to the announcement that the Company had entered into the
January Amendment, the closing price of the Shares was $1.25 per Share. Under
the January Amendment, the cash consideration to be paid to the stockholders was
reduced from $2.00 to $1.50 per Share in cash. On March 26, 1997, the last
trading day prior to the announcement that the Company had entered into the
March Amendment to the Merger Agreement, the closing price of the Shares was
$0.15625 per share. Pursuant to the March Amendment to the Merger Agreement, the
cash consideration to be paid to the stockholders was reduced from $1.50 to
$0.30 per Share in cash. On June , 1997, the closing price of the Shares was
[$ ] per Share.
As of June , 1997, there were 18,294,474 Shares outstanding held by
owners of record.
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<PAGE> 37
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The following table sets forth information with respect to the beneficial
ownership of Shares as of June , 1997, by (a) each person known by the Company
to own more than 5% of the Shares (this being the only class of voting
securities now outstanding), (b) the directors and certain executive officers of
the Company and (c) all current directors and executive officers of the Company
as a group:
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL PERCENTAGE
NAME OF BENEFICIAL OWNER ADDRESS OF BENEFICIAL OWNER OWNERSHIP OF CLASS
------------------------ --------------------------- ----------- ----------
<S> <C> <C> <C>
IMH Acquisition Corp. 75 Terminal Avenue 9,711,005(1) 51.0%
Clark, New Jersey 07066
Clifford E. Hotte 51 Prospect Road 1,006,432(2) 5.5%
Center Port, New York 11721
Lloyd N. Myers 11 Rosemont Lane 205,760(3) 1.1%
Pittsburgh, Pennsylvania 15217
James R. Mieszala c/o 1371-A Abbott Court 133,333(4) *
Buffalo Grove, Illinois 60089
Robert C. Clifton 26 Hermitage Street 11,666(5) *
Wading River, New York 11792
Andre C. Dimitriadis c/o 1371-A Abbott Court 39,500(6) *
Buffalo Grove, Illinois 60089
Michael R. Norman 8 Old Field Woods Road 400 *
Seatauket, New York 11733
W. James Nicol c/o 1371-A Abbott Court -0- *
Buffalo Grove, Illinois 60089
D. Mark Weinberg c/o 1371-A Abbott Court 10,000(7) *
Buffalo Grove, Illinois 60089
Dr. Timothy J. Triche c/o 1371-A Abbott Court 10,000(8) *
Buffalo Grove, Illinois 60089
Drew Bergman 9 Cornell Place 1,016 *
Merrick, New York 11566
All Current Directors and Officers as 204,499 1.1%
a Group (5 Persons)(4)(5)
(6)(7)(8)
</TABLE>
- ---------------
* Less than one percent (1.0%)
(1) Includes 746,713 Shares issuable upon exercise of the Transworld Option with
an exercise price of $1.00 per Share. Does not include 264,532 Shares (based
on the Company's calculations) into which the subordinated convertible note
acquired by Hyperion Partners II, L.P., the principal stockholder of
Transworld, from Caremark, Inc. is currently convertible.
(2) Does not include Shares beneficially owned by Virginia Belloise, Clifford E.
Hotte's wife.
(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 133,333 Shares subject to options with an exercise price that
exceeds the Merger Consideration.
(5) Includes 11,666 Shares subject to options with an exercise price that
exceeds the Merger Consideration.
(6) Includes 18,500 Shares subject to options with an exercise price that
exceeds the Merger Consideration. Does not include 4,000 Shares which Mr.
Dimitriadis will be entitled to receive upon consummation of the Merger; the
rights to which Shares were to vest on the fifth anniversary of the date on
which Mr. Dimitriadis was elected to the Board of Directors, but which
vesting accelerates upon a merger of the Company.
(7) Includes 10,000 Shares subject to options with an exercise price that
exceeds the Merger Consideration.
(8) Includes 10,000 Shares subject to options with an exercise price that
exceeds the Merger Consideration.
27
<PAGE> 38
SELECTED FINANCIAL DATA
The following selected consolidated financial information for the nine
months ended January 31, 1997 and January 31, 1996 (unaudited) and for the five
fiscal years ended April 30, 1996 is derived from the consolidated financial
statements of the Company. The Company's annual financial statements were
audited by BDO Seidman, LLP, independent certified public accountants, whose
report with respect to the financial statements covering the three fiscal years
ended April 30, 1996 appears elsewhere herein. Such report was modified with
respect to the Company's ability to continue as a going concern.
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 herein. 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 and Exchange
Commission on June 5, 1997.
HEALTH MANAGEMENT, INC.
(CONSOLIDATED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JANUARY 31, YEARS ENDED APRIL 30,
------------------- ------------------------------------------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1997 1996 1996 1995 1994 1993 1992
-------- -------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data
Revenues..................... $120,030 $118,370 $158,860 $88,456 $44,250 $26,393 $14,594
Gross profit(1).............. 22,805 28,247 38,636 24,748 15,606 9,023 4,822
Selling.................... 4,190 3,627 4,650 2,898 1,847 1,324 642
Provision for Doubtful
Accounts(1)(2).......... 15,493 13,267 14,715 7,978 1,781 705 132
G&A........................ 20,031 17,661 24,324 10,649 5,428 3,458 2,092
Unusual Charges(1)(2)...... 4,213 5,600 5,600 -- -- -- --
Total Operating Expenses..... 43,927 40,155 49,289 21,525 9,056 5,487 2,866
Operating income (loss)...... (21,122) (11,908) (10,652) 3,223 6,549 3,536 1,956
Settlement Costs(3).......... 7,375 -- -- -- -- -- --
Income (Loss) Before Income
Taxes...................... (31,251) (13,846) (13,332) 3,287 6,752 3,488 1,831
Net income (loss)............ (31,348) (8,175) (10,927) 1,946 4,001 2,207 1,066
Net income (loss) per share
--primary............... (3.15) (0.87) (1.16) $ 0.21 $ 0.54 $ .38 $ .23
--fully diluted......... (3.15) (0.87) (1.16) $ 0.21 $ 0.53 .35 .22
Weighted Average number of
Shares outstanding
--primary............... 9,940 9,400 9,415 9,408 7,383 5,884 4,599
--fully diluted......... 9,940 9,400 9,415 9,421 7,594 6,309 5,076
Book Value per Share......... $ 0.77 $ 4.30 $ 4.01 $ 5.17 $ 4.84 $ 1.61 $ .52
Ratio of Earnings
(Losses) to Fixed
Charges(4)................. (10.3) (4.2) (2.8) 13.2 77.7 21.0 13.0
</TABLE>
- ---------------
(1) Unusual charges reflected in the fiscal year 1996 and nine months ended
January 31, 1996 include $3,600,000 for costs associated with organizational
consolidation and other cost reduction programs and $2,000,000 for
professional fees related to litigation and restatements of fiscal 1995
financial statements. Additionally, a $2,840,000 charge for the write-off of
medical device inventory was recorded to cost of sales, thereby reducing
gross profit and, an $8,400,000 additional increase was recorded to the
provision for doubtful accounts.
28
<PAGE> 39
(2) Unusual charges for the nine months ended January 31, 1997 include
$1,400,000 for costs associated with overpayments from New York State
Medicaid and approximately $2,813,000 relating to costs and other expenses
related to the closing or sale of three retail pharmacies, including a
goodwill write-off of approximately $2,400,000. Additionally, the provision
for doubtful accounts was increased by $10 million.
(3) Settlement costs reflected in the nine months ended January 31, 1997 relate
to estimated costs for the proposed settlement of the stockholder class
action suit, $7,200,000, and the estimated costs associated with settlement
of the derivative actions, $175,000. There can be no assurance that such
litigation will be settled for such amount or that such reserves will be
sufficient to satisfy such liabilities. See Note 6 to the Condensed
Consolidated Financial Statements included elsewhere herein relating to a
subsequent proposed reduction in the stockholder class action settlement to
$4.55 million.
(4) Earnings (losses) were inadequate to cover fixed charges for the nine months
ended January 31, 1997 and January 31, 1996 and the fiscal year ended April
30, 1996 to the extent of $28.5 million, $11.2 million and $9.8 million,
respectively. These results arise from circumstances more fully described in
"Management's Discussion and Analysis of Financial Condition and Results of
Operation".
<TABLE>
<CAPTION>
AS OF
JANUARY 31, AS OF APRIL 30,
----------- ----------------------------------------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1997 1996 1995 1994 1993 1992
----------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data
Total Assets...................... $ 78,455 $95,916 $88,690 $52,418 $17,158 $6,842
Working Capital................... (19,496) 2,492 12,486 32,013 8,946 2,158
Long term debt, including current
maturities...................... 32,354 32,752 26,326 256 521 730
Stockholders' equity.............. 14,104 37,363 48,171 44,096 9,755 2,372
</TABLE>
29
<PAGE> 40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The consolidated financial statements for the nine months ended January 31,
1997 included herein are unaudited and include all adjustments which, in the
opinion of management, are necessary for a fair presentation of the results of
operations of the interim period pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. These condensed
financial statements should be read in conjunction with the Company's Annual
Report on Form 10-K for the year ended April 30, 1996. The results of operations
for the interim periods are not necessarily indicative of the operating results
for the whole year.
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.
Financial Condition. 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 ended 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 the restatements and special charges
recorded in the Company's financial statements for the fiscal years 1995 and
1996, the Company recorded significant charges to its balance sheet including
reductions in the Company's working capital, retained earnings and stockholders'
equity. The Company was in default under its Credit Agreement with Chase
Manhattan Bank, N.A., as agent and lender. This senior debt, the principal
amount of which aggregated approximately $28,300,000, was acquired by Transworld
on November 13, 1996, the date on which Transworld entered into the Stock
Purchase Agreement and the Merger Agreement with the Company. Also, on November
13, 1996, Transworld agreed to forbear until December 12, 1996 from exercising
any remedies under such bank debt and agreed, in its discretion, to loan the
Company up to an additional $3,000,000 under the Company's revolving credit
facility. As of December 12, 1996, the Forbearance Agreement was further
extended until December 23, 1996 and the availability under the Company's
revolving credit facility was further increased by up to an additional
$2,000,000, subject to certain conditions and at the discretion of Transworld.
At the closing of the Stock Purchase Agreement, of the $8,964,292 of cash
proceeds, $4,649,285 was applied to repay all loans of Transworld to the Company
from November 13, 1996 through January 13, 1997 and $107,248 was applied toward
interest on amounts covered under the Credit Agreement. Since that time the
revolving credit facility has been frozen; however, Transworld has continued to
extend the Forbearance Agreement in short-term intervals, currently expiring
July , 1997. There are no assurances that Transworld will continue to extend
the Forbearance Agreement and, if no such extension is granted, it is likely
that the Company will seek protection under the Federal bankruptcy laws. See
"Special Factors -- Background of the Merger".
In addition, Hyperion Partners II, L.P., the majority stockholder of
Transworld, acquired the obligations of the Company due to Foxmeyer Drug Co.,
Bindley Western, Inc. and Caremark, Inc. which, in the aggregate, amount to
approximately $18.2 million. Hyperion has agreed to contribute the obligations
purchased from Foxmeyer Drug Co., and Bindley Western Inc. to Transworld in
exchange for stock of Transworld.
There have been no improvements in the lines of credit available to the
Company as a result of entering into and consummating the Stock Purchase
Agreement and entering into the Merger Agreement.
As a result of the restatement of the Company's first and second quarters
of fiscal 1997 and the special charges recorded in the third quarter of fiscal
1997, the Company has recorded significant additional charges
30
<PAGE> 41
to its balance sheet including reductions of the Company's working capital,
retained earnings and stockholders' equity.
Significant Litigation. The Company has been named as a defendant in a
consolidated stockholder class action lawsuit and as a nominal defendant in two
derivative suits. No assurances can be given as to the outcome of such
litigation and the effect on the financial condition or future results of
operations of the Company. With respect to the consolidated stockholder class
action lawsuit, the Company entered into a Stipulation of Partial Settlement
with the plaintiffs' counsel and on September 18, 1996 such Stipulation of
Partial Settlement received preliminary court approval (the "Original
Settlement"). The Original Settlement provided for, among other things, the
payment by the Company of $2,000,000 in cash, the issuance of 2,200,000 shares
of Common Stock and warrants to purchase 2,200,000 shares of Common Stock. On
December 19, 1996 the Company entered into an Amended Stipulation of Partial
Settlement providing for, among other things, a $7,200,000 cash payment.
Preliminary approval of the Amended Stipulation of Partial Settlement was
granted by the U.S. District Court for the Eastern District of New York, thereof
on December 20, 1996. As a condition to Transworld's obligation to consummate
the Merger, the Amended Stipulation of Partial Settlement was further amended on
April 23, 1997, to provide for a reduced cash settlement in the amount of
$4,550,000, and preliminary court approval of such amended settlement was
received on April 25, 1997. As a further condition to the closing of the Merger,
at or prior to the Effective Time, such Restated Stipulation of Partial
Settlement must have received final court approval. A hearing for final court
approval is currently scheduled for June 6, 1997. The Restated Stipulation of
Partial Settlement provides for the settlement of the lawsuit as against the
Company of $4,550,000 in cash, of which $3,200,000 was paid into escrow at the
time the Restated Stipulation of Partial Settlement was signed and will be
released from escrow upon the Court's final approval of the settlement. The
remaining $1,350,000 is to be paid at the Effective Time. The Company is in the
process of negotiating with its directors and officers' liability insurance
carrier with respect to coverage for damages in connection with the stockholder
class action lawsuit and any payments received from such carrier may reduce the
Company's liability with respect to such settlement. After the Company announced
that it would have to restate its financial statements for the first and second
quarters of fiscal 1997, the Company and certain executive officers were named
as defendants in a purported stockholder class action lawsuit. See "Business of
the Company -- Legal Proceedings".
Changes in Management. Effective May 1, 1996, W. James Nicol, an
experienced health care executive, was named Chief Executive Officer and
President of the Company, succeeding the office of the Chief Executive Officer
of the Company which was formed when Clifford E. Hotte resigned in February
1996. James R. Mieszala, formerly of Caremark, Inc., who became president of
Home Care Management, Inc., a wholly-owned operating subsidiary of the Company,
in January 1996, was named Chief Operating Officer of the Company effective May
10, 1996. Paul S. Jurewicz, formerly of Caremark, Inc., who became Chief
Financial Officer of the Company in December 1995 was also named the Executive
Vice President of the Company in April 1996. Mr. Jurewicz resigned, effective
January 10, 1997, to assume a new position. Mr. Nicol has assumed the additional
duties of the Chief Financial Officer effective January 10, 1997 and the Company
has recently retained outside financial consultants to provide support in the
financial area.
The Company has experienced substantial turnover of its senior management
group over the past fourteen months and several of the Company's executive
officers have been in their current position 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.
Also, the Company's ability to successfully conclude the Transworld transaction
may depend on its ability to retain its key personnel to manage through the
transition. There can be no assurances that the Company will be successful in
its efforts to attract and retain such personnel.
Business Strategy. The Company's strategy, which it has been in the process
of implementing since May 1996, is focused on the basic factors that could
improve profitability: revenue generation, cost reduction, quality improvement
and cash collections. To generate increased revenue, the Company is directing
its marketing efforts towards improving its referral relationships in addition
to developing new programs, developing relationships with payor organizations
(including managed care organizations) and forging relationships with
pharmaceutical companies requiring services such as clinical management,
marketing,
31
<PAGE> 42
reimbursement and other services. Cost reduction efforts are focused on the
consolidation of the Company's pharmacy locations and increasing efficiencies in
reimbursement and distribution services. Management is also focused on improved
cash collections through an emphasis on enhancing systems capabilities within
the Company. However, much of senior management's attention this fiscal year has
been focused on the normally routine task of sourcing product from its suppliers
and this distraction was heightened substantially following the bankruptcy
filing, on August 27, 1996, by its principal wholesaler. More recently,
management has focused on the pursuit of the Transworld transaction. Throughout
this period the Company has had inadequate financial resources to implement some
of its strategy. Additionally, concerns about the Company's financial condition
have resulted in declining customer referrals. While management believes the
continued pursuit of its business strategy could improve the Company's
operations and financial performance, no assurances can be given as to its
ultimate success in view of the numerous distractions presently facing
management and the Company's limited capital resources.
Introduction of New Antipsychotic Drugs; Blood Monitoring. In October,
1996, Olanzapine, a new antipsychotic agent for the treatment of schizophrenia,
was introduced into the market. The Company also expects several additional
antipsychotic drugs to be introduced in the next year, based upon the recent
history of such new products having been introduced into the market and the
present pipeline of potential new products in various stages of the Food and
Drug Administration review process. The Company anticipates providing these new
drugs to schizophrenic patients as it broadens its Lifecare(TM) Program.
Management believes that the introduction of Olanzapine has been a factor in the
recent decline of the Company's Clozapine customer base (approximately 5% during
the course of the third quarter of fiscal 1997) as physicians preferentially
prescribe Olanzapine for treatment of schizophrenia. Because Olanzapine does not
require weekly blood monitoring, and therefore is less costly than Clozapine,
and because the relative efficacy of Olanzapine is still uncertain, the Company
cannot predict the ultimate effect on its customer base and, in turn, its
financial condition from the introduction of Olanzapine. The Company also cannot
predict the effect on its financial condition of the introduction of other
antipsychotic drugs.
In addition, the Company's Clozaril Patient Management Business ("CPMB")
contains multiple components including weekly blood draws to test for a side
effect associated with Clozapine. The Company understands that the Food and Drug
Administration may be contemplating a reduction in blood monitoring which, with
no changes in the way that the Company participates in this market, could have a
substantial negative impact on the Company's earnings and cash flow. See
"Business of the Company -- Markets -- Schizophrenia".
Goodwill and Other Long Lived Assets. At January 31, 1997, the Company had
goodwill of approximately $30.8 million, or 39% of its total assets. A
significant portion of the Company's goodwill relates to the CPMB. See
"Introduction of New Antipsychotic Drugs; Blood Monitoring" above. It is the
Company's policy to review the recoverability of goodwill and other long-lived
assets periodically to determine if any impairment indicators are present. The
evaluation of the recoverability of goodwill is significantly affected by
estimates of future cash flows from each of the Company's market areas. If
estimates of future cash flows from operations decrease, the Company may be
required to write down its goodwill and other long-lived assets in the future.
Any such writedown could have a material adverse effect on the financial
position and results of operations of the Company. During the third quarter of
fiscal 1997, the Company wrote off approximately $2.4 million of goodwill
related to retail pharmacies closed or sold.
Dilution. The Company's issuance of 8,964,292 shares of Common Stock to
Transworld under the Stock Purchase Agreement at $1.00 per share resulted in
substantial dilution of the Company's outstanding shares. An additional 746,713
shares of Common Stock could be issued to Transworld pursuant to an option with
an exercise price of $1.00 per share issued in connection with the Stock
Purchase Agreement. Additionally, the Caremark Convertible Subordinated Note
acquired by Hyperion, the $3,000,000 principal amount and accrued interest
(which at April 30, 1997 totalled approximately $140,000) of which may be
converted into shares of Common Stock at Hyperion's option, if converted could
also result in the issuance of additional shares of Common Stock. Based on the
Company's calculations, as of April 30, 1997, the Note was convertible into
approximately 264,532 shares of Common Stock at approximately $11.87 per share.
32
<PAGE> 43
RESULTS OF OPERATIONS
Nine months ended January 31, 1997 as compared to nine months ended January
31, 1996
Revenues for the nine months ended January 31, 1997 were $120,030,137, an
increase of $1,659,915, or 1.4%, in comparison to revenues for the nine months
ended January 31, 1996. The increase in revenues was the result from internal
growth from ongoing patient referrals from existing referral sources and the
addition of new referral sources, partially offset by the following factors: (a)
the reduction in reimbursement rates that occur when the pharmacy benefit is
"carved out" from the major medical benefit and switched to a drug card plan at
lower revenue rates; (b) the ongoing increase in the number of transplant
patients receiving immunosuppressant drug benefits under Medicare due to the
extension of Medicare coverage beyond the historical one year period
post-transplant (Medicare reimbursement is at lower rates than indemnity
insurance); (c) a decline in the number of patients served by the Company's CPMB
(see "-- Special Considerations -- Introduction of New Antipsychotic Drugs;
Blood Monitoring" above); (d) the implementation of the Company's decision to
discontinue its modest retail pharmacy businesses; and (e) an increase in the
accrual of contractual allowances.
Gross profit margins were 19.0% for the nine months ended January 31, 1997,
as compared to 23.9% for the comparable period in the prior year. The decrease
in the gross profit rate reflects an overall reduction in reimbursement rates
from third party payors, including pricing pressures exerted by managed care
payors on the Company, as described above, even though the nine month period
ended January 31, 1996, had been negatively impacted by the one time write-off
of $2,840,000 of medical device inventory, without which the gross profit rate
would have been 26.3%. In addition, the current period gross profit margin was
negatively impacted by the following: (a) a one-time payment to Caremark, Inc.
of approximately $525,000 to account for a working capital adjustment relating
to the Company's acquisition of the Clozaril Patient Management Business
recorded in the quarter ended October 31, 1996; (b) a delay in updated Medicare
pricing for an immunosuppressant drug widely distributed by the Company and
servicing its organ transplant patients for which the drug manufacturer raised
its price which primarily affected the quarter ended October 31, 1996; (c) the
retroactive reversal in the quarter ended January 31, 1997, by the vendor of
discounts of approximately $450,000 recorded in prior fiscal 1997 periods
presuming payment in accordance with specified terms, such amount being
consented to by the Company in connection with Hyperion's purchase of the
Foxmeyer accounts payable; (d) lost purchase discounts associated with drug
purchases due to more unfavorable terms under which vendors placed the Company
and (e) higher contractual allowances.
Operating expenses for the nine months ended January 31, 1997 were
$43,926,971, a net increase of $3,771,824 or 9.4% over the nine months ended
January 31, 1996. The principal components of the net increase were:
A $2.4 million increase in general and administrative expenses. This
increase is primarily related to increased professional fees, including (a)
$500,000 attributable to the retention of an investment banking firm to
seek additional financing or the sale of the Company, and (b) increased
legal, audit, tax return preparation and consulting fees.
A $2.2 million increase in the provision for doubtful accounts. In the
third quarter of fiscal 1997 and 1996 the Company evaluated the adequacy of
the allowance for doubtful accounts, which caused an increased provision
(change in estimate) of $10 million and $8.4 million in the third quarter
of fiscal 1997 and 1996, respectively. The additional provision for
doubtful accounts of $10 million in fiscal 1997 was the result of employee
turnover and ineffective staff levels in the reimbursement function caused,
in part, by the additional financial and operating strains on the Company
and its management. The follow-up required to collect the Company's
receivables, especially in the transplant patient business, which has been
managed primarily in the Company's former New York corporate offices in
Long Island, New York, suffered as a result of the inadequate staffing and
other factors, primarily in the latter part of 1996 and early 1997. It was
not practical to determine the potential impact on the first two quarters
of fiscal 1997 of these factors.
33
<PAGE> 44
A $1.4 million decrease in unusual charges. During the nine months
ended January 31, 1997, the Company provided (a) a $2.8 million charge
($2,400,000 of which relates to a write-off of goodwill) for the closing or
sale of three retail pharmacies, which retail pharmacies no longer
conformed to the Company's current focus and strategy and were immaterial
to the Company's overall current and prospective operations, and (b) $1.4
million for costs associated with overpayments from New York State
Medicaid. The fiscal 1996 charges of $5.6 million relate to the (a) costs
associated with the organizational consolidation and other cost reduction
programs ($3.6 million) and (b) professional fees related to the Company's
litigation and restatements of fiscal 1995 financial statements ($2
million).
Loss from operations for the nine months ended January 31, 1997 was
($21,122,303) compared to a ($11,907,882) loss in the comparable period last
year. The primary reasons for this loss are the decline in gross profits and the
increase in operating expenses described above.
The Company incurred settlement costs of $7,375,000 during the nine months
ended January 31, 1997 related to the estimated costs of the settlement of the
stockholder class action litigation and derivative litigation. No similar costs
were incurred during the same period in 1996.
Interest expense for the nine moths ended January 31, 1997 was $2,753,932
an increase of $815,476 or 42.1% over the nine months ended January 31, 1996.
The increase is attributable to increased borrowings and higher percentage rate
of interest being paid on the senior debt.
Loss before income taxes for the nine months ended January 31, 1997 was
($31,251,235) compared to a loss of ($13,846,338) for the nine months ended
January 31, 1996. Expenses related to the additional $10 million provision for
doubtful accounts; the costs associated with the closing or sale of the
Company's three retail pharmacies; the estimated costs of the settlement of the
stockholder class action litigation of $7.2 million and estimated costs
associated with overpayments from New York State Medicaid of $1.4 million;
increased interest expense and professional fees and lower margins generally
throughout the nine month period were the primary reasons for the loss.
Income taxes for the nine months ended January 31, 1997 are less than the
statutory rate since the Company, in accordance with generally accepted
accounting principles, did not record the benefit, if any, of the potential net
operating loss carry forward because of the uncertainty of its future
realization.
The net loss for the nine months ended January 31, 1997 was ($31,347,877)
compared to net loss of ($8,175,384) for the period ended January 31, 1996. The
increase in the net loss was primarily a result of the increased costs discussed
above, together with the tax benefit recorded in the nine months ended January
31, 1996 related to the tax benefit of a net operating loss carryback, which did
not apply to a significant extent in the nine months ended January 31, 1997.
Primary and fully diluted loss per common share for the nine months ended
January 31, 1997 were ($3.15) compared to a loss per common share of ($0.87) for
the nine months ended January 31, 1996. The weighted average number of shares
outstanding used in the calculation of primary and fully diluted earnings per
share were 9,939,574 for the nine months ended January 31, 1997 and 9,399,984
for the six months ended January 31, 1996.
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 $47,000,000
of the increased levels. Additional growth of approximately $6,000,000 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.
34
<PAGE> 45
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:
(a) a $2,840,000 charge was recorded in the third quarter of fiscal 1996 for the
write-down of medical device inventory; (b) 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, which generally provides for a lower
reimbursement rate; (c) the phase-in of a change in Medicare regulations
extending immunosuppressant drug Medicare benefits to transplant patients for up
to three years post-transplant, as opposed to the historical one year period,
which results in lower reimbursement rates for such patients covered thereby as
compared to those covered by commercial insurance carriers and other private
payors. (See "Business of the Company -- Reimbursement -- Medicare and
Medicaid"). Without the $2,840,000 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 than the other segments of the Company's business and which
recorded a gross profit of $15,940,480 or approximately 41% of the Company's
overall gross profit in fiscal 1996. The erosion of the Company's gross profit
margins is typical of recent healthcare industry trends and is attributable to
the pricing pressure exerted by managed care organizations. The Company is
attempting to minimize the further erosion of gross profit margins by reducing
its costs of service and related support activities and increasing its volume
through focused marketing efforts to spread its fixed costs over a larger
patient base. There are no assurances that the Company will be successful in
these efforts.
Operating expenses for the fiscal year ended April 30, 1996 were
$49,288,793, an increase of $27,763,604 or 129.0%, over operating expenses of
$21,525,189 for the year ended April 30, 1995. $5,600,000 of this increase was
attributable to unusual charges recorded during the third quarter of fiscal year
1996; $3,600,000 of the charge was attributable to costs associated with
organizational consolidation and other cost reduction programs, which includes
severance costs of approximately $1.3 million, a goodwill writedown charge of
approximately $550,000 and a charge for the writeoff of assets of approximately
$1 million and the accrual of lease termination costs of approximately $750,000;
and $2,000,000 was associated with professional fees arising out of the
Company's restatements, litigation, etc. The Company also increased the
provision for doubtful accounts by $8,400,000 in the third quarter of fiscal
1996. This increased provision related primarily to the transplant patient
business where collection efforts are more difficult and the Company's
collection efforts were hampered by inadequate staffing levels and the requisite
follow-up. These efforts are conducted primarily from the Company's former
corporate offices in Long Island, New York, which has been particularly affected
by employee turnover. It was not practical to determine the potential impact of
the additional provision on the first two quarters of fiscal 1996. During 1996,
the Company also wrote off approximately $12.6 million of receivables against
the allowance for doubtful accounts, which were deemed to be uncollectible
because of the age of the receivables and, in some cases, the collectibility
period from third party payors had lapsed. 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 $9,900,000.
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 and other charges recorded in the third quarter of fiscal year
1996 resulted in the operating loss for the year.
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 term loans associated with the
CPMB acquisition and the borrowings under the Company's line of credit.
Loss before income taxes for the year ended April 30, 1996 was
($13,332,187) compared to a $3,286,579 income level for the year ended April 30,
1995. The unusual and other charges recorded in the third quarter contributed
significantly to the loss for fiscal 1996.
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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, in part, the result of the unusual and other charges recorded
in the third quarter of this fiscal year. Also contributing to the net loss was
a valuation allowance of approximately $2,500,000 to reserve for a deferred tax
asset. The remaining unreserved deferred tax asset is the estimated benefit of a
net operating loss carryback to the Company. Given the circumstances that led to
the modification of the independent auditor's opinion, a valuation allowance was
established for the deferred tax asset.
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 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: (a) increases
in Betaseron revenues, which presently yields lower margins than have been
historically achieved by the Company for other disease management programs; (b)
reductions in the fixed fee reimbursement rates from certain state Medicaid
programs (principally New York, which lowered its reimbursement by 10%); (c) the
phase-in of a change in Medicare regulations extending immunosuppressant drug
Medicare benefits to transplant patients for up to three years post-transplant,
as opposed to the historical one year period, which results in lower
reimbursement rates for such patients covered thereby as compared to those
covered by commercial insurance carriers and other private payors; (d) 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, which generally
provides for a lower reimbursement rate.
