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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
XX Annual Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 for the fiscal year ended April 30, 1997.
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for transition period from ____________ to
____________.
Commission File No. 0-18472
HEALTH MANAGEMENT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2096632
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1371-A ABBOTT COURT, BUFFALO GROVE, ILLINOIS 60089
(Address of principal executive offices)
Registrant's telephone number, including area code: (847) 913-2700
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS
Common Stock, $.03 par value per share
Indicate by check mark whether the Registrant has (1) filed all reports
required to be filed by Section 12 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K. [ ]
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As of September 2, 1997, the closing price of the Registrant's common
stock quoted on the NASDAQ SmallCap Market was $.125. The aggregate market
value of the voting stock held by non-affiliates of the Registrant was
$1,163,650. As of September 2, 1997, there were 18,294,494 shares of the
Company's Common Stock ("Common Stock"), $.03 par value, outstanding. For
purposes of the computation of the number of shares of the Registrant's Common
Stock held by non-affiliates, the shares of Common Stock held by directors,
officers and principal stockholders that filed a Schedule 13G or Schedule 13D
were deemed to be stock held by affiliates. As of September 2, 1997, there were
8,985,292 shares of Common Stock outstanding held by such affiliates.
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 Merger Agreement and other transactions with
Transworld HealthCare, Inc., a New York corporation ("Transworld"), including
Transworld's willingness not to proceed against the Company for being in
default under the Credit Agreement; competitive factors; the ability of the
Company adequately to defend or reach a settlement of outstanding litigation
and investigations involving the Company or its management; changes in labor,
equipment and capital costs; changes in regulations affecting the Company's
business; management and employee turnover; general business and economic
conditions; and other factors described from time to time in the Company's
reports filed with the Securities and Exchange Commission. The Company wishes
to caution readers not to place undue reliance on any such forward-looking
statements, which statements are made pursuant to the Private Litigation Reform
Act of 1995 and, as such, speak only as of the date made.
PART I
ITEM 1. BUSINESS
GENERAL
Health Management, Inc., a Delaware corporation (the "Company"), was
founded in 1986 as a home health care provider. In 1989, the Company made a
strategic shift and began to concentrate on the provision of post-surgical
pharmaceutical products and services to organ transplant patients. Currently,
the Company is focused on the provision of integrated pharmaceutical management
services to patients with chronic medical conditions which may be complicated
by a higher risk of patient non-compliance with the prescribed pharmaceutical
regimen, and to the health care professionals, pharmaceutical manufacturers and
third-party payors involved in the care of such patients. Services offered
include the distribution of prescription drugs, drug utilization review,
patient compliance monitoring, assistance in insurance coverage, verification
and reimbursement. The Company has expanded its
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business primarily through acquisitions to include the oncology, HIV/AIDS,
infertility, and schizophrenia markets.
Transactions with Transworld Healthcare, Inc.
On November 13, 1996, Transworld HealthCare, Inc, a New York corporation
("Transworld"), acquired the bank debt of the Company that was outstanding under
the 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 principal amount of which aggregated $28.35 million. The Company
was in default under various covenants contained in the Credit Agreement and
Transworld agreed to forebear until December 12, 1996 from exercising any
remedies under the Credit Agreement and agreed, in its discretion, to loan the
Company up to an additional $3.0 million under the Company's revolving credit
facility. The forbearance agreement was subsequently extended in short term
intervals until July 15, 1997 and the Company's revolving credit facility was
increased by up to an additional $2.0 million on December 23, 1996.
Also on November 13, 1996, the Company entered into a Stock Purchase
Agreement with Transworld, pursuant to which Transworld agreed to acquire
8,964,292 newly issued shares of Common Stock, representing 49% of the
outstanding Common Stock, as well as an option to purchase an additional
746,713 shares of the Common Stock at $1.00 per share. The closing of this
transaction occurred on January 13, 1997. The consideration for the Shares
included: (i) the execution by Transworld of the Merger Agreement (defined
below), (ii)the purchase by Transworld of the rights of the Company's
senior lenders under the Credit Agreement, (iii) the extension by Transworld of
the expiration date under the Forbearance Agreement, (iv)the extension by
Transworld of additional amounts under the revolving credit facility, subject
to certain conditions and at Transworld's discretion, (v) the cancellation by
Transworld of rights granted to the lenders to warrants of the Company, and
(vi) $1.00 per share of Common Stock. Of the $1.00 per share consideration,
which aggregated approximately $8.9 million, approximately $4.6 million was
applied toward repayment of amounts loaned to the Company under the revolving
credit facility subsequent to November 13, 1996 through January 13, 1997, and
approximately $.1 million was applied towards payment of outstanding interest
under the Credit Agreement. If Transworld exercises its option, it will own 51%
of the outstanding Common Stock of the Company.
On November 13, 1996, the Company, Transworld and IMH Acquisition Corp., a
wholly owned Delaware subsidiary of Transworld ("IMH"), also entered into an
Agreement and Plan of Merger (the "Merger Agreement") pursuant to which IMH
would merge (the "Merger") into the Company and each stockholder of the Company
(other than Transworld and its affiliates) would receive cash consideration
equal to $2.00 per share. On January 13, 1997, the Merger Agreement was
amended to provide for, among other things, a reduced cash consideration of
$1.50 per share in light of certain material adverse changes to the business
and financial condition of the Company. On March 17, 1997, the Company
announced that it planned to restate its
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first and second quarter fiscal 1997 results and take a charge of approximately
$13 million in the third quarter of fiscal 1997. In light of these events, the
cash consideration was renegotiated to $0.30 per share (the "Merger
Consideration"). If the Merger is consummated, the Company will become the
wholly owned subsidiary of Transworld. The Merger Agreement is subject to
certain conditions, including the consent of Transworld's lenders. The Merger
Agreement was approved and adopted by the stockholders of the Company on July
11, 1997.
On August 1, 1997, Transworld informed the Company that Transworld's
lenders had not yet consented to the Merger and Transworld would not be able to
consummate the Merger in the near future. Transworld and the Company began to
explore alternative transactions, including those involving bankruptcy filings.
On August 14, 1997, Transworld announced that it had entered into an agreement
with Counsel Corporation, a Canadian corporation ("Counsel"), relating to the
sale of substantially all of the business and assets of the Company. Pursuant
to the agreement, Counsel will purchase the assets of the Company for $40
million, subject to certain conditions, including satisfactory due diligence.
While the Company is not a party to the agreement between Transworld and
Counsel, the Company has agreed to allow Counsel to conduct due diligence and
has agreed to refrain from discussing transactions with other potential buyers
until September 30, 1997 or such earlier date after September 3, 1997 as
instructed by Transworld. As the Company previously announced, it is still not
clear whether Transworld intends to consummate the Merger. If the Merger is
not consummated and the transaction with Counsel proceeds as a purchase of
assets, it is not clear what consideration, if any, would be paid to the
Company's stockholders.
In addition, Hyperion Partners II, L.P. ("Hyperion"), 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 $18.3 million. Hyperion has agreed to
contibute the obligations purchased from Foxmeyer Drug Co., and Bindley
Western, Inc to Transworld in exchange for stock of Transworld.
The revolving credit facility was frozen from January 13, 1997 until May
1997. From May through July 1997, the Company received additional advances of
$1.4 million from Transworld pursuant to the revolving credit facility.
However, the Forbearance Agreement expired on July 15, 1997 and the Company is
currently in default under its Credit Agreement.
The Company continues to experience severe financial difficulties and, if
not stabilized through the Merger or an alternative transaction, may seek
protection under the Federal Bankruptcy Laws.
LIFECARE(TM) PROGRAM
Through its LifecareTM 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
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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 17 pharmacy locations (in 16 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 comprehensive patient
profiles, including demographics, 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 17,000 patients is currently
maintained through the system. The Company makes information from this
database and from drug utilization review data available to referral sources,
third-party payors and pharmaceutical manufacturers, in compliance with patient
confidentiality requirements.
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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 personnel 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.
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.
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.
The Company 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 127 as of April 30, 1997. Furthermore, the Company has established
contractual arrangements with health care providers and payors to provide
services at negotiated rates. The Company also
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intends to continue to expand its LifecareTM 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 other first line
antipsychotic medications. 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, the FDA currently requires that patients using Clozapine receive
weekly monitoring of their white blood cell levels. The Company presently
provides Clozapine to approximately 5,500 schizophrenia patients at an average
cost per patient of between $6,000 and $8,000 per year depending upon the
dosage. The Clozaril patient base of the Company has declined approximately
17% since October 1996, 9% of such decline is directly related to office
closures by the Company or the loss of referral sources. Management believes
that the balance of the decline may be attributable to the introduction of
Olanzapine and other market factors. (See below for discussion of Olanzapine).
The Company's Clozaril Patient Management Business contains multiple
components including weekly blood draws to test for a side effect associated
with Clozapine.
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 LifecareTM Program
by taking advantage of its existing relationships with over 3,000
psychiatrists, various payors and state mental health and Medicaid programs.
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 8% 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.
On July 14, 1997, an advisory committee of the Food and Drug Administration
("FDA") convened a meeting to discuss potential changes in the need for and
frequency of monitoring. The advisory committee recommended the following to
the FDA:
1. After six months, the weekly blood monitoring could be reduced to
bi-weekly;
2. Blood monitoring should not be totally eliminated; and
3. After one year, the monitoring should be made voluntary.
Subsequently, alternative scenarios have been discussed with the manufacturer.
At this time, there is no certainty regarding whether the FDA will accept the
recommendations of the committee, decide not to make any changes for the time
being,
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or make alternative changes in the frequency of or requirement for monitoring.
However, management believes that there is sufficient evidence to conclude that
a substantial decrease in monitoring frequency is probable in the near future..
The Company derives a significant portion of its Clozapine gross margin from
the fees related to the weekly blood test monitoring of its Clozapine patients.
Any changes in the requirement for or frequency of monitoring could materially
effect the Company's results of operations and cash flows. Accordingly, the
carrying value of the goodwill associated with the original purchase of the
Clozapine business as well as long-lived assets at certain Clozapine facilities
has been written off. (See Note 6 to the Consolidated Financial Statements.)
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 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.
Oncology. The American Cancer Society estimates that over 1.0 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 800 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 400 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
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The Company's business strategy has been focused on the basic factors
that could improve profitability and cash flows: revenue generation, cost
reduction, supplier relations, 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 then principal wholesaler. More recently, management has focused on the
pursuit of the Transworld and Counsel transactions. Throughout this period the
Company has had inadequate financial resources to implement much of its
strategy. Cost reduction efforts are focused on the consolidation and
operational efficiency 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, and retaining
outside consultants to provide support in the financial, reimbursement and
systems areas.