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.
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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 $158,377 in the Company's cash and cash equivalents to
$3,121,818 at January 31, 1997 was attributable to cash used in operating
activities, debt repayments and capital expenditures offset by the additional
equity from Transworld.
Working capital at January 31, 1997 was a negative ($19,496,008), a
decrease of $21,987,627 from April 30, 1996. Current assets decreased
$12,827,075 due to a decrease in cash and cash equivalents of $158,377, a
decrease in net accounts receivable of $8,079,990, an increase in inventories of
$1,524,072, a decrease in a tax refund receivable of $6,709,924, an increase in
deferred tax assets of $1,110,000 and a decrease in prepaid expenses of
$512,856.
Current liabilities increased $9,160,552 from April 30, 1996 principally
due to an increase of $4,948,930 in accrued unusual charges and settlement
costs, an increase in accrued expenses of $1,679,259, and increase in the
current maturities of long term debt of $2,963,080 and decrease in accounts
payable of $430,717. The increase in accrued unusual charges and settlement
costs is primarily the result of the accrual of $7.4 million for the settlement
of the stockholder class action and derivative suit litigation and the accrual
of $1.4 million to settle overpayments from New York State Medicaid and the
payment of approximately $3.9 million of such charges accrued as of April 30,
1996.
On November 13, 1996, Transworld acquired the Company's outstanding bank
debt, in the aggregate amount of $28,300,000, agreed to forbear until December
12, 1996 from exercising any remedies under such bank debt and agreed in its
discretion to loan the Company up to an additional $3,000,000 under its
revolving credit facility. As of December 12, 1996, the Forbearance Agreement
was further extended until December 23, 1996 and the availability under the
revolving line of credit was increased by up to an additional $2,000,000,
subject to certain conditions and at the discretion of Transworld. Since that
time, the Company has repaid to Transworld all principal amounts borrowed under
the revolving credit facility since November 13, 1996 and the revolving credit
facility has been frozen; however, Transworld has continued to extend the
Forbearance Agreement in short-term intervals, currently expiring July , 1997.
Also on November 13, 1996, the Company entered into the Stock Purchase
Agreement. The closing of this transaction occurred on January 13, 1997. See
"Special Factors -- Background of the Merger". Of the $8,964,292 received at
that closing by the Company from Transworld, approximately $4.6 million was
applied toward repayment of amounts loaned to the Company under the revolving
credit facility subsequent to November 13, 1996, and approximately $.1 million
was applied towards payment of outstanding interest under the Company's
revolving credit facility. The Company also incurred expenses of approximately
$.9 million in related costs. The remainder was used for general corporate
purposes.
The Company purchases its pharmaceuticals from wholesalers and, to a lesser
degree, directly from pharmaceutical manufacturers. Its sources have established
credit limitations and a few suppliers recently reduced their credit limitations
with the Company. The Company's primary supplier, Foxmeyer Drug Company, filed
for protection under the Federal bankruptcy laws on August 27, 1996 and has
subsequently
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been acquired by McKesson Drug Company. There was no improvement in the lines of
credit available to the Company as a result of entering into the Stock Purchase
Agreement and Merger Agreement with Transworld and there has been no improvement
in such relationship since the completion of the Stock Purchase Agreement.
Although the Company has been able to maintain adequate product supply within
established credit limitations, there can be no assurances that it will continue
to be able to do so in the future. Such an inability would have a material
adverse impact on the Company if alternative sources of product supply were
inadequate.
If the Company is unsuccessful in consummating the Merger Agreement with
Transworld or Transworld refuses to continue to extend the Forbearance Agreement
or if the Company is unsuccessful in continuing satisfactory relationships with
its suppliers, it is probable that the Company will seek protection under the
Federal bankruptcy laws.
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BUSINESS OF THE COMPANY
GENERAL
Health Management, Inc. 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 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 20 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 21,000 patients is currently
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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.
Patient Support: The Company has designed a regimen of support services to
meet the special 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: (a) education seminars and videotapes for the patients and others
involved in their care; (b) creation, direction and/or sponsorship of patient
support groups that provide patients with support and information exchange; (c)
newsletters containing medical and non-medical information relevant to patients
and health care professionals; and (d) 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 full and part time 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 assignment of 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
Until recently, the Company had several 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 the reestablishment of these services would
enable it to establish, maintain and expand its relationships with
pharmaceutical companies and to become an integral component of any
comprehensive disease, or specialty pharmaceutical, 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, 1996, there were approximately 80,000 transplant patients in the
United States and an additional 49,650 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 $10,000, as compared to the average annual cost of
hemodialysis, the principal alternative therapy, which is approximately $25,000.
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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 7,000 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 and 110 at January 31, 1997. 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 6,400 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
Clozapine. The Company understands that the FDA may be contemplating a reduction
in blood 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.
In October, 1996, Olanzapine, a new antipsychotic agent for the treatment
of schizophrenia, was introduced into the market. The Company also expects
several additional antipsychotic drugs to be introduced in the next year, based
upon the recent history of such new products having been introduced into the
market and the present pipeline of potential products in various stages of the
Food and Drug Administration review process. The Company anticipates providing
these new drugs to schizophrenic patients as it broadens its Lifecare(TM)
Program by taking advantage of its existing relationships with over 3,000
psychiatrists, various payors and state mental health and Medicaid programs, and
new sales and marketing initiatives. To date, management believes that the
introduction of Olanzapine has been a factor in the recent decline of the
Company's Clozapine customer base of approximately 6% as physicians
preferentially prescribe Olanzapine for treatment of schizophrenia. Because
Olanzapine does not require weekly blood monitoring, and therefore is less
costly than Clozapine, and because the relative efficacy of Olanzapine is still
uncertain, the Company cannot predict the ultimate effect on its customer base
and, in turn, its financial condition from the introduction of Olanzapine. The
Company also cannot predict the effect on its financial condition of the
introduction of other antipsychotic drugs.
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. 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 1996, the total U.S. market for
drugs used in infertility treatment was approximately $540,000 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.
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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 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 were 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-fluorouracil 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 1,000 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 1996, 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 1996. 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 300 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.
COMPANY STRATEGY
The Company's strategy, which it has been in the process of implementing
since May 1996, is focused on the basic factors that could improve
profitability: revenue generation, cost reduction, quality improvement and cash
collections. However, much of senior management's attention has been focused on
the normally routine task of sourcing product from its suppliers and this
distraction was heightened substantially following the bankruptcy filing, on
August 27, 1996, by its principal wholesaler. More recently, management has
focused on the pursuit of the Transworld transaction. Throughout this period the
Company has had inadequate financial resources to implement some of its
strategy. Cost reduction efforts are focused on the consolidation of the
Company's pharmacy locations, improving efficiencies in reimbursement and
distribution services and selling certain retail pharmacies. Management focused
on improved cash collections through an emphasis on enhancing systems
capabilities within the Company, but this has not yet resulted in a demonstrable
change in cash flow or collections. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for a discussion of the $2.2
million increase in the provision for doubtful accounts.
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 and healthcare professionals. Although the Company believes that
developing relationships with managed care organizations will also contribute to
its business, the Company does not currently have the financial resources
necessary to pursue this opportunity, but hopes to do so if and when adequate
funds are available. 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
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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 Phase IV study refers to the post-market safety monitoring
requirements that may be imposed by the Food and Drug Administration after it
has approved a new drug application. In connection with a Phase IV study, the
Company is responsible for drug distribution, clinical patient management, data
management and coordination with the contract research organization. The Company
has had a contract with a major pharmaceutical company to provide services in
connection with a Phase IV study of Alzheimer's patients for the period from
January 1, 1996 through July, 1997.
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. This note has
been purchased from Caremark by Hyperion, the principal stockholder of
Transworld. The source of funds for the cash portion of the acquisition was bank
financing provided pursuant to the Credit Agreement.
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, restricted
Shares of the Company, which were valued at $325,000. The aggregate purchase
price for the assets of Kaufmann's consisted of 82,755 newly-issued, restricted
Shares of the Company, which were valued at $1,034,375. The assets related to
retail pharmacies acquired by the Company were sold earlier in the fourth
quarter of the Company's 1997 fiscal year for approximately $1 million.
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, restricted Shares of the Company,
which were valued at $243,375. In March 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 Audited Consolidated
Financial Statements elsewhere herein.)
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 wholly-owned by the
Company, the Company acquired substantially all the assets
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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,
restricted Shares, which were valued at $4,600,000. The aggregate purchase price
for the acquired assets of Murray Pharmacy consisted of 248,175 newly-issued,
restricted Shares, which were valued at $3,094,747. The Company closed the
retail pharmacy in November, 1996; however, a substantial portion of that is now
being serviced by the Company's mail order.
MARKETING AND SALES
The Company's 13 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.
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.
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., Stadtlander Drug Company, Inc. and Systemed, Inc.
These competitors, other than Chronimed Inc. and Coram Healthcare Corp., have
all been recently acquired by other companies.
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, drug manufacturers 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 or intense price
competition, or could render the Company's services noncompetitive. The Company
expects to continue to encounter increased competition in the future, which, if
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<PAGE> 55
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 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 "Regulation-Medicare and Medicaid"
below in this section.
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.
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<PAGE> 56
The following table sets forth the approximate percentages of the Company's
revenue attributable to the stated payors for the periods noted:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 30,
----------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
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%
</TABLE>
A majority of the Company's revenue is derived from third-party payors,
including private insurers, managed care organizations such as HMOs and PPOs and
governmental payors such as Medicare and Medicaid. Like other medical service
providers, as a result of third-party and governmental payment procedures, the
Company experiences lengthy delays prior to its reimbursement by third-party and
governmental payors. 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 (fees based on a flat rate
per patient). 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 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.
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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 like all providers under the program, is
subject to government audits of its Medicare and Medicaid reimbursement claims.
The Company has been audited in the past. 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, such
authorities may institute criminal or civil proceedings, including proceedings
to revoke the Company's status as a certified Medicare or Medicaid provider.
The Company entered into a settlement agreement, dated as of March 31,
1997, with the New York State Department of Social Services, pursuant to which
the Company agreed to make payments of $1,418,433 with respect to prior Medicaid
overpayments from such Department, $510,060 of which will be paid in the form of
set-offs against amounts currently held by New York State Medicaid on behalf of
the Company. The settlement agreement provides that the remaining $908,373 will
be paid in four installments between March 31, 1997 and November 1, 1998,
together with interest on the unpaid portion thereof at a rate of 10.25% per
annum.
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.
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. New federal and/or state
legislation may 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 such legislation or what, if any, changes may
occur in the method and rates of Medicare and Medicaid reimbursement or in other
government regulations that may affect its business, or, whether such changes,
if made, will have a material adverse effect on its business, financial position
or 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
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<PAGE> 58
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.
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 it does
business in order to provide retail and wholesale 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.
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<PAGE> 59
ACCREDITATION
The Company's New York and Pittsburgh facilities have received
accreditation by the Joint Commission on Accreditation of Healthcare
Organizations.
SOURCES AND AVAILABILITY OF PRODUCT SUPPLY
Approximately 20% of the Company's revenues are currently attributable to
sales of Sandimmune (also known as cyclosporine) and Neoral, the primary
immunosuppressive drugs used in the United States and approximately 31% 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),
which drugs are produced only by a single manufacturer, 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 their manufacturer
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, were in short supply in the general market throughout 1995
and 1996. The Company's infertility business was not materially affected by this
shortage, and it appears that such shortages have been abated, but there can be
no assurances that the Company will not be affected by shortages of such drugs
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 its pharmaceuticals from wholesalers and, to a lesser
degree, directly from pharmaceutical manufacturers. Its sources have established
credit limitations and a few suppliers are seeking to reduce their credit
limitations with the Company. The Company's primary supplier, Foxmeyer Drug
Company, filed for protection under the Federal Bankruptcy laws on August 27,
1996 and has subsequently been acquired by McKesson Drug Company. There has been
no improvement in the lines of credit available to the Company as a result of
entering into the Stock Purchase Agreement and Merger Agreement with Transworld
and there has been no improvement in such relationships since the completion of
the Stock Purchase Agreement. Although the Company has been able to maintain
adequate product supply within the credit limitations, there can be no
assurances that it will continue to do so in the future. Such an inability would
have a material adverse impact on the Company if alternative sources of product
supply were inadequate.
EMPLOYEES
As of January 27, 1997, the Company employed 474 persons, of whom 383 were
full-time employees. Of the full-time and part-time employees, 33 were
executive, corporate and administrative personnel, 21 were sales and marketing
personnel and 420 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 believes that relations with its employees are good. The employees are
not represented by any union.
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.
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<PAGE> 60
The Company also operates a substantial pharmacy 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.
In addition to the above described properties, the Company has leased the
following regional offices:
<TABLE>
<CAPTION>
LOCATION SQUARE FEET
-------- -----------
<S> <C>
Birmingham, Alabama...................................... 2,425
Torrance, California..................................... 4,070
Atlanta, Georgia......................................... 1,190
Kailua, Hawaii........................................... 1,776
Portland, Maine.......................................... 2,300
Baltimore, Maryland...................................... 5,170
Baltimore, Maryland...................................... 2,737
Milford, Massachusetts................................... 2,500
Livonia, Michigan........................................ 2,680
Arden Hills, Minnesota................................... 4,170
Florissant, Missouri..................................... 2,000
Portland, Oregon......................................... 1,766
Pittsburgh, Pennsylvania................................. 8,665
Wayne, Pennsylvania...................................... 2,240
Columbia, South Carolina................................. 3,850
Dallas, Texas............................................ 3,000
Salt Lake City, Utah..................................... 1,400
Bothell, Washington...................................... 3,500
</TABLE>
The aggregate of the monthly rents for the leased facilities listed above
is approximately $89,561.
The Company believes that these facilities are suitable and adequate for
its current needs.
LEGAL PROCEEDINGS
The Company and certain of its former directors and officers and its
current outside auditors, BDO Seidman, have been named as defendants in a
consolidated securities fraud lawsuit filed on February 29, 1996 in the United
States District Court for the Eastern District of New York entitled In re Health
Management, Inc. Securities Litigation, Master File No. 96 Civ. 0889 (ADS). This
consolidated action alleges claims under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 arising out of alleged misrepresentations and
omissions by the Company in connection with certain of its previous securities
filings. The consolidated action purports to represent a class of persons who
purchased Shares between August 25, 1994 and February 27, 1996, the date the
Company announced that it would have to restate certain of its financial
statements. The consolidated actions seek unspecified monetary damages
reflecting the decline in the trading price of the Shares that allegedly
resulted from the Company's February 1996 announcements. The Company entered
into a Stipulation of Partial Settlement with plaintiffs' counsel and on
September 18, 1996 such Stipulation of Partial Settlement received preliminary
court approval (the "Original Settlement"). The Original Settlement provided
for, among other things, the payment by the Company of $2,000,000 in cash, the
issuance of 2,200,000 Shares and warrants to purchase 2,200,000 Shares. As a
condition to Transworld's obligation to close the Stock Purchase Agreement,
preliminary court approval was obtained with respect to a modified settlement
providing for a $7,200,000 cash payment in lieu of the consideration provided in
the Original Settlement to be paid after the Merger is consummated. An Amended
Stipulation of Partial Settlement to this effect was executed on December 19,
1996 and preliminary approval by the U.S. District Court for the Eastern
District of New York was granted on December 20, 1996. As a condition to closing
the Merger Agreement, the Amended Stipulation of Partial Settlement was further
amended, on April 23, 1997, to provide for the settlement of such class actions
for a reduced settlement amount of $4,550,000, and
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<PAGE> 61
preliminary court approval of such amended settlement was received on April 25,
1997. As a further condition to the closing of the Merger, at or prior to the
Effective Time, such Restated Stipulation of Partial Settlement must have
received final court approval. A hearing for final court approval is currently
scheduled for June 6, 1997. The Restated Stipulation of Partial Settlement
provides for the settlement of the lawsuit as against the Company for $4,550,000
in cash, of which $3,200,000 has been paid into escrow at the time the Restated
Stipulation of Partial Settlement was signed and will be released from escrow
upon the Court's final approval of the settlement. The remaining $1,350,000 is
to be paid at the Effective Time. See "The Merger--Summary of the Merger
Agreement--Conditions, Representations and Covenants". The Company is in the
process of negotiating with its directors and officers liability insurance
carrier with respect to coverages for damages in connection with the stockholder
class action lawsuit and certain payments received from such carrier may reduce
the Company's liability with respect to such settlement.
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 on March 15, 1996 in the United States
District Court for the Eastern District of New York entitled In re Health
Management, Inc. Stockholders' Derivative Litigation, Master File No. 96 Civ.
1208 (TCP). The consolidated action alleges claims for breach of fiduciary duty
and contribution against the individual director defendants arising out of
alleged misrepresentations and omissions contained in certain of the Company's
previous securities filings. The consolidated action seeks unspecified monetary
damages on behalf of the Company as well as declaratory and injunctive relief.
An amended consolidated complaint was served on the Company on August 12, 1996.
The Company filed a motion to dismiss the amended consolidated complaint on June
2, 1997. The Company's motion argued, among other things, that plaintiffs failed
to lodge a presuit demand upon the Company's Board of Directors and that
plaintiffs will lose standing upon the consummation of the Merger. A hearing on
the Company's motion is currently scheduled to take place on July 18, 1997. In
December 1996, the Company and the plaintiffs' counsel tentatively agreed on a
cash settlement of $175,000; however, the parties subsequently were unable to
agree on the other terms of the settlement and currently there is no settlement
offer pending.
BDO Seidman has been named as a defendant, and the Company has been named
as a nominal defendant, in a derivative lawsuit filed on June 12, 1996 in the
Supreme Court for the State of New York, County of New York entitled Howard
Vogel, et al. v. BDO Seidman, LLP, et al., Index No. 96-603064. The complaint
alleges claims for breach of contract, professional malpractice, negligent
misrepresentation, contribution and indemnification against BDO Seidman arising
out of alleged misrepresentations and omissions contained in certain of the
Company's securities filings. BDO Seidman was the Company's auditor at the time
those filings were made and has continued to serve as such. The complaint seeks
unspecified monetary damages on behalf of the Company as well as declaratory and
injunctive relief. Pursuant to stipulation, the Company's time to answer or
otherwise move against the complaint in this action has been adjourned
indefinitely.
The Company and Messrs. Nicol, Jurewicz and Mieszala have been named as
defendants in an alleged class action lawsuit filed on April 3, 1997 in the
United States District Court for the Eastern District of New York entitled
Nicholas Volonnino et al. v. Health Management, Inc., W. James Nicol, Paul S.
Jurewicz and James Mieszala, 97 Civ. 1646. This action alleges claims under
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder arising out of misrepresentations and omissions by the
Company in connection with certain of its previous securities filings and press
releases. The action purports to represent a class of persons who purchased
shares between September 15, 1996 and March 17, 1997, the date the Company
announced that it would have to restate certain of its financial statements and
that it was renegotiating its deal with Transworld. The action seeks unspecified
compensatory damages for the harm sustained as a result of the alleged
wrongdoing. The Company intends to vigorously defend itself in such action.
Under the Company's Certificate of Incorporation and Bylaws, certain
officers and directors may be entitled to indemnification, or advancement of
expenses for legal fees in connection with the above lawsuits. The Company may
be required to make payments in respect thereof in the future. The Company and
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Transworld have been named as defendants in a lawsuit filed on March 11, 1997 in
the Chancery Court of the State of Delaware for New Castle County entitled Drew
Bergman v. Health Management, Inc. and Transworld Home Healthcare, Inc., CA No.
15609NC. The plaintiff in that case seeks reimbursement and advancement of legal
fees and expenses and on April 29, 1997, that suit was settled for $275,000.
The enforcement division of the Securities and Exchange Commission has
issued 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 requests of the Securities and Exchange
Commission for documentary evidence.
On April 3, 1995, American Preferred Prescription, Inc. ("APP") filed a
complaint against the Company, Preferred Rx, Inc., Community Prescription
Services and Sean Strub in the New York Supreme Court for tortious interference
with existing and prospective contractual relationships, for lost customers and
business opportunities resulting from allegedly slanderous statements and for
allegedly false advertising and promotions. Four separate causes of action are
alleged, each for up to $10 million in damages. 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 financial statements of the Company
that were allegedly fraudulent. On September 17, 1996 the Court granted APP's
motion to amend its complaint to add a fifth cause of action. The Company
noticed an appeal of this order in November 1996. Management believes APP's suit
against it to be without merit, intends to defend the proceeding vigorously and
believes the outcome will not have a material adverse effect on the Company's
results of operations or financial position.
On or about August 4, 1995, APP commenced an action in the Supreme Court of
the State of New York, County of Nassau, against a former APP employee who is
currently employed by the Company, and Charles Hutson, Susan Hutson and Hutson
Consulting Services (collectively, the "Hutsons"). The Company is not named as a
defendant in this lawsuit. The complaint in this action alleges, among other
things, that the employee provided to the Hutsons, who formed and subsequently
discontinued a joint marketing venture with APP, confidential information which
was disclosed to competitors of APP, including the Company. The action was
removed to the United States Bankruptcy Court of the Eastern District of New
York and subsequently remanded to the Supreme Court of the State of New York,
Nassau County. The Hutsons have noticed their appeal of this order and have
moved to dismiss the action against them, asserting that they are not subject to
the jurisdiction of the New York State court. The Company is presently paying
certain expenses of its employee in connection with this litigation.
If the Merger is not consummated, the outcomes of certain of the foregoing
lawsuits and the investigation are uncertain and the ultimate outcomes could
have a material adverse effect on the Company.
MANAGEMENT OF THE COMPANY
Set forth below are the names, ages and business experience of the
directors and current executive officers of the Company. The business address of
each of the persons listed below is Health Management, Inc., 1371-A Abbott
Court, Buffalo Grove, IL 60089, unless otherwise provided.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Andre C. Dimitriadis......................... 55 Chairman of the Board and Director
W. James Nicol............................... 52 Chief Executive Officer, President, Chief
Financial Officer, Treasurer and Director
James R. Mieszala............................ 45 Chief Operating Officer
Dr. Timothy Triche........................... 52 Director
D. Mark Weinberg............................. 43 Director and Secretary
</TABLE>
52
<PAGE> 63
W. James 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. Effective January 10, 1997, Mr.
Nicol assumed the duties of Chief Financial Officer after the resignation of
Paul S. Jurewicz. 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.
James R. 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.
Andre C. Dimitriadis was elected 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. Mr. Dimitriadis' business address is LTC Properties, 300 Esplanade
Drive, Suite 1860, Oxnard, CA 93030.
D. Mark Weinberg was elected 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. Mr. Weinberg's business address is Wellpoint Health Networks, Inc.,
26565 West Agoura Road, Suite 300, Calabasas, CA 91302.
Dr. Timothy Triche was elected 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. Dr. Triche's business address is
OncorMed, Inc. 205 Perry Parkway, Suite 3, Gaithersburg, MD 20877.
53
<PAGE> 64
BUSINESS OF TRANSWORLD AND IMH
Transworld is a regional provider of a broad range of alternate site health
care services and products. Transworld provides the following services and
products to their patients in their homes or in outpatient services: (i)
respiratory therapy, home medical equipment and specialized mail-order
pharmaceuticals and medical supplies, including respiratory and diabetic
medications and supplies, wound care dressings and ostomy and orthotic products;
(ii) patients services, including nursing and para-professional services and
radiation therapy; and (iii) infusion therapy. IMH was incorporated solely for
the purpose of consummating the Merger. IMH has minimal assets (other than
8,964,292 Shares) and no business and has carried on no activities that are not
directly related to its formation and its execution of the Merger Agreement.
Transworld's and IMH's principal executive offices are located at 75 Terminal
Avenue, Clark, New Jersey 07066 and their phone number is (908) 340-1144.
MANAGEMENT OF TRANSWORLD AND IMH
Set forth below are the names, ages and business experience of the
directors and current officers of Transworld and IMH. The business address of
each of the persons listed below is Transworld HealthCare, Inc., 75 Terminal
Avenue, Clark, New Jersey 07066, unless otherwise provided.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Timothy M. Aitken............................ 52 Chairman of the Board, Chief Executive Officer
and Director
Robert W. Fine............................... 60 President, Chief Operating Officer and Director
Wayne A. Palladino........................... 38 Senior Vice President and Chief Financial
Officer
H. Gene Berger............................... 56 Executive Vice President
Michael P. Garippa........................... 42 Vice President
Kevin M. Buhrman............................. 45 Vice President
Leslie J. Levinson........................... 42 Secretary
Richard A. Yoken............................. 46 Director
Scott A. Shay................................ 39 Director
Lewis S. Ranieri............................. 50 Director
</TABLE>
Timothy M. Aitken has served as Chairman of the Board and Chief Executive
Officer of Transworld since January 15, 1997. Prior to joining Transworld, Mr.
Aitken served as an independent consultant to the health care industry from
November 1996 until January 1997. From June 1995 until November 1996, Mr. Aitken
served as the vice chairman and president of Apria Healthcare Group, Inc., a
California based home health care company. Since September 1995, he has also
served as chairman of the board of Omnicare plc, a publicly listed company in
the United Kingdom. From 1990 until June 1995, Mr. Aitken served as chairman of
the board, president and chief executive officer of Abbey Healthcare Group Inc.,
a California based home health care company.
Robert W. Fine has been a Director of Transworld since July 1988. Mr. Fine
has served as Chief Operating Officer since June 1993, President of Transworld
since August 1995 and Acting Chief Executive Officer from May 1996 to January
1997. From June 1993 until August 1995, he also served as a Vice President of
Transworld. From November 1990 until June 1993, Mr. Fine was the president of
the domestic operations of Fortress Company, a manufacturer of wheelchairs and
related equipment. Mr. Fine has been Chief Executive Officer, President, Chief
Operating Officer and Director of IMH since November 1996.
Wayne A. Palladino has been a Vice President and Chief Financial Officer of
Transworld since February 1991, a Senior Vice President of Transworld since
September 1996 and Chief Financial Officer, Senior Vice President and Assistant
Secretary of IMH since November 1996. From September 1989 until joining
Transworld, he served as the vice president-finance and chief financial officer
of ESC Electronics Corp., an electronics manufacturer. From December 1985 until
January 1991, he was a principal in Pennwood
54
<PAGE> 65
Capital Corporation, a private investment concern. From January 1984 through
December 1985, Mr. Palladino was a senior associate in the business development
unit of W.R. Grace & Co., Inc.
H. Gene Berger has been Executive Vice President of Transworld since July
1995 and served as a Vice President from June 1992 until July 1995. From June
1992 until November 1993, Mr. Berger was the principal officer in charge of
operations at Steri-Pharm, Inc., a subsidiary of Transworld. From October 1991
to June 1992, Mr. Berger was the President, Chief Operating and Executive
Officer of Transworld. Prior thereto, from January 1990, Mr. Berger was
president of Jayile Associates, a consulting firm to the health care industry.
Beginning in January 1987, Mr. Berger was employed by Biotech Capital
Corporation, a venture capital firm, and was designated by such firm to serve as
president of three affiliated companies in the health care sector. From January
1984 through November 1986, Mr. Berger was chairman of the board, chief
executive officer and president of Clinical Sciences, Inc., a company in the
immunodiagnostics and biotechnology fields.
Michael P. Garippa has been a Vice President of Transworld and the
principal officer in charge of Transworld's infusion therapy, respiratory
therapy and home medical equipment operations since September 1993. Since June
1985, Mr. Garippa has been the president of The PromptCare Companies, Inc., a
subsidiary of Transworld.
Kevin M. Buhrman has been a Vice President of Transworld since June 1992.
Since November 1993, Mr. Buhrman has been the principal officer in charge of
Transworld's nursing and paraprofessional operations. From June 1992 until
November 1993, Mr. Buhrman was the principal officer in charge of the
Transworld's Home HealthCare -- Nursing Division, Inc. ("Nurses") operations.
From February 1990 to June 1992, Mr. Buhrman was executive vice president of
Nurses. From February 1988 to 1990, Mr. Buhrman was the corporate administrator
of Nurses' New Jersey offices. From 1974 through 1988, he managed the
Respiratory Care Department of Riverview Medical Center in Red Bank, New Jersey.
Leslie J. Levinson has served as Secretary of Transworld since October 1990
and Secretary of IMH since November 1996. Since June 1991, he has been a partner
in the law firm of Baer Marks & Upham LLP, which firm serves as counsel to
Transworld. From January 1988 until June 1991, he was a partner in the law firm
of Dow, Lohnes & Albertson, which firm served as counsel to Transworld. Mr.
Levinson's business address is Baer Marks & Upham LLP, 805 Third Avenue, New
York, New York 10022.
Richard A. Yoken has been a Director of Transworld since June 1992. Since
May 1990, Mr. Yoken has been the chairman, president and chief executive officer
of The Portfolio Strategy Group, Inc., an investment consulting firm. Since July
1984, he also has been the president and principal shareholder of Yoken &
Company, Inc., a corporate and personal financial consulting firm. Mr. Yoken's
business address is 505 Park Avenue, New York, New York 10022.
Scott A. Shay has been a Director of Transworld since January 1996 and
served as Acting Chairman of the Board of Transworld from September 1996 until
January 1997 and a Director of IMH since November 1996. Since March 1995, Mr.
Shay has been the executive vice president of Hyperion Funding II Corp., the
general partner of the general partner of Hyperion. Since 1988, Mr. Shay has
been a control person of Hyperion Partners L.P., an affiliate of Hyperion, and
has at various times acted as a director of various entities owned directly and
indirectly by Hyperion Partners L.P., including, currently, Bank United Corp.
and Hyperion Capital Management, Inc. Since 1988, Mr. Shay also has been a
managing director of Ranieri & Co., Inc., an investment consulting firm. Prior
to joining Ranieri & Co., Mr. Shay was a director of Salomon Brothers Inc where
he was employed from 1980 until 1988, and where he was responsible at various
times for the firm's thrift mergers and acquisition practice and for mortgage
banking financing and mergers and acquisitions. Mr. Shay's business address is
50 Charles Lindbergh Boulevard, Suite 500, Uniondale, New York 11553.
Lewis S. Ranieri has been a Director of Transworld since May 1997. Mr.
Ranieri is the chairman of Bank United Corp., a position he has held since 1988;
he was also the president, chief executive of Bank United Corp. and chairman of
Bank United, the subsidiary of Bank United Corp., from 1988 until July 15, 1996.
Mr. Ranieri is also the chairman and president of Ranieri & Co., Inc., positions
he has held since founding
55
<PAGE> 66
Ranieri & Co., Inc., in 1988. Mr. Ranieri is a founder of Hyperion Partners L.P.
and of Hyperion. He is also chairman of Hyperion Capital Management, Inc., a
registered investment advisor and the Hyperion Total Return Fund, Inc. He is
director of the Hyperion 1999 Term Trust, Inc., the Hyperion 1997 Term Trust,
Inc., the Hyperion 2002 Term Trust, Inc. and Hyperion 2005 Investment Grade
Opportunity Trust, Inc. Mr. Ranieri is also chairman and president of various
other indirect subsidiaries of Hyperion Partners L.P. and Hyperion. He is also
chairman of the board and a director of American Marine Holdings, Inc. Mr.
Ranieri is also a director of Delphi Financial Group, Inc. Mr. Ranieri is a
former vice chairman of Salomon Brothers where he was employed from 1968 to
1987, and was one of the principal developers of the secondary mortgage market.
He is a member of the National Association of Home Builders Mortgage Roundtable.
Mr. Ranieri's business address is 50 Charles Lindbergh Boulevard, Suite 500,
Uniondale, New York 11553.
INDEPENDENT AUDITORS
BDO Seidman are the Company's independent auditors. Representatives of BDO
Seidman are expected to be present at the Special Meeting to respond to
appropriate questions of stockholders and make a statement if they so desire.
AVAILABLE INFORMATION
Pursuant to Rule 13e-3 of the General Rules and Regulations under the
Securities Exchange Act of 1934, as amended, the Company and Transworld have
filed with the Securities and Exchange Commission a Rule 13e-3 Transaction
Statement on Schedule 13E-3 (including any amendments thereto, the "Schedule
13E-3"), together with exhibits thereto, furnishing certain additional
information with respect to the Merger. This Proxy Statement does not contain
all the information contained in the Schedule 13E-3 and the exhibits thereto,
certain portions of which are omitted as permitted by the rules and regulations
of the Securities and Exchange Commission.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and, in accordance therewith, files reports,
proxy statements and other information with the Securities and Exchange
Commission. The Schedule 13e-3 and the exhibits thereto, as well as such
reports, proxy statements and other information filed by the Company with the
Securities and Exchange Commission, can be inspected and copied at the public
reference facilities maintained by the Securities and Exchange Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
public reference facilities maintained by the Commission at 7 World Trade
Center, Suite 1300, New York, New York 10048 and at Northwestern Atrium Center,
Suite 1400, 500 West Madison Street, Chicago, Illinois 60661. Copies of such
material can be obtained at prescribed rates from the Public Reference Section
of the Securities and Exchange Commission at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549. The Schedule 13E-3 and the exhibits thereto, as
well as recent reports and proxy statements of the Company, have been filed
through the Electronic Data Gathering, Analysis and Retrieval (EDGAR) system and
are publicly available through the Securities and Exchange Commission's Web site
(http://www.sec.gov). The Company's Common Stock is quoted on the NASDAQ
SmallCap Market. Copies of documents filed by the Company can also be inspected
at the offices of the National Association of Securities Dealers, Inc.,
Attention: Proxy Department, 1735 K Street Northwest, Washington, D.C.
20006-1500.
All reports and opinions from outside parties filed as exhibits to the
Schedule 13E-3 filed with the Securities and Exchange Commission in connection
with the Merger also will be made available for inspection and copying at the
principal executive offices of the Company during its regular business hours by
any interested stockholder or representative thereof who has been so designated
in writing.
56
<PAGE> 67
OTHER BUSINESS AT THE SPECIAL MEETING
The Company is not aware of any business to be acted upon at the Special
Meeting other than as described herein. If, however, other matters are properly
brought before the Special Meeting, or any adjournments or postponements
thereof, the persons appointed as proxies will have discretion to vote or act
thereon in accordance with their best judgment. If the Merger is not
consummated, proposals of stockholders intended to be presented at the next
annual meeting of stockholders of the Company must be received by the Company on
or before [ ], 1997.
BY ORDER OF THE BOARD OF DIRECTORS,
W. James Nicol
Chief Executive Officer and President
Dated: June , 1997
57
<PAGE> 68
INDEX TO FINANCIAL STATEMENTS
AUDITED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants.......... F-2
Consolidated balance sheets:
April 30, 1996 and 1995................................... F-3
Consolidated financial statements for the three years ended
April 30, 1996:
Statements of operations.................................. F-4
Statements of stockholders' equity........................ F-5
Statements of cash flows.................................. F-6 - F-7
Notes to consolidated financial statements.................. F-8 - F-21
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Index to Condensed Consolidated Financial Statements........ F-22
Balance Sheets as of January 31, 1997 (Unaudited) and April
30, 1996 (Audited)........................................ F-23
Statements of Operations for the Nine Months Ended January
31, 1997 and January 31, 1996 (Unaudited)................. F-24
Statements of Cash Flow for the Nine Months Ended January
31, 1997 and January 31, 1996 (Unaudited)................. F-25
Statement of Stockholders' Equity for the Nine Months Ended
January 31, 1997 (Unaudited).............................. F-26
Notes to Financial Statements............................... F-27
</TABLE>
58
<PAGE> 69
HEALTH MANAGEMENT, INC.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
INDEX
-----
<S> <C>
Report of Independent Certified Public Accountants.......... F-2
Consolidated Balance Sheets:
April 30, 1996 and 1995................................... F-3
Consolidated Financial Statements for the Three Years Ended
April 30, 1996:
Statements of operations.................................. F-4
Statements of stockholders' equity........................ F-5
Statements of cash flows.................................. F-6 - F-7
Notes to Consolidated Financial Statements.................. F-8 - F-21
</TABLE>
F-1
<PAGE> 70
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-2
<PAGE> 71
HEALTH MANAGEMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS (NOTE 4(A))
<TABLE>
<CAPTION>
APRIL 30,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
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-3
<PAGE> 72
HEALTH MANAGEMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
----------------------------------------
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Revenues............................................. $158,859,638 $88,456,028 $44,249,516
Cost of Sales (including unusual charges of
$2,840,000 in 1996) (Note 5)....................... 120,223,528 63,708,021 28,643,460
------------ ----------- -----------
Gross profit.................................. 38,636,110 24,748,007 15,606,056
------------ ----------- -----------
Operating Expenses:
Selling............................................ 4,649,697 2,898,208 1,847,197
General and administrative......................... 24,324,490 10,648,792 5,428,342
Provision for doubtful accounts (Note 5)........... 14,714,606 7,978,189 1,781,000
Unusual charges (Note 5)........................... 5,600,000 -- --
------------ ----------- -----------
Total Operating Expenses...................... 49,288,793 21,525,189 9,056,539
------------ ----------- -----------
Income (Loss) from Operations........................ (10,652,683) 3,222,818 6,549,517
Interest Expense..................................... (2,717,155) (269,316) (88,215)
Interest Income...................................... 37,651 333,077 290,341
------------ ----------- -----------
Income (loss) before Income Taxes............. (13,332,187) 3,286,579 6,751,643
Income Taxes (Note 6)................................ (2,404,846) 1,340,391 2,750,685
------------ ----------- -----------
Net Income (Loss)............................. $(10,927,341) $ 1,946,188 $ 4,000,958
============ =========== ===========
Earnings (Loss) per share of Common Stock
-- primary......................................... $(1.16) $.21 $.54
============ =========== ===========
-- fully diluted................................... $(1.16) $.21 $.53
============ =========== ===========
Weighted Average Shares Outstanding
-- primary......................................... 9,414,500 9,408,300 7,383,040
============ =========== ===========
-- fully diluted................................... 9,414,500 9,420,816 7,593,465
============ =========== ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
F-4
<PAGE> 73
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 ADDITIONAL RETAINED RESTRICTED
-------------------- PAID-IN EARNINGS STOCK
SHARES AMOUNT CAPITAL (DEFICIT) COMPENSATION
--------- -------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, May 1, 1993................ 6,076,063 $182,281 $ 5,647,475 $ 3,925,195 $ --
Common stock issued upon exercise
of stock options............... 2,833 85 12,663 -- --
Common stock issued upon exercise
of stock warrants.............. 40,330 1,210 216,572 -- --
Common stock issued upon
conversion of subordinated
debentures..................... 357,145 10,715 364,288 -- --
Common stock issued upon public
offering....................... 2,000,000 60,000 21,922,258 -- --
Common stock issued upon
acquisition of Murray Group.... 617,060 18,512 7,676,230 -- --
Restricted stock issued to
consultants.................... 11,000 330 113,795 -- (114,125)
Compensation under restricted
stock.......................... -- -- -- -- 57,060
Net income for the year ended
April 30, 1994................. -- -- -- 4,000,958 --
--------- -------- ----------- ------------ ---------
Balance, April 30, 1994............. 9,104,431 273,133 35,953,281 7,926,153 (57,065)
Common stock issued upon
acquisition of:
Pharmaceutical Marketing
Alliance..................... 20,000 600 242,775 -- --
Maryland Pharmacies............ 108,757 3,263 1,356,112 -- --
Common stock issued upon exercise
of stock warrants.............. 78,996 2,370 424,208 -- --
Common stock issued upon exercise
of stock options............... 2,833 85 24,414 -- --
Common stock issued to
directors...................... 1,000 30 18,720 -- --
Compensation under restricted
stock.......................... -- -- -- -- 57,065
Net income for the year ended
April 30, 1995................. -- -- -- 1,946,188
--------- -------- ----------- ------------ ---------
Balance, April 30, 1995............. 9,316,017 279,481 38,019,510 9,872,341 --
Common stock issued upon exercise
of stock options............... 12,223 367 119,261
Net loss for the year ended April
30, 1996....................... (10,927,341)
--------- -------- ----------- ------------ ---------
Balance, April 30, 1996............. 9,328,240 $279,848 $38,138,771 $ (1,055,000) $ --
========= ======== =========== ============ =========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
F-5
<PAGE> 74
HEALTH MANAGEMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(NOTE 9)
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-----------------------------------------
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................. $(10,927,341) $ 1,946,188 $ 4,000,958
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization.................. 2,127,400 846,869 453,149
Provision for doubtful accounts receivable..... 14,714,606 7,978,189 1,781,000
Deferred taxes................................. 1,326,300 (2,516,300) (701,315)
Write-off of improvements and equipment........ 263,563
Write-off of goodwill.......................... 552,432
Write-off of organizational costs.............. 134,161
Loss from disposition of rental equipment...... -- 287,287 --
Compensation under restricted stock............ -- 57,065 57,060
Common stock issued to director................ -- 18,750 --
Increase (decrease) in cash flows from changes in
operating assets and liabilities, net of
effects of purchase of CPMB and other
acquisitions in 1995 and Murray Group in 1994:
Accounts receivable............................ (19,831,996) (16,706,549) (9,624,966)
Tax refund receivable.......................... (6,210,030) (1,827,000) --
Inventories.................................... 986,841 (1,826,911) 205,220
Prepaid expenses and other..................... 508,183 (976,058) (205,307)
Other assets................................... 98,008 (239,758) (249,281)
Accounts payable............................... 8,384,845 4,870,054 99,675
Accrued unusual charges........................ 3,559,000 -- --
Accrued expenses............................... (336,288) 396,332 203,075
Income taxes payable........................... (1,759,590) 280,467
------------ ------------ -----------
NET CASH USED IN OPERATING ACTIVITIES............... (4,650,316) (9,451,432) (3,700,265)
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash used in acquisition of CPMB.................. (324,366) (20,630,212) --
Cash used in acquisition of Murray Group.......... -- -- (7,500,000)
Other acquisitions................................ -- (2,167,500) (250,000)
Collection of receivable from the seller of Murray
Group.......................................... -- 1,444,426 --
Capital expenditures.............................. (1,491,722) (948,368) (565,815)
Proceeds from sale of rental equipment............ -- 214,598 --
------------ ------------ -----------
NET CASH USED IN INVESTING ACTIVITIES............... (1,816,088) (22,087,056) (8,315,815)
------------ ------------ -----------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
F-6
<PAGE> 75
HEALTH MANAGEMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(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-7
<PAGE> 76
HEALTH MANAGEMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES
ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include Health Management, Inc.
(formerly Homecare 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 AND CONCENTRATION
In preparing financial statements in conformity 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.
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.
F-8
<PAGE> 77
HEALTH MANAGEMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
IMPROVEMENTS AND EQUIPMENT
Improvements and equipment are stated at cost. 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 (double
declining balance method) are used for both book and tax purposes for all
classes of assets except for leasehold improvements which are amortized using
straight line method.
GOODWILL AND OTHER LONG-LIVED ASSETS
Goodwill represents the excess of the purchase 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. The amount of
impairment is computed based on the excess of the asset's carrying value over
its fair value under SFAS 121. Long-lived assets acquired in business
combinations accounted for using the purchase method includes the goodwill that
arose in those transactions allocated on a pro rata basis using the relative
fair values of the long-lived assets and identifiable intangibles acquired at
the acquisition date. Based on the Company's analysis under SFAS No. 121, the
Company believes that, other than the write-off of goodwill related to the
Pharmaceutical Marketing Alliance acquisition (see Note 2) totalling $553,000,
no impairment of the carrying value of its long-lived assets inclusive of
allocated goodwill existed at April 30, 1996. The Company's analysis at April
30, 1996 has been based on an estimate of future undiscounted net cash flows.
Should the results forecasted not be achieved, future analyses may indicate
insufficient future undiscounted net cash flows to recover the carrying value of
the Company's long-lived assets inclusive of allocated goodwill, in which case
SFAS No. 121 would require the carrying value of such assets to be written down
to fair value if lower than carrying value.
INCOME TAXES
Deferred taxes are recorded to reflect the temporary differences in the tax
bases of assets and liabilities and their reported amounts in the financial
statements. The differences relate principally to the allowance for doubtful
accounts and unusual charges.
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
F-9
<PAGE> 78
HEALTH MANAGEMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 FINANCIAL INSTRUMENTS
The carrying amounts of certain financial instruments, including cash,
accounts receivable 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 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 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.
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:
<TABLE>
<CAPTION>
YEAR ENDED
APRIL 30, 1995
---------------
(IN THOUSANDS)
<S> <C>
Revenues.................................................... $133,178
========
Income...................................................... $ 6,237
========
Net income.................................................. $ 3,505
========
Earnings Per Share
Primary................................................... $ .37
Fully Diluted............................................. $ .37
========
</TABLE>
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-10
<PAGE> 79
HEALTH MANAGEMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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.
(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.
F-11
<PAGE> 80
HEALTH MANAGEMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As a result of the above acquisitions, total excess of purchase price in
excess of net assets acquired are as follows:
<TABLE>
<CAPTION>
APRIL 30,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Goodwill resulting from acquisition of:
CPMB.............................................. $22,860,251 $22,535,855
Maryland pharmacies............................... 2,453,959 2,453,959
PMA............................................... -- 581,507
Murray group...................................... 10,099,860 10,099,860
Other............................................. 250,000 250,000
----------- -----------
35,664,070 35,921,181
Less: accumulated amortization...................... 1,655,574 456,921
----------- -----------
$34,008,496 $35,464,260
=========== ===========
</TABLE>
3. IMPROVEMENTS AND EQUIPMENT
Improvements and equipment consist of the following:
<TABLE>
<CAPTION>
APRIL 30,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
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>
(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
F-12
<PAGE> 81
HEALTH MANAGEMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
On July 26, 1996, the Company and the lenders under the agreements entered
into a forbearance agreement covering the period from July 26, to November 15,
1996. Under this agreement, the lenders agreed subject to certain conditions, to
forbear from exercising any of their legal, contractual or equitable rights of
remedies in respect of any of the existing events of default during the above
forbearance period and the Company agreed to certain revised financial covenants
and reporting requirements. The forbearance agreement also reduced the
availability under the revolving credit facility to a maximum of $1,500,000 over
the borrowings currently outstanding. Concurrently, the Company engaged National
Westminster Bank PLC ("Nat West") to act as its financial advisor to explore a
variety of strategic and financial alternatives. The Company requires additional
financing to remedy the default condition of its term loan and borrowings under
revolving credit facility. In order to satisfy such obligations the Company may
consider engaging in a public or private offering of securities of the Company.
There is no assurance that such financing can be obtained.
(b) In connection with the CPMB acquisition (see Note 2(a)), the Company is
obligated on a $3,000,000 unsecured subordinated note, bearing interest at an
annual rate of 8% and maturing March 31, 2000.
As a result of the restatement of the Company's April 30, 1995 financial
statements and the provision of unusual charges (see Note 5), the Company did
not meet certain of the financial ratios as required by the note. As a result,
the note became convertible into the Company's common stock upon notice received
from the holder of the note. The conversion price is based upon the average
closing price of the Company's common stock for the ten trading days immediately
proceeding the conversion date and the ten trading days immediately subsequent
to the conversion date. The Company has not received notice from the noteholder
for conversion.
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.
F-13
<PAGE> 82
HEALTH MANAGEMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Long term debt matures as follows:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
--------------------
<S> <C>
1997................................................. $28,746,028
1998................................................. 377,771
1999................................................. 315,873
2000................................................. 3,245,162
2001................................................. 67,271
-----------
$32,752,105
===========
</TABLE>
5. UNUSUAL CHARGES AND OTHER CHARGES
The following charges were incurred during the year ended April 30, 1996:
<TABLE>
<S> <C>
Included in costs of sales:
Write-off of medical device inventory (a)................. $ 2,840,000
===========
</TABLE>
Included in the provision for doubtful accounts:
<TABLE>
<S> <C>
Additional provision reflecting a change in the estimation
of the allowance for doubtful accounts (b)................ $8,400,000
==========
Unusual charges:
Cost associated with organizational consolidation and
other cost reduction programs (c)...................... 3,600,000
Professional fees related to the Company's litigation and
restatement of fiscal 1995 financial statements (see
Note 7(d))............................................. 2,000,000
----------
$5,600,000
==========
</TABLE>
(a) Through January 31, 1996, the Company purchased approximately $3.5 million
of medical device inventory under a purchase agreement which provided for a
total purchase commitment of approximately $5.4 million in return for an
exclusive right to distribute in the home care market. A substantial portion
of the $3.5 million was purchased during the nine months ended January 31,
1996.
This device was originally targeted for use in the multiple sclerosis market
but was not being utilized in the treatment of such condition because of the
concerns of drug manufacturers and physicians that the device could affect
the molecular stability of the drug being administered. The lack of
acceptance of such device was conclusively identified during the third
quarter of fiscal 1996.
As a result, in January 1996, the Company notified the manufacturer of this
device that the Company would cease further purchase of such product. The
Company also negotiated a return agreement whereby the manufacturer of the
device purchased back the inventory in return for the forgiveness of
$322,000 payable to the manufacturer from the Company and payment to the
Company of $338,000. Accordingly, the Company wrote down its medical device
inventory by $2,840,000.
(b) The Company had an evaluation of its allowance for doubtful accounts
completed in the third quarter of fiscal 1996, using a statistical sampling
approach to its receivables. Based on the result of this sampling, the
Company concluded that its allowance for doubtful accounts was understated
by $8.4 million. Accordingly, the Company provided an additional $8.4
million allowance during the quarter ended January 31, 1996 when it revised
its estimate of the required allowance for doubtful accounts.
F-14
<PAGE> 83
HEALTH MANAGEMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(c) The organizational consolidation costs include termination benefits accrued
totalling $1,271,000 related to the Company's January 1996 plan of
termination of approximately 30 employees as part of the consolidation of
the Company's accounting and executive offices in Buffalo Grove, Illinois.
Through April 30, 1996, $545,000 of such benefits had been paid leaving a
balance of $726,000.
The remaining organizational consolidation costs and other cost reduction
programs, totalling $2,329,000 can be summarized as follows:
<TABLE>
<S> <C>
Estimated lease termination costs........................... $ 766,000
Write off of PMA goodwill................................... 553,000
Write off of PMA and New York fixed assets.................. 397,000
Write off of deferred financing costs....................... 613,000
----------
$2,329,000
==========
</TABLE>
Estimated lease termination costs represent the lease expense for the
remaining lease term of the New York headquarters which is to be closed. The
write off of PMA goodwill represents the carrying value of goodwill of HMI-PMA
(see Note 2(c)), which was closed in fiscal 1996. The write off of PMA and New
York fixed assets represents the net book value of leasehold improvements of PMA
and the New York headquarters to be closed. Write off of deferred financing
costs represents deferred financing costs resulting from the Company's April
1995 term loan and credit agreement under which the Company is currently in
default.
Through April 30, 1996, write-off of fixed assets, goodwill and related
long lived assets amounted to $950,000, leaving a balance of $1,379,000.
The above remaining liabilities of $726,000 and $1,379,000 and the unpaid
professional fees of $1,454,000 as of April 30, 1996 were included in accrued
unusual charges, the majority of which are expected to be paid within the year
ended April 30, 1997.
6. INCOME TAXES
The income tax expenses (benefits) are comprised of the following:
<TABLE>
<CAPTION>
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
=========== =========== ==========
</TABLE>
F-15
<PAGE> 84
HEALTH MANAGEMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following reconciles the federal statutory tax rate with the actual
effective rate:
<TABLE>
<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%
=== == ==
</TABLE>
Deferred tax assets (liabilities) consist of the following:
<TABLE>
<CAPTION>
APRIL 30,
---------------------------
1996 1995
----------- ----------
<S> <C> <C>
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>
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 CONTINGENCIES
(A) LEASES
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).
F-16
<PAGE> 85
HEALTH MANAGEMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of April 30, 1996, future net minimum lease payments under capital
leases and noncancellable operating lease agreements are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
---------- ----------
<S> <C> <C>
1997................................................ $ 416,241 $1,296,629
1998................................................ 389,908 1,088,500
1999................................................ 312,249 765,575
2000................................................ 227,870 680,728
2001................................................ 68,405 177,447
Thereafter.......................................... -- 97,654
---------- ----------
Total minimum lease payments............................. 1,414,673 4,106,533
Less amounts representing interest....................... 179,803 --
---------- ----------
Net minimum lease payments............................... $1,234,870 $4,106,533
========== ==========
</TABLE>
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.
(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
F-17
<PAGE> 86
HEALTH MANAGEMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
The Company's auditors have been named as a defendant, and the Company has
been named as a nominal defendant, in a derivative lawsuit filed in the Supreme
Court for the State of New York, County of New York. The complaint against the
Company's auditors alleges claims for misrepresentations and omissions contained
in certain of the Company's corporate filings. The complaint seeks unspecified
monetary damages on behalf of the Company as well as declaratory and injunctive
relief. Pursuant to stipulation, the Company's time to answer or otherwise move
against the complaint in this action has been indefinitely adjourned.
The enforcement division of the Securities and Exchange Commission has a
formal order of investigation relating to matters arising out of the Company's
public announcement on February 27, 1996 that the Company would have to restate
its financial statements for prior periods as a result of certain accounting
irregularities and the Company is fully cooperating with this investigation and
has responded to the commission's requests for documentary evidence.
(2) The Company has been named as a defendant in an action pending in the
United States District Court for the Eastern District of New York entitled
Bindley Western Industries, Inc. vs. Health Management Inc., 96 Civ. 2330 (ADS).
The action alleges claims for breach of contract and accounts stated arising out
of a dispute regarding payments for certain goods. The action seeks damages in
the amount of $3,187,157.35 together with interest, costs and disbursements. The
Company has answered the complaint, complied with its automatic disclosures
obligations and has reduced the accounts payable to approximately $2,600,000 as
of July 26, 1996.
(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.
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
F-18
<PAGE> 87
HEALTH MANAGEMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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 STOCK INCENTIVE
OPTION STOCK OPTION DIRECTORS'
PLAN(1) PLAN(2) WARRANTS OPTIONS(3)
--------------- ------------ -------- -----------
<S> <C> <C> <C> <C>
Shares covered................... 1,000,000 50,000 130,662 26,000
--------- ------ ------- -------
Outstanding at May 1, 1993....... -- 12,221 130,662 --
Granted........................ 420,000 2,500 -- 19,000
Exercised...................... -- (2,833) (40,330) --
Cancelled...................... -- (833) -- --
--------- ------ ------- -------
Outstanding at April 30, 1994.... 420,000 11,055 90,332 19,000
Granted........................ 132,500 -- -- 4,000
Exercised...................... (2,000) (833) (78,996) --
Cancelled...................... -- -- -- --
--------- ------ ------- -------
Outstanding at April 30, 1995.... 550,500 10,222 11,336 23,000
Granted........................ 709,000 -- -- 3,000
Exercised...................... (11,000) (1,223) -- --
Cancelled...................... (309,500)
--------- ------ ------- -------
Outstanding at April 30, 1996.... 939,000 8,999 11,336 26,000
========= ====== ======= =======
At April 30, 1996:
Price range...................... $ 4.98 $ .90 -- $10.875
$ 10.38 $ 4.50 $ 5.40 $18.840
Shares exercisable............... 346,833 8,999 11,336 26,000
Available for grant.............. -- 5,669 -- --
</TABLE>
F-19
<PAGE> 88
HEALTH MANAGEMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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.
(C) RESTRICTED STOCK
On May 1, 1993, the Company awarded 11,000 shares of restricted common
stock to three outside consultants. The shares awarded are subject to certain
restrictions and forfeiture. Vesting occurs over a two year period from the date
the shares are awarded. The shares were recorded at their quoted market value at
the date of grant of $10.375 per share, or $114,125. The compensation element
related to the awarding of such shares is recognized ratably over the two-year
restriction period. Compensation expense recognized related to such shares for
the years ended April 30, 1996, 1995 and 1994 were $-0-, $57,065 and $57,060,
respectively.
9. SUPPLEMENTAL CASH FLOW INFORMATION
(A) SUPPLEMENTAL DISCLOSURES OF CASH FLOW 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)).
F-20
<PAGE> 89
HEALTH MANAGEMENT, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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.
(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 INFORMATION (UNAUDITED, IN THOUSANDS, EXCEPT FOR PER
SHARE DATA)
The following table summarizes quarterly results:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30, 1996
-------------------------------------------------------
FIRST SECOND THIRD FOURTH
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)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30, 1995
-------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- ----
<S> <C> <C> <C> <C> <C>
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-21
<PAGE> 90
HEALTH MANAGEMENT, INC.