ACQUISITIONS AND DISPOSITIONS
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 subsequently 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 Common Stock 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 Common Stock of the
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Company, which were valued at $1,034,375. The assets related to retail
pharmacies acquired by the Company were sold in the fourth quarter of the
Company's 1997 fiscal year for approximately $1 million.
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, the Company acquired substantially all the assets
subject to certain liabilities of Murray Pharmacy, Inc., a Pennsylvania
corporation ("Murray Pharmacy"), that was 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 of the Common Stock of the Company, 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 of the
Common Stock of the Company, which were valued at $3,094,747. The Company
closed the retail pharmacy in November, 1996; however, a significant portion of
that is now being serviced by the Company's remaining Pittsburgh retail
facility.
MARKETING AND SALES
The Company's 13 full-time sales personnel market the LifecareTM 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 LifecareTM 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
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Chronimed Inc., Coram Healthcare Corp., Caremark Inc., Stadtlander
Drug Company, Inc. (owned by Counsel) and Systemed, Inc. These competitors,
other than Chronimed Inc. and Coram Healthcare Corp., have all been 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 that 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 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 reimbursement services to 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 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.
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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.
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 commercial 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.
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
---------------------
1997 1996 1995
---- ---- ----
APRIL 30,
- ---------
<S> <C> <C> <C>
Commercial Insurance and other private payors 43% 56% 60%
Medicaid and other state programs 39% 35% 26%
Medicare and other federal programs 18% 9% 14%
---- ---- ----
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 experienced problems in its
billing and collections functions that have resulted in a deterioration of its
accounts receivable collections. The Company has retained outside consultants
to help improve operations, controls and systems related to these functions and
anticipates that it will experience improved
12
<PAGE> 13
collection results. However, there can be no assurance that these efforts will
result in such improvements.
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.
13
<PAGE> 14
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 that 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.
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. In August, 1997,
Congress enacted a statute which provided for a decrease in Medicare
reimbursement levels for transplant medications to 95% of Average Wholesale
Price ("AWP") down from the current reimbursement of 100% of AWP.
14
<PAGE> 15
However, under the new statute Medicare would have the authority to pay a
reasonable dispensing fee. The new statute will take effect on January 1,
1998. The Company's management expects a negative effect on the cash flow and
margins of the Company's transplant business as a result of the statute;
however, no prediction can be made at this time whether or not the effect will
be significant particularly because the magnitude of the dispensing fees is not
yet known.
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 intends to
comply with all regulations. In addition, the Company believes its pricing
policies are within the limits established by Medicare and Medicaid, and the
drugs, services 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 $1.4 million with respect to prior
Medicaid overpayments from such Department, $.5 million of which was paid in
the form of set-offs against amounts then held by New York State Medicaid on
behalf of the Company. The settlement agreement provides that the remaining
$.9 million 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
approximately 40 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
15
<PAGE> 16
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 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
16
<PAGE> 17
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 that apply to
pharmacies that engage in the interstate distribution of prescription drugs.
Some such states generally permit such out-of-state pharmacies to operate in
accordance with the laws of the state in which they are located, but require
them to register with the state's board of pharmacy, follow certain procedures
and make certain disclosures. Other such states generally require out-of-state
pharmacies to obtain a license in those states and comply with local laws, as
in-state pharmacies must do. The Company believes that it is in substantial
compliance with the registration, disclosure and licensing requirements of
those jurisdictions in which it conducts its business. If the Company were
found to be in noncompliance with applicable laws and regulations, the Company
might be subject to sanctions and its operations in such states might be
impaired, interrupted, discontinued or prohibited.
ACCREDITATION
The Company's New York and Pittsburgh facilities have received
accreditation by the Joint Commission on Accreditation of Healthcare
Organizations.
17
<PAGE> 18
SOURCES AND AVAILABILITY OF PRODUCT SUPPLY
Approximately 19% of the Company's revenues are currently attributable to
sales of Sandimmune (also known as cyclosporine) and Neoral(R), the primary
immunosuppressive drugs used in the United States and approximately 21% 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 Neoral(R), Sandimmune(R) and
Clozaril(R), which drugs are produced only by a single manufacturer,
principally directly from the manufacturer and some through wholesalers. If
the Company were unable to purchase Neoral(R), Sandimmune(R) or Clozaril(R) for
any reason, its results of operations would be materially and adversely
affected. The patents on Sandimmune(R) 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
1996 and 1997. 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 former 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 the 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 August 1, 1997, the Company employed 369 persons, of whom 300 were
full-time employees. Of the full-time and part-time employees, 27 were
executive, corporate and administrative personnel, 20 were sales and marketing
personnel and
18
<PAGE> 19
322 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. However, financial
uncertainty surrounding the Company has led to significant employee turnover.
The employees are not represented by any union.
ITEM 2. PROPERTIES
In April 1996, the Company moved its executive offices to its 19,367
square feet facility in Buffalo Grove, Illinois. During the fiscal year ended
April 30, 1997, the monthly rent for this facility was $21,194. The lease for
this facility expires in August 2000. Also located at the facility are a
pharmacy and a substantial reimbursement operation.
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, 1997, the monthly rent for this
facility was $12,284. 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 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 all the leased facilities is
approximately $87,111. The Oregon and Michigan facilities were closed in June
1997. The Company is still responsible for rents on those properties through
the expiration of the respective leases.
During the 1996 fiscal year, the Company closed its administrative offices
in Holbrook, New York and moved its executive headquarters to Buffalo Grove,
Illinois.In fiscal year 1997, the Company closed its walk-in retail
pharmacies, including two which were located in Baltimore, Maryland and one
which was located in Pittsburgh, Pennsylvania. Since the beginning of the 1998
fiscal year, as part of its plan of
19
<PAGE> 20
consolidation, the Company closed its facilities in Sneads, Florida, Detroit,
Michigan and Portland, Oregon.
The Company believes that these facilities are suitable and adequate for
its current needs.
ITEM 3. 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 alleged 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 represented 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 action sought unspecified monetary
damages reflecting the decline in the trading price of the Common Stock that
allegedly resulted from the Company's February 1996 announcements. The Company
reached a settlement of the consolidated action which received court approval
on June 9, 1997. The settlement provided for a cash payment of $4,550,000 of
which $3,200,000 was paid at the time the court's approval of the settlement
became final and the remaining $1,350,000 is to be paid at the effective time
of the Merger. The Company has been 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 serve 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 October 17, 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
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<PAGE> 21
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 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. The Company has not responded to the
complaint and plaintiff has indicated that it will file an amended complaint by
September 2, 1997. 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
Transworld had 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 sought 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
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<PAGE> 22
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 and has filed its
initial brief on the matter. 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.
On May 22, 1997, a Writ of Summons was sent to the Company in respect of
action brought in the Superior Court at Nashua, New Hampshire entitled Linley
v. Health Management, Inc. Mr. Linley alleges, among other things, breach of
contract, estoppel, negligent misrepresentation, fraud and breach of fiduciary
duties and obligation of good faith and fair dealing in connection with an
alleged joint venture between plaintiff and the Company. Management believes
this action to be without merit and not material to the Company's results of
operations or financial condition.
On June 4, 1997, the Company commenced an action in the United States
District Court for the Eastern District of New York entitled Health Management,
Inc. v. Clifford E. Hotte, Robert Clifton, Robert Heiser, Christopher DeMarzo,
Crystal Collard, Clementine Ceglia, and Virginia Belloise. The complaint
alleges that Messrs. Hotte, Clifton, Heiser, and DeMarzo and Ms. Collard and
Ceglia breached their respective employment agreements with the Company by
competing against the Company, soliciting its customers and employees,
and/or disclosing or using confidential information. The complaint also
alleges that Clifford E. Hotte and Virginia Belloise breached their fiduciary
duties while serving as members of the Company's Board of Directors. Finally,
the complaint alleges that Pharmaceutical Care Services, Inc.
22
<PAGE> 23
interfered with the contractual relations between the Company and the
above-referenced individuals. A hearing on the Company's application for a
preliminary injunction was held on June 12, 1997, and the Magistrate issued his
Report and Recommendations on July 10, 1997 that the preliminary injunction be
granted against defendants Hotte, Clifton and DeMarzo but not against the other
defendants. Hotte, Clifton and DeMarzo filed their objections to the
Magistrate's Report and Recommendation on July 21 and 24, 1997, and the Company
filed its opposition to the defendants' objections on July 29, 1997.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
23
<PAGE> 24
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
The Registrant's Common Stock began trading on a limited basis on the
over-the-counter market on March 1, 1988, and was approved for quotation on
NASDAQ National Market effective May 24, 1990 under the trading symbol HMIS.
The Registrant's Common Stock was included on the NASDAQ National Market from
June 5, 1992 until March 11, 1997, on which date quotation of the Registrant's
Common Stock was commenced on the NASDAQ SmallCap Market, because the Company
no longer met the maintenance criteria for the NASDAQ National Market System.
The following table sets forth the range of high and low bid prices of the
Common Stock for the periods indicated, as quoted by NASDAQ National Market or
NASDAQ Small Cap Market, as applicable. These quotations represent prices
between dealers in securities, do not include retail mark-ups, mark-downs or
commissions, and do not necessarily represent actual transactions.
<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
Second Quarter 5 1/4 2 7/8
Third Quarter 2 3/16 5/8
Fourth Quarter 1 1/4 5/32
Fiscal Year Ending April 30, 1998:
First Quarter 1/4 5/32
Second Quarter (through September 2, 1997) 1/4 1/16
</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.
As of September 2, 1997, there were 18,294,474 shares of Common Stock
outstanding held by 1,359 owners of record.
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The following selected financial information for the five fiscal years
ended
24
<PAGE> 25
April 30, 1997 is derived from the consolidated financial statements of the
Company, which statements were audited by BDO Seidman, LLP, independent
certified public accounts, whose report with respect to the more recent
statements covering the three fiscal years ended April 30, 1997 appears
elsewhere in this Annual Report. 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 in this Report.
25
<PAGE> 26
HEALTH MANAGEMENT, INC.
(CONSOLIDATED)
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
---------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues $158,419 $158,860 $88,456 $44,250 $26,393
Gross Profit(1) 29,700 38,636 24,748 15,606 9,023
Selling 5,446 4,650 2,898 1,847 1,324
Provision for Doubtful
Accounts(1)(2) 18,911 14,715 7,978 1,781 705
G&A 26,383 24,324 10,649 5,428 3,458
Unusual Charges(1)(2) 35,157 5,600 -- -- --
Total Operating Expenses 85,897 49,289 21,525 9,056 5,487
Operating Income (Loss) (56,197) (10,652) 3,223 6,549 3,536
Settlement Costs(3) 4,825 -- -- -- --
Income (Loss) Before Income Taxes (65,822) (13,332) 3,287 6,752 3,488
Net Income (Loss) (66,099) (10,927) 1,946 4,001 2,207
Net Income (Loss) per Share
--Primary $(5.52) $(1.16) $0.21 $.54 $.38
--Fully Diluted $(5.52) $(1.16) $0.21 $.53 $.35
Weighted Average Number of Shares
Outstanding
--Primary 11,982 9,415 9,408 7,383 5,884
--Fully Diluted 11,982 9,415 9,421 7,594 6,309
</TABLE>
(1) Unusual charges reflected in the fiscal year 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.(See Note 6 to the Consolidated Financial Statements.)
(2) Unusual charges reflected in the year ended April 30, 1997 include
$30,944,000 for the write-off of goodwill and certain facilities for
impairment in value; $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. (See Note 6 to the Consolidated Financial Statements.)
(3) Settlement costs reflected in the year ended April 30, 1997 relate to
estimated costs for the settlement of the stockholder class action suit,
$4,550,000, and the actual costs of settling an additional suit of
$275,000. There can be no assurance that litigation will be settled for
the amounts provided. (See Note 6 to the Consolidated Financial
Statements.)
26
<PAGE> 27
<TABLE>
<CAPTION>
AS OF APRIL 30,
---------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Total Assets $40,989 $95,916 $88,690 $52,418 $17,158
Working Capital (Deficiency) (22,257) 2,492 12,486 32,013 8,946
Long term debt, including
current maturities 34,994 32,752 26,326 256 521
Stockholders' Equity (Deficit) (20,647) 37,363 48,171 44,096 9,755
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SPECIAL CONSIDERATIONS
The Company's business is subject to a number of special considerations,
such as industry trends, certain risks inherent in the business and the
Company's recent events. Some of these considerations are described in this
Item 7 "Management's Discussion and Analysis of Financial Condition and Results
of Operations." Other considerations are presented elsewhere in this Annual
Report.
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 $28,350,000, 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
27
<PAGE> 28
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 and until May 1997, the revolving credit facility had been frozen;
however, Transworld continued to extend the Forbearance Agreement in short term
intervals. The Forbearance Agreement expired July 15, 1997. From May through
July 1997, the Company received additional advances of $1.4 million from
Transworld pursuant to the revolving credit facility; however, the
Forbearance Agreement expired on July 15, 1997, and the Company is currently in
default under its credit agreement. 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 $18.3 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.
The Company was anticipating to consummate the Merger Agreement by July 31
1997; however, Transworld has not yet been able to obtain the bank consent
necessary to consummate the transaction. The Company and Transworld have
entered into discussions regarding alternatives, including bankruptcy. The
Company is also cooperating with Transworld in its search for a buyer of
assets of the Company following the consummation of the Merger Agreement,
including entering into an agreement with Counsel Corporation ("Counsel") (See
"Business - Transactions with Transworld HealthCare, Inc.")
If the Merger or an alternative transaction is not consummated in the
near future or if Transworld or Hyperion does not advance additional
funds to the Company, the Company may file for protection under the Federal
bankruptcy laws.
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. 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
28
<PAGE> 29
York, 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 court approval of such amended settlement was
received on June 9, 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 at the time the Restated Stipulation of
Partial Settlement became final. The remaining $1,350,000 is to be paid at the
effective time of the Merger. 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--
Legal Proceedings".
Management and Employee Turnover. 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 assumed the additional
duties of the Chief Financial Officer effective January 10, 1997 and in March
1997 the Company retained outside financial consultants to also provide support
in the financial area. In July 1997, Mr. Dennis J. Conley joined the Company to
provide support in the financial area. In August he was appointed Vice
President of Finance. Mr. Mieszala assumed the additional duties of President
and Chief Executive Officer from Mr. Nicol effective August 11, 1997. Mr. Nicol
remains on the Board of Directors.
The Company has experienced substantial turnover of its management group
and, as a result of financial uncertainty surrounding the Company, its
employees over the past twenty 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 depends, in large part, upon its ability to obtain,
retain and replace its staff . 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 retain such personnel.
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
29
<PAGE> 30
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 LifecareTM Program.
Management believes that the introduction of Olanzapine has been a factor in
the recent decline of the Company's Clozapine customer base (approximately 17%
since October 1996, including an approximately 9% decline attributable to the
closure of three offices) 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. On July 14, 1997, an advisory committee of
the FDA recommended potential changes to reduce the need for and frequency of
the blood test monitoring. At this time, there is no certainty regarding
whether the FDA will accept the recommendations of the committee, decide not to
make any changes for the time being, or make some other changes in the
frequency of or requirement for monitoring. The Company derives a significant
portion of its gross margin from the sale of Clozapine from the fees related to
the weekly monitoring. See "Business - Markets - Schizophrenia" above. Any
change in the requirement for or frequency of monitoring could materially
effect the Company's results of operations and cash flows and, accordingly, the
carrying value of the goodwill associated with the original purchase of the
Clozapine business has been written off. (See Note 6 to the Consolidated
Financial Statements.)
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 related to 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. As a
result of a July 1997 advisory committee recommendation to the FDA, it is
possible that there will be a change in the frequency of blood monitoring to
bi-weekly after six months of therapy and monitoring after one year may become
voluntary. While this preliminary recommendation is subject to approval by the
FDA, the Company believes it is probable that the future profitability and cash
flows of the CPMB business have been impaired sufficiently to result in a
write-off of the related goodwill. Because of the significance of the CPMB
business to the total cash flows and the deteriorating financial condition of
the Company, it is likely the Company will need to restructure its future
operations with or without the potential merger with Transworld. In assessing
the carrying value of its goodwill, the Company's estimate of future cash flows
was based on their best estimate for the next five years. While definitive
restructuring plans have not been finalized, the Company has written off, in
the fourth quarter of fiscal 1997, the remainder of its
30
<PAGE> 31
goodwill and approximately $950,000 of assets related to facilities expected
to be closed or sold. (See "Business --Markets--Schizophrenia" and Note 6 to
the Consolidated Financial Statements.).
.
RESULTS OF OPERATIONS
YEAR ENDED APRIL 30, 1997 AS COMPARED TO YEAR ENDED APRIL 30, 1996
Revenues for the year ended April 30, 1997 were $158,419,205, a decrease
of $440,433 or .3% in comparison to revenues for the year ended April 30, 1996.
The slight decline in revenues is largely attributable to management's focus
being diverted to cash flow improvement and cost reductions as well as
financing for and selling the Company rather than revenue growth. In addition,
the Company has been experiencing (a) a reduction in reimbursement rates that
occurs when the pharmacy benefit is "carved out" from the major medical
benefit and switched to a drug card plan at lower revenue rates; (b) an 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 Clozaril(R) Patient Management Business (see "Introduction of
New Antipsychotic Drugs; Blood Monitoring," in "Special Considerations,"
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. These factors were somewhat offset by internal growth
from ongoing patient referrals from existing and new referral sources.
Gross profit margins were 18.7% for the year ended April 30, 1997, as
compared to 24.3% for the prior year. Without the one time write-off of
$2,840,000 of medical device inventory in fiscal year 1996, the gross profit
margin for that year would have been 26.1%. 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. 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(R) 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
prices which primarily affected the quarter ended October 31, 1996; (c) the
retroactive reversal in the quarter ended January 31, 1997, by a 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) purchase discounts associated with drug
purchases which are no longer available to the Company because of its recent
financial condition and (e) higher contractual allowances.
Operating expenses for the year ended April 30, 1997 were $85,896,735, a
net
31
<PAGE> 32
increase of $36,607,942 over the year ended April 30, 1996. The principal
components of the net increase were:
A $.8 million increase in selling expenses. This increase is primarily
the result of incremental shipping costs of $.35 million incurred because
the Company could only afford to carry minimum amounts of inventory and
had to use expensive overnight shipping to deliver product and
$.25 million in marketing of the Company's new infertility line of
products, including supporting its internet web site.
A $2.1 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 $4.2 million increase in the provision for doubtful accounts. In the
third quarters 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 remainder of the
increase is due to the higher estimated loss rates being applied to the
various aging categories of receivables especially in the receivables
being collected by the Company's Long Island, New York, office where
collection efforts were hampered by inadequate staffing and follow-up.
See Note 6 to the Consolidated Financial Statements.
A $29.5 million increase in unusual charges. During the year ended April
30, 1997, the Company provided (a) $30.9 million to write off goodwill and
write down certain facilities related to an impairment in value caused
primarily by an advisory committee recommendation to the FDA to reduce
the blood monitoring of Clozaril(R) patients, fees from which are a
significant portion of the Company's gross margin from its Clozaril(R)
business; (b) $2.8 million charge ($2.4 million of which relates to a
write-off of goodwill) for the closing or sale of three retail pharmacies,
which pharmacies no longer conform to the Company's current focus and
strategy and were immaterial to the Company's overall current and
prospective operations; and (c) $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). See Note 6 to the
Consolidated Financial Statements.
Loss from operations for the year ended April 30, 1997 was ($56,196,933)
compared to a ($10,652,683) 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 $4,825,000 during the year ended
32
<PAGE> 33
April 30, 1997 related to the estimated costs of the settlement of the
stockholder class action litigation and certain other litigation. No similar
costs were incurred in 1996.
Interest expense for the year ended April 30, 1997 was $4,813,941 an
increase of $2,096,786, or 77.2% over the year ended April 30, 1996. The
increase is attributable to the accrual of a $650,000 forbearance fee to the
Company's senior lender, increased borrowings and a higher percentage rate of
interest being paid on debt and other obligations.
Loss before income taxes for the year ended April 30, 1997 was
($65,822,407) compared to a loss of ($13,332,187) for the year ended April 30,
1996. Expenses related to the write-off of the $30.9 million of goodwill and
long lived assets at certain facilities; an additional $10 million provision
for doubtful accounts; the costs associated with the closing or sale of the
Company's three retail pharmacies ($2.8 million); the estimated costs of the
settlement of the stockholder class action litigation of $4.55 million and
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 year were the primary reasons for the loss.