AND SUBSIDIARIES
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Balance Sheets as of January 31, 1997 (Unaudited) and April
30, 1996 (Audited)........................................ F-23
Statements of Operations for the Nine Months Ended January
31, 1997 and January 31, 1996 (Unaudited)................. F-24
Statements of Cash Flow for the Nine Months Ended January
31, 1997 and January 31, 1996 (Unaudited)................. F-25
Statement of Stockholders' Equity for the Nine Months Ended
January 31, 1996 (Unaudited).............................. F-26
Notes to Financial Statements............................... F-27
</TABLE>
F-22
<PAGE> 91
HEALTH MANAGEMENT, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JANUARY 31, 1997 APRIL 30, 1996
----------------- ---------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................... $ 3,121,818 $ 3,280,195
Accounts Receivable, Less Allowance for Doubtful Accounts of
Approximately $15,829,000 and $10,070,000, respectively... 28,377,209 36,457,199
Inventories................................................. 8,324,892 6,800,820
Tax Refund Receivable....................................... 1,327,106 8,037,030
Deferred Taxes.............................................. 2,917,000 1,807,000
Prepaid expenses and other.................................. 142,502 655,358
----------- -----------
TOTAL CURRENT ASSETS........................................ 44,210,527 57,037,602
IMPROVEMENTS and EQUIPMENT, Less Accumulated Depreciation
and Amortization.......................................... 3,336,870 3,825,974
GOODWILL.................................................... 30,766,995 34,008,496
OTHER....................................................... 140,938 1,043,607
----------- -----------
$78,455,330 $95,915,679
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable:
Trade.................................................. $ 4,954,235 $20,714,836
Due to Hyperion........................................... 15,329,884 --
Accrued Unusual Charges and Settlement Costs................ 8,507,930 3,559,000
Accrued Expenses............................................ 3,205,378 1,526,119
Current Maturities of Long Term Debt:
Due to Transworld...................................... 28,350,000 --
Due to Hyperion........................................ 3,000,000 --
Other.................................................. 359,108 28,746,028
----------- -----------
TOTAL CURRENT LIABILITIES................................... 63,706,535 54,545,983
Long Term Debt, Less Current Maturities..................... 645,052 4,006,077
----------- -----------
TOTAL LIABILITIES...................................... 64,351,587 58,552,060
COMMITMENTS and CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred Stock--$.01 Par Value:
Shares Authorized--1,000,000 Issued and Outstanding, none
Common Stock--$.03 Par Value:
Shares Authorized--39,000,000 Issued and
Outstanding--18,294,474 and 9,328,240, respectively....... 548,834 279,848
Additional Paid-in Capital.................................. 45,957,786 38,138,771
Accumulated Deficit......................................... (32,402,877) (1,055,000)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY.................................. 14,103,743 37,363,619
----------- -----------
$78,455,330 $95,915,679
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
F-23
<PAGE> 92
HEALTH MANAGEMENT, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JANUARY 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Revenues.................................................... $120,030,137 $118,370,222
Costs of Sales.............................................. 97,225,469 90,122,957
------------ ------------
Gross Profit................................................ 22,804,668 28,247,265
------------ ------------
Operating Expenses:
Selling................................................... 4,189,665 3,627,031
General and Administrative................................ 20,031,826 17,660,956
Provision for Doubtful Accounts........................... 15,492,760 13,267,160
Unusual Charges........................................... 4,212,720 5,600,000
------------ ------------
Total Operating Expenses.......................... 43,926,971 40,155,147
------------ ------------
Loss from Operations........................................ (21,122,303) (11,907,882)
Settlement Costs............................................ 7,375,000 --
Interest Expense............................................ 2,753,932 1,938,456
------------ ------------
Loss Before Income Taxes.................................... (31,251,235) (13,846,338)
Income Taxes................................................ 96,642 (5,670,954)
------------ ------------
Net Loss.................................................... ($31,347,877) ($ 8,175,384)
============ ============
Loss Per Common Share:
Primary................................................ $(3.15) $(0.87)
Fully Diluted.......................................... $(3.15) $(0.87)
Weighted Average Shares Outstanding:
Primary................................................ 9,939,574 9,399,984
Fully Diluted.......................................... 9,939,574 9,399,984
</TABLE>
See Notes to Condensed Consolidated Financial Statements
F-24
<PAGE> 93
HEALTH MANAGEMENT, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
JANUARY 31,
---------------------------
1997 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss.................................................... $(31,347,877) $(8,175,384)
Adjustments to Reconcile Net Income to Net Cash Used In
Operating Activities:
Depreciation and Amortization............................... 1,917,835 1,313,692
Provision for Doubtful Accounts............................. 15,492,760 13,267,160
Unusual Charges............................................. 2,534,634 --
Deferred Taxes.............................................. (1,110,000) (3,795,168)
Increase (Decrease) in Cash Flows From Changes in Operating
Assets and Liabilities:
Accounts Receivable......................................... (7,412,770) (16,178,070)
Inventory................................................... (1,524,072) (1,909,973)
Prepaid Expenses and Other.................................. 512,856 (404,357)
Other Assets................................................ 811,169 518,447
Accounts Payable............................................ (430,717) 5,907,519
Accrued Expenses............................................ 1,679,259 8,153,926
Accrued Unusual Charges and Settlement Costs................ 4,955,930 --
Tax Refund Receivable....................................... 6,709,924 (4,270,527)
------------ -----------
NET CASH USED IN OPERATING ACTIVITIES....................... (7,211,069) (5,572,735)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures................................... (630,364) (1,575,631)
------------ -----------
NET CASH USED IN INVESTING ACTIVITIES....................... (630,364) (1,575,631)
Cash Flows from Financing Activities:
Borrowings (Payments) on Credit Facility............... (361,025) 5,925,768
Principal Payments on Long-Term Debt................... (36,920) --
Proceeds from Sale of Stock............................ 8,081,001 --
Proceeds from Exercise of Stock Options................ -- 57,378
------------ -----------
Net Cash From Financing Activities.......................... 7,683,056 5,983,146
------------ -----------
Net Decrease in Cash and Cash Equivalents................... (158,377) (1,165,220)
Cash and Cash Equivalents, at Beginning of Period........... 3,280,195 4,562,712
------------ -----------
Cash and Cash Equivalents, at End of Period................. $ 3,121,818 $ 3,397,492
============ ===========
Supplemental Disclosures of Cash Flow Information:
Cash Paid for Interest...................................... $ 2,826,558 $ 1,510,928
Cash Paid (Refunded) for Taxes.............................. $ (5,005,694) $ 2,099,047
</TABLE>
See Notes to Condensed Consolidated Financial Statements
F-25
<PAGE> 94
HEALTH MANAGEMENT, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED JANUARY 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK $.03 PAR VALUE
---------------------------- ADDITIONAL ACCUMULATED
SHARES AMOUNT PAID-IN CAPITAL DEFICIT
----------- --------- --------------- ------------
<S> <C> <C> <C> <C>
Balance, May 1, 1996................ 9,328,240 $279,848 $38,138,771 $ (1,055,000)
Issuance of Common Shares........... 1,942 58 6,942
Sale of Common Stock to Transworld
Home HealthCare, Inc., Net of
Expenses.......................... 8,964,292 268,928 7,812,073
Net Loss for the Nine Months Ended
January 31, 1997.................. (31,347,877)
---------- -------- ----------- ------------
Balance, January 31, 1997........... 18,294,474 $548,834 $45,957,786 $(32,402,877)
========== ======== =========== ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements
F-26
<PAGE> 95
HEALTH MANAGEMENT, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The condensed consolidated financial statements include Health Management,
Inc., a Delaware corporation (the "Company"), and its wholly-owned subsidiaries,
including HomeCare Management, Inc., a New York corporation, HMI Pennsylvania,
Inc., a Delaware corporation, HMI Retail Corp., Inc., a Delaware corporation,
HMI PMA, Inc., a Delaware corporation, Health Reimbursement Corp., a Delaware
corporation, HMI Maryland, Inc., a Delaware corporation, and HMI Illinois, Inc.,
a Delaware corporation. All intercompany accounts and transactions have been
eliminated in consolidation.
The condensed consolidated financial statements have been prepared assuming
the Company will continue as a going concern (Note 5).
Certain 1996 amounts have been reclassified to conform to the 1997
presentation.
The Condensed Consolidated Financial Statements included herein are
unaudited and include all adjustments which, in the opinion of management, are
necessary for a fair presentation of the results of operations of the interim
period pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These condensed financial statements
should be read in conjunction with the Company's Annual Report on Form 10-K for
the year ended April 30, 1996. The results of operations for the interim periods
are not necessarily indicative of the operating results for the whole year.
NOTE 2: CONTINGENCIES
The Company, certain of its past directors and officers and its current
outside auditors, BDO Seidman, LLP have been named as defendants in a
consolidated class action securities fraud lawsuit filed in the United States
District Court for the Eastern District of New York entitled In re Health
Management, Inc. Securities Litigation, Master File No. 96 Civ. 0889 (ADS). The
consolidated actions allege claims under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, arising out of alleged misrepresentations and
omissions by the Company in connection with certain of its previous securities
filings. The consolidated actions purport to represent a class of persons who
purchased the Company's common stock between August 25, 1994 and February 27,
1996, the date the Company announced that it would have to restate certain of
its financial statements. The consolidated actions seek unspecified monetary
damages reflecting the decline in the trading price of the Company's stock that
allegedly resulted from the Company's February 1996 announcements. The Company
entered into a Stipulation of Partial Settlement with the plaintiffs' counsel
and on September 18, 1996 such Stipulation of Partial Settlement received
preliminary court approval (the "Original Settlement"). The Original Settlement
provided for, among other things, the payment by the Company of $2,000,000 in
cash, the issuance of 2,200,000 shares of Common Stock and warrants to purchase
2,200,000 shares of Common Stock. As a condition to Transworld Home HealthCare,
Inc.'s ("Transworld") obligation to close the Stock Purchase Agreement,
preliminary court approval was obtained with respect to a modified settlement
providing for a $7,200,000 cash payment in lieu of the consideration provided in
the Original Settlement to be paid after the Merger is consummated. The $7.2
million is included in settlement costs in the accompanying Condensed
Consolidated Statement of Operations for the nine months ended January 31, 1997
(Note 3). An Amended Stipulation of Partial Settlement to this effect was
executed on December 19, 1996 and preliminary approval by the U.S. District
Court for the Eastern District of New York was granted on December 20, 1996. The
hearing for final approval of the Amended Stipulation of Partial Settlement,
which was scheduled for March 14, 1997, was rescheduled to April 11, 1997. In
connection with the negotiations between the Company and Transworld regarding
further amendments to the Merger Agreement, the Company and Transworld are also
renegotiating with the plaintiffs in the consolidated stockholder class action
to further amend the
F-27
<PAGE> 96
HEALTH MANAGEMENT, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Amended Stipulation of Partial Settlement to provide for a reduction in the
consideration to be paid to the plaintiff class. See Note 6.
Certain of the Company's current and former officers and directors,
including Messrs. Bergman, Hotte, Clifton and Dimitriadis and Ms. Belloise, have
been named as defendants, and the Company has been named as a nominal defendant,
in a consolidated derivative action filed in the United States District Court
for the Eastern District of New York entitled In re Health Management, Inc.
Stockholders' Derivative Litigation, Master File No. 96 Civ. 1208 (TCP). The
consolidated action alleges claims for breach of fiduciary duty and contribution
against the individual director defendants arising out of alleged
misrepresentations and omissions contained in certain of the Company's previous
securities filings. The consolidated action seeks unspecified monetary damages
on behalf of the Company, as well as declaratory and injunctive relief. An
amended consolidated complaint was served on the Company on August 12, 1996. The
Company's time to answer or move with respect to the amended consolidated
complaint has been extended pursuant to stipulation until May, 1997. The Company
has recorded an estimated settlement cost of $175,000 related to this derivative
action in the nine months ended January 31, 1997 in the accompanying Condensed
Consolidated Statement of Operations (Note 3).
BDO Seidman, LLP has been named as a defendant, and the Company has been
named as a nominal defendant, in a derivative lawsuit filed in the Supreme Court
for the State of New York, County of New York entitled Howard Vogel, et al. v.
BDO Seidman, LLP, et al., Index No. 96-603064. The complaint alleges claims for
breach of contract, professional malpractice, negligent misrepresentation,
contribution and indemnification against BDO Seidman arising out of alleged
misrepresentations and omissions contained in certain of the Company's previous
securities filings. BDO Seidman was the Company's auditor at the time those
filings were made and has continued to serve as such. The complaint seeks
unspecified monetary damages on behalf of the Company as well as declaratory and
injunctive relief. Pursuant to stipulation, the Company's time to answer or
otherwise move against the complaint in this action has been adjourned
indefinitely. The Company is unable to make an estimate of the anticipated loss,
if any, arising from this suit.
Under the Company's Certificate of Incorporation and Bylaws, certain
officers and directors may be entitled to indemnification, or advancement of
expenses for legal fees in connection with the above suits. The Company may be
required to make payments in respect thereof in the future. The Company and
Transworld have been named as defendants in a lawsuit filed on March 11, 1997 in
the Chancery Court of the State of Delaware for New Castle County entitled Drew
Bergman v. Health Management, Inc. and Transworld Home HealthCare, Inc., CA No.
15609 NC. The plaintiff in that case seeks reimbursement and advancement of
legal fees and expenses. A hearing on this matter has been scheduled for April
30, 1997. The Company is unable to make an estimate of the anticipated loss
arising from this suit.
The enforcement division of the Securities and Exchange Commission has a
formal order of investigation relating to matters arising out of the Company's
public announcement on February 27, 1996 that the Company would have to restate
its financial statements for prior periods as a result of certain accounting
irregularities and the Company is fully cooperating with this investigation and
has responded to the commission's requests for documentary evidence.
As a result of a New York State Medicaid audit, the Company settled with
the New York State Department of Social Services regarding certain overpayments
to the Company. The Company's liability was approximately $1.4 million, of which
approximately $.5 million was held in escrow by the State. The remaining amounts
will be paid in installments through November 1998, plus interest. The $1.4
million is included in unusual charges for the nine months ended January 31,
1997 in the accompanying Condensed Consolidated Statements of Operations (Note
3).
F-28
<PAGE> 97
HEALTH MANAGEMENT, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: UNUSUAL CHARGES, SETTLEMENT COSTS AND OTHER CHARGES
The unusual charges, settlement costs and other charges included in the
accompanying Condensed Consolidated Statements of Operations are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JANUARY 31,
-------------------------
1997 1996
----------- ----------
<S> <C> <C>
Included in Cost of Sales:
Writeoff of medical device inventory...................... $ -- $2,840,000
=========== ==========
Included in the Provision for Doubtful Accounts:
Additional provisions reflecting changes in estimation of
the allowance for doubtful accounts.................... $10,000,000 $8,400,000
=========== ==========
Unusual Charges:
Costs associated with overpayments from New York State
Medicaid (Note 2)...................................... $ 1,400,000 $ --
Costs and other expenses related to the closing or sale of
three retail pharmacies, including a goodwill write-off
of approximately $2.4 million.......................... 2,812,720 --
Costs associated with organizational consolidation and
other cost reduction programs.......................... -- 3,600,000
Professional fees related to litigation and restatements
of fiscal 1995 financial statements.................... -- 2,000,000
----------- ----------
$ 4,212,720 $5,600,000
=========== ==========
Settlement Costs (Note 2):
Estimated for the settlement of --
Stockholder class action.................................. $ 7,200,000 $ --
Derivative action......................................... 175,000 --
----------- ----------
$ 7,375,000 $ --
=========== ==========
</TABLE>
NOTE 4: STOCKHOLDERS' EQUITY
During the second quarter of fiscal 1997, the Company issued 1,942 shares
(valued at $7,000), primarily for the purchase of a marketing product. During
the third quarter of fiscal 1997, Transworld acquired 8,964,292 of newly issued,
unregistered common shares (49% of the Company's outstanding common stock),
effective January 13, 1997, at $1.00 per share, less related expenses of
$883,291.
NOTE 5: OTHER MATTERS
The Company entered into Stock Purchase and Merger Agreements
("Agreements") with Transworld in November, 1996 for Transworld to eventually
acquire all the outstanding common stock of the Company. Transworld or its
majority stockholder, Hyperion Partners II, LP have acquired the Company's
senior debt (approximately $28.3 million), debt previously owed to Caremark,
Inc. ($3 million) and certain supplier accounts payable (approximately $15.2
million), as well as acquiring 49% of the Company's common stock (Note 4), as of
January 31, 1997.
If the Company is unable to (a) consummate the Merger Agreement with
Transworld; (b) continue satisfactory relations with its suppliers; (c) continue
to obtain extensions to its current Forbearance Agreement and obtain other
financing for ongoing operations and (d) settle its litigation in a satisfactory
manner, it is probable the Company will seek protection under the Federal
Bankruptcy laws. As a result, there
F-29
<PAGE> 98
HEALTH MANAGEMENT, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
continues to be substantial doubt about the Company's ability to continue as a
going concern. The condensed consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
NOTE 6: SUBSEQUENT EVENTS
On March 26, 1997, Transworld and the Company agreed to reduce the cash
consideration to be paid to the Company's stockholders (other than Transworld)
to $0.30 per share from $1.50 per share (see Note 5) and an amendment to the
Merger Agreement among Transworld, IMH Acquisition Corp., a wholly-owned
subsidiary of Transworld, and the Company was executed. The March 26, 1997
amendment also requires, among other things, that as a condition to closing the
merger, the settlement agreement with the plaintiffs in the stockholder class
action lawsuit be amended to provide for a $4.55 million cash settlement, rather
than the $7.2 million cash settlement recorded at January 31, 1997 (Notes 2 and
3) and that final court approval of such amended settlement be obtained. The
revision of this estimate is expected to be recorded in the fourth quarter of
fiscal 1997.
The hearing for final approval of the Amended Stipulation of Partial
Settlement discussed in Note 2, which was originally scheduled for March 14,
1997 was postponed and is currently scheduled April 25, 1997.
The plaintiffs in the consolidated derivative action discussed in Note 2
indicated that they were no longer interested in proceeding with the proposed
$175,000 settlement.
The Company and Messrs. Nicol, Jurewicz and Mieszala have been named as
defendants in an alleged class action lawsuit filed in the United States
District Court for the Eastern District of New York entitled Nicholas Volonnino
et al. v. Health Management, Inc., W. James Nicol, Paul S. Jurewicz and James
Mieszala, 97 Civ. 1646. This action alleges claims under Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder arising out of misrepresentations and omissions by the Company in
connection with certain of its previous securities filings and press releases.
The action purports to represent a class of persons who purchased shares between
September 15, 1996 and March 17, 1997, the date the Company announced that it
would have to restate certain of its financial statements and that it was
renegotiating its deal with Transworld. The action seeks unspecified
compensatory damages for the harm sustained as a result of the alleged
wrongdoing. The Company intends to vigorously defend itself in such action.
F-30
<PAGE> 99
ANNEXES
Exhibit I Agreement and Plan of Merger
Exhibit II Section 262 of the Delaware General Corporation Law
<PAGE> 100
ANNEX I
AGREEMENT AND PLAN OF MERGER
AMONG
TRANSWORLD HOME HEALTHCARE, INC.
IMH ACQUISITION CORP.,
AND
HEALTH MANAGEMENT, INC.
DATED AS OF NOVEMBER 13, 1996
<PAGE> 101
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION PAGE
------- ----
<S> <C> <C>
ARTICLE I THE MERGER.......................................................... 1
SECTION 1.1. The Merger.................................................. 1
SECTION 1.2. Effective Time.............................................. 1
SECTION 1.3. Effect of the Merger........................................ 1
SECTION 1.4. Certificate of Incorporation; By-Laws....................... 1
SECTION 1.5. Directors and Officers...................................... 2
SECTION 1.6. Conversion of Securities.................................... 2
SECTION 1.7. Surrender and Payment....................................... 2
SECTION 1.8. Dissenter's Rights.......................................... 3
SECTION 1.9. Options and Restricted Shares............................... 4
SECTION 1.10. Closing..................................................... 4
ARTICLE II REPRESENTATIONS AND WARRANTIES OF TRANSWORLD AND NEWCO............. 5
SECTION 2.1. Corporate Organization...................................... 5
SECTION 2.2. Authority Relative to this Agreement, the Stock Purchase
Agreement, and the Registration Rights Agreement............ 5
SECTION 2.3. No Conflict; Required Filings and Consents.................. 5
SECTION 2.4. Proxy Material.............................................. 6
SECTION 2.5. Litigation.................................................. 6
SECTION 2.6. Brokers..................................................... 6
SECTION 2.7. Financing................................................... 6
SECTION 2.8. Board Recommendation........................................ 7
SECTION 2.9. Fairness Opinion............................................ 7
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY..................... 7
SECTION 3.1. Organization and Qualification; Subsidiaries................ 7
SECTION 3.2. Certificate of Incorporation and By-Laws.................... 7
SECTION 3.3. Capitalization.............................................. 7
SECTION 3.4. Authority Relative to this Agreement, the Stock Purchase
Agreement, and the Registration Rights Agreement............ 8
SECTION 3.5. No Conflict; Required Filings and Consents.................. 8
SECTION 3.6. SEC Filings; Financial Statements........................... 9
SECTION 3.7. Absence of Certain Changes or Events........................ 9
SECTION 3.8. Absence of Litigation....................................... 10
SECTION 3.9. Employee Benefit Plans...................................... 10
SECTION 3.10. Permits and Licenses........................................ 11
SECTION 3.11. Proxy Material.............................................. 12
SECTION 3.12. Brokers..................................................... 12
SECTION 3.13. Properties, Contracts, and Insurance........................ 12
SECTION 3.14. Board Recommendation........................................ 13
SECTION 3.15. Fairness Opinion............................................ 13
SECTION 3.16. Compliance with Environmental Laws.......................... 13
SECTION 3.17. Employment Matters.......................................... 15
SECTION 3.18. Tax Returns, Audits, and Liabilities........................ 15
SECTION 3.19. Full Disclosure............................................. 16
</TABLE>
i
<PAGE> 102
<TABLE>
<CAPTION>
SECTION PAGE
------- ----
<S> <C> <C>
ARTICLE IV COVENANTS OF THE COMPANY........................................... 17
SECTION 4.1. Conduct of Business by the Company Pending the Merger....... 17
SECTION 4.2. No Solicitation of Transactions............................. 18
SECTION 4.3. Option Plans, Convertible Debt, Options, and Warrants....... 19
SECTION 4.4. State Takeover Statutes..................................... 19
SECTION 4.5. Consents and Approvals...................................... 19
ARTICLE V COVENANTS OF TRANSWORLD AND NEWCO................................... 20
SECTION 5.1. Directors' and Officers' Indemnification.................... 20
ARTICLE VI ADDITIONAL AGREEMENTS OF THE PARTIES............................... 20
SECTION 6.1. Proxy Material.............................................. 20
SECTION 6.2. Meeting of Stockholders of the Company...................... 20
SECTION 6.3. HSR Act..................................................... 20
SECTION 6.4. Access to Information; Confidentiality...................... 21
SECTION 6.5. Notification of Certain Matters............................. 21
SECTION 6.6. Further Action.............................................. 21
SECTION 6.7. Public Announcements........................................ 22
SECTION 6.8. Government Compliance....................................... 22
ARTICLE VII CONDITIONS OF THE MERGER.......................................... 22
SECTION 7.1. Conditions to Obligations of Each Party to Effect the
Merger...................................................... 22
SECTION 7.2. Additional Conditions to Obligation of the Company to Effect
the Merger.................................................. 23
SECTION 7.3. Additional Conditions to Obligations of Transworld and Newco
to Effect the Merger........................................ 23
ARTICLE VIII TERMINATION, AMENDMENT, AND WAIVER............................... 24
SECTION 8.1. Termination................................................. 24
SECTION 8.2. Effect of Termination....................................... 25
SECTION 8.3. Fees and Expenses........................................... 25
SECTION 8.4. Amendment................................................... 26
SECTION 8.5. Waiver...................................................... 26
ARTICLE IX GENERAL PROVISIONS................................................. 26
SECTION 9.1. Survival of Representations, Warranties, and Agreements..... 26
SECTION 9.2. Notices..................................................... 27
SECTION 9.3. Certain Definitions......................................... 27
SECTION 9.4. Headings.................................................... 27
SECTION 9.5. Entire Agreement............................................ 27
SECTION 9.6. Parties in Interest; Assignment............................. 27
SECTION 9.7. Governing Law............................................... 28
SECTION 9.8. Counterparts................................................ 28
SECTION 9.9. Severability................................................ 28
SECTION 9.10. Specific Performance........................................ 28
SECTION 9.11. Schedules................................................... 28
</TABLE>
ii
<PAGE> 103
LIST OF DISCLOSURE SCHEDULES
<TABLE>
<CAPTION>
SECTION
- -------
<C> <S>
3.1 Names of jurisdictions of incorporation, capitalization and
percentage of outstanding capital stock of Subsidiaries
owned by the Company
3.3 Warrants, options, convertible debt and convertible
securities
3.5 (a) Breaches or conflicts with existing agreements
3.5 (b) Healthcare related licenses
3.6 Liabilities
3.7 Changes in business, etc. and material transactions
3.8 Litigation
3.9 Employee benefits
3.13(a) Trademarks; trade names
3.13(b) Material contracts, etc.
3.13(c) Insurance coverage
3.16 Environmental laws and regulations
3.17(b) Change in ownership or control provisions
3.17(c) Labor dispute or litigation
3.18 Tax matters
4.1 (f) Acquisitions; dispositions
4.1 (i) Taxes
4.1 (k) Contracts
9.11 Deferred schedules
</TABLE>
<PAGE> 104
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of November 13, 1996 (this
"Agreement"), among Transworld Home HealthCare, Inc., a New York corporation
("Transworld"), IMH Acquisition Corp., a Delaware corporation and a wholly-owned
subsidiary of Transworld ("Newco"), and Health Management, Inc., a Delaware
corporation (the "Company").
WHEREAS, the Boards of Directors of Transworld, Newco, and the Company have
each approved the merger (the "Merger") of Newco with and into the Company in
accordance with the General Corporation Law of the State of Delaware ("Delaware
Law") and upon the terms and subject to the conditions set forth herein; and
WHEREAS, Transworld and the Company have entered into a Stock Purchase
Agreement of even date herewith (the "Stock Purchase Agreement") providing for
(a) the purchase (the "Stock Purchase") by Transworld from the Company of
certain shares (the "Agreement Shares") of Company Common Stock (as defined in
Section 1.6(a)) and the grant by the Company to Transworld of an option (the
"Transworld Option") to purchase shares of Company Common Stock (the "Transworld
Option Shares") and (b) the execution and delivery by Transworld and the Company
of a Registration Rights Agreement (the "Registration Rights Agreement")
relating to the registration of the Agreement Shares under applicable Federal
and state securities laws;
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein contained, and intending to be legally bound hereby,
Transworld, Newco, and the Company hereby agree as follows:
ARTICLE
THE MERGER
SECTION 1.1. THE MERGER.
At the Effective Time (as defined in Section 1.2) and subject to and upon
the terms and conditions of this Agreement and Delaware Law, Newco shall be
merged with and into the Company, the separate corporate existence of Newco
shall cease, and the Company shall continue as the surviving corporation. The
Company as the surviving corporation after the Merger is hereinafter sometimes
referred to as the "Surviving Corporation."
SECTION 1.2. EFFECTIVE TIME.
As promptly as practicable after the satisfaction or waiver of the
conditions set forth in Article VII and after the Closing referred to in Section
1.10, the parties hereto shall cause the Merger to be consummated by delivering
a Certificate of Merger (the "Certificate of Merger") to the Secretary of State
of the State of Delaware, in such form as required by, and executed in
accordance with the relevant provisions of, Delaware Law, for filing by the
Secretary of State (the time of such filing being the "Effective Time").
SECTION 1.3. EFFECT OF THE MERGER.
At the Effective Time, the effect of the Merger shall be as provided in the
applicable provisions of Delaware Law. Without limiting the generality of the
foregoing, and subject thereto, at the Effective Time all the rights,
privileges, powers, franchises, and property of the Company and Newco shall vest
in the Surviving Corporation, and all restrictions, disabilities, duties, debts,
and liabilities of the Company and Newco shall become the restrictions,
disabilities, duties, debts, and liabilities of the Surviving Corporation.
SECTION 1.4. CERTIFICATE OF INCORPORATION; BY-LAWS.
At the Effective Time, the Certificate of Incorporation and By-Laws of
Newco shall be the Certificate of Incorporation and By-Laws of the Surviving
Corporation until thereafter amended, except that, effective as of
1
<PAGE> 105
the Effective Time, such Certificate of Incorporation will be amended in order
to change the name of the Surviving Corporation to "Health Management, Inc."
SECTION 1.5. DIRECTORS AND OFFICERS.
The directors of the Surviving Corporation shall be the directors of Newco
immediately prior to the Effective Time, and the officers of the Surviving
Corporation shall be the officers of the Company immediately prior to the
Effective Time, in each case until their respective successors are duly elected
or appointed and qualified.
SECTION 1.6. CONVERSION OF SECURITIES.
At the Effective Time, by virtue of the Merger and without any action on
the part of Newco, the Company, or the holders of any of the following
securities:
(a) each share of Common Stock, par value $.03 per share ("Company Common
Stock"), of the Company then held by the Company as a treasury share or then
held by Transworld or Newco shall be cancelled and extinguished without payment
of any consideration therefor and without any conversion thereof;
(b) each share of Company Common Stock then issued and outstanding (other
than those referred to in Section 1.6(a) and other than Dissenting Shares (as
defined in Section 1.8)), shall, subject to and in accordance with Section 1.7
hereof, be automatically cancelled and extinguished and thereafter shall
represent the right to receive $2.00 in cash, without interest (the "Merger
Consideration"); and
(c) each share of common stock, par value $.01 per share, of Newco issued
and outstanding immediately prior to the Effective Time shall be converted into
and thereupon and thereafter shall represent one validly issued, fully paid, and
nonassessable share of common stock, par value $.03 per share, of the Surviving
Corporation.
SECTION 1.7. SURRENDER AND PAYMENT.
(a) Prior to the Effective Time, Newco shall designate a commercial bank or
trust company organized under the laws of the United States or any state of the
United States with capital, surplus, and undivided profits of at least
$100,000,000 to act as agent (the "Exchange Agent") for the purpose of
exchanging certificates representing shares of Company Common Stock for the
MERGER CONSIDERATION. At or prior to the Effective Time, Transworld shall
deposit in trust with the Exchange Agent the funds necessary to pay the MERGER
CONSIDERATION for shares of Company Common Stock converted by reason of the
Merger. Promptly after the Effective Time, the Surviving Corporation shall cause
the Exchange Agent to send to each holder of record of shares of Company Common
Stock at the Effective Time a letter of transmittal in customary form for use in
such exchange (which shall specify that the delivery of certificates shall be
effected, and risk of loss and title shall pass, only upon proper delivery of
the certificates representing shares of Company Common Stock to the Exchange
Agent).
(b) Each holder of shares of Company Common Stock that have been converted
into a right to receive the MERGER CONSIDERATION, upon surrender to the Exchange
Agent of a certificate or certificates representing such shares of Company
Common Stock, together with a properly completed letter of transmittal covering
such shares of Company Common Stock, will be entitled to receive the Merger
Consideration payable in respect of such shares. After the Effective Time, each
such certificate shall, until so surrendered, represent for all purposes only
the right to receive such Merger Consideration.