Income taxes for the year ended April 30, 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 while
at the same time the Company incurred income or franchise tax expense in
certain states in which it does business.
The net loss for the year ended April 30, 1997 was ($66,098,797) compared
to net loss of ($10,927,341) for the period ended April 30, 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 year ended April 30, 1996 related
to the tax benefit of a net operating loss carryback, which did not apply in
the year ended April 30, 1997.
Primary and fully diluted loss per common share for the year ended April
30, 1997 were ($5.52) compared to a loss per common share of ($1.16) for the
year ended April 30, 1996. The weighted average number of shares outstanding
used in the calculation of primary and fully diluted earnings per share were
11,982,000 for the year ended April 30, 1997 and 9,414,500 for the year ended
April 30, 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
million of the increased levels. Additional growth of approximately $6 million
was generated from the acquisition of the Arcade and Kaufmann's businesses which
were acquired on February 1,
33
<PAGE> 34
1995 and therefore were reflected in the Company's consolidated 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 LifecareTM Program and new referral
sources.
Gross profit margins were 24.3% for the year ended April 30, 1996, a 3.7
percentage-point decline from 28.0% for the preceding fiscal year. The decrease
in the gross profit rate was primarily attributable to the following factors:
(a) a $2.8 million 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; and (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 -Reimbursement "). Without the $2.8 million
charge, the gross profit margin would have been 26.1%. These decreases in gross
profit margins were partially offset by the Clozaril(R) Patient Management
Business, which currently generates a higher gross profit margin than the other
segments of the Company's business and which recorded a gross profit of $15.9
million or approximately 41% of the Company's overall gross profit in fiscal
1996. The erosion of the Company's profit margins is typical of recent
healthcare industry trends and is attributable to the pricing pressure exerted
by managed care organizations.
Operating expenses for the fiscal year ended April 30, 1996 were
$49,288,793, an increase of $27,736,604 or 129.0% over operating expenses of
$21,525,189 for the year ended April 30, 1995. $5.6 million of this increase
was attributable to unusual charges recorded during the third quarter of fiscal
year 1996; $3.6 million 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 $.6 million and a charge for the write-off of assets of
approximately $1 million and the accrual of lease termination costs of
approximately $.7 million; and $2.0 million was associated with professional
fees arising out of the Company's restatements, litigation, etc. The Company
also increased the provision for doubtful accounts by $8.4 million in the third
quarter of fiscal 1996. This increased provision related primarily to the organ
transplant 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 wereconducted 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
34
<PAGE> 35
Arcade and Kaufmann's business versus three months in the fiscal year 1995. The
Clozaril(R) Patient Management Business was acquired on April 1, 1995. The full
year inclusion of the Clozaril(R) Patient Management Business resulted in an
increase in operating expenses of approximately $9.9 million.
The operating loss for the fiscal year 1996 was ($10,652,683), a
$13,875,501 change from the operating profit of $3,222,818 for the fiscal year
1995. The unusual and other charges recorded in the third quarter of fiscal
year 1996 resulted in the operating loss for the year.
Interest expense for the year ended April 30, 1996 was $2,717,155 compared
to $269,316 in fiscal year 1995. The increase in interest expense was driven by
the outstanding term loans associated with the Clozaril(R) Patient Management
Business 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.
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 $2.5 million 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 auditors' report, a valuation
allowance was established for the deferred tax asset.
Primary and fully diluted earnings per share of Common Stock 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.
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 $2,146,600 in the Company's cash and cash equivalents
to $1,133,595 at April 30, 1997 was attributable to cash used in operating
activities, debt repayments and capital expenditures offset by the additional
equity and debt from Transworld and the sales of certain retail pharmacies.
The Company continues to experience monthly operating losses and negative cash
flow.
35
<PAGE> 36
Working capital at April 30, 1997 was a negative ($22,257,107), a decrease
of $24,748,726 from April 30, 1996. Current assets decreased $18,594,443 due
to a decrease in cash and cash equivalents of $2,146,600, a decrease in net
accounts receivable of $9,558,918, an increase in inventories of $307,039, a
decrease in tax refund receivable of $5,175,997, a decrease in deferred tax
assets of $1,807,000 and a decrease in prepaid expenses of $212,967.
Current liabilities increased $6,154,283 from April 30, 1996 principally
due to a increase an accounts payable of $430,936, a decrease of $2,105,697 in
accrued unusual charges and settlement costs, an increase in accrued expenses
of $2,516,932, and an increase in the current maturities of debt and other
obligations of $5,312,112.
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 historical 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 was no improvement in the lines of credit available to the Company as a
result of entering into the Stock Purchase Agreement and the Merger Agreement
with Transworld and there has been no significant improvement in such
relationships 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 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.
The Company is in default under various covenants contained in the Credit
Agreement and, since July 15, 1997, has not made payments of interest
thereunder. The Forbearance Agreement between Transworld and the Company has
not been extended past July, 1997, but, as of the date hereof, Transworld has
not pursued any of its remedies under the Credit Agreement. To date the Company
has experienced continued monthly operating losses and net cash outflows.
During the period May through July 1997, the Company received additional net
advances of $1.4 million from Transworld under its revolving credit facility.
In addition the Company continues to experience monthly operating losses
and negative cash flows. According, the Company is not generating sufficient
cash flow to meet its expenses. While the Company is continuing to experience
difficulties in collecting accounts receivable, management anticipates that the
Company may be able to make sufficient collections, particularly from older
accounts receivable, to meet its expenses. There can be no assurance, however,
that the Company will be able to collect accounts receivable in a timely
manner. The Company's liquidity crisis may be temporarily eased upon receipt
of an anticipated tax refund of $2.8 million. However, under the terms of
the Credit Agreement, the proceeds of the refund are payable to Transworld.
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<PAGE> 37
In order to meet its ongoing cash flow requirements and continue its
operations, the Company may be dependent upon further cash infusions from
Transworld. In light of Transworld's agreement with Counsel, Transworld's
principal stockholder, Hyperion, has indicated its willingness to provide the
Company with additional liquidity. However, neither Transworld nor Hyperion is
obligated to provide the Company with additional funds.
In the event that the Company is not stabilized throught the Merger or an
alternative transaction, the Company may file for protection under Federal
Bankruptcy Laws.
NEW ACCOUNTING PRONOUNCEMENTS
Earnings per Share
Statement of Financial Accounting Standards Number 128 "Earnings per
Share" ("SFAS 128"), issued by the Financial Accounting Standards Board
("FASB") is effective for financial statements for fiscal years ending after
December 15, 1997. This pronouncement provides a different method of
calculating earnings per share than is currently used in accordance with
Accounting Principles Board Opinion Number 15, "Earnings per Share". SFAS 128
provides for the calculation of basic and diluted earnings per share. Basic
earnings per share includes no dilution and is computed by dividing income
available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution of securities that could share in the earnings of an entity.
Management does not anticipate a significant effect on earnings (loss) per
share as a result of implementing SFAS 128.
Information About Capital Structure
SFAS 129, "Disclosure of Information about Capital Structure", effective
for periods ending after December 15, 1997, establishes standards for
disclosing information about an entity's capital structure. SFAS 129 requires
disclosure of the pertinent rights and privileges of various securities
outstanding (stock, options, warrants, preferred stock, debt and participation
rights) including dividend and liquidation preferences, participation rights,
call prices and dates, conversion or exercise prices and redemption
requirements. Adoption of SFAS 129 is not expected to affect the Company as it
currently discloses the information specified.
Reporting Comprehensive Income
SFAS 130, "Reporting Comprehensive Income", effective for fiscal years
beginning after December 15, 1997, establishes standards for reporting
comprehensive income and its components (revenues, expenses, gains and losses).
This statement requires that all items that are required to be recognized
under accounting standards as the components of comprehensive income be
reported in a financial statement that
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<PAGE> 38
is displayed with the same prominence as other financial statements. This
statement requires that an enterprise (a) classify items of other comprehensive
income by their nature in a financial statement and (b) display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of the balance sheet. The
Company has not evaluated the impact of this statement since it was just
released in June 1997.
Disclosure About Segments of an Enterprise and Related Information
SFAS 131, "Disclosures About Segments of an Enterprise and Related
Information", effective for periods beginning after December 15, 1997,
establishes standards for the way public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to stockholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. This statement supersedes SFAS 14,
"Financial Reporting for Segments of a Business Enterprise", but retains the
requirement to report information about major customers. This statement
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. Operating segments are
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. Generally,
financial information is required to be reported on the basis that it is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. The Company has not evaluated the impact of this
statement since it was released in June 1997.
ITEM 8. FINANCIAL STATEMENTS
The Financial Statements for the fiscal year ended April 30, 1997 may be
found beginning on page F-1 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The following table contains information concerning the Company's
directors and executive officers. It is expected that these persons will serve
in these offices until the next annual meeting or until their respective
successors are elected and qualified or until they are replaced following the
consummation of the Merger.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Andre C. Dimitriadis...... 56 Chairman of the Board and Director
James R. Mieszala......... 46 Chief Executive Officer, President
and Assistant Secretary
Dennis J. Conley.......... 44 Vice President of Finance and
Treasurer
W. James Nicol............ 54 Director and Secretary
Dr. Timothy Triche........ 53 Director
D. Mark Weinberg.......... 45 Director
</TABLE>
James R. Mieszala
Mr. Mieszala was named the Chief Executive Officer, President and
Assistant Secretary of the Company on August 11, 1997. From May 1996 until
August 1997, Mr. Mieszala served as the Chief Operating Officer of the Company
and prior to that served as Acting President of the Company's subsidiary Home
Care Management, Inc. 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.
Dennis J. Conley
Mr. Conley has been the Vice President of Finance and Treasurer of the
Company since August 11, 1997. Prior to joining the Company, Mr. Conley served
as Chief Financial Officer of Dental Care Plan Management Corp. from 1995 until
1996. From 1979 through 1994, Mr. Conley held various positions with KPMG Peat
Marwick, including Partner from 1989 through 1994. Mr. Conley graduated from
Saint Louis University in 1975 and has an MBA from the Saint Louis University
Graduate School of Business.
39
<PAGE> 40
Andre C. Dimitriadis
Mr. Dimitriadis was elected as a Director of the Company in October 1993.
He became the Chairman of the Board of Directors of the Company in May 1996.
Mr. Dimitriadis is the Chief Executive Officer and Chairman of LTC Properties,
Inc., Oxnard, California, a real estate investment trust that invests in
long-term care and other health care related facilities. Prior to founding LTC
Properties, Mr. Dimitriadis was Executive Vice President and Chief Financial
Officer of Beverly Enterprises, an owner/operator of nursing facilities, from
October 1989 to May 1992. From December 1984 to July 1989 he was Executive
Vice President, Chief Financial Officer and a Director of American Medical,
Inc., an owner/operator of hospitals. Mr. Dimitriadis is a Director of
Magellan Health Services, Inc. and Assisted Living Concepts, Inc. Mr.
Dimitriadis earned a B.S. in electrical engineering from Robert College,
Istanbul, Turkey, an M.S. in computer science from Princeton University and an
M.B.A. and Ph.D. from New York University.
W. James Nicol
Mr. Nicol was named to the Board of Directors of the Company in May 1996.
He also served as Chief Executive Officer and President of the Company from May
1, 1996 through August 10, 1997, as Chief Financial Officer and Treasurer from
January 10, 1997 through August 10, 1997 and as Secretary since January 10,
1997. Mr. Nicol is currently the Chief Financial Officer of Med First
Healthcare Affiliates. 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 in 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.
D. Mark Weinberg
Mr. Weinberg was elected as a Director of the Company in November 1995.
Mr. Weinberg is the President of the WellPoint Group's Unicare Businesses.
Prior to that position, from 1987 to 1996, Mr. Weinberg held a variety of
executive management positions with WellPoint Health Networks Inc. and its
affiliates, including Executive Vice President. Mr. Weinberg received a B.S.
in 1975 from the University of Missouri at Columbia.
Dr. Timothy Triche
Dr. Triche was elected as a Director of the Company in November 1995. Dr.
Triche is the Chairman of the Board and the Chief Executive Officer of
OncorMed, Inc., a clinical services company. He is also Pathologist-in-Chief
for the Children's Hospital of Los Angeles in Los Angeles, California and
Professor of Pathology and Pediatrics at, and Vice Chairman of, the University
of Southern
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<PAGE> 41
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.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's executive officers and directors, and persons who own more than
ten percent of a registered class of the Company's equity securities, to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission and the Nasdaq Stock Market. Executive officers, directors and
greater than ten percent stockholders are required by SEC regulation to furnish
the Company with copies of all Section 16(a) forms they may file.
Based solely on a review of the copies of such forms furnished to the
Company, or written representations from certain persons that no Forms 5 were
required, the Company believes that during the fiscal year ended April 30,
1997, no directors, officers or beneficial owners of more than 10% of the
Company's common stock failed to file, on a timely basis, reports required by
Section 16(a) of the Securities Exchange Act of 1934 other than Messrs.
Dimitriades and Weinberg and Dr. Triche who failed to file one Form 4 on a
timely basis.
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<PAGE> 42
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table summarizes compensation for services to the Company in
all capacities awarded to, earned by or paid to (i) the Company's chief
executive officers and(ii) the three other most highly compensated executive
officers who earned in excess of $100,000 in salary and bonus (the "Named
Executive Officers"). No other executive officer of the Company met the
definition of "highly compensated" within the meaning of the Securities and
Exchange Commission's executive compensation disclosure rules.
<TABLE>
<CAPTION>
Long Term Compensation
----------------------
Annual Compensation AWARDS PAYOUTS
------ -------
All Other
Name and Principal Year Salary Bonus Options/SARs Compensation(2)
- -------------------- ---- ------ ----- ------------ ------------
Position (1)
- --------
<S> <C> <C> <C> <C> <C>
W. James Nicol,
Chief Executive
Officer and
President(3) 1997 $286,154 $50,000 -- --
Paul S. Jurewicz,
Chief Financial
Officer and
Executive Vice
President(4) 1997 $133,606 $50,000 -- $1,177
1996 $ 58,461 __ 200,000 __
James R. Mieszala,
Chief Operating
Officer(5) 1997 $215,193 $50,000 -- $2,690
1996 $ 64,616 -- 200,000 --
Robert Clifton,
Vice President (6) 1997 $166,920 -- 35,000 $2,787
1996 $165,264 -- -- $3,059
1995 $149,600 -- -- $1,723
</TABLE>
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<PAGE> 43
(1) Effective May 1, 1996, Mr. Nicol entered into a three-year employment
agreement pursuant to which he received $300,000 during the first year of the
term of the agreement plus a bonus to be determined in the future. In
connection with the Merger Agreement and the Stock Purchase Agreement, on
November 13, 1996, Mr. Nicol and the Company amended Mr. Nicol's employment
agreement to provide that Mr. Nicol shall continue to serve as Chief Executive
Officer and President of the Company through the effective date of the Merger
and to provide for the payment of certain bonuses, $50,000 of which was paid
during the fiscal year ended April 30, 1997.
On September 9, 1996, Messrs. Jurewicz and Mieszala entered into new
employment agreements with the Company with a term through April 30, 1998. Mr.
Jurewicz's agreement provided for a base salary of $180,000. Mr. Mieszala's
employment agreement provided for a base salary of $225,000 during the fiscal
year ended April 30, 1997. In connection with the Merger Agreement and Stock
Purchase Agreement, on November 13, 1996, Messrs. Jurewicz and Mieszala entered
into amendments to their employment agreements providing that the Merger and
stock purchase will not trigger the change of control provisions in their
employment agreements. The amendments also provided for the payment of certain
bonuses, $50,000 of which was paid to each of them during the fiscal year
ending April 30, 1997.
(2) All compensation listed herein consists of matching payments made pursuant
to the Company's 401(k) Plan.
(3) Mr. Nicol served as the President and Chief Executive Officer of the
Company from May 1, 1996 through August 10, 1997 when he was replaced by Mr.
Mieszala.
(4) Mr. Jurewicz served as the Chief Financial Officer and Executive Vice
President of the Company until January 10, 1997.
(5) Mr. Mieszala was named the Chief Executive Officer and President of the
Company on August 11, 1997. Prior to that, he was the Chief Operating Officer
of the Company.
(6) Mr. Clifton resigned effective March 28, 1997.
Lance Berkowitz, a Vice President of a subsidiary of the Company and a
previous owner of the businesses of Arcade and Kaufmann's, was paid a salary
and bonus of $196,154 and $150,000, respectively, in fiscal 1997 and $152,308
and $150,000, respectively, in fiscal 1996. He also received options for 10,000
shares of Common Stock of the Company and payouts of $3,154 in fiscal 1997.
Mr. Berkowitz is not an executive officer of the Company.
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<PAGE> 44
OPTION GRANTS IN LAST YEAR
<TABLE>
<CAPTION>
Individual Grants Potential
realizable value at
assumed annual
rates of stock
price appreciation
for option term (1)
- ------------------------------------------------------------------------------------------------------------------------------------
Percent
of total Exercise Expiration
Name Number options or base date 5% 10%
of granted price
securities to
underlying employees
options in fiscal
granted year
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> C> <C> <C>
W. James Nicol -- -- -- -- -- --
Paul S. Jurewicz -- -- -- -- -- --
James R. Mieszala -- -- -- -- -- --
Robert Clifton 35,000 7.2% $4.16 9/9/03 -- --
</TABLE>
(1) In connection with the Merger, a holder of an outstanding option will be
entitled to receive the $0.30 per share merger consideration upon payment of
the exercise price of such option.
AGGREGATED OPTION EXERCISES DURING THE FISCAL YEAR ENDED APRIL 30, 1997 AND
FISCAL YEAR END OPTION VALUES
No options were exercised during the fiscal year ended April 30, 1997 by
the Named Executive Officers.
The following table provides information relating to the number and value
of options held by such Officers at fiscal year-end:
44
<PAGE> 45
Number of securities Value of unexercised
underlying unexercised in-the-money options at
options at fiscal year end fiscal year end (1)
--------------------------------------------------------
Name Exercisable/ Exercisable/
unexercisable unexercisable
W. James Nicol 0/0 0/0
Paul S. Jurewicz 133,333/66,667 0/0
James R. Mieszala 133,333/66,667 0/0
Robert Clifton 11,666/23,334 0/0
(1) The value of unexercised options is determined by multiplying the number of
options held by the difference in the fair market value of the Common Stock
underlying the options at April 30, 1997 (as determined by the closing sales
price on April 30, 1997 as reported by the NASDAQ National Market, which was
$0.172 per share) and the exercise price of the options granted.
LONG-TERM INCENTIVE PLAN AWARDS TABLE.
There were no long-term incentive plans awards granted by the Company
during the fiscal year ended April 30, 1997.
DEFINED BENEFIT OR ACTUARIAL PLAN DISCLOSURE.
The Company has no defined benefit or actuarial plans.
COMPENSATION OF DIRECTORS
Generally, outside directors receive $2,000 per year as a retainer, $1,000
per meeting of the Board of Directors attended, $1,000 per Chairmanship of a
committee of the Board of Directors, and $1,000 per meeting of a committee of
the Board of Directors attended. Pursuant to the 1996 Non-Employee Director
Stock Option Plan, which was adopted by the stockholders at the November 1996
annual meeting of stockholder of the Company, each outside director receives an
option to purchase 10,000 shares of Common Stock at the time of his or her
election. Each non-employee director who has already received the initial
stock option grant mentioned above also receives an annual automatic grant of
options to purchase 2,500 shares of common stock after being reelected at each
annual meeting of the stockholders of the Company.
In addition, the Board of Directors voted to award Mr. Dimitriadis 1,000
shares
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<PAGE> 46
of Common Stock on February 8, 1995 and on that same date awarded him 4,000
shares of Common Stock to be issued to him on the fifth anniversary of the date
that he was elected to the Board of Directors, provided that if he resigns,
retires or dies prior to such date he is entitled only to the pro rata amount
of such shares; however, if he is terminated as a director, other than for
cause, or if there is a merger, consolidation, acquisition of substantially all
of the assets, reorganization or liquidation of the Company, he will be
entitled to the full 4,000 shares. These awards of shares were in place of
awards of 5,000 shares to be made over a five-year period at the time of Mr.
Dimitriadis' election to the Board of Directors.