(c) If any portion of the MERGER CONSIDERATION is to be paid to a person
other than the registered holder of the shares of Company Common Stock
represented by the certificate or certificates in exchange therefor, it shall be
a condition to such payment that the certificate or certificates surrendered
shall be properly endorsed or otherwise be in proper form for transfer and that
the person requesting such payment shall pay to the Exchange Agent any transfer
or other taxes required as a result of such payment to a person other than the
registered holder of such shares of Company Common Stock or establish to the
satisfaction of the Exchange Agent that such tax has been paid or is not
payable.
2
<PAGE> 106
(d) After the Effective Time, there shall be no further registration of
transfers of shares of Company Common Stock outstanding prior to the Effective
Time. If, after the Effective Time, certificates representing shares of Company
Common Stock outstanding prior to the Effective Time are presented to the
Surviving Corporation, they shall be cancelled and exchanged for the MERGER
CONSIDERATION provided for, and in accordance with the procedures set forth, in
this Agreement.
(e) Any portion of the funds deposited with the Exchange Agent pursuant to
Section 1.7(a) that remains unclaimed by the holders of shares of Company Common
Stock one year after the Effective Time shall be returned to the Surviving
Corporation upon demand, and any such holder who has not exchanged his shares of
Company Common Stock for the MERGER CONSIDERATION in accordance with this
Section 1.7 prior to that time shall thereafter look only to the Surviving
Corporation for payment of the MERGER CONSIDERATION in respect of his shares of
Company Common Stock, but shall have those rights against the Surviving
Corporation as may be accorded to general creditors under applicable law.
Notwithstanding the foregoing, the Surviving Corporation shall not be liable to
any holder of shares of Company Common Stock for any amount paid to a public
official pursuant to applicable abandoned property laws. Any portion of the
funds remaining unclaimed by holders of shares of Company Common Stock as of a
date which is immediately prior to such time as such portion would otherwise
escheat to or become property of any governmental entity shall, to the extent
permitted by applicable law, become the property of the Surviving Corporation,
free and clear of any claims or interest of any person previously entitled
thereto.
(f) Any portion of the funds deposited with the Exchange Agent pursuant to
Section 1.7(a) to pay for Dissenting Shares shall be returned to the Surviving
Corporation upon demand.
(g) The funds deposited with the Exchange Agent shall be invested by the
Exchange Agent as directed by the Surviving Corporation in direct obligations of
the United States of America, obligations for which the full faith and credit of
the United States of America is pledged to provide for the payment of principal
and interest, commercial paper rated of the highest quality by Moody's Investors
Services, Inc. or Standard & Poor's Corporation, or certificates of deposit
issued by a commercial bank having combined capital, surplus, and undivided
profits aggregating at least $500,000,000, or a fund, substantially all of the
assets of which are invested in the foregoing types of investments, and any net
earnings with respect thereto shall be paid to the Surviving Corporation as and
when requested by the Surviving Corporation.
SECTION 1.8. DISSENTER'S RIGHTS.
(a) Notwithstanding any provision of this Agreement to the contrary, any
shares of Company Common Stock outstanding immediately prior to the Effective
Time held by a holder who has demanded and perfected the right for appraisal of
those shares of Company Common Stock in accordance with the provisions of
Section 262 of Delaware Law and as of the Effective Time has not withdrawn or
lost such right to such appraisal ("Dissenting Shares") shall not be converted
into or represent a right to receive the MERGER CONSIDERATION pursuant to
Section 1.6(b), but the holder shall only be entitled to such rights as are
granted by Delaware Law. If a holder of shares of Company Common Stock who
demands appraisal of those shares under Delaware Law shall effectively withdraw
or lose (through failure to perfect or otherwise) the right to appraisal, then,
as of the Effective Time or the occurrence of such event, whichever occurs
later, each such share of Company Common Stock shall be converted into and
represent the right to receive the MERGER CONSIDERATION as provided in Section
1.6(b), without interest, upon the surrender of the certificate or certificates
representing those shares. The Company shall give Transworld: (i) prompt notice
of any written demands for appraisal of any shares of Company Common Stock,
attempted withdrawals of such demands, and any other instruments served pursuant
to Delaware Law and received by the Company relating to stockholders' rights of
appraisal and (ii) the authority to direct all negotiations and proceedings with
respect to demands for appraisal under Delaware Law. The Company shall not,
except with the prior written consent of Transworld, voluntarily make any
payment with respect to any demands for appraisals of shares of Company Common
Stock, offer to settle or settle any such demands, or approve any withdrawal of
any such demands.
(b) Each holder of Dissenting Shares who becomes entitled under Delaware
Law to payment for his Dissenting Shares shall receive payment therefor after
the Effective Time from the Surviving Corporation
3
<PAGE> 107
(but only after the amount thereof shall have been agreed upon or finally
determined pursuant to Delaware Law) and such shares of Company Common Stock
shall thereupon be cancelled.
SECTION 1.9. OPTIONS AND RESTRICTED SHARES.
(a) Immediately following the Effective Time, each outstanding stock option
(an "Option") granted under the Company's 1989 Stock Option Plan, 1996 Employee
Stock Option Plan, the Shareholder Value Incentive Plan, or 1996 Nonemployee
Director Stock Option Plan (the "Option Plans"), whether or not then vested or
exercisable, shall be converted into the right to receive an amount equal to the
product of (i) the number of shares of Company Common Stock subject to the
Option and (ii) the excess, if any, of the MERGER CONSIDERATION over the
exercise price per share of Company Common Stock of such Option (the "Option
Consideration").
(b) Immediately following the Effective Time, each outstanding Option and
warrant granted under any plan, agreement, or arrangement of the Company other
than the Option Plans, whether or not then vested or exercisable, shall be
cancelled and the holders thereof shall be entitled to receive from the Company,
in cancellation and settlement of the Option or warrant, an amount equal to the
Option Consideration.
(c) All awards of shares of Company Common Stock (the "Share Awards")
outstanding under any plan, agreement, or arrangement of the Company, when
vested, shall be cancelled and each holder of a cancelled Share Award shall be
entitled to receive from the Company upon vesting in such Share Award, in
cancellation and settlement of the vested Share Award, an amount equal to the
product of (i) the number of shares of Company Common Stock subject to the
vested Share Award and (ii) the MERGER CONSIDERATION.
(d) Any amounts payable pursuant to this Section 1.9 shall be subject to
any required withholding of taxes and shall be paid without interest.
(e) The Company shall (without the payment of additional consideration):
(i) make any amendments to the Option Plans and any other plan, agreement, or
arrangement of the Company; (ii) use all reasonable best efforts to obtain any
consents or releases; and (iii) take any other action necessary to effect the
transactions contemplated by this Section 1.9. Notwithstanding any other
provision of this Section 1.9, payment may be withheld in respect of any Option
or Share Award until any necessary consents or releases are obtained.
SECTION 1.10. CLOSING.
The closing of the transactions contemplated by this Agreement (the
"Closing") shall take place at the offices of Proskauer Rose Goetz & Mendelsohn
LLP, 1585 Broadway, New York, New York, at 11:00 a.m., local time, on the day on
which the conditions set forth in Article VII hereof are satisfied or waived, or
at such other place and time and on such other date as Transworld and the
Company shall agree (the "Closing Date").
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ARTICLE II
REPRESENTATIONS AND WARRANTIES OF TRANSWORLD AND NEWCO
Transworld and Newco hereby jointly and severally represent and warrant to
the Company that:
SECTION 2.1. CORPORATE ORGANIZATION.
Each of Transworld and Newco is a corporation duly organized, validly
existing, and in good standing under the laws of the jurisdiction of its
incorporation and has the requisite corporate power and authority and any
necessary governmental authority to own, operate, or lease the properties that
it purports to own, operate, or lease and to carry on its business as it is now
being conducted, and is in good standing in each jurisdiction where the
character of its properties owned, operated, or leased or the nature of its
activities makes such qualification necessary, except for such failures which,
individually or in the aggregate, would not have a Material Adverse Effect on
Transworld. Newco is a newly formed corporation which has not engaged in any
business other than in connection with its organization and the transactions
contemplated by this Agreement. The term "Material Adverse Effect," as used in
this Agreement with respect to Transworld or the Company, means any change or
effect that is materially adverse to the business, results of operations,
assets, liabilities, condition (financial or otherwise), or prospects of
Transworld and its Subsidiaries (as defined in Section 3.1), taken as a whole,
or the Company and its Subsidiaries, taken as a whole, as the case may be.
SECTION 2.2.AUTHORITY RELATIVE TO THIS AGREEMENT, THE STOCK PURCHASE AGREEMENT,
AND THE REGISTRATION RIGHTS AGREEMENT.
Each of Transworld and Newco has all necessary corporate power and
authority to enter into this Agreement, the Stock Purchase Agreement, and the
Registration Rights Agreement and to carry out its obligations hereunder and
thereunder. The execution and delivery of this Agreement, the Stock Purchase
Agreement, and the Registration Rights Agreement by Transworld and Newco and the
consummation by Transworld and Newco of the transactions contemplated hereby and
thereby have been duly authorized by all necessary corporate action on the part
of Transworld and Newco. This Agreement, the Stock Purchase Agreement, and the
Registration Rights Agreement have been duly executed and delivered by
Transworld and Newco and, assuming the due authorization, execution, and
delivery hereof and thereof by the Company, constitute legal, valid, and binding
obligations of Transworld and Newco, enforceable against each in accordance with
their respective terms, except as enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium, and other similar laws relating to or
affecting creditors' rights generally, by general equitable principles
(regardless of whether such enforceability is considered in a proceeding in
equity or at law) or by an implied covenant of good faith and fair dealing.
SECTION 2.3. NO CONFLICT; REQUIRED FILINGS AND CONSENTS.
(a) The execution and delivery of this Agreement, the Stock Purchase
Agreement, and the Registration Rights Agreement by Transworld and Newco do not,
and neither the performance of this Agreement, the Stock Purchase Agreement, or
the Registration Rights Agreement by Transworld and Newco nor the Merger or
other transactions contemplated hereby or by the Stock Purchase Agreement or the
Registration Rights Agreement will (i) conflict with or violate the Certificate
of Incorporation or By-Laws of Transworld or the Certificate of Incorporation or
By-Laws of Newco, (ii) conflict with or violate in any material respect any law,
rule, regulation, order, judgment, or decree applicable to Transworld or Newco
or by which either of them or their respective properties is bound or affected
(assuming compliance with the requirements set forth in clauses (i), (ii),
(iii), and (iv) of Section 2.3(b)) or (iii) result in any breach of or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration, or cancellation of, or result in the creation of a
material lien or encumbrance on any of the property or assets of Transworld or
Newco pursuant to, any note, bond, mortgage, indenture, contract, agreement,
lease, license, permit, franchise, or other instrument or obligation to which
Transworld or Newco is a party or by which Transworld or Newco or any of their
respective properties is bound or affected, except as contemplated by Section
7.3(i) and except for any such breaches, defaults, or
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other occurrences which would not, individually or in the aggregate, have a
Material Adverse Effect on Transworld.
(b) The execution and delivery of this Agreement, the Stock Purchase
Agreement, and the Registration Rights Agreement by Transworld and Newco do not,
and the performance of this Agreement, the Stock Purchase Agreement, and the
Registration Rights Agreement by Transworld and Newco will not require
Transworld or Newco to obtain any consent, approval, authorization or permit of,
or to make any filing with or notification to, any governmental or regulatory
authority, domestic or foreign, except (i) for applicable requirements of state
securities laws ("Blue Sky Laws"), Federal securities laws, and filing and
recordation of the Certificate of Merger as required by Delaware Law, (ii)
filings required pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, and the rules and regulations promulgated thereunder (the "HSR
Act"), (iii) filings with respect to Medicare and Medicaid provider number
licenses and other healthcare related licenses, and (iv) where failure to obtain
such consents, approvals, authorizations, or permits, or to make such filings or
notifications, would not prevent or materially delay consummation of the Merger,
or otherwise prevent Transworld or Newco from performing their respective
obligations under this Agreement.
SECTION 2.4. PROXY MATERIAL.
None of the information supplied or to be supplied by Transworld or any of
its affiliates or representatives for inclusion in (i) the proxy statement to be
mailed to holders of Company Common Stock in connection with the special meeting
of stockholders of the Company (the "Company Stockholders Meeting") (such proxy
statement, together with the letter to stockholders, notice of meeting, and form
of proxy being hereinafter collectively referred to as the "Definitive Proxy
Material") or any amendment or supplement thereto, or (ii) any other documents
to be filed with the Securities and Exchange Commission (the "SEC") or any other
regulatory agency in connection with the transactions contemplated hereby, will,
at the respective time such documents are filed, and, in the case of the
Definitive Proxy Material or any amendment thereof or supplement thereto, at the
time of the Company Stockholders Meeting or at the time of mailing of the
Definitive Proxy Material to stockholders of the Company, be false or misleading
with respect to any material fact, or omit to state any material fact necessary
in order to make the statements therein, at the time and in light of the
circumstances under which they were made, not false or misleading or necessary
to correct any statement in any earlier communication with respect to the
solicitation of any proxy for the Company Stockholders Meeting.
SECTION 2.5. LITIGATION.
As of the date hereof, there is no suit, action, proceeding, or
investigation pending or, to the knowledge of Transworld or Newco, threatened,
against Newco or Transworld which seeks to prevent or challenge the transactions
contemplated by this Agreement, the Stock Purchase Agreement, or the
Registration Rights Agreement.
SECTION 2.6. BROKERS.
No broker, finder, or investment banker is entitled to any brokerage,
finder's, or similar fee or commission in connection with the transactions
contemplated by this Agreement, the Stock Purchase Agreement, and the
Registration Rights Agreement, based upon arrangements made by or on behalf of
Transworld or Newco, except UBS Securities LLC, in connection with providing a
fairness opinion and certain financial advisory services to Transworld and BT
Securities Corporation in connection with certain other services, none of which
will be paid by the Company, except as provided in Section 8.3(a) hereof.
SECTION 2.7. FINANCING.
Subject to the receipt by Transworld of an amendment or consent under its
existing credit facility as contemplated by Section 7.3(i), Transworld will have
sufficient funds to enable it to consummate the Merger and the Stock Purchase.
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SECTION 2.8. BOARD RECOMMENDATION.
The Board of Directors of Transworld, at a meeting of such board duly
called and held on November 11, 1996, by the unanimous vote of all directors
present, approved and adopted this Agreement, the Merger, and the other
transactions contemplated hereby, and the Stock Purchase Agreement, the
Registration Rights Agreement, and the transactions contemplated thereby.
SECTION 2.9. FAIRNESS OPINION.
Transworld has received the opinion of UBS Securities LLC that the
consideration paid by Transworld in connection with the purchase by Transworld
of certain indebtedness of the Company, the Merger, and the Stock Purchase is
fair, from a financial point of view, to Transworld.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Transworld and Newco that,
except as set forth in the Disclosure Schedule previously delivered by the
Company to Transworld (the "Disclosure Schedule"):
SECTION 3.1. ORGANIZATION AND QUALIFICATION; SUBSIDIARIES.
Each of the Company and its Subsidiaries is a corporation duly organized,
validly existing, and in good standing under the laws of the jurisdiction of its
incorporation and has the requisite corporate power and authority and any
necessary governmental authority to own, operate, or lease the properties that
it purports to own, operate, or lease and to carry on its business as it is now
being conducted, and is in good standing in each jurisdiction where the
character of its properties owned, operated, or leased or the nature of its
activities makes such qualification necessary, except for such failures which,
individually or in the aggregate, would not have a Material Adverse Effect on
the Company. Section 3.1 of the Disclosure Schedule sets forth the name,
jurisdiction of incorporation, capitalization, and percentage of outstanding
capital stock owned, directly or indirectly, by the Company with respect to each
of its Subsidiaries. Except as set forth in Section 3.1 of the Disclosure
Schedule, all the outstanding capital stock and other ownership interests or
equity equivalents of each of the Subsidiaries of the Company is duly
authorized, validly issued, fully paid, and nonassessable and is owned by the
Company or another Subsidiary of the Company free and clear of any claim, lien,
or encumbrance. Except as disclosed in Section 3.1 of the Disclosure Schedule,
neither the Company nor any of its Subsidiaries directly or indirectly controls
or owns any interest in any other corporation, partnership, joint venture, or
other business association or entity. The term "Subsidiary" of a person as used
in this Agreement shall mean any corporation or other legal entity of which that
person (either alone or together with other Subsidiaries of that person) owns,
directly or indirectly, more than 50% of the stock or other equity interests
which are ordinarily and generally, in the absence of contingencies or
understandings, entitled to vote for the election of a majority of the board of
directors or governing body.
SECTION 3.2. CERTIFICATE OF INCORPORATION AND BY-LAWS.
The Company has heretofore furnished to Transworld a complete and correct
copy of the Certificate of Incorporation and By-Laws, each as amended to date,
of the Company. Such Certificate of Incorporation and By-Laws are in full force
and effect. The Company is not in violation of any of the provisions of its
Certificate of Incorporation or By-Laws.
SECTION 3.3. CAPITALIZATION.
The authorized capital stock of the Company consists of 39,000,000 shares
of Company Common Stock and 1,000,000 shares of preferred stock ("Company
Preferred Stock"). As of the date hereof, (i) no shares of Company Preferred
Stock are outstanding or reserved for issuance, (ii) 9,330,182 shares of Company
Common Stock are issued and outstanding, (iii) 1,011,668 shares of Company
Common Stock are reserved for issuance pursuant to outstanding warrants,
convertible debt, and Options, and (iv) 9,711,005 shares of
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Company Common Stock are reserved for issuance pursuant to the Stock Purchase
Agreement. The names of the holders of all such warrants, convertible debt, and
Options, and the number of shares of Company Common Stock subject to such
warrants, convertible debt, and Options are set forth in Section 3.3 of the
Disclosure Schedule. Except as set forth in such Section 3.3 of the Disclosure
Schedule, there are no securities convertible into capital stock or other
ownership interests or equity equivalents, options, warrants, or other rights,
agreements, arrangements, or commitments of any character relating to the issued
or unissued capital stock, or ownership or equity equivalent of the Company or
any Subsidiary or obligating the Company or any Subsidiary to issue or sell any
shares of capital stock of, or other ownership interests or equity equivalents
in, the Company or a Subsidiary or any agreement to issue any such convertible
securities, options, warrants, rights, agreements, arrangements, or commitments.
All issued and outstanding shares of Company Common Stock are, and all shares of
Company Common Stock reserved for issuance as aforesaid, upon issuance on the
terms and conditions specified in the instruments pursuant to which they are
issuable, shall be, duly authorized, validly issued, fully paid, and
nonassessable. Without limiting the foregoing, the Agreement Shares and the
Transworld Option Shares, upon issuance on the terms and conditions specified in
the Stock Purchase Agreement, (x) will be duly authorized, validly issued, fully
paid, and nonassessable, (y) will be free of any pledges, liens, security
interests, or other encumbrances of any kind, and (z) will not be issued in
violation of any preemptive rights. There are no voting trusts or other
agreements or understandings to which the Company or any Subsidiary is a party
with respect to the voting of the capital stock of the Company or any
Subsidiary.
SECTION 3.4. AUTHORITY RELATIVE TO THIS AGREEMENT, THE STOCK PURCHASE AGREEMENT,
AND THE REGISTRATION RIGHTS AGREEMENT.
The Company has all necessary corporate power and authority to enter into
this Agreement, the Stock Purchase Agreement, and the Registration Rights
Agreement and to carry out its obligations hereunder and thereunder, and the
execution and delivery of this Agreement, the Stock Purchase Agreement, and the
Registration Rights Agreement by the Company and the consummation by the Company
of the transactions contemplated hereby and thereby have been duly authorized by
all necessary corporate action on the part of the Company, subject, in the case
of this Agreement and the Merger, to the calling and holding of the Company
Stockholders Meeting and approval of the Merger and adoption of this Agreement
by a vote of the holders of a majority of the outstanding shares of Company
Common Stock ("Company Stockholder Approval"). This Agreement, the Stock
Purchase Agreement, and the Registration Rights Agreement have been duly
executed and delivered by the Company and, assuming the due authorization,
execution, and delivery by Transworld and Newco, constitute legal, valid, and
binding obligations of the Company, enforceable against the Company in
accordance with their respective terms, except as enforceability may be limited
by bankruptcy, insolvency, reorganization, moratorium, and other similar laws
relating to or affecting creditors' rights generally, by general equitable
principles (regardless of whether such enforceability is considered in a
proceeding in equity or at law), or by an implied covenant or good faith and
fair dealing.
SECTION 3.5. NO CONFLICT; REQUIRED FILINGS AND CONSENTS.
(a) The execution and delivery of this Agreement, the Stock Purchase
Agreement, and the Registration Rights Agreement by the Company do not, and
neither the performance of this Agreement, the Stock Purchase Agreement, and the
Registration Rights Agreement by the Company nor the Merger or other
transactions contemplated hereby or by the Stock Purchase Agreement or the
Registration Rights Agreement (nor any change in control of the Company
resulting therefrom), subject to obtaining Company Stockholder Approval, will
(i) conflict with or violate the Certificate of Incorporation or By-Laws of the
Company or any of its Subsidiaries, (ii) conflict with or violate in any
material respect any law, rule, regulation, order, judgment, or decree
applicable to the Company or any of its Subsidiaries or by which any of their
respective properties are bound or affected (assuming compliance with the
requirements set forth in clauses (i), (ii), (iii), (iv) and (v) of Section
3.5(b)), or (iii) result in any breach of or constitute a default (or an event
which with notice or lapse of time or both would become a default) under, or
give to others any rights of termination, amendment, acceleration, or
cancellation of, or give to others any other rights pursuant to, or result in
the creation of a lien or encumbrance on any of the properties or assets of the
Company or any of its Subsidiaries
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pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease,
license, permit, franchise, or other instrument or obligation to which the
Company or its Subsidiaries is a party or by which the Company or its
Subsidiaries or any of their assets is bound or affected, except as set forth in
Section 3.5(a) of the Disclosure Schedule and except for any such breaches,
defaults, or other occurrences which would not, individually or in the
aggregate, have a Material Adverse Effect on the Company.
(b) The execution and delivery of this Agreement, the Stock Purchase
Agreement, and the Registration Rights Agreement by the Company do not, and the
performance of this Agreement, the Stock Purchase Agreement, and the
Registration Rights Agreement by the Company will not, require the Company or
any of its Subsidiaries to obtain any consent, approval, authorization, or
permit of, or to make any filing with or notification to, any governmental or
regulatory authority, domestic or foreign, except (i) for applicable
requirements of Federal securities laws, Blue Sky Laws, and filing and
recordation of the Certificate of Merger as required by Delaware Law, (ii) in
connection with the Stock Purchase Agreement, a waiver by the NASDAQ Stock
Market of a section of the By-Laws of the National Association of Securities
Dealers, Inc., (iii) filings pursuant to the HSR Act, (iv) filings with respect
to MediCare and Medicaid provider number licenses and other healthcare related
licenses as set forth in Section 3.5(b) of the Disclosure Schedule, and (v)
where failure to obtain such consents, approvals, authorizations, or permits, or
to make such filings or notifications, would not prevent or materially delay
consummation of the Merger, or otherwise prevent the Company from performing its
obligations under this Agreement, the Stock Purchase Agreement, or the
Registration Rights Agreement and would not have a Material Adverse Effect on
the Company.
SECTION 3.6. SEC FILINGS; FINANCIAL STATEMENTS.
(a) As of their respective dates, all reports, schedules, registration
statements, and definitive proxy statements filed by the Company with the SEC
since April 30, 1994 (collectively, the "Company SEC Reports"), except as
described in subsequently filed Company SEC Reports (that have been filed with
the SEC prior to the date hereof) (i) complied as to form in all material
respects with the requirements of the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), as the case
may be, and (ii) did not contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading. None of the Company's Subsidiaries is required to file any
forms, reports, or other documents with the SEC.
(b) Except as described in subsequently filed Company SEC Reports (that
have been filed with the SEC prior to the date hereof), each of the consolidated
financial statements (including, in each case, any related notes thereto)
contained in the Company SEC Reports has been prepared in accordance with
generally accepted accounting principles applied on a consistent basis
throughout the periods involved (except as may be indicated in the notes
thereto), and each fairly presents the consolidated financial position of the
Company and its consolidated Subsidiaries as at the respective dates thereof and
the consolidated results of its operations and changes in financial position for
the periods indicated, except that the unaudited interim financial statements
were or are subject to normal and recurring year-end adjustments which were not
or are not expected to be material in amount.
(c) Except as set forth in Section 3.6 of the Disclosure Schedule, neither
the Company nor any Subsidiary has any liability or obligation of any nature
whatsoever (whether known or unknown, due or to become due, accrued, fixed,
contingent, liquidated, unliquidated, or otherwise), other than liabilities and
obligations (i) which are set forth in the consolidated balance sheet of the
Company and its consolidated Subsidiaries as of April 30, 1996 or reflected in
the notes thereto or (ii) which arose in the ordinary course since April 30,
1996 and do not and will not individually or in the aggregate, have a Material
Adverse Effect on the Company.
SECTION 3.7. ABSENCE OF CERTAIN CHANGES OR EVENTS.
Except as contemplated by this Agreement or disclosed in the Company SEC
Reports or Section 3.7 of the Disclosure Schedule, since April 30, 1996, the
Company and its Subsidiaries have conducted their
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respective businesses only in the ordinary course and in a manner consistent
with past practice and, since such date, (i) there has not been any change in
the business, assets, liabilities, results of operations, or condition
(financial or otherwise) of the Company or its Subsidiaries having a Material
Adverse Effect on the Company, and (ii) the Company and its Subsidiaries have
not entered into any material transaction with any third party.
SECTION 3.8. ABSENCE OF LITIGATION.
Except as set forth in Section 3.8 of the Disclosure Schedule or in the
Company SEC Reports, no claim, action, proceeding, or investigation is pending
or, to the best knowledge of the Company, threatened against the Company or its
Subsidiaries which would, individually or in the aggregate, if adversely
determined, have a Material Adverse Effect on the Company. As of the date
hereof, there are no actions, suits, or proceedings pending or, to the knowledge
of the Company, threatened against the Company or any of its Subsidiaries
arising out of or in any way related to this Agreement, the Stock Purchase
Agreement, the Registration Rights Agreement, or any of the transactions
contemplated hereby or thereby. From the date hereof until the Effective Time,
the Company shall promptly advise Transworld and Newco if any such claim, suit,
governmental proceeding, or litigation is commenced against the Company or any
of its Subsidiaries or is, to the knowledge of the Company, threatened against
the Company or any of its Subsidiaries.
SECTION 3.9. EMPLOYEE BENEFIT PLANS.
True, correct, and complete copies, as in effect on the date hereof, of the
employee benefit plans (as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA")), and related summary plan
descriptions, currently or previously established, maintained, sponsored or
contributed to (or with respect to which any obligation to contribute has been
undertaken) by the Company or its Subsidiaries or any entity that would be
deemed a "single employer" with the Company or any of its Subsidiaries (an
"ERISA Affiliate") within the meaning of Section 414(b), (c), (m) or (o) of the
Internal Revenue Code of 1986, as amended (the "Code"), and all bonus, stock
option, stock purchase, stock appreciation right, incentive, deferred
compensation, supplemental retirement, severance, welfare, medical, life,
vacation, sickness, change in control, death benefit, and other similar fringe
or employee benefit plans, programs, policies, or arrangements, all employment,
consulting, or executive compensation agreements for the benefit of, or relating
to, any employee, former employee, consultant, director, or retiree of the
Company or any Subsidiary thereof or any ERISA Affiliate (including their family
members and other beneficiaries) (collectively, the "Employee Plans"), and
written descriptions of any oral arrangements or agreements with respect to the
foregoing, have been provided or made available to Transworld prior to the date
hereof and are listed in Section 3.9 of the Disclosure Schedule; provided that
an Employee Plan that is no longer maintained by the Company or an ERISA
Affiliate shall not be listed in Section 3.9 of the Disclosure Schedule and
copies thereof need not be made available to Transworld prior to the date
hereof. With respect to any Employee Plans (i) each Employee Plan intended to
qualify under Section 401(a) of the Code has been qualified since inception and
has received a favorable determination letter under Revenue Procedure 93-39 and
subsequent revenue procedures from the Internal Revenue Service (the "IRS") and
delivered to Transworld for any such Employee Plan evidencing its qualified
status, and with respect to each such Employee Plan, no event has occurred or
condition exists that could disqualify such Employee Plan or cause the loss of
any tax deductions for contributions made to such Employee Plan; (ii) no such
Employee Plan is or has ever been a "multiemployer plan" within the meaning of
Section 3(37) or 4001(a)(3) of ERISA or Section 414(f) of the Code or a single
employer pension plan within the meaning of Section 4001(a)(15) of ERISA which
is subject to Sections 4063 and 4064 of ERISA (a "Multiple Employer Plan"), and
neither the Company nor any ERISA Affiliate has had an obligation to contribute
to any multiemployer plan; (iii) there has been no "prohibited transaction"
within the meaning of Section 4975(c) of the Code or Section 406 of ERISA,
involving the assets of the Employee Plans, in connection with which the Company
or any of its ERISA Affiliates could be subject either to a civil penalty
assessed pursuant to Section 502(i) of ERISA or a tax imposed by Section 4975 of
the Code; (iv) all payments required by any Employee Plan, any collective
bargaining agreement or other agreement, or by law (including, without
limitation, all contributions, insurance premiums, or intercompany charges)
required to have been made shall have been made prior to the Closing or
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provided for by the Company as applicable, by full accruals as if all targets
required by such Employee Plan had been or will be met at maximum levels) on its
financial statements; (v) no Employee Plan is or has ever been subject to
Section 412 of the Code, Section 302 of ERISA, or Title IV of ERISA; (vi) except
as disclosed in Section 3.9 of the Disclosure Schedule no claim, lawsuit,
arbitration or other action has been threatened, asserted, instituted, or
anticipated against the Employee Plans (other than non-material routine claims
for benefits, and appeals of such claims), any trustee or fiduciaries thereof,
the Company, any ERISA Affiliate, any director, officer, or employee thereof, or
any of the assets of any trust of the Employee Plans; (vii) each Employee Plan
complies and has been maintained and operated in all material respects in
accordance with its terms and applicable law, including, without limitation,
ERISA and the Code; (viii) no Employee Plan is or expected to be under audit or
investigation by the IRS, U.S. Department of Labor, or any other governmental
authority and no such completed audit, if any, has resulted in the imposition of
any tax or penalty; (ix) each Employee Plan intended to meet requirements for
tax-favored treatment under any provision of the Code, including, without
limitation, Sections 79, 105, 106, 117, 120, 125, 127, 129, 132, 162(m), 404,
404A, 419, 419A, or 501(c)(9) of the Code satisfies the applicable requirements
under the Code; (x) with respect to each Employee Plan that is funded mostly or
partially through an insurance policy, neither the Company nor any ERISA
Affiliate has any liability in the nature of retroactive rate adjustment, loss
sharing arrangement or other actual or contingent liability arising wholly or
partially out of events occurring on or before the Closing; and (xi) the Company
will make available to Transworld as to each Employee Plan, a true and correct
copy of the most recent annual report (Form 5500) filed with the IRS and the
most recent report.