On April 3, 1996, the Executive Committee passed resolutions compensating
Messrs. Dimitriadis and Weinberg and Dr. Triche for their efforts serving on
various committees of the Board, including the Special Committee, and for
serving as the Office of the Chief Executive Officer. Each of Mr. Weinberg and
Dr. Triche were awarded options to purchase 7,500 shares of Common Stock, stock
appreciation rights with respect to 22,500 shares of Common Stock and $30,000
in cash, and Mr. Dimitriadis was awarded options to purchase 10,000 shares of
Common Stock, stock appreciation rights with respect to 30,000 shares of Common
Stock and $40,000 in cash. The vesting schedule for the exercisability of the
stock options and for the stock appreciation rights were half upon the
appointment of the permanent Chief Executive Officer of the Company and half
upon the first annuversary of the date thereof. The exercise prices or strike
price for these stock options and stock appreciation rights was the average
closing price of shares of Common Stock for the five (5) trading days preceding
April 3, 1996 or $4.8375 per share. On September 9, 1996,the Executive
Committee of the Board of Directors of the Company repriced the exercise price
of the stock options to $4.16 per share, or the average closing price of the
Common stock for the five (5) days preceding September 9, 1996. Also, at the
September 9th meeting of the Executive Committee, the stock appreciation rights
previously authorized for issuance to Messrs. Dimitriadis and Weinberg and Dr.
Triche were rescinded and, in place thereof, stock options were authorized,
subject to stockholder approval, for 30,000, 22,500,and 22,500 shares of Common
Stock, respectively. Such stockholder approval was not obtained. The
foregoing awards of stock options, stock appreciation rights and cash were
contingent upon Messrs. Weinberg and Dimitriadis and Dr. Triche waiving their
respective rights to any remunerations to which they might be entitled from the
Company for the period beginning on February 18, 1996 through September 9, 1996.
In addition, Mr. Weinberg and Dr. Triche relinquished their rights to receive
the options for 4,000 shares normally granted to new directors of the Company.
In addition, on May 6, 1996, the Board of Directors of the Company voted
to issue stock options for 30,000 shares of the Common Stock for each
non-employee director and stock options for an additional 20,000 shares of the
Common Stock to the Chairman of the Board, subject to stockholder approval.
Stockholder approval for these shares was not obtained.
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
In May 1996 the Company entered into a three year employment agreement
with W. James Nicol to serve as Chief Executive Officer and President of the
Company.
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<PAGE> 47
Pursuant to the terms of the employment agreement, Mr. Nicol received an annual
base salary of $300,000. Pursuant to the employment agreement, if (i) the
Company terminates Mr. Nicol other than for disability or for cause or (ii) Mr.
Nicol resigns pursuant to the agreement upon a change of control of the Company
or upon a material reduction by the Company of Mr. Nicol scope and/or
authority, then Mr. Nicol will be entitled to receive a severance payment equal
to his base salary for the remaining term of the agreement and all of the
options granted to Mr. Nicol's under the agreement shall become vested and
immediately exercisable. If the Company terminates Mr. Nicol other than for
disability or for cause, then Mr. Nicol will also be entitled to receive a
prorated portion of any bonus to which he may be entitled. Under his
employment agreement, Mr. Nicol was also eligible to receive options for
500,000 shares of Common Stock of the Company subject to stockholder approval;
however, such stockholder approval was not obtained.
On September 9, 1996, the Company entered into a new employment agreement
with James R. Mieszala to serve as Chief Operating Officer of the Company. The
term of Mr. Mieszala's employment ends on April 30, 1998. Pursuant to the
terms of the employment agreement, Mr. Mieszala is entitled to receive an
annual base salary of $225,000. Mr. Mieszala may receive, at the sole
discretion of the Company, a performance bonus based upon the Executive
Incentive Compensation Plan to be approved and adopted by the Board of
Directors. On April 3, 1996, the Executive Committee of the Board of Directors
of the Company granted Mr. Mieszala and certain other employees of the Company
options with an exercise price of $4.975 per share, subject to a waiver of
previously granted options. Such options were repriced to $4.16 per share on
September 9, 1996. Mr. Mieszala's option was with respect to 200,000 shares of
Common Stock. Pursuant to the employment agreement, if (i) the Company
terminates Mr. Mieszala other than for disability or for cause or (ii) Mr.
Mieszala resigns pursuant to the agreement upon a change of control of the
Company or upon a material reduction by the company of Mr. Mieszala's scope
and/or authority, then Mr. Mieszala will be entitled to receive a severance
payment equal to his base salary for the remaining term of the agreement and
all of the options granted to Mr. Mieszala under the agreement shall become
vested and immediately exercisable. If the Company terminates Mr. Mieszala
other than for disability or for cause, then Mr. Mieszala will also be entitled
to receive a prorated portion of any bonus to which he may be entitled. On
August 11, 1997, in anticipation of his added responsibility as Chief Executive
Officer and President of the Company, the Board of Directors voted to grant a
bonus of $15,000 to Mr. Mieszala and increase his salary by $10,000 per month
effective August, 1997.
On November 13, 1996, in connection with the execution of the Merger
Agreement and 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.
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 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. The Letter
Agreement provided that if Mr. Nicol's employment were terminated by the
Company prior to or after the Effective
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<PAGE> 48
Time, or if Mr. Nicol were to voluntarily elect to terminate his employment
after the Effective Time, the Company would 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 provided 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. On August 10, 1997, Mr. Nicol's
employment with the Company was terminated and Mr. Nicol agreed to receive his
accrued vacation pay and base salary through December 31, 1997 in lieu of any
other severance payments.
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 will not constitute a
change of control under Mr. Mieszala's employment agreement provided (a) the
Company pays Mr. Mieszala $50,000 on January 2, 1997 (which the Company has
paid), $50,000 on June 30, 1997 (which the Company has paid), 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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors has a compensation committee which consists of Mr.
Dimitriadis and Dr. Triche, with Dr. Triche serving as chairman. Mr.
Dimitriadis and Dr. Triche are independent non-employee directors and were
appointed by the Board of Directors to serve as members of the committee on
February 18, 1996.
Report of the Compensation Committee of the Board of Directors on Executive
Compensation
Introduction
During the fiscal year ended April 30, 1997 the Compensation Committee
consisted of two independent non-employee directors, Dr. Triche and Mr.
Dimitriadis who were appointed on February 18, 1996. The Compensation
Committee is responsible for establishing executive compensation for the
Company's top level executives, administering the Company's current long-term
incentive program and implementing any additional short and long-term
compensation programs for executives which the Committee believes are
appropriate in the future. All decisions by the Compensation Committee are
subject to the approval of the Board of Directors or the executive
48
<PAGE> 49
Committee thereof. The Compensation Committee met 4 times during the fiscal
year ended April 30, 1997.
Philosophy
Generally, the compensation philosophy of the Company is to develop and
implement policies that will encourage and reward outstanding performance, seek
to increase the profitability of the Company, and maximize the Company's return
on equity so as to increase stockholder value. Maintaining competitive
compensation levels in order to attract and retain executives who bring
valuable experience and skills to the Company is also an important
consideration. Over the past year, the Company has attempted to maintain and
incentivize employees by rewarding them for their increased duties performed
during the course of a difficult period at the Company. The Compensation
Committee has been particularly focused on the substantial demands the Company
has made on its senior management team during the course of the year.
Compensation of the Chief Executive Officer
Mr. Nicol, who was appointed Chief Executive Officer as of May 1, 1996,
received an annual base salary of $300,000 in the fiscal year ending April 30,
1997 plus a bonus of $50,000. The Compensation Committee believes that Mr.
Nicol's salary was reasonable in light of the unusual demands which were placed
on him during the year.
Effective August 11, 1997, Mr. Mieszala was appointed Chief Executive
Officer and President and will earn a base annual salary of $225,000 plus
$10,000 per month beginning August 1997. Since the end of the fiscal year,
Mr. Mieszala has been paid a bonus of $50,000 and is eligible to be paid an
additional $15,000. The Compensation Committee believes that Mr. Mieszala's
salary is reasonable in light of the unusual demands which will be placed on
him during the upcoming year, that his compensation level reflects the
Compensation Committee's confidence in Mr. Mieszala and the Company's desire to
retain his talents during an extremely difficult period.
Executive Compensation for Fiscal Year 1998
In the fiscal year ending April 30, 1998, total compensation of top
executives will be targeted in order to retain such executives during the
Company's period of financial uncertainty. It is anticipated that total
compensation will consist of base salary and bonuses, and that given the
Company's present condition no stock or other equity compensation will be
granted.
Conclusion
The Compensation Committee believes that the compensation paid to its
executive officers is comparable to compensation paid by similar companies and
companies under difficult circumstances similar to those of the Company.
49
<PAGE> 50
This report by the Compensation Committee shall not be deemed to be
incorporated by reference by any general statement incorporating by reference
this Proxy Statement into any filing under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended, and shall not
otherwise be deemed filed under such Acts.
DR. TIMOTHY TRICHE
STOCK PERFORMANCE CHART
The following graph compares cumulative total returns to the holders of
the Common Stock from May 1, 1992 through the end of the fiscal year ended
April 30, 1997 to a peer group consisting of Health Care service companies
listed on the NASDAQ National Market, and to the NASDAQ Market Index. Total
return values were calculated based on the assumption of $100 invested and on
cumulative total return values assuming reinvestment of dividends. The stock
price performance shown on the graph below is not necessarily indicative of
future price performance.
50
<PAGE> 51
COMPARISON OF MAY 1, 1992 TO APRIL 30, 1997
CUMULATIVE TOTAL RETURN
AMONG HEALTH MANAGEMENT, INC., HEALTH CARE SERVICE COMPANIES
LISTED ON THE NASDAQ SMALLCAP MARKET, AND THE NASDAQ INDEX
[LINE GRAPH]
<TABLE>
<CAPTION>
NASDAQ NAT'L NASDAQ MARKET
MARKET INDEX INDEX HMI
<S> <C> <C> <C>
1992 100 100 100
1993 114 104 174
1994 127 132 283
1995 148 134 308
1996 210 210 91
1997 224 162 3
</TABLE>
51
<PAGE> 52
The foregoing stock price performance graph shall not be deemed to be
incorporated by reference by any general statement incorporating by reference
this Proxy Statement into any filing under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended, and shall not
otherwise be deemed filed under such Acts.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The following information is submitted as of August 15, 1997 with respect
to the Company's voting securities owned beneficially by each person known by
the Company owning more than 5% of the Common Stock of the Company (this being
the only class of voting securities now outstanding), by Named Executive
Officers of the Company and by all directors, officers both individually and as
a group:
<TABLE>
<CAPTION>
Amount and Nature
Name of Beneficial Address of Beneficial Percentage
Owner 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
James R. Mieszala c/o 1371-A Abbott Court 133,333(3) *
Buffalo Grove,
Illinois 60089
Paul S. Jurewicz 2261 Churchill Lane
Libertyville,
Illinois 60048
Robert C. Clifton 26 Hermitage Street 11,666(4) *
Wading River, New York
11792
Andre C. Dimitriadis c/o 1371-A Abbott Court 39,500(5) *
Buffalo Grove,
Illinois 60089
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(6) *
Buffalo Grove,
Illinois 60089
Dr. Timothy J. Triche c/o 1371-A Abbott Court 10,000(7) *
Buffalo Grove,
Illinois 60089
All Current Directors and 204,499 1.1%
Officers as a Group (5
</TABLE>
52
<PAGE> 53
Persons) (3) (5) (6) (7)
*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) Includes 133,333 Shares subject to options with an exercise price that
exceeds the Merger Consideration.