Except as listed in Section 3.9 of the Disclosure Schedule or as required
by Section 4980B(f) of the Code, no plan or arrangement provides medical, death,
or welfare benefits (whether or not insured) with respect to current or former
employees of the Company or its Subsidiaries beyond their retirement or other
termination of employment.
The consummation of the transactions contemplated by this Agreement will
not give rise to any liability, including, without limitation, liability for
severance pay, unemployment compensation, termination pay, or withdrawal
liability, or accelerate the time of payment or vesting or increase the amount
of compensation or benefits due to any employee, or director of the Company, its
Subsidiaries or ERISA Affiliates (whether current, former, or retired) or their
beneficiaries solely by reason of such transactions. No amounts payable under
any Employee Plan will fail to be deductible for federal income tax purposes by
virtue of Section 280G or 162(m) of the Code. Except as disclosed in Section 3.9
of the Disclosure Schedule, neither the Company nor any ERISA Affiliate, or any
officer or employee thereof, has made any promises or commitments, whether
legally binding or not, to create any additional plan, agreement, or
arrangement, or to modify or change any existing Employee Plan. Neither the
Company nor any ERISA Affiliate maintains a pension plan (as defined in Section
3(2) of ERISA), including, without limitation, a nonqualified deferred
compensation plan or excess benefit plan, that is unfunded. No event, condition,
or circumstance exists that would prevent the amendment or termination of any
Employee Plan.
SECTION 3.10. PERMITS AND LICENSES.
Except as set forth in Section 3.10 of the Disclosure Schedule, the Company
and its Subsidiaries are now, and on the Closing Date will be, the holder of all
licenses, franchises, ordinances, authorizations, permits, and certificates,
domestic or foreign (collectively, the "Company Licenses"), necessary to enable
them to continue to conduct their businesses in all material respects as
presently conducted, except where the failure to have such Company Licenses,
individually or in the aggregate, would not have a Material Adverse Effect on
the Company. Except as set forth in Section 3.10 of the Disclosure Schedule, all
of the Company Licenses are now, and (assuming satisfaction of all requirements
set forth in Section 3.5(b)(iv) and (v)) on the Closing Date will be, in full
force and effect. The Company has no reason to believe that any Federal, state,
or local government or agency having jurisdiction will revoke, cancel, rescind,
refuse to renew in the ordinary course, or modify any of the Company Licenses.
Except as disclosed in the Company SEC Reports or except as set forth in Section
3.10 of the Disclosure Schedule, there is not now pending, or, to the best
knowledge of the Company, threatened, any investigation before any such Federal,
state, or local governments or agencies
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which, either individually or in the aggregate, would have a Material Adverse
Effect on the Company. Except as disclosed in the Company SEC Reports, each of
the Company and its Subsidiaries has conducted its business so as to comply with
all applicable laws, regulations, ordinances, and codes, domestic and foreign,
including, without limitation, laws, regulations, ordinances, and codes relating
to the protection of the environment, the failure to comply with which could
have, either individually or in the aggregate, a Material Adverse Effect on the
Company.
SECTION 3.11. PROXY MATERIAL.
None of the information supplied or to be supplied by the Company or any of
its affiliates or representatives for inclusion, or included or incorporated by
reference, in (i) the Definitive Proxy Material or (ii) any other documents to
be filed with the SEC or any other regulatory agency in connection with the
transactions contemplated hereby, will, at the respective time such documents
are filed, and, in the case of the Definitive Proxy Material or any amendment
thereof or supplement thereto, at the time of the Company Stockholders Meeting
or at the time of mailing of the Definitive Proxy Material to stockholders of
the Company, be false or misleading with respect to any material fact, or omit
to state any material fact necessary in order to make the statements therein, at
the time and in light of the circumstances under which they were made, not false
or misleading or necessary to correct any statement in any earlier communication
with respect to the solicitation of any proxy for the Company Stockholders
Meeting. The Definitive Proxy Material and any amendment thereof or supplement
thereto will comply as to form in all material respects with the provisions of
the Exchange Act.
SECTION 3.12. BROKERS.
No broker, finder, or investment banker, other than National Westminster
Bank Plc. ("NatWest"), is entitled to any brokerage, finder's, or other fee or
commission in connection with the transactions contemplated by this Agreement,
the Stock Purchase Agreement, or the Registration Rights Agreement, based upon
arrangements made by or on behalf of the Company. The Company has heretofore
furnished to Transworld a complete and correct copy of all agreements between
the Company and NatWest pursuant to which such firm would be entitled to any
payment as a result of the transactions contemplated hereby.
SECTION 3.13. PROPERTIES, CONTRACTS, AND INSURANCE.
(a) Except as set forth in Section 3.13(a) to the Disclosure Schedule, the
Company and its Subsidiaries own, or are licensed to use, or lease, all property
and assets, real and personal, tangible and intangible (including, but not
limited to, all patents, trademarks, trade names, copyrights, technology,
know-how, and processes), used in or necessary for the conduct of their
businesses as currently conducted except where the failure so to own, license,
or lease would not have a Material Adverse Effect on the Company. To the
knowledge of the Company, the use of such patents, trademarks, trade names,
copyrights, technology, know-how, and processes by the Company or its
Subsidiaries does not infringe on the rights of any person, subject to such
claims and infringement which, individually or in the aggregate, have not had
and will not have a Material Adverse Effect on the Company.
(b) Section 3.13(b) of the Disclosure Schedule sets forth a true and
complete list of all contracts, agreements, notes, bonds, mortgages, indentures,
guarantees, instruments, or commitments (written or oral) relating to the
Company or any of its Subsidiaries which are material to the Company and its
Subsidiaries, taken as a whole (other than those relating to insurance
coverage), and all agreements which impose operational, geographic, or other
restrictions upon the ability of the Company or any of its Subsidiaries to
engage in any business. To the best knowledge of the Company and except as set
forth in Section 3.13(b) of the Disclosure Schedule, all of such material
contracts of the Company and its Subsidiaries are presently valid and existing
and in full force and effect, and there is no violation, default or claim of
violation or default by any party thereto and no condition or event has occurred
which with notice or lapse of time or both would constitute a violation or
default thereunder, except for any such failure to be valid and existing and in
full force and effect, or any such violation, default, or claim, which would not
have a Material Adverse Effect on the Company.
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(c) Section 3.13(c) of the Disclosure Schedule sets forth a true and
correct list of all insurance coverage maintained by or for the benefit of the
Company and its Subsidiaries with respect to their operations or any incident,
event, or thing arising therefrom or relating thereto, setting forth (i) the
name of the carrier, (ii) the nature and dollar limits of the coverage, (iii)
the policy number and scheduled expiration date, (iv) the premium rate and date
through which paid, and (v) the named insureds thereunder. Except as set forth
in Section 3.13(c) of the Disclosure Schedule, all such policies are in full
force and effect, no notice of default or termination has been given thereunder,
and no effect, occurrence, or thing has occurred which, with notice or lapse of
time or both, could result in the early termination thereof.
SECTION 3.14. BOARD RECOMMENDATION.
The Board of Directors of the Company, at a meeting of such board duly
called and held on November 12, 1996 (prior to the time of the execution of this
Agreement and the Stock Purchase Agreement), by the unanimous vote of all
directors voting, (a) determined that the Merger and the Stock Purchase are fair
to the Company and its stockholders, and approved and adopted this Agreement,
(b) approved (i) this Agreement, the Merger and the other transactions
contemplated hereby, and (ii) the Stock Purchase Agreement, the Registration
Rights Agreement, and the transactions contemplated thereby, and (c) resolved to
recommend approval and adoption of the Merger and this Agreement by the
Company's stockholders.
SECTION 3.15. FAIRNESS OPINION.
The Company has received the opinion of NatWest that the Merger
Consideration is fair, from a financial point of view, to the stockholders of
the Company.
SECTION 3.16. COMPLIANCE WITH ENVIRONMENTAL LAWS.
For the purposes of this Section 3.16:
"Contaminant" shall mean all Hazardous Materials and all those substances
which are regulated by or form the basis of liability under Federal, state or
local environmental, health and safety statutes or regulations including,
without limitation, asbestos, polychlorinated biphenyls ("PCBs"), and
radioactive substances, or any other material or substance which constitutes a
material health, safety or environmental hazard to any person or property.
"Environmental Claim" shall mean any written notice of violation, claim,
demand, abatement or other order by any governmental authority or any person for
personal injury (including sickness, disease or death), tangible or intangible
property damage, damage to the environment, nuisance, pollution, contamination
or other adverse effects on the environment, or for fines, penalties or deed or
use restrictions, resulting from or based upon (i) the existence, or the
continuation of the existence, of a Release (including, without limitation,
sudden or non-sudden, accidental or nonaccidental Releases), of, or exposure to,
any substance, chemical, material, pollutant, contaminant, odor, or audible
noise or other release or emission in, into or onto the environment (including,
without limitation, the air, ground, water or any surface) at, in, by or from
any of the properties of the Company or any of its Subsidiaries, (ii) the
environmental aspects of the transportation, storage, treatment, or disposal of
materials in connection with the operation of any of the properties of the
Company or any of its Subsidiaries, or (iii) the violation, or alleged violation
by the Company or any of its Subsidiaries, of any statutes, ordinances, orders,
rules, regulations, permits or licenses of or from any governmental authority,
agency or court relating to environmental matters connected with any of the
properties of the Company or any of its Subsidiaries, under any applicable
Environmental Law.
"Environmental Laws" shall mean the Comprehensive Environmental Response,
Compensation, and Liability Act (42 U.S.C.sec. 9601 et seq.), the Hazardous
Material Transportation Act (49 U.S.C. sec. 1801 et seq.), the Resource
Conservation and Recovery Act (42 U.S.C. sec. 6901 et seq.), the Federal Water
Pollution Control Act (33 U.S.C. sec. 1251 et seq.), the Oil Pollution Act of
1990 (P.L. 101-380), the Safe Drinking Water Act (42 U.S.C. sec. 300(f), et
seq.), the Clear Air Act (42 U.S.C. sec. 7401 et seq.), the Toxic Substances
Control Act, as amended (15 U.S.C. sec. 2601 et seq.), the Federal Insecticide,
Fungicide, and Rodenticide Act
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(7 U.S.C. sec. 136 et seq.), and the Occupational Safety and Health Act (29
U.S.C. sec. 651 et seq.), as such laws have been and hereafter may be amended or
supplemented, and any related or analogous present or future Federal, state or
local, statutes, rules, regulations, ordinances, licenses, permits and
interpretations and orders of regulatory and administrative bodies and the
common law.
"Hazardous Material" shall mean any pollutant, contaminant, chemical, or
industrial or hazardous, toxic or dangerous waste, substance or material,
defined or regulated as such in (or for purposes of) any Environmental Law and
any other toxic, reactive, or flammable chemicals, including (without
limitation) any asbestos, any petroleum (including crude oil or any fraction),
any radioactive substance and any PCBs; provided, in the event that any
Environmental Law is amended so as to broaden the meaning of any term defined
thereby, such broader meaning shall apply subsequent to the effective date of
such amendment; and provided, further, to the extent that the applicable laws of
any state establish a meaning for "hazardous material," "hazardous substance,"
"hazardous waste," "solid waste" or "toxic substance" which is broader than that
specified in any Environmental Law, such broader meaning shall apply.
"Release" shall mean any releasing, spilling, leaking, seepage, pumping,
pouring, emitting, emptying, discharging, injecting, escaping, leaching,
disposing or dumping, in each case as defined in Environmental Law, and shall
include any "Threatened Release," as defined in Environmental Law.
"Remedial Work" shall mean any investigation, site monitoring, containment,
cleanup, removal, restoration or other remedial work of any kind or nature with
respect to any property of the Company or any of its Subsidiaries (whether such
property is owned, leased, subleased or used), including, without limitation,
with respect to Contaminants and the Release thereof.
(a) Except as disclosed in Section 3.16 of the Disclosure Schedule: (i) the
operations of the Company and its Subsidiaries comply in all material respects
with all applicable Environmental Laws; (ii) the Company, its Subsidiaries, and
all of their present facilities or operations, and, to the knowledge of the
Company or any of its Subsidiaries, their past facilities or operations, are not
subject to any judicial proceeding or administrative proceeding or any
outstanding written order or agreement with any governmental authority or
private party regarding (a) any Environmental Law, (b) any Remedial Work, or (c)
any Environmental Claims arising from the Release of a Contaminant into the
environment; (iii) to the best of the knowledge of the Company and its
Subsidiaries, none of their operations is the subject of any Federal or state
investigation evaluating whether any Remedial Work is needed to respond to a
Release of any Contaminant into the environment; (iv) neither the Company nor
any of its Subsidiaries, nor any predecessor of the Company or any of its
Subsidiaries, has filed any notice under any Environmental Law indicating past
or present treatment, storage, or disposal of a Hazardous Material or reporting
a spill or Release of a Contaminant into the environment; (v) to the best of the
knowledge of the Company and its Subsidiaries, neither the Company nor any of
its Subsidiaries has any contingent liability in connection with any Release of
any Contaminant into the environment; (vi) none of the operations of the Company
and its Subsidiaries involve the generation, transportation, treatment, or
disposal of Hazardous Materials; (vii) neither the Company nor any of its
Subsidiaries has disposed of any Contaminant by placing it in or on the ground
or waters of any premises owned, leased or used by any of them and to the
knowledge of the Company and its Subsidiaries neither has any lessee, prior
owner, or other person; (viii) no underground storage tanks or surface
impoundments are on any property of the Company or any of its Subsidiaries; and
(ix) no lien in favor of any governmental authority for (A) any liability under
any Environmental Law or regulation, or (B) damages arising from or costs
incurred by such governmental authority in response to a Release of a
Contaminant into the environment, has been filed or attached to the property of
the Company or any of its Subsidiaries.
(b) Except as set forth in Section 3.16 of the Disclosure Schedule, neither
the Company nor any of its Subsidiaries has contractually, nor, to the knowledge
of the Company or any of its Subsidiaries, by operation of law, or under any
Environmental Law, assumed or succeeded to any material environmental
liabilities relating to any Environmental Claims of any predecessor or other
person or entity.
(c) None of the matters set forth in Section 3.16 of the Disclosure
Schedule have, or are likely to have, individually or in the aggregate, a
Material Adverse Effect on the Company.
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SECTION 3.17. EMPLOYMENT MATTERS.
(a) Except as set forth in Section 3.17 of the Disclosure Statement, each
of the Company and its Subsidiaries: (i) is in compliance in all material
respects with all applicable Federal and state laws, rules, and regulations
respecting employment, employment practices, terms and conditions of employment
and wages and hours, in each case, with respect to current, former, or retired
employees or consultants of the Company or any of its Subsidiaries (collectively
"Employees"); (ii) has withheld all amounts required by law or by agreement to
be withheld from the wages, salaries, and other payments to Employees; (iii) is
not liable for any arrears of wages or any taxes or any penalty for failure to
comply with any of the foregoing; and (iv) (other than routine payments to be
made in the ordinary course of business and consistent with past practice) is
not liable for any payment to any trust or other fund or to any governmental or
administrative authority, with respect to unemployment compensation benefits,
social security or other benefits for Employees, except in each case, for
immaterial amounts.
(b) Except as set forth in Section 3.17(b) of the Disclosure Schedule, no
Employee Plans, employment or other agreements, or trusts exist that expressly
or impliedly make reference to, or provide that payments be made or benefits
provided, upon any "change in ownership or control," pursuant to which, with or
without notice, the lapse of time or action by the Company or any of its
Subsidiaries or by any Employee or other person, the payment, vesting, or
funding of compensation or benefits is or may be provided or accelerated, or a
reversion to the Company or any of its Subsidiaries of assets from an Employee
Plan may be prohibited, or an obligation to sell assets may arise, by reason of
or in connection with the consummation of a transaction contemplated by this
Agreement or the Stock Purchase Agreement (collectively, "Change of Control
Provisions").
(c) Except as set forth in Section 3.17(c) of the Disclosure Schedule,
neither the Company nor any of its Subsidiaries is involved in or, to the
knowledge of the Company, threatened with, any labor dispute, grievance, or
litigation relating to labor, safety or discrimination matters involving any
Employee, including, without limitation, charges of unfair labor practices or
discrimination complaints, which, if adversely determined, would, individually
or in the aggregate, have a Material Adverse Effect on the Company. Neither the
Company nor any of its Subsidiaries has engaged in any unfair labor practices
within the meaning of the National Labor Relations Act which would, individually
or in the aggregate, directly or indirectly, have a Material Adverse Effect on
the Company. Neither the Company nor any of its Subsidiaries is presently or has
been in the past a party to, or bound by, any collective bargaining agreement or
union contract with respect to Employees and no collective bargaining agreement
is being negotiated by the Company or any of its Subsidiaries.
SECTION 3.18. TAX RETURNS, AUDITS, AND LIABILITIES.
(a) Except as set forth in Section 3.18 of the Disclosure Schedule, each of
the Company and its Subsidiaries has (i) timely filed in accordance with all
applicable laws, all Returns (as defined below) required to be filed by them,
(ii) paid all Taxes (as defined below) shown to have become due pursuant to such
Returns, and (iii) paid all Taxes (other than those being contested in good
faith, all of which are disclosed in Section 3.18 of the Disclosure Schedule)
for which a notice of, or assessment or demand for, payment has been received or
which are otherwise due and payable, in each case other than failures to file or
pay that would not, in the aggregate, have a Material Adverse Effect on the
Company. All Returns filed by each of the Company and each of its Subsidiaries
with respect to Taxes were true and correct in all material respects as of the
date on which they were filed or as subsequently amended to the date hereof.
Except as set forth in Section 3.18 of the Disclosure Schedule, complete copies
of (i) consolidated federal Income Tax Returns (as defined below) for the
Company and its Subsidiaries and (ii) state and local Income Tax and other Tax
Returns of the Company and its Subsidiaries for each of the years ended April
30, 1995 and 1996, have heretofore been delivered or made available to
Transworld. Except as set forth in Section 3.18 of the Disclosure Schedule, (A)
there is no action, suit, proceeding, investigation, audit, claims or assessment
pending or proposed with respect to any liability for Tax that relates to the
Company or any of its Subsidiaries for which a material amount of Tax is at
issue, (B) all material amounts required to be collected or withheld by the
Company and each of its Subsidiaries with respect to Taxes have been duly
collected or withheld and
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any such amounts that are required to be remitted to any taxing authority have
been duly remitted, (C) no extension of time within which to file any material
Return that relates to the Company or any of its Subsidiaries has been requested
which Return has not since been filed, (D) there are no waivers or extensions of
any applicable statute of limitations for the assessment or collection of Taxes
with respect to any material Return that relates to the Company or any of its
Subsidiaries which remain in effect, (E) there are no tax rulings, requests for
rulings, or closing agreements relating to the Company or any of its
Subsidiaries which could materially affect their liability for Taxes for any
period after the Effective Time, (F) all material Federal, state, and local
Income Tax Returns of the Company and each of its Subsidiaries with respect to
taxable periods through the year ended April 30, 1992 have been examined and
closed or are Returns with respect to which the applicable statute of
limitations has expired without extension or waiver, (G) no power of attorney
has been granted by the Company or any of its Subsidiaries with respect to any
matter relating to Taxes of the Company and its Subsidiaries which is currently
in force, (H) no excess loss account (as referred to in Treasury Regulation
Section 1.1502-19) exists with respect to any Subsidiary of the Company, (I)
neither the Company nor any of its Subsidiaries has any deferred gain or loss
(i) arising from deferred intercompany transactions (as referred to in Treasury
Regulation Sections 1.1502-13 and 1.1502-13T), or (ii) with respect to the stock
or obligations of any other member of the Company's affiliated group (as
described in Treasury Regulation Sections 1.1502-14 and 1.1502-14T) and (J)
neither the Company nor any Subsidiary has filed a consent under Section 341(f)
of the Code or any comparable provision of state revenue statutes. The Company
has filed a consolidated Return for Federal Income Tax purposes on behalf of
itself and other members of the affiliated group (within the meaning of Section
1504 of the Code) of which it is the parent corporation since at least the date
on which each was incorporated. The accruals for deferred Federal income taxes
reflected in the audited financial statements of the Company for the year ended
April 30, 1996 are adequate in all material respects to cover any deferred
Federal Income Tax liability of the Company and its Subsidiaries determined in
accordance with generally accepted principles through the date thereof. The
accruals and reserves for Taxes in such financial statements are adequate in all
material respects to cover any liability of the Company and its Subsidiaries for
Taxes for periods through the date thereof.
(b) The Company has heretofore provided Transworld with complete copies
(or, if oral, written descriptions) of any Tax Sharing Arrangement to which the
Company or any of its Subsidiaries is a party.
(c) For purposes of this Agreement, except as otherwise expressly provided,
unless the context otherwise requires:
"Income Taxes" means any Federal, state, local, or foreign income, or
franchise Tax and in each instance any interest, penalties, or additions to
tax attributable to such Tax;
"Return" means any report, return, statement, estimate, declaration,
form, or other information required to be supplied to a taxing authority in
connection with Taxes;
"Tax" or "Taxes" means taxes of any kind, levies or other like
assessments, customs, duties, imposts, charges or, including, without
limitation, income, gross receipts, ad valorem, value added, excise, real
or personal property, asset, sales, use, license, payroll, transaction,
capital, net worth and franchise taxes, estimated taxes, withholding,
employment, social security, workers compensation, utility, severance,
production, unemployment compensation, occupation, premium, windfall
profits, transfer and gains taxes or other governmental taxes imposed or
payable to the United States, or any state, county, local, or foreign
government or subdivision or agency thereof, and in each instance such term
shall include any interest, penalties, or additions to tax attributable to
any such Tax; and
"Tax Sharing Arrangement" means any written or unwritten agreement or
arrangement for the allocation or payment of or with respect to Tax
liabilities or Tax benefits.
SECTION 3.19. FULL DISCLOSURE.
No statement herein or in the Disclosure Schedule hereto or in any
certificate delivered pursuant to the requirements of this Agreement by or on
behalf of the Company contains or will contain any untrue statement
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of a material fact or omits or will omit to state a material fact necessary in
order to make the statements herein or therein, in light of the circumstances
under which they were made, not misleading.
ARTICLE IV
COVENANTS OF THE COMPANY
SECTION 4.1. CONDUCT OF BUSINESS BY THE COMPANY PENDING THE MERGER.
The Company covenants and agrees that, between the date of this Agreement
and the Effective Time, except as otherwise contemplated by this Agreement or
unless Transworld shall otherwise give its prior written consent, the business
of the Company shall be conducted only in, and the Company shall not take any
action except in, the ordinary course of business and in a manner consistent
with past practice (including financial and other controls of the Company
instituted since the commencement of the current fiscal year), and the Company
will use its commercially reasonable efforts to continue its business
development activities, to maintain in effect all licenses, approvals, and
authorizations, to preserve intact its business organization and to maintain
existing relationships with licensors, licensees, suppliers, contractors,
distributors, customers, and others having business relationships with it, and
Transworld and Newco agree to cooperate reasonably, if required by the Company,
with the Company in connection with the foregoing. By way of amplification and
not limitation, except as contemplated by this Agreement, neither the Company
nor any of its Subsidiaries shall, between the date of this Agreement and the
Effective Time, do or agree to do any of the following without the prior written
consent of Transworld:
(a) amend or otherwise change its Certificate of Incorporation or By-Laws;
(b) issue, sell, pledge, dispose of, encumber, or authorize the issuance,
sale, pledge, disposition, or encumbrance of (i) any shares of capital stock of
any class, or any options, warrants, convertible securities, subscriptions, or
other rights of any kind to acquire any shares of capital stock, or any other
ownership interest or equity equivalent, of the Company or any of its
Subsidiaries (including, without limitation, stock appreciation rights) or any
other securities in respect of, in lieu of, or in substitution for any
outstanding shares (other than, in the case of the Company, shares of Company
Common Stock issuable pursuant to the exercise of outstanding convertible debt,
warrants, or Options as set forth in Section 3.3 of the Disclosure Schedule) or
grant or accelerate any right to convert or exercise or otherwise amend in any
respect any such outstanding convertible debt, warrants, or Options or (ii) any
material assets of the Company or any of its Subsidiaries, except for sales of
goods or services in the ordinary course of business and in a manner consistent
with past practice;
(c) declare, set aside, make, or pay any dividend or other distribution,
payable in cash, stock, property, or otherwise, with respect to any of its
capital stock, any other ownership interest or equity equivalent, or any other
securities, or reclassify, combine, split, subdivide, redeem, purchase, or
otherwise acquire, directly or indirectly, any such capital stock, ownership
interest, equity equivalent, or other securities, or adopt a plan of complete or
partial liquidation or resolutions providing for or authorizing such liquidation
or a dissolution, restructuring, recapitalization, or other reorganization or,
except to the extent required by fiduciary obligations under applicable law, a
merger or consolidation;
(d) (i) except in the ordinary course of business and consistent with past
practice, issue any debt securities or assume, guarantee, or endorse the
obligations of any other person, except for immaterial amounts; (ii) except in
the ordinary course of business and consistent with past practice, make any
loans, advances, or capital contributions to, or investments in, any other
person (other than to or in the Company or its Subsidiaries or customary loans
or advances to employees in amounts not material to the maker of such loan or
advance); (iii) pledge or otherwise encumber shares of capital stock of or other
ownership interests or equity equivalents in the Company or any of its
Subsidiaries; or (iv) except in the ordinary course of business and consistent
with past practice, mortgage or pledge any of its material assets, tangible or
intangible, or create or suffer to exist any material lien thereupon;
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(e) except as set forth in Section 4.3, enter into, adopt, establish, or
(except as may be required by law) amend or terminate any collective bargaining
agreement, bonus, profit sharing, thrift, compensation, severance, termination,
stock option, stock appreciation right, restricted stock, performance unit,
stock equivalent, stock purchase agreement, pension, retirement, deferred
compensation, employment, severance, or other employee benefit agreement, trust,
plan, fund, or other arrangement for the benefit or welfare of any director,
officer, or employee, or (except for normal increases in the ordinary course of
business consistent with past practice that, in the aggregate, do not result in
a material increase in benefits or compensation expenses) increase in any manner
the compensation or benefits of any director, officer, or employee or pay any
benefit not required by any plan or arrangement as in effect as of the date
hereof (including, without limitation, the granting of stock appreciation rights
or performance units), increase the amount or change in any material respect the
terms of any insurance covering directors or officers;
(f) except as set forth in Section 4.1(f) to the Disclosure Schedule,
acquire, sell, license, lease, or dispose of any assets outside the ordinary
course of business which in the aggregate are material to the Company or enter
into any commitment or transaction outside the ordinary course of business
consistent with past practice;
(g) change any of the accounting principles or practices used by it;
(h) (i) acquire (by merger, consolidation, or acquisition of stock or
assets) any corporation, partnership, or other business organization or division
thereof or any interest therein; (ii) enter into any partnership, joint venture,
or similar agreement or arrangement or any contract or agreement other than in
the ordinary course of business consistent with past practice; (iii) authorize
any new capital expenditure(s) which, individually, is in excess of $50,000 or,
in the aggregate, are in excess of $100,000; or (iv) amend or modify any
material existing agreement, arrangement, or understanding which would increase
the obligations or impair or diminish the rights of the Company or any of its
Subsidiaries in any material respect;
(i) except as set forth in Section 4.1(i) to the Disclosure Schedule, make
any tax election or settlement or compromise any income tax liability material
to the Company or its Subsidiaries;
(j) except as set forth in Section 4.1(j) to the Disclosure Schedule, pay,
discharge, or satisfy any claims, liabilities, or obligations (absolute,
accrued, asserted, or unasserted, contingent or otherwise), other than the
payment, discharge, or satisfaction in the ordinary course of business
consistent with past practice or in accordance with their terms, of liabilities
reflected or reserved against in, or contemplated by, the consolidated financial
statements (or the notes thereto) of the Company and its consolidated
Subsidiaries or incurred in the ordinary course of business consistent with past
practice, except for fees and expenses (including legal fees and expenses)
incurred in connection with this Agreement, the Stock Purchase Agreement and the
Registration Rights Agreement and the transactions contemplated hereby and
thereby and except as required by applicable law.