(4) Includes 11,666 Shares subject to options with an exercise price that
exceeds the Merger Consideration.
(5) 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.
(6) Includes 10,000 Shares subject to options with an exercise price that
exceeds the Merger Consideration.
(7) Includes 10,000 Shares subject to options with an exercise price that
exceeds the Merger Consideration.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On November 13, 1996 Transworld acquired the bank debt of the Company and
entered into the Stock Purchase Aagreement and the Merger Agreement with the
Company. On January 13, 1997, pursuant to the Stock Purchase Agreement,
Transworld acquired 49% of the outstanding shares of the Company's Common Stock
and option to purchase additional shares of the Company's common stock which,
if exercised, would result in Transworld owning 51% of the outstanding shares
of the Company's Common Stock. The Merger Agreement is currently in effect but
Transworld has not yet been able to obtain the necessary bank consent in order
to consummate 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
53
<PAGE> 54
Caremark, Inc. which, in the aggregate, amount to approximately $18.3 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.
For more information concerning the transactions with Transworld and Hyperion,
see "Business-Transactions with Transworld Health Care, Inc." above.
Transworld has asserted that under the terms of the $28,350,000 bank debt
it purchased, Transworld is owed $650,000 related to the forbearance agreement
related to that debt. The Company has accrued this forbearance fee in interest
expense.
54
<PAGE> 55
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents Filed As A Part of This Report
(1) Financial Statements. The financial statements of Health Management,
Inc. and Subsidiaries for the year ended April 30, 1997, together with the
Report of Independent Certified Public Accountants, are set forth
beginning on page F-1 hereof.
(2) Financial Statement Schedules. Financial statement schedules required
by Items 8 and 14(d) of this Report are set forth following page S-1 of
the financial statements.
(b) Reports on Form 8-K
The Company filed one current report on Form 8-K, dated March 26, 1997,
with the Securities and Exchange Commission, during the fourth quarter of
the fiscal year ended April 30, 1997. The Form 8-K related to matters
described under Item 5.
(c) Exhibits
3.1 Certificate of Incorporation of the Company, as filed with the Secretary
of State of Delaware on March 25, 1986 (incorporated by reference to
Registration Statement on Form S-1, Registration No. 33-04485).
3.2 Certificate of Amendment to Certificate of Incorporation of the Company,
as filed with the Secretary of State of Delaware on March 9, 1988
(incorporated by reference to Form 10-K for year ended April 30, 1988).
3.3 Certificate of Amendment to Certificate of Incorporation of the Company,
as filed with the Secretary of State of Delaware on March 31, 1992
(incorporated by reference to Registration Statement on Form S-1, No.
33-46996).
3.4 Certificate of Amendment to Certificate of Incorporation of the Company,
as filed with the Secretary of State of Delaware on October 27, 1994
(incorporated by reference to Form 10-K for year ended April 30, 1995).
3.5 Certificate of Amendment of Certificate of Incorporation of
55
<PAGE> 56
the Company, as filed with the Secretary of State of Delaware on
November 8, 1996 (incorporated by reference to Form 10-Q for the
quarter ended January 31, 1997).
3.6 Amended and Restated By-Laws of the Company (incorporated by reference to
Form 10-Q for the quarter ended January 31, 1996).
4.1 Form of 10% Convertible Subordinated Debenture (incorporated by reference
to Form 8-K dated March 4, 1991).
4.2 Specimen Form of Certificate for Common Stock (incorporated by reference
to Registration Statement on Form S-1, Registration No. 33-46996).
4.3 Form of Representatives' Purchase Warrant (incorporated by reference to
Amendment Number 2 to Registration Statement on Form S-1, Registration
No. 33-46996).
4.4 Form of Selling Shareholders' Power of Attorney (incorporated by
reference to Registration Statement on Form S-1, Registration No.
33-46996).
4.5 Form of Selling Shareholders' Custody Agreement (incorporated by
reference to Registration Statement on Form S-1, Registration No.
33-46996).
10.1 Stock Purchase Agreement dated December 8, 1988 (incorporated by
reference to Form 8-K dated December 23, 1988).
10.3* 1989 Stock Option Plan (incorporated by reference to Registration
Statement on Form S-1, Registration No. 33-46996).
10.4 Lease dated April 20, 1990 on Company's Ronkonkoma, New York facility
between the Company and Four L Realty Co (incorporated by reference to
Registration Statement on Form S-1, Registration No. 33-46996).
10.5 Amendment, dated March 16, 1992 to Lease dated April 20, 1990 on
Company's Headquarters between the Company and Four L Realty Co.
(incorporated by reference to Form 10-K for year ended April 30, 1992).
10.6* Company 401(k) Plan (incorporated by reference to Amendment Number 1 to
Registration Statement on Form S-1, Registration
No. 33-46996).
10.7* Employment Agreement, dated as of May 1, 1996, between the
56
<PAGE> 57
Company and W. James Nicol (incorporated by reference to Annual Report
on Form 10-K for the fiscal year ended April 30, 1996).
10.8* Letter Agreement dated November 13, 1996, between W. James Nicol and the
Company and guaranteed by Transworld Home HealthCare, Inc. (incorporated
by reference to Form 10-Q for the quarter ended January 31, 1997).
10.9*+ Severance Agreement dated August 10, 1997, between W. James Nicol and
the Company.
10.10* Employment Agreement, dated as of September 9, 1996, between the Company
and James R. Mieszala (incorporated by reference to Current Report on
Form 8-K dated September 16, 1996).
10.11* Letter Agreement dated November 13, 1996, between James R. Mieszala and
the Company and guaranteed by Transworld Home HealthCare, Inc.
(incorporated by reference to Form 10-Q for the quarter ended January
31, 1997).
10.12* Employment Agreement, dated as of September 9, 1996, between the Company
and Paul S. Jurewicz (incorporated by reference to Current Report on
Form 8-K dated September 16, 1996).
10.13* Letter Agreement dated November 13, 1996, between Paul S. Jurewicz and
the Company and guaranteed by Transworld Home HealthCare, Inc.
(incorporated by reference to Form 10-Q for the quarter ended January
31, 1997).
10.14 Assets Purchase Agreement, dated as of March 27, 1994, between the
Registrant, Murray Pharmacy Too, Inc. and the Shareholders named therein
(incorporated by reference to Current Report on Form 8-K dated April 1,
1994).
10.15 Assets Purchase Agreement, dated as of March 27, 1994, between HMI
Retail Corp., Murray Pharmacy, Inc. and the Shareholders named therein
(incorporated by reference to Annual Report on Form 10-K filed August 2,
1994).
10.16 First Amendment to Asset Purchase Agreement, dated as of March 31, 1995,
between Caremark Inc. and Health Management, Inc. (incorporated by
reference to Current Report on Form 8-K dated April 14, 1995).
10.17 Transition Agreement, dated as of March 31, 1995, between
Caremark Inc. and HMI Illinois (incorporated by reference to Current
Report on Form 8-K dated April 14, 1995).
10.18 Credit Agreement, dated as of March 31, 1995 among Health
57
<PAGE> 58
Management, Inc., Home Care Management, Inc., HMI Pennsylvania, Inc.,
HMI Illinois, Inc., Chemical Bank, and the Guarantors and Lenders named
therein (incorporated by reference to Current Report on Form 8-K dated
April 14, 1995).
10.19 Security Agreement, dated as of March 31, 1995, among Health Management,
Inc., Home Care Management, Inc., Health Reimbursement Corporation, HMI
Retail Corp., Inc., HMI Pennsylvania, Inc. and HMI Maryland, Inc. and
Chemical Bank for itself and the Lenders named therein (incorporated by
reference to Current Report on Form 8-K dated April 14, 1995).
10.20 Security Agreement and Mortgage Trademarks and Patent, dated as of March
31, 1994, among Health Management, Inc., Home Care Management, Inc.,
Health Reimbursement Corporation, HMI Retail Corp., Inc., HMI
Pennsylvania, Inc. and HMI Maryland, Inc. and Chemical Bank for itself
and the Lenders named therein (incorporated by reference to Current
Report on Form 8-K dated April 14, 1995).
10.21 Forbearance Agreement, dated July 26, 1996 among Health Management,
Inc., Home Care Management, Inc., HMI Illinois, Inc., HMI Pennsylvania,
Inc., Health Reimbursement Corporation, HMI Retail Corp., Inc., HMI PMA,
Inc., HMI Maryland, Inc., Chase Manhattan Bank, as lender and agent, and
European American Bank, as lender (incorporated by reference to Annual
Report on Form 10-K for the fiscal year ended April 30, 1996).
10.22 Forbearance Agreement, dated as of November 13, 1996, between the
Company and Transworld Home Healthcare, Inc. (incorporated by reference
to the Form 8-K dated November 13, 1996).
10.23 Agreement of Lease by and between Joseph M. Rosenthal and the Company
dated December 13, 1994 (incorporated by reference to Form 10-K for the
year ended April 30, 1995).
10.24 Lease by and between Irwin Hirsh and Lloyd N. Myers and HMI
Pennsylvania, Inc. dated March 27, 1994 (incorporated by reference to
Form 10-K for the year ended April 30, 1995).
10.25 Lease by and between Irwin Hirsh and HMI Retail Corp., Inc. dated March
27, 1994 (incorporated by reference to Form 10-K for the year ended
April 30, 1995).
10.26 Stipulation of Partial Settlement dated September 16, 1996,
between the Company and the Representative Plaintiffs (incorporated by
reference to Form 8-K dated September, 1996).