(k) except as set forth in Section 4.1(k) to the Disclosure Schedule, enter
into (in writing or otherwise) any contract, agreement, commitment, arrangement,
or understanding to do any of the foregoing; or
(l) take, or agree to take, any action which would make any representation
or warranty untrue or incorrect in any material respect.
SECTION 4.2. NO SOLICITATION OF TRANSACTIONS.
From and after the date hereof through the earlier to occur of the
Effective Date and the date of termination of this Agreement, the Company shall
not, directly or indirectly, through any officer, director, agent, or otherwise,
solicit, initiate, or encourage submission of, proposals or offers from any
person relating to any acquisition or purchase of all or a substantial portion
of the assets of, or any equity interest in, the Company or any of its
Subsidiaries or any business combination with the Company or any of its
Subsidiaries or, except to the extent required by fiduciary obligations under
applicable law, participate in any negotiations regarding, or furnish to any
other person any information with respect to, or encourage, any effort or
attempt by any other person to do or seek any of the foregoing; provided,
however, that nothing contained in this Section 4.2 shall prohibit the Company
or its Board of Directors from taking and disclosing to the Company's
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stockholders a position with respect to a tender offer by a third party pursuant
to Rules 14d-9 and 14e-2(a) promulgated under the Exchange Act or from making
such other disclosure to the Company's stockholders which, in the judgment of
the Board of Directors with advice of counsel, may be required under applicable
law. The Company will immediately cease and cause to be terminated any existing
activities, discussions, or negotiations with any parties conducted heretofore
with respect to any of the foregoing, and shall immediately demand the return or
destruction of any non-public information concerning the Company distributed to
other persons for the purpose of soliciting or encouraging any of the foregoing;
provided, however, that nothing in this sentence shall restrict the Company to
the extent required by fiduciary obligations under applicable law from
participating in any activities, discussions, or negotiations with any such
parties. The Company shall as soon as practicable (a) notify Transworld if any
such proposal or offer, or any inquiry or contact with any person with respect
thereto, is made and (b) disclose to Transworld the terms and conditions of such
proposal or offer and the identity of the offeror or potential offeror.
SECTION 4.3. OPTION PLANS, CONVERTIBLE DEBT, OPTIONS, AND WARRANTS.
(a) The Company shall take such action, if any, as may be necessary to
terminate the Option Plans at the Effective Time and shall take the actions
contemplated by Section 1.9(e).
(b) The Company shall use commercially reasonable efforts to amend the
terms of the outstanding convertible debt of the Company (as disclosed in
Section 3.3 of the Disclosure Schedule) in order to provide that such
convertible debt will cease to be convertible into equity of the Company on and
after the Effective Time.
(c) The Company shall take such action, if any, as may be necessary to
cause the outstanding Options and warrants (as disclosed in Section 3.3 of the
Disclosure Schedule) to be cancelled and settled in the manner provided in
Section 1.9(b).
SECTION 4.4. STATE TAKEOVER STATUTES.
The Company, will, upon the request of Transworld, take all reasonable
steps to (i) exempt the Merger from the requirements of any state takeover law
by action of the Company's Board of Directors or otherwise and (ii) assist in
any challenge by Transworld or Newco to the validity or applicability to the
Merger of any state takeover law, it being understood that the Company may
condition any such action on the consummation of the Merger. The phrase "state
takeover law" does not include the New York State statute relating to the
taxation of corporate transactions.
SECTION 4.5. CONSENTS AND APPROVALS.
The Company shall use commercially reasonable efforts to obtain the
consents and approvals required with respect to the items described in Sections
3.5(a) and (b) of the Disclosure Schedule.
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ARTICLE V
COVENANTS OF TRANSWORLD AND NEWCO
SECTION 5.1. DIRECTORS' AND OFFICERS' INDEMNIFICATION.
From and after the Effective Time, Transworld and the Surviving Corporation
shall jointly and severally (to the same extent as the Company currently
indemnifies its officers and directors pursuant to the Company's Certificate of
Incorporation and By-Laws as in effect on the date hereof), indemnify, defend,
and hold harmless the present officers and directors (the "Indemnified Parties")
of the Company against all losses, claims, damages, or liabilities ("Claims")
arising out of actions or omissions occurring at or prior to the Effective Time
that are based on or arising out of the fact that such person is or was a
director or officer of the Company prior to the Effective Time, including,
without limitation, any Claim arising out of this Agreement, the Stock Purchase
Agreement, or the Registration Rights Agreement or the transactions contemplated
hereby and thereby.
ARTICLE VI
ADDITIONAL AGREEMENTS OF THE PARTIES
SECTION 6.1. PROXY MATERIAL.
The Company shall prepare and, subject to the prior consent of Transworld,
file with the SEC preliminary proxy material relating to the transactions
contemplated by this Agreement (the "Preliminary Proxy Material") as soon as
reasonably practicable. The Company shall use its best efforts to respond to the
comments of the SEC, provide a copy of all amended Preliminary Proxy Material to
Transworld, file such amended Preliminary Proxy Material with the SEC with
Transworld's prior consent, and cause the Definitive Proxy Material to be mailed
to the stockholders of the Company. Each of the Company, Newco, and Transworld
shall notify the other parties promptly of the receipt of any comments of the
SEC and of any request by the SEC for amendments or supplements to the
Preliminary Proxy Material or the Definitive Proxy Material, or for additional
information. Each of the Company, Newco, and Transworld shall supply the other
parties with copies of all correspondence with the SEC with respect to any of
the foregoing filings. If at any time prior to the Company Stockholders Meeting,
any event should occur relating to the Company or any of its officers,
directors, or affiliates which should be described in an amendment or supplement
to the Definitive Proxy Material, the Company shall promptly inform Transworld.
If at any time prior to the Company Stockholders Meeting, any event should occur
relating to Transworld or any of its officers, directors, or affiliates which
should be described in an amendment or supplement to the Definitive Proxy
Material, Transworld shall inform the Company. Whenever any event occurs which
should be described in an amendment or supplement to the Definitive Proxy
Material, the Company, Newco, and Transworld shall, upon learning of such event,
cooperate with each other to promptly file and clear with the SEC and, if
applicable, mail such amendment or supplement to the stockholders of the
Company.
SECTION 6.2. MEETING OF STOCKHOLDERS OF THE COMPANY.
The Company shall as promptly as reasonably practicable take all action
necessary in accordance with Delaware Law and its Certificate of Incorporation
and By-Laws duly to call, convene, and hold the Company Stockholders Meeting.
The Company shall, subject to the fiduciary obligations of the Company's
directors under applicable law as advised by outside counsel, use reasonable
efforts to solicit from stockholders of the Company proxies in favor of the
Merger and shall take such other action as is reasonably necessary to secure the
vote of stockholders required by Delaware Law to effect the Merger. Transworld
shall vote, or cause to be voted, in favor of the Merger all shares of Company
Common Stock beneficially owned by it.
SECTION 6.3. HSR ACT.
Each of Transworld and the Company shall promptly following the date
hereof, file duly completed and executed Pre-Merger Notification and Report
Forms as required pursuant to the HSR Act and use its best
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efforts to comply promptly with any requests made by the Federal Trade
Commission or the Department of Justice pursuant to the HSR Act.
SECTION 6.4. ACCESS TO INFORMATION; CONFIDENTIALITY.
(a) Subject to applicable law, from the date hereof to the Effective Time,
the Company shall afford the officers, employees, and authorized agents of
Transworld reasonable access, during normal business hours and upon reasonable
notice, to its officers, employees, authorized agents, properties, offices,
books, and records and shall furnish Transworld with all financial and operating
data and other information regarding the assets, properties, goodwill, and
business of the Company as Transworld may from time to time reasonably request.
(b) In the event of the termination of this Agreement and the Stock
Purchase Agreement, Transworld and Newco shall, and shall cause their respective
affiliates and their officers, directors, employees, and agents to, (i) return
promptly every document furnished to them by the Company or any of its officers,
directors, employees, and agents in connection with the transactions
contemplated hereby and any copies thereof, and shall use its best efforts to
cause others to whom such documents may have been furnished promptly to return
such documents and any copies thereof any of them may have made, other than
documents filed with the SEC or otherwise publicly available and (ii) destroy
promptly all documents created by them from any data, information, or document
furnished by the Company or any of its officers, directors, employees, and
agents in connection with the transactions contemplated hereby and any copies
thereof, and shall use its best efforts to cause others to whom such documents
may have been furnished promptly to destroy the same and any copies thereof,
other than documents created from data, information or documents filed with the
SEC or otherwise publicly available. The terms of the Confidentiality Agreement
dated October 23, 1996 among Hyperion Partners II L.P., the Company, and
Transworld shall survive the termination hereof.
(c) No investigation pursuant to this Section 6.4 or other investigation
shall affect any representations or warranties of the parties herein or the
conditions to the obligations of the parties hereto.
SECTION 6.5. NOTIFICATION OF CERTAIN MATTERS.
The Company shall give prompt notice to Transworld, and Transworld shall
give prompt notice to the Company, of (i) the occurrence, or non-occurrence, of
any event, the occurrence or non-occurrence of which would be likely to cause
any representation or warranty of such party contained in this Agreement to be
untrue or inaccurate at or prior to the Effective Time and (ii) any failure of
the Company, Transworld, or Newco, as the case may be, to comply with or satisfy
any covenant, condition or agreement to be complied with or satisfied by it
hereunder; provided, however, that the delivery of any notice pursuant to this
Section 6.5 shall not limit or otherwise affect the remedies available hereunder
to the party receiving such notice.
SECTION 6.6. FURTHER ACTION.
Upon the terms and subject to the conditions hereof, and subject, in the
case of the Company, to the exercise by the Board of Directors of the Company of
its fiduciary obligations, each of the parties hereto shall use all reasonable
efforts to take, or cause to be taken, all actions and to do, or cause to be
done, all other things necessary, proper, or advisable to consummate and make
effective as promptly as practicable the transactions contemplated by this
Agreement and to obtain in a timely manner all necessary waivers, consents, and
approvals and to effect all necessary registrations and filings, including, but
not limited to: (i) reasonable efforts to lift or rescind any injunction or
restraining order or other order which may be entered; (ii) cooperation in
reasonable tax planning measures for the Company and the Surviving Corporation
in light of the transactions contemplated hereby so long as no action shall be
required to be taken which would result in adverse tax consequences to the
stockholders of the Company or, if the Merger does not occur, to the Company;
and (iii) reasonable cooperation in respect of the filing of the Definitive
Proxy Material and any amendment or supplement thereto and other filings to be
made in connection with the Merger and the transactions contemplated hereby.
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SECTION 6.7. PUBLIC ANNOUNCEMENTS.
Transworld and the Company shall consult with each other before issuing any
press release or otherwise making any public statements with respect to the
Merger and shall not issue any such press release or make any such public
statement prior to such consultation, except as may be required by law or by the
NASDAQ Stock Market.
SECTION 6.8. GOVERNMENT COMPLIANCE.
Each of the Company, Transworld, and Newco agrees promptly to effect all
necessary registrations, filings, applications, and submissions of information
requested by governmental authorities.
ARTICLE VII
CONDITIONS OF THE MERGER
SECTION 7.1. CONDITIONS TO OBLIGATIONS OF EACH PARTY TO EFFECT THE MERGER.
The respective obligations of each party to effect the Merger shall be
subject to the fulfillment at or prior to the Effective Time of the following
conditions:
(a) This Agreement shall have been approved and adopted by the requisite
vote of the stockholders of the Company in accordance with the Company's
Certificate of Incorporation and Delaware Law.
(b) The Company and Transworld shall have received evidence, in form and
substance reasonably satisfactory to Transworld, that such licenses, permits,
consents, approvals, authorizations, qualifications, orders of governmental
authorities, and third parties as are required in connection with the
consummation of the transactions contemplated hereby or necessary to conduct the
business of the Company and its Subsidiaries as presently conducted have been
obtained and are in full force and effect other than those which, if not
obtained, would not, either individually or in the aggregate, have a Material
Adverse Effect on Transworld or the Company.
(c) Any applicable waiting period under the HSR Act shall have expired or
been terminated.
(d) At the Effective Time, there shall be no effective injunction, writ, or
preliminary restraining order or any order of any nature issued by a court or
governmental agency of competent jurisdiction directing that the transactions
provided for herein not be consummated as herein provided.
(e) The Company shall have received from NatWest a written opinion
addressed to the Company, for inclusion in the Definitive Proxy Material, that
the Merger Consideration is fair, from a financial point of view, to the
stockholders of the Company.
SECTION 7.2.ADDITIONAL CONDITIONS TO OBLIGATION OF THE COMPANY TO EFFECT THE
MERGER.
The obligation of the Company to effect the Merger is also subject to each
of the following conditions:
(a) Each of Transworld and Newco shall in all material respects have
performed each obligation to be performed by it hereunder on or prior to the
Effective Time.
(b) The representations and warranties of each of Transworld and Newco set
forth in this Agreement shall be true and correct in all material respects at
and as of the Effective Time as if made at and as of such time, except for
changes contemplated by this Agreement and except to the extent that any such
representation or warranty is made as of a specified date, in which case such
representation or warranty shall have been true and correct in all material
respects as of such date.
(c) The Company shall have received a certificate of Transworld, dated the
Closing Date, signed by the Chief Executive Officer of Transworld, to the effect
that, to the best of the knowledge, information, and belief of such officer, the
conditions specified in Section 7.2(a) and (b) have been fulfilled.
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(d) The Company shall have received an opinion from Proskauer Rose Goetz &
Mendelsohn LLP, counsel to Transworld and Newco, dated the Closing Date, in form
and substance reasonably satisfactory to the Company as to (i) the valid
existence and good standing of Transworld and Newco in their respective
jurisdictions of incorporation, (ii) the corporate power and authority of
Transworld and Newco to own their properties and to conduct their business,
(iii) the corporate power and authority of Transworld and Newco to execute and
deliver this Agreement and the due authorization thereof, (iv) the due execution
and delivery and enforceability of this Agreement, (v) the absence of conflicts
with the charter, bylaws or material agreements of Transworld and Newco, (vi)
the absence of material consents or approvals required to consummate the
transactions contemplated by this Agreement, and (vii) the absence of litigation
regarding the transaction.
(e) All actions, proceedings, instruments, and documents required to carry
out the transactions contemplated hereby or incidental hereto and all other
related legal matters shall have been reasonably satisfactory to and approved by
counsel for the Company and such counsel shall have been furnished with such
certified copies of such corporate actions and proceedings and such other
instruments and documents as it shall have reasonably requested.
SECTION 7.3.ADDITIONAL CONDITIONS TO OBLIGATIONS OF TRANSWORLD AND NEWCO TO
EFFECT THE MERGER.
The obligations of Transworld and Newco to effect the Merger are also
subject to each of the following conditions:
(a) The Company shall in all material respects have performed each
obligation to be performed by it hereunder on or prior to the Effective Time.
(b) The representations and warranties of the Company set forth in this
Agreement shall be true and correct in all material respects at and as of the
Effective Time as if made at and as of such time, except for changes
contemplated by this Agreement and except to the extent that any such
representation or warranty is made as of a specified date, in which case such
representation or warranty shall have been true and correct in all material
respects as of such date.
(c) Transworld shall have received a certificate of the Company, dated the
Closing Date, signed by the Chief Executive Officer of the Company, to the
effect that, to the best of the knowledge, information and belief of such
officer, the conditions specified in paragraphs (a) and (b) of this Section 7.3
have been fulfilled.
(d) There shall not have been any action taken, or any statute, rule,
regulation, or order enacted, promulgated, or issued or deemed applicable to the
Merger by any Federal or state government or governmental authority or court,
which would (i) prohibit the Surviving Corporation's or Transworld's ownership
or operation of all or a material portion of the Company's business or assets,
or compel the Surviving Corporation or Transworld to dispose of or hold separate
all or a material portion of the Company's business or assets, as a result of
the Merger; (ii) render Newco unable to consummate the Merger; (iii) make such
consummation illegal; or (iv) impose or confirm material limitations on the
ability of Transworld effectively to exercise full rights of ownership of shares
of the capital stock of the Surviving Corporation, including without limitation,
the right to vote any such shares on all matters properly presented to the
stockholders of the Surviving Corporation, and no such action shall have been
taken or any such statute, rule, regulation, or order enacted, promulgated,
issued, or deemed applicable to the Merger which in the reasonable judgment of
Transworld will produce such result.
(e) Transworld and Newco shall have received an opinion from McDermott,
Will & Emery, counsel to the Company, dated the Closing Date, in form and
substance reasonably satisfactory to Transworld and Newco, as to (i) the valid
existence and good standing of the Company and its Subsidiaries in their
respective jurisdictions of incorporation and qualification and good standing of
the Company and its Subsidiaries in certain foreign jurisdictions, (ii) the
corporate power and authority of the Company and its Subsidiaries to own their
properties and to conduct their business, (iii) the corporate power and
authority of the Company to execute and deliver this Agreement and the due
authorization thereof, (iv) the due execution and delivery and enforceability of
this Agreement, (v) the absence of conflicts with the Company's charter, bylaws
or material
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agreements, (vi) the absence of material consents or approvals required to
consummate the transactions contemplated by this Agreement, and (vii) the
absence of litigation regarding the transaction.
(f) All actions, proceedings, instruments, and documents required to carry
out the transactions contemplated hereby or incidental hereto and all other
related legal matters shall have been reasonably satisfactory to and approved by
counsel for Transworld and such counsel shall have been furnished with such
certified copies of such corporate actions and proceedings and such other
instruments and documents as it shall have reasonably requested.
(g) On or prior to the Closing Date, the Option Plans shall have been
terminated or arrangements for termination reasonably acceptable to Transworld
shall have been made.
(h) At or prior to the Effective Time that certain Stipulation of Partial
Settlement of the consolidated class actions under the caption In re Health
Management, Inc. Securities Litigation, Master File No. 96 Civ. 0889 (ADS) shall
have been amended to provide for the settlement of such actions for an aggregate
cash payment of $7.2 million at the Effective Time, and such settlement shall
have been finally approved by the United States District Court.
(i) At or prior to December 12, 1996, (A) Transworld's lenders shall have
completed their due diligence investigation of the Company and the transactions
contemplated by this Agreement, the Stock Purchase Agreement, and the
Registration Rights Agreement, and such due diligence investigation and such
transactions shall be satisfactory in all respects to such lenders, (B) such
lenders shall have consented to the Merger and the Stock Purchase, and (C) such
lenders shall have agreed to amend Transworld's credit facility in order to
lend, and shall have agreed to lend, to Transworld the funds necessary for
Transworld to consummate the Merger and the Stock Purchase, all in the sole and
absolute discretion of such lenders.
(j) At or prior to the Effective Time, the Company shall have received
waivers, in form and substance satisfactory to Transworld, from each employee,
director, officer, or consultant who is a party to any of the agreements listed
in Section 3.17(b) of the Disclosure Schedule and who will be offered employment
with the Surviving Corporation after the Effective Time, of his or her rights
under such Change of Control Provisions in such agreements.
(k) As of the Effective Time, the opinion of UBS Securities LLC referred to
in Section 2.9 hereof shall not have been modified or withdrawn.
(l) At or prior to the Effective Time, the outstanding convertible debt of
the Company (as disclosed in Section 3.3 of the Disclosure Schedule) shall no
longer be outstanding or the terms thereof shall have been amended to provide
that such convertible debt is no longer convertible into equity of the Company
on and after the Effective Time.
(m) At or prior to the Effective Time, the Company shall have received all
the consents or approvals required with respect to the items described in
Sections 3.5(a) and (b) of the Disclosure Schedule, except where the failure to
obtain such consents and approvals, individually or in the aggregate, would not
have a Material Adverse Effect on the Company.
ARTICLE VIII
TERMINATION, AMENDMENT, AND WAIVER
SECTION 8.1. TERMINATION.
(a) This Agreement may be terminated at any time prior to the Effective
Time, whether prior to or after approval hereof by the stockholders of the
Company:
(i) By mutual written consent duly authorized by the Boards of
Directors of Transworld and the Company;
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(ii) By the Board of Directors of the Company acting on behalf of the
Company, if (x) a corporation, partnership, person, or other entity or
group shall have made a bona fide proposal that the Board of Directors
believes, in good faith after consultation with its outside legal counsel
and financial advisors, is more favorable to the Company's stockholders
than the Merger (a "Superior Proposal") and (y) Newco does not make, within
five business days of Newco's receiving notice of such third-party
proposal, an offer that the Board of Directors believes, in good faith
after consultation with its outside legal counsel and financial advisors,
is at least as favorable to the Company's stockholders as such Superior
Proposal;
(iii) By Transworld if the Board of Directors of the Company shall
have withdrawn or modified in a manner adverse to Transworld or Newco its
approval or recommendation of this Agreement or the Merger or shall have
approved or recommended another offer or proposal;
(iv) By either Transworld or the Company if the Merger shall not have
been consummated by June 30, 1997, unless the absence of such consummation
shall be due to the failure of the party seeking to terminate this
Agreement (or its subsidiaries or affiliates) to perform its obligations
under this Agreement required to be performed by it at or prior to the
Effective Time;
(v) By either Transworld or the Company, if at the Company
Stockholders Meeting (including any adjournment thereof), the stockholders
of the Company fail to approve and adopt this Agreement and the Merger;
(vi) By either Transworld or the Company if a United States or state
governmental authority, agency, or commission or United States or state
court of competent jurisdiction shall have issued an order, decree, or
ruling or taken any other action (which order, decree, ruling, or action
the parties hereto shall use their best efforts to lift), in each case
permanently restraining, enjoining, or otherwise prohibiting the Merger,
and such order, decree, ruling, or action shall have become final and non-
appealable; or
(vii) (A) By Transworld, if the Company shall breach or fail to
perform in any material respect any of its material covenants or agreements
contained herein, or (B) by the Company, if Transworld or Newco shall
breach or fail to perform in any material respect any of their respective
material covenants or agreements contained herein.
(b) This Agreement may be terminated by Transworld, at any time prior to 10
days after the Schedules Delivery Date (as defined in Section 9.11), if
Transworld in its sole discretion is not satisfied with the disclosures made in
the Deferred Schedules (as defined in Section 9.11) when delivered.
(c) This Agreement may be terminated by Transworld at any time on or prior
to December 16, 1996 if the condition set forth in Section 7.3(i) shall not have
been satisfied.
SECTION 8.2. EFFECT OF TERMINATION.
In the event of termination of this Agreement as provided in Section 8.1,
there shall be no liability or further obligation on the part of any party
hereto except (i) as set forth in Sections 8.3 and 9.1 hereof and (ii) nothing
herein shall relieve any party from liability for any breach of this Agreement.
SECTION 8.3. FEES AND EXPENSES.
(a) If this Agreement is terminated pursuant to Sections 8.1(a)(ii),
8.1(a)(iii), 8.1(a)(iv), 8.1(a)(v), 8.1(a)(vii)(A), or 8.1(b), and neither
Transworld nor Newco is in material breach of its material covenants and
agreements under this Agreement, the Company shall reimburse each of Transworld,
Newco, and their respective affiliates (not later than five days after
submission of statements therefor itemizing in reasonable detail such fees and
expenses) for all reasonable out-of-pocket expenses and fees (including, without
limitation, bank commitment fees, all reasonable fees and expenses of counsel,
accountants, experts, financial advisors, and consultants to Transworld and
Newco and their lenders and financial advisors) incurred or required to be paid
by it or them or on its or their behalf in connection with all transactions
contemplated by
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this Agreement, the Stock Purchase Agreement, or the purchase by Transworld of
certain indebtedness of the Company.
(b) If this Agreement is terminated by the Company pursuant to Section
8.1(a)(vii)(B) and the Company is not in material breach of its material
covenants and agreements under this Agreement, Transworld shall reimburse the
Company (not later than five days after submission of statements therefor
itemizing in reasonable detail such fees and expenses) for all reasonable
out-of-pocket expenses and fees (including, without limitation, filing fees, all
reasonable fees and expenses of printers, all reasonable fees and expenses of
NatWest and its counsel, and all reasonable fees and expenses of counsel,
accountants, experts, and consultants to the Company) incurred or required to be
paid by the Company or on its behalf in connection with the Merger and the
consummation of all transactions contemplated by this Agreement.
(c) Except as provided otherwise in Sections 8.3(a) and 8.3(b) hereof, all
costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party incurring such
expenses, and the costs of printing the Preliminary Proxy Material, Definitive
Proxy Material, and any other filings to be printed, and in each case all
exhibits, amendments, or supplements thereto shall be paid by the Company.
SECTION 8.4. AMENDMENT.
This Agreement may be amended by the parties hereto by action taken by or
on behalf of their respective Boards of Directors at any time prior to the
Effective Time; provided, however, that, after approval of the Merger by the
stockholders of the Company, no amendment may be made which would change the
MERGER CONSIDERATIONinto which each share of Company Common Stock shall be
converted upon consummation of the Merger. This Agreement may not be amended
except by an instrument in writing signed by the parties hereto.
SECTION 8.5. WAIVER.
At any time prior to the Effective Time, any party hereto may (a) extend
the time for the performance of any of the obligations or other acts of the
other parties hereto, (b) waive any inaccuracies in the representations and
warranties contained herein or in any document delivered pursuant hereto, and
(c) waive compliance with any of the agreements or conditions contained herein.
Any such extension or waiver shall be valid if set forth in an instrument in
writing signed by the parties hereto. The failure of any party hereto to assert
any of its rights hereunder shall not constitute a waiver of such rights.
ARTICLE IX
GENERAL PROVISIONS
SECTION 9.1. SURVIVAL OF REPRESENTATIONS, WARRANTIES, AND AGREEMENTS.
The representations, warranties, and agreements in this Agreement shall
terminate at the Effective Time or upon the termination of this Agreement
pursuant to Section 8.1, as the case may be, except that the agreements set
forth in Sections 1.7, 1.8, 1.9, 5.1, 6.7, 9.1, and 9.7 shall survive the
Effective Time indefinitely and those set forth in Sections 6.4(b) and (c), 6.7,
8.2, 8.3, 9.1, and 9.7 shall survive termination indefinitely.
SECTION 9.2. NOTICES.
All notices and other communications given or made pursuant hereto shall be
in writing and shall be deemed to have been duly given or made as of the date
delivered, if delivered personally or mailed by registered or certified mail
(postage prepaid, return receipt requested) or sent by Federal Express or
similar
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overnight delivery or courier service or by telecopy to the parties at the
following addresses (or at such other address for a party as shall be specified
by like notice):
(a) if to Transworld or Newco:
75 Terminal Avenue
Clark, New Jersey 07066
Attention: Vincent J. Caruso
with a copy to:
Proskauer Rose Goetz & Mendelsohn LLP
1585 Broadway
New York, New York 10036
Attention: Bruce L. Lieb, Esq.
(b) if to the Company:
1371-A Abbott Court
Buffalo Grove, Illinois 60089
Attention: W. James Nicol
with a copy to:
McDermott, Will & Emery
50 Rockefeller Plaza
New York, New York 10020
Attention: Cheryl V. Reicin, Esq.
SECTION 9.3. CERTAIN DEFINITIONS.
For purposes of this Agreement, the term:
(a) "affiliate" of a person means a person that directly or indirectly,
through one or more intermediaries, controls, is controlled by, or is under
common control with, the first mentioned person;
(b) "beneficial owner" has the meaning in Rule 13d-3 under the Exchange
Act;
(c) "control" (including the terms "controlled by" and "under common
control with") means the possession, directly or indirectly or as trustee or
executor, of the power to direct or cause the direction of the management
policies of a person, whether through the ownership of stock, as trustee or
executor, by contract or credit arrangement or otherwise; and
(d) "person" means an individual, corporation, partnership, association,
trust, or any unincorporated organization.
SECTION 9.4. HEADINGS.
The headings contained in this Agreement and the Disclosure Schedule are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement or the Disclosure Schedule.
SECTION 9.5. ENTIRE AGREEMENT.
This Agreement constitutes the entire agreement and supersedes all prior
agreements and undertakings, both written and oral, among the parties, or any of
them, with respect to the subject matter hereof and, except as otherwise
expressly provided herein, is not intended to confer upon any other person any
rights or remedies hereunder.
SECTION 9.6. PARTIES IN INTEREST; ASSIGNMENT.
This Agreement shall not be assigned by operation of law or otherwise,
except that Transworld and Newco may assign all or any of their rights hereunder
to a wholly-owned subsidiary of Transworld or of Newco
27
<PAGE> 131
or to their lenders; provided, however, that no such assignment shall relieve
the assigning party of its obligations hereunder. This Agreement shall be
binding upon and inure solely to the benefit of each party hereto and such
permitted assigns of Transworld and Newco, and nothing in this Agreement,
express or implied, is intended to confer upon any other person any rights or
remedies of any nature whatsoever under this Agreement, except that any of the
Indemnified Parties shall be entitled after the Effective Time to enforce the
provisions of Section 5.1.
SECTION 9.7. GOVERNING LAW.
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of New York applicable to contracts executed in and to be
performed in that State, without regard to conflicts of laws, except that
Delaware Law shall apply to the Merger.
SECTION 9.8. COUNTERPARTS.
This Agreement may be executed in one or more counterparts, and by the
different parties hereto in separate counterparts, each of which when executed
shall be deemed to be an original but all of which taken together shall
constitute one and the same agreement.
SECTION 9.9. SEVERABILITY.
If any provision of this Agreement is invalid, illegal, or unenforceable,
the balance of this Agreement shall remain in effect, and if any provision is
inapplicable to any person or circumstance, it shall nevertheless remain
applicable to all other persons and circumstances.
SECTION 9.10. SPECIFIC PERFORMANCE.
Since a breach of the provisions of this Agreement could not adequately be
compensated by money damages, any party shall be entitled, in addition to any
other right or remedy available to it, to an injunction restraining such breach
or a threatened breach and to specific performance of any such provision of this
Agreement, and in either case no bond or other security shall be required in
connection therewith, and the parties hereby consent to the issuance of such
injunction and to the ordering of specific performance.
SECTION 9.11. SCHEDULES.
It is acknowledged that the schedules listed in Section 9.11 of the
Disclosure Schedule are not being delivered in their entirety by the Company on
the date hereof (collectively, the "Deferred Schedules" and each, a "Deferred
Schedule"). The Company will use all reasonable best efforts promptly to deliver
to Transworld and Newco each Deferred Schedule, and the Company will have
delivered to Transworld and Newco all of the Deferred Schedules no later than 10
days after the date hereof. The date on which the last of the Deferred Schedules
is delivered to Transworld and Newco is referred to as the "Schedules Delivery
Date".
28
<PAGE> 132
IN WITNESS WHEREOF, Transworld, Newco, and the Company have caused this
Agreement to be executed as of the date first written above by their respective
officers thereunto duly authorized.
TRANSWORLD HOME HEALTH CARE, INC.
By /s/ VINCENT J. CARUSO
------------------------------------
Name: Vincent J. Caruso
Title: Executive Vice President
IMH ACQUISITION CORP.
By /s/ VINCENT J. CARUSO
------------------------------------
Name: Vincent J. Caruso
Title: Executive Vice President
HEALTH MANAGEMENT, INC.
By /s/ WM. JAMES NICOL
------------------------------------
Name: Wm. James Nicol
Title: President and Chief
Executive Officer
29
<PAGE> 133
TRANSWORLD HOME HEALTHCARE, INC.
75 TERMINAL AVENUE
CLARK, NEW JERSEY 07066
November 27, 1996
Ladies and Gentlemen:
Reference is made to the Agreement and Plan of Merger, dated November
13, 1996, among Transworld Home HealthCare, Inc., IMH Acquisition Corp., and
Health Management, Inc. (the "Merger Agreement") (terms defined in the Merger
Agreement shall have their defined meanings herein, unless otherwise defined
herein) and to the Stock Purchase Agreement, dated as of November 13, 1996
between Health Management, Inc. and Transworld Home HealthCare, Inc. (the
"Stock Purchase Agreement").
Notwithstanding the provisions of the Merger Agreement and the Stock
Purchase Agreement, the parties hereto agree that the Merger Agreement and the
Stock Purchase Agreement may be terminated by Transworld, at any time on or
prior to December 9, 1996, if Transworld, in its sole discretion, is not
satisfied with the disclosures made in the Deferred Schedules.
Except to the extent amended hereby, the Merger Agreement and the Stock
Purchase Agreement shall remain in full force and effect and nothing herein
shall affect, or be deemed to be a waiver of, the other terms and provisions of
the Merger Agreement or the Stock Purchase Agreement, including without
limitation the other termination provisions thereof.
If this letter correctly sets forth our understanding with respect to
the foregoing matter, kindly execute and return the enclosed copy of this
letter to evidence our binding agreement.
Very truly yours,
TRANSWORLD HOME HEALTHCARE, INC.
By Vincent J. Caruso
-------------------------------
Name: Vincent J. Caruso
Title: EVP
IMH ACQUISITION CORP.
By Vincent J. Caruso
-------------------------------
Name: Vincent J. Caruso
Title: EVP
Agreed to:
HEALTH MANAGEMENT, INC.
By Paul S. Juraniez
--------------------
Name: Paul S. Juraniez
Title: CFO
<PAGE> 134
TRANSWORLD HOME HEALTHCARE, INC.
75 TERMINAL AVENUE
CLARK, NEW JERSEY 07666
As of December 12, 1996
Ladies and Gentlemen:
Reference is made to the Agreement and Plan of Merger, dated November 13,
1996, as amended by a letter of agreement, dated November 27, 1996, among
Transworld Home Healthcare, Inc. ("Transworld"), IMH Acquisition Corp., and
Health Management, Inc. (the "Merger Agreement") and to the Stock Purchase
Agreement, dated as of November 13, 1996, as amended by a letter agreement,
dated November 27, 1996, between Health Management, Inc. and Transworld Home
Healthcare, Inc. (the "Stock Purchase Agreement").
The parties hereto agree as follows:
1. Section 7.3(i) of the Merger Agreement is hereby amended by changing the
date "December 12, 1996" to "December 19, 1996".
2. Section 8.1(c) of the Merger Agreement is hereby amended by changing the
date "December 16, 1996" to December 23, 1996", with the parties acknowledging
that, unless such date is further extended by agreement of the parties, the
condition to Transworld's obligation to close the Stock Purchase Agreement and
the Merger Agreement set forth in Section 7.3(i) of the Merger Agreement shall
be deemed to have been waived by Transworld with respect to such agreements if
Transworld has not given notice of termination of such agreements on or prior to
December 23, 1996.
Except to the extent amended hereby, the Merger Agreement and the Stock
Purchase Agreement shall remain in full force and effect and nothing herein
shall affect, or be deemed to be a waiver of, the other terms and provisions of
the Merger Agreement or the Stock Purchase Agreement, including without
limitation the other termination provisions thereof.
If this letter correctly sets forth our understanding with respect to the
foregoing matters, kindly execute and return the enclosed copy of this letter to
evidence our binding agreement.
Very truly your,
<TABLE>
<S> <C>
TRANSWORLD HOME HEALTHCARE, INC. IMH ACQUISITION CORP.
By: /s/ VINCENT J. CARUSO By: /s/ VINCENT J. CARUSO
------------------------------------------------- -------------------------------------------------
Name: Vincent J. Caruso Name: Vincent J. Caruso
Title: Executive Vice President Title: Executive Vice President
AGREED TO:
HEALTH MANAGEMENT, INC.
By: /s/ W. JAMES NICOL
-------------------------------------------------
Name: W. James Nicol
Title: Chief Executive Officer
</TABLE>
<PAGE> 135
TRANSWORLD HOME HEALTHCARE, INC.
75 TERMINAL AVENUE
CLARK, NEW JERSEY 07066
December 23, 1996
Health Management, Inc.
1371-A Abbott Court
Buffalo Grove, Illinois 60089
Ladies and Gentlemen:
Reference is made to (i) the Agreement and Plan of Merger, dated as of
November 13, 1996, as amended by letter agreements, dated November 27, 1996 and
December 12, 1996, among Transworld Home HealthCare, Inc. ("Transworld"), IMH
Acquisition Corp., and Health Management, Inc. (the "Company") (as amended, the
"Merger Agreement") and (ii) the Stock Purchase Agreement, dated as of November
13, 1996, as amended by letter agreements, dated November 27, 1996 and December
12, 1996, among Transworld and the Company (as amended, the "Stock Purchase
Agreement").
The parties hereto agree as follows:
1. Section 7.3(i) of the Merger Agreement is hereby amended by changing the
date "December 19, 1996" to "January 8, 1997."
2. Section 8.1(c) of the Merger Agreement is hereby amended by changing the
date "December 23, 1996" to "January 10, 1997," with the parties acknowledging
that, unless such date is further extended by agreement of the parties, the
condition to Transworld's obligation to close the Stock Purchase Agreement and
the Merger Agreement set forth in Section 7.3(i) of the Merger Agreement shall
be deemed to have been waived by Transworld with respect to such agreements if
Transworld has not given notice of termination of such agreements on or prior
to January 10, 1997.
Except to the extent amended hereby, the Merger Agreement and the Stock
Purchase Agreement shall remain in full force and effect and nothing herein
shall affect, or be deemed to be a waiver of, the other terms and provisions of
the Merger Agreement or the Stock Purchase Agreement, including without
limitation the other termination provisions thereof.
If this letter correctly sets forth our understanding with respect to the
foregoing matters, kindly execute and return
<PAGE> 136
Health Management, Inc.
December 23, 1996
Page 2
the enclosed copy of this letter to evidence our binding agreement.
Very truly yours,
TRANSWORLD HOME HEALTHCARE, INC.
By Vincent J. Caruso
-------------------------------
Name: Vincent J. Caruso
Title: EVP
IMH ACQUISITION CORP.
By Vincent J. Caruso
-------------------------------
Name: Vincent J. Caruso
Title: EVP
AGREED TO:
HEALTH MANAGEMENT, INC.
By [SIG]
-------------------------------
Name: James
Title: Chief Operating Officer
<PAGE> 137
TRANSWORLD HOME HEALTHCARE, INC.
75 TERMINAL AVENUE
CLARK, NEW JERSEY 07066
January 10, 1997
Health Management, Inc.
1371-A Abbott Court
Buffalo Grove, Illinois 60089
Ladies and Gentlemen:
Reference is made to (i) the Agreement and Plan of Merger, dated as of
November 13, 1996, as amended by letter agreements, dated November 27, 1996,
December 12, 1996 and December 23, 1996, among Transworld Home HealthCare, Inc.
("Transworld"), IMH Acquisition Corp., and Health Management, Inc. (the
"Company") (as amended, the "Merger Agreement") and (ii) the Stock Purchase
Agreement, dated as of November 13, 1996, as amended by letter agreements,
dated November 27, 1996, December 12, 1996 and December 23, 1996, among
Transworld and the Company (as amended, the "Stock Purchase Agreement").
The parties hereto agree as follows:
1. Section 7.3(i) of the Merger Agreement is hereby amended by changing the
date "January 8, 1997" to "January 10, 1997."
2. Section 8.1(c) of the Merger Agreement is hereby amended by changing the
date "January 10, 1997" to "January 13, 1997," with the parties acknowledging
that, unless such date is further extended by agreement of the parties, the
condition to Transworld's obligation to close the Stock Purchase Agreement and
the Merger Agreement set forth in Section 7.3(i) of the Merger Agreement shall
be deemed to have been waived by Transworld with respect to such agreements if
Transworld has not given notice of termination of such agreements on or prior
to January 13, 1997.
Except to the extent amended hereby, the Merger Agreement and the Stock
Purchase Agreement shall remain in full force and effect and nothing herein
shall affect, or be deemed to be a waiver of, the other terms and provisions of
the Merger Agreement or the Stock Purchase Agreement, including without
limitation the other termination provisions thereof.
If this letter correctly sets forth our understanding with respect to the
foregoing matters, kindly execute and return
<PAGE> 138
Health Management, Inc.
January 10, 1997
Page 2
the enclosed copy of this letter to evidence our binding agreement.
Very truly yours,
TRANSWORLD HOME HEALTHCARE, INC.
By Vincent J. Caruso
-------------------------------
Name: Vincent J. Caruso
Title: EVP
IMH ACQUISITION CORP.
By Vincent J. Caruso
-------------------------------
Name: Vincent J. Caruso
Title: EVP
AGREED TO:
HEALTH MANAGEMENT, INC.
By W. James Nicol
-------------------------------
Name: W. James Nicol
Title: Chief Executive Officer
& President
<PAGE> 139
TRANSWORLD HOME HEALTHCARE, INC.
75 TERMINAL AVENUE
CLARK, NEW JERSEY 07066
January 13, 1997
Health Management, Inc.
1371-A Abbott Court
Buffalo Grove, Illinois 60089
Ladies and Gentlemen:
Reference is made to (i) the Agreement and Plan of Merger, dated as of
November 13, 1996, as amended by letter agreements, dated November 27, 1996,
December 12, 1996, December 23, 1996 and January 10, 1997, among Transworld
Home HealthCare, Inc. ("Transworld"), IMH Acquisition Corp. ("Newco"), and
Health Management, Inc. (the "Company") (as amended, the "Merger Agreement")
and (ii) the Stock Purchase Agreement, dated as of November 13, 1996, as
amended by letter agreements, dated November 27, 1996, December 12, 1996,
December 23, 1996 and January 10, 1997, among Transworld and the Company (as
amended, the "Stock Purchase Agreement"). Terms defined in the Merger
Agreement shall have their defined meanings herein, unless otherwise defined
herein.
The parties have agreed that in view of the Company's recent business
performance, it is appropriate to amend the Merger Agreement, among other
things, to reduce the Merger Consideration.
Accordingly, the parties hereto agree as follows:
1. Section 1.6(b) of the Merger Agreement is hereby amended by changing the
amount "$2.00" to "$1.50". The Company hereby represents and warrants to
Transworld and Newco that the Company has received the opinion of NatWest that
the Merger Consideration, as hereby amended, is fair, from a financial point of
view, to the stockholders of the Company.
2. Section 7.3(b) of the Merger Agreement is hereby amended in its entirety
and, as so amended, shall read as follows:
"The representations and warranties of the Company set forth in this
Agreement shall be true and correct in all material respects at and as of the
Effective Time as if made at and as of such time, except for changes
contemplated by this Agreement and by the Disclosure Schedule, the Deferred
Schedules and the Supplemental Disclosure Schedule dated January 13, 1997 and
changes disclosed in the Company's Quarterly Report on Form 10-Q for the
Quarterly Period ended October 31, 1996 (it being agreed, however, that all
descriptions therein as to the effect of Olanzapine or other antipsychotic
drugs shall be deemed superseded and replaced by the description set forth in
item A. of Section 3.19 of the Supplemental Disclosure Schedule dated January
13, 1997), and except to the extent that any such representation or warranty is
made as of a specified date, in which case such representation or warranty
shall have been true and correct in all material respects as of such date."
-1-
<PAGE> 140
Health Management, Inc.
January 13, 1997
Page 2
3. Section 7.3(h) of the Merger Agreement is hereby amended in its entirety
and, as so amended, shall read as follows:
"At or prior to the Effective Time, the Amended Stipulation of Partial
Settlement of the consolidated class actions under the caption In re Health
Management, Inc. Securities Litigation, Master File No. 96-CV-889 (ADS), dated
December 19, 1996, shall have been finally approved by the United States
District Court and such Court shall have entered a judgment (including a bar
order) substantially in the form of Exhibit B to such Amended Stipulation and
all applicable proceedings for review, appeals, and rights of appeal of such
judgment (other than a proceeding or order, or any appeal or petition for a
writ of certiorari, pertaining solely to any plan of allocation and/or
application for attorneys' fees, costs, or expenses) shall have been exhausted
or all applicable waiting periods during which any appeal or other request for
review of such judgment (other than a proceeding or order, or any appeal or
petition for a writ of certiorari, pertaining solely to any plan of allocation
and/or application for attorneys' fees, costs, or expenses) may be made shall
have expired without any appeal having been filed."
4. Section 7.3(i) of the Merger Agreement is hereby amended in its
entirety, and, as so amended, shall read as follows:
"At or prior to the Effective Time, the lenders (the "Banks") party to the
Credit Agreement, dated as of July 31, 1996, as amended (the "Credit
Agreement"), among Transworld, the Banks, and Bankers Trust Company, as agent,
shall have consented to the Merger, shall have agreed to amendments to the
Credit Agreement in order to permit the Merger and shall have loaned to
Transworld the funds necessary for Transworld to consummate the Merger, all in
the sole and absolute discretion of such Banks."
5. Transworld hereby waives the condition set forth in Section 7.3(l) of
the Merger Agreement insofar as such condition applies to the $3,000,000
Subordinated Note dated March 31, 1995 made by HMI Illinois, Inc. in favor of
Caremark Inc. which was purchased from Caremark Inc. by Hyperion Partners II
L.P.
6. Section 8.1(c) of the Merger Agreement is hereby amended in its entirety
and, as so amended, shall read as follows:
"This Agreement may be terminated by Transworld at any time prior to the
Effective Time, whether prior to or after approval hereof by the stockholders
of the Company, if the condition set forth in Section 7.3(i) of this Agreement
shall not have been satisfied by June 30, 1997."
7. Notwithstanding anything to the contrary in the Merger Agreement,
Transworld hereby consents to the settlement by the Company of (i) the
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) and
(ii) the derivative lawsuit filed in the Supreme Court of the State of New
York, County of New York entitled Howard Vogel, et al. v. BDO Seidman, LLP, et
al., Index No. 96-603064, for an aggregate
-2-
<PAGE> 141
Health Management, Inc.
January 13, 1997
Page 3
payment by the Company not to exceed $175,000 (it being understood that the
Company will preserve all of its claims against the defendants named in such
actions, other than Messrs. Clifton and Dimitriadis).
* * *
The parties acknowledge and agree that, notwithstanding anything contained
in the letter agreement dated January 10, 1997 among Transworld, Newco and the
Company, in no event shall Transworld be deemed to have waived the condition to
Transworld's obligation to close the Merger Agreement set forth in Section
7.3(i) of the Merger Agreement, and such condition, as hereby amended in
Section 4 hereof, is in full force and effect.
Except to the extent amended hereby, the Merger Agreement and the Stock
Purchase Agreement shall remain in full force and effect and nothing herein
shall affect, or be deemed to be a waiver of, the other terms and provisions of
the Merger Agreement or the Stock Purchase Agreement, including without
limitation the other termination provisions thereof.
-3-
<PAGE> 142
Health Management, Inc.
January 13, 1997
Page 4
If this letter correctly sets forth our understanding with respect to the
foregoing matters, kindly execute and return the enclosed copy of this letter
to evidence our binding agreement.
Very truly yours,
TRANSWORLD HOME HEALTHCARE, INC.
By /s/ Vincent J. Caruso
------------------------------------
Name: Vincent J. Caruso
Title: Executive Vice President and
Chief Administrative Officer
IMH ACQUISITION CORP.
By /s/ Vincent J. Caruso
----------------------------------
Name: Vincent J. Caruso
Title: Executive Vice President and
Chief Administrative Officer
AGREED TO:
HEALTH MANAGEMENT, INC.
By /s/ Wm. James Nicol
-------------------------------
Name: Wm. James Nicol
Title: President and Chief
Executive Officer
-4-
<PAGE> 143
TRANSWORLD HOME HEALTHCARE, INC.
75 TERMINAL AVENUE
CLARK, NEW JERSEY 07066
March 26, 1997
Health Management, Inc.
1371-A Abbott Court
Buffalo Grove, Illinois 60089
Ladies and Gentlemen:
Reference is made to the Agreement and Plan of Merger, dated as of
November 13, 1996, as amended by letter agreements, dated November 27, 1996,
December 12, 1996, December 23, 1996, January 10, 1997 and January 13, 1997,
among Transworld Home HealthCare, Inc. ("Transworld"), IMH Acquisition Corp.
("Newco"), and Health Management, Inc. (the "Company") (as amended, the "Merger
Agreement"). Terms defined in the Merger Agreement shall have their defined
meanings herein, unless otherwise defined herein.
The parties have agreed that in view of the Company's publicly announced
restatement of its financial statements for the quarterly periods ended July
31, 1996 and October 31, 1996, and the Company's publicly announced charge for
the quarterly period ended January 31, 1997, it is appropriate to further amend
the Merger Agreement, among other things, to further reduce the Merger
Consideration.
Accordingly, the parties hereto agree as follows:
1. Section 1.6(b) of the Merger Agreement is hereby amended by changing the
amount "$1.50" to "$0.30".
2. Section 7.1(e) of the Merger Agreement is hereby deleted (it being
acknowledged by Transworld for purposes hereof and Section 7.3(b) of the Merger
Agreement that the Company will not obtain a fairness opinion with respect to
the Merger Consideration, as reduced by this amendment).
3. Section 7.3(b) of the Merger Agreement is hereby amended in its entirety
and, as so amended, shall read as follows:
"The representations and warranties of the Company set forth in this
Agreement shall be true and correct in all material respects at and as of the
Effective Time as if made at and as of such time, except for changes
contemplated by this Agreement and by the Disclosure Schedule, the Deferred
Schedules, the Supplemental Disclosure Schedule dated January 13, 1997 and the
Supplemental Disclosure Schedule dated March 26, 1997 and changes
<PAGE> 144
Health Management, Inc.
March 26, 1997
Page 2
reflecting historical facts and current trends disclosed in the Company's
Quarterly Reports on Form 10-Q for the quarterly period ended January 31, 1997,
on Form 10-Q/A-2 for the quarterly period ended October 31, 1996 and on Form
10-Q/A for the quarterly period ended July 31, 1996 (it being agreed, however,
that (i) all descriptions therein as to the effect of Olanzapine or other
antipsychotic drugs shall be deemed superseded and replaced by the description
set forth in item A. of Section 3.19 of the Supplemental Disclosure Schedule
dated January 13, 1997 and (ii) notwithstanding the disclosure of a current
trend, a Material Adverse Effect may nevertheless be deemed to have occurred by
reason of a material change in such current trend), and except to the extent
that any such representation or warranty is made as of a specified date, in
which case such representation or warranty shall have been true and correct in
all material respects as of such date."
4. Section 7.3(h) of the Merger Agreement is hereby amended in its entirety
and, as so amended, shall read as follows:
"At or prior to April 11, 1997, the Amended Stipulation of Partial
Settlement of the consolidated class actions under the caption In re Health
Management, Inc. Securities Litigation, Master File No. 96-CV-889 (ADS), dated
December 19, 1996, shall have been further amended, in form and substance
satisfactory to Transworld and Newco, to provide for the settlement of such
actions for a reduced settlement amount not to exceed $4.55 million, and at or
prior to the Effective Time, such Amended Stipulation of Partial Settlement, as
so amended, shall have been finally approved by the United States District
Court and such Court shall have entered a judgment (including a bar order)
substantially in the form of Exhibit B to such Amended Stipulation and all
applicable proceedings for review, appeals, and rights of appeal of such
judgment (other than a proceeding or order, or any appeal or petition for a
writ of certiorari, pertaining solely to any plan of allocation and/or
application for attorneys' fees, costs, or expenses) shall have been exhausted
or all applicable waiting periods during which any appeal or other request for
review of such judgment (other than a proceeding or order, or any appeal or
petition for a writ of certiorari, pertaining solely to any plan of allocation
and/or application for attorneys' fees, costs, or expenses) may be made shall
have expired without any appeal having been filed."
5. Section 7.3(k) of the Merger Agreement is hereby deleted (it being
acknowledged by the Company that Transworld will not obtain an updated opinion
of UBS Securities LLC as to the fairness of the consideration being paid by
Transworld).
<PAGE> 145
Health Management, Inc.
March 26, 1997
Page 3
* * *
Except to the extent amended hereby, the Merger Agreement shall remain in
full force and effect and nothing herein shall affect, or be deemed to be a
waiver of, the other terms and provisions of the Merger Agreement.
The effectiveness of this amendment shall be subject, at the option of
Transworld and Newco, to the receipt by Transworld of the written consent to
this amendment by the lenders (the "Banks") party to the Credit Agreement,
dated as of July 31, 1996, as amended, among Transworld, the Banks and Bankers
Trust Company, as agent. If the written consent of the Banks has not been
obtained on or prior to April 11, 1997, then at any time thereafter Transworld
may, in its sole discretion, terminate this amendment (in which case this
amendment shall be null and void ab initio) and terminate the Merger Agreement.
<PAGE> 146
Health Management, Inc.
March 26, 1997
Page 4
If this letter correctly sets forth our understanding with respect to the
foregoing matters, kindly execute and return the enclosed copy of this letter
to evidence our binding agreement.
Very truly yours,
TRANSWORLD HOME HEALTHCARE, INC.
By Robert W. Fine
------------------------------
Name: Robert W. Fine
Title: President
IMH ACQUISITION CORP.
By Robert W. Fine
------------------------
Name: Robert W. Fine
Title: President
AGREED TO:
HEALTH MANAGEMENT, INC.
By Wm. James Nicol
---------------------------------
Name: Wm. James Nicol
Title: President and Chief
Executive Officer
<PAGE> 147
ANNEX II
262 APPRAISAL RIGHTS--(a) Any stockholder of a corporation of this State
who holds shares of stock on the date of the making of a demand pursuant to
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to sec.228 of this title shall be entitled to an appraisal by the Court
of Chancery of the fair value of his shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec.251 (other than a merger effected pursuant to
subsection (g) or Section 251), 252, 254, 257, 258, 263 or 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall be
available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the holders of the surviving corporation as
provided in subsection (f) of sec.251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series of
stock of a constituent corporation if the holders thereof are required by the
terms of an agreement of merger or consolidation pursuant to sec.sec.251, 252,
257, 258, 263 and 264 of this title to accept for such stock anything except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock or depository receipts at the effective
date of the merger or consolidation will be either listed on a national
securities exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities Dealers,
Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository receipts and cash in
lieu of fractional shares or fractional depository receipts described in the
foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec.253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall be
available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
<PAGE> 148
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting, shall
notify each of its stockholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available pursuant to
subsections (b) or (c) hereof that appraisal rights are available for any or all
of the shares of the constituent corporations, and shall include in such notice
a copy of this section. Each stockholder electing to demand the appraisal of his
shares shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to demand
the appraisal of his shares. A proxy or vote against the merger or consolidation
shall not constitute such a demand. A stockholder electing to take such action
must do so by a separate written demand is herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent corporation who
has complied with this subsection and has not voted in favor or consented to the
merger or consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to sec.228 or
sec.253 of this title, each constituent corporation, either before the effective
date of the merger or consolidation or within ten days thereafter, shall notify
each of the holders of any class or series of stock of such constituent
corporation who are entitled to appraisal rights of the approval of the merger
or consolidation and that appraisal rights are available for any or all shares
of such class or series of stock of such constituent corporation, and shall
include in such notice a copy of this section; provided that, if the notice is
given on or after the effective date of the merger or consolidation, such notice
shall be given by the surviving or resulting corporation to all such holders of
any class or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective date
of the merger or consolidation, shall, also notify such stockholders of the
effective date of the merger or consolidation. Any stockholder entitled to
appraisal rights may, within twenty days after the date of mailing of such
notice, demand in writing from the surviving or resulting corporation the
appraisal of such holder's shares. Such demand will be sufficient if it
reasonably informs the corporation of the identify of the stockholder and that
the stockholder intends thereby to demand the appraisal of such holder's shares.
If such notice did not notify stockholders of the effective date of the merger
or consolidation, either (i) each such constituent corporation shall send a
second notice before the effective date of the merger or consolidation notifying
each of the holders of any class or series of stock of such constituent
corporation that are entitled to appraisal rights of the effective date of the
merger or consolidation or (ii) the surviving or resulting corporation shall
send such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more than
20 days following the sending of the first notice, such second notice need only
be sent to each stockholder who is entitled to appraisal rights and who has
demanded appraisal of such holder's shares in accordance with this subsection.
An affidavit of the secretary or assistant secretary or of the transfer agent of
the corporation that is required to give either notice that such notice has been
given shall, in the absence of fraud, be prima facie evidence of the facts
stated therein. For purposes of determining the stockholders entitled to receive
either notice, each constituent corporation may fix, in advance, a record date
that shall be not more than 10 days prior to the date the notice is given;
provided that, if the notice is given on or after the effective date of the
merger or consolidation, the record date shall be such effective date. If no
record date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the day on
which the notice is given.
(c) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections
<PAGE> 149
(a) and (d) hereof, upon written request, shall be entitled to receive from the
corporation surviving the merger or resulting from the consolidation a statement
setting forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been received
and the aggregate number of holders of such shares. Such written statement shall
be mailed to the stockholder within 10 days after his written request for such a
statement is received by the surviving or resulting corporation or within 10
days after expiration of the period for delivery of demands for appraisal under
subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for the shares
and with whom agreements as to the value of their shares have not been reached
by the surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (i) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without
<PAGE> 150
limitation, reasonable attorney's fees and the fees and expenses of experts, to
be charged pro rata against the value of all the shares entitled to an
appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(1) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger to consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
<PAGE> 151
PROXY
HEALTH MANAGEMENT, INC.
1371-A ABBOTT COURT
BUFFALO GROVE, ILLINOIS 60089
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned hereby appoints each of W. JAMES NICOL and JAMES R. MIESZALA as
proxies, with full power of substitution, to represent the undersigned and to
vote, as designated below, all shares of Common Stock of Health Management, Inc.
which the undersigned is entitled to vote at the special meeting of stockholders
to be held on , 1997, and any adjournment thereof.
This proxy when properly executed will be voted in the manner directed herein by
the stockholder. If no direction is made, this proxy will be voted "FOR"
Proposal 1. The proxies appointed herein may act by one of said proxies at the
meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 1.
Please mark, sign, date and mail the proxy card promptly using the enclosed
envelope.
(Continued and to be signed on the reverse side.)
<PAGE> 152
HEALTH MANAGEMENT, INC.
PLEASE MARK VOTE IN SPACE PROVIDED USING INK ONLY
1. Proposal to adopt the Agreement and Plan of Merger, which provides for the
merger of IMH Acquisition Corp. with and into Health Management, Inc., as
described in the accompanying proxy statement
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting.
Dated , 1997
------------
Signature of Stockholder
-------------------------
For Joint Account Each
Owner Should Sign
Please mark and date the
proxy and sign the proxy
as name appears. Joint
owners should each sign
personally. Trustees and
others signing in a
representative capacity
should indicate the
capacity in which they
sign.