10.27 Amended Stipulation of Partial Settlement dated December 19,
58
<PAGE> 59
1996, between the Company and the Representative Plaintiffs
(incorporated by reference to Form 8-K, dated December 23, 1996).
10.28 Agreement and Plan of Merger, dated November 13, 1996, as amended, among
IMH Acquisition Corp., Transworld Home HealthCare, Inc. and the Company
(incorporated by reference to Annex I to the definitive Proxy Statement
on Schedule 14A dated June 16, 1997).
10.29 Stock Purchase Agreement dated as of November 13, 1996, between the
Company and Transworld Home HealthCare, Inc. (incorporated by reference
to Form 8-K dated November 13, 1996).
10.30* 1996 Non-Employee Director Stock Option Plan (incorporated by reference
to Schedule 14A dated October 9, 1996).
10.31* 1996 Employee Stock Option Plan (incorporated by reference to Schedule
14A dated October 9, 1996)
10.32* 1997 Employee Stock Purchase Plan (incorporated by reference to Schedule
14A dated October 9, 1996)
10.33+ Restated Stipulation of Partial Settlement, dated April 23, 1997,
between the Company and the Representative Plaintiffs.
10.34+ Amendment to Merger Agreement, dated July 7, 1997, between the Company,
Transworld HealthCare, Inc. and IMH Acquisition Corp.
10.35 Letter Agreement, dated August 13, 1997, between the Company and Counsel
Corporation (incorporated by reference to Form 8-K dated August 15,
1997).
11+ Statement re Computation of Per Share Earnings.
27+ Financial Data Schedule
99.1+ Final Judgement and Order of Partial Dismissal of Action, dated
June 9, 1997.
* Management contract or compensatory plan or arrangement.
+ Filed with this Report.
59
<PAGE> 60
HEALTH MANAGEMENT, INC.
AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
FORM 10-K - ITEM 8 AND ITEM 14(a)(1) AND (2)
YEAR ENDED APRIL 30, 1997
<PAGE> 61
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
CONTENTS
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-3
FINANCIAL STATEMENTS
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Stockholders' Equity (Deficit) F-6
Consolidated Statements of Cash Flows F-7 - F-8
Notes to Consolidated Financial Statements F-9 - F-43
F-2
<PAGE> 62
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Health Management, Inc. and Subsidiaries
Buffalo Grove, Illinois
We have audited the accompanying consolidated balance sheets of Health
Management, Inc. and Subsidiaries as of April 30, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for each of the three years in the period ended April 30, 1997.
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 financial
statement presentation. 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, 1997 and 1996, and the results of their
operations and cash flows for each of the three years in the period ended April
30, 1997, 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 Note 1 to
the consolidated financial statements, the Company's ability to continue as a
going concern depends on (a) the consummation of the merger agreement with
Transworld Healthcare, Inc. ("Transworld") and the continuing financial and
operating support of Transworld or, should the merger not occur, alternative
means of financial or operating support; (b) continuing satisfactory relations
with its suppliers; and (c) the satisfactory resolution of the litigation
discussed in Note 8(d). In addition, should Transworld exercise its rights
under the credit agreement (Notes 5(a) and 12(b)) or not extend the forbearance
agreement, which expired July 15, 1997, the Company may seek protection under
federal bankruptcy laws. Accordingly, there is 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.
BDO Seidman, LLP
Chicago, Illinois
July 30, 1997, except for Note 12(b) which is
as of August 14, 1997
F-3
<PAGE> 63
CONSOLIDATED FINANCIAL
STATEMENTS
----------------------
<PAGE> 64
- -------------------------------------------------------------------
<TABLE>
<CAPTION>
April 30, 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS (Note 5)
CURRENT ASSETS
Cash and cash equivalents $ 1,133,595 $ 3,280,195
Accounts receivable, less allowance for doubtful accounts of
approximately $16 million and $10 million (Note 6(b)) 26,898,281 36,457,199
Inventories 7,107,859 6,800,820
Tax refund receivable (Note 7) 2,861,033 8,037,030
Deferred taxes (Note 7) - 1,807,000
Prepaid expenses 442,391 655,358
- -----------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 38,443,159 57,037,602
IMPROVEMENTS AND EQUIPMENT, less accumulated depreciation and
amortization (Notes 3 and 5) 2,326,680 3,825,974
GOODWILL (Note 2) - 34,008,496
OTHER 219,161 1,043,607
- -----------------------------------------------------------------------------------------------
$ 40,989,000 $ 95,915,679
===============================================================================================
</TABLE>
<PAGE> 65
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------
<TABLE>
<CAPTION>
April 30, 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable
Trade $ 5,815,888 $ 20,714,836
Due to Hyperion (Note 11) 15,329,884 -
Accrued unusual charges and settlement costs (Notes 6 and 8(d)) 1,453,303 3,559,000
Accrued expenses (Note 4) 4,043,051 1,526,119
Current maturities of debt and other obligations (Note 5)
Due to Transworld 30,167,766 -
Due to Hyperion 3,000,000 -
Other 890,374 28,746,028
- ----------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 60,700,266 54,545,983
DEBT AND OTHER OBLIGATIONS, less current maturities (Note 5) 935,911 4,006,077
- ----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 61,636,177 58,552,060
- ----------------------------------------------------------------------------------------------------
COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (Notes 8 and 9)
STOCKHOLDERS' EQUITY (DEFICIT) (Notes 9 and 11)
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 9,328,240 548,834 279,848
Additional paid-in capital 45,957,786 38,138,771
Accumulated deficit (67,153,797) (1,055,000)
- ----------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (20,647,177) 37,363,619
- ----------------------------------------------------------------------------------------------------
$ 40,989,000 $ 95,915,679
====================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 66
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended April 30, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES $ 158,419,205 $ 158,859,638 $ 88,456,028
COST OF SALES (including an unusual charge of
$2.8 million in 1996) (Note 6) 128,719,403 120,223,528 63,708,021
- -----------------------------------------------------------------------------------------------------
Gross profit 29,699,802 38,636,110 24,748,007
- -----------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Selling 5,446,241 4,649,697 2,898,208
General and administrative 26,383,150 24,324,490 10,648,792
Provision for doubtful accounts (Note 6) 18,910,557 14,714,606 7,978,189
Unusual charges, including impairment
write-down of $30.9 million in 1997 (Note 6) 35,156,787 5,600,000 -
- -----------------------------------------------------------------------------------------------------
Total operating expenses 85,896,735 49,288,793 21,525,189
- -----------------------------------------------------------------------------------------------------
(Loss) income from operations (56,196,933) (10,652,683) 3,222,818
SETTLEMENT COSTS (Note 6) (4,825,000) - -
INTEREST EXPENSE (Note 5) (4,813,941) (2,717,155) (269,316)
INTEREST INCOME 13,467 37,651 333,077
- -----------------------------------------------------------------------------------------------------
(Loss) income before income taxes (benefit) (65,822,407) (13,332,187) 3,286,579
INCOME TAXES (BENEFIT) (Note 7) 276,390 (2,404,846) 1,340,391
- -----------------------------------------------------------------------------------------------------
NET (LOSS) INCOME $ (66,098,797) $ (10,927,341) $ 1,946,188
=====================================================================================================
(LOSS) EARNINGS PER SHARE OF COMMON STOCK -
primary and fully diluted $ (5.52) $ (1.16) $ 0.21
=====================================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING - primary 11,982,000 9,414,500 9,408,300
=====================================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING - fully
diluted 11,982,000 9,414,500 9,420,816
=====================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 67
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
- --------------------------------------------------------------------------------
<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, 1994 9,104,431 $ 273,133 $ 35,953,281 $ 7,926,153 $ (57,065)
Common stock issued upon acquisitions 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) -
Common stock issued (Note 9(a)) 1,942 58 6,942 - -
Sale of common stock to Transworld
Healthcare, Inc., net of expenses
(Note 9(a)) 8,964,292 268,928 7,812,073 - -
Net loss for the year ended April 30,
1997 - - - (66,098,797) -
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE, April 30, 1997 18,294,474 $ 548,834 $ 45,957,786 $ (67,153,797) $ -
===========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 68
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended April 30, 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (66,098,797) $ (10,927,341) $ 1,946,188
Adjustments to reconcile net (loss) income to net
cash used in operating activities
Depreciation and amortization 2,692,971 2,127,400 846,869
Provision for doubtful accounts 18,910,557 14,714,606 7,978,189
Unusual charges 34,137,427 950,156 -
Forbearance fee 650,000 - -
Deferred taxes 1,807,000 1,326,300 (2,516,300)
Loss from disposition of rental equipment - - 287,287
Compensation under restricted stock - - 57,065
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:
Accounts receivable, net (9,351,639) (19,831,996) (16,706,549)
Tax refund receivable 5,175,997 (6,210,030) (1,827,000)
Inventories (737,398) 986,841 (1,826,911)
Prepaid expenses 212,967 508,183 (976,058)
Other assets 634,356 98,008 (239,758)
Accounts payable 430,936 8,384,845 4,870,054
Accrued unusual charges and settlement
costs (2,105,697) 3,559,000 -
Accrued expenses 2,516,932 (336,288) 396,332
Income taxes payable - - (1,759,590)
- ------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (11,124,388) (4,650,316) (9,451,432)
- ------------------------------------------------------------------------------------------------------------
</TABLE>
F-7
<PAGE> 69
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended April 30, 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES
Cash used in acquisition of CPMB $ - $ (324,366) $ (20,630,212)
Other acquisitions - - (2,167,500)
Collection of receivable from the seller of
Murray Group - - 1,444,426
Capital expenditures (986,940) (1,491,722) (948,368)
Proceeds from sale of pharmacies 1,041,781 - 214,598
- ------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 54,841 (1,816,088) (22,087,056)
- ------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt and other obligations 3,200,000 16,450,000 23,000,000
Principal payments on debt and other obligations (2,032,234) (11,000,000) -
Net payments on capital leases (325,820) (385,741) (123,357)
Proceeds from sale of common stock, net 8,081,001 - -
Cash paid for deferred borrowing fees - - (722,000)
Proceeds from exercise of warrants - - 426,578
Proceeds from exercise of options - 119,628 24,499
- ------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 8,922,947 5,183,887 22,605,720
- ------------------------------------------------------------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,146,600) (1,282,517) (8,932,768)
CASH AND CASH EQUIVALENTS, at beginning of year 3,280,195 4,562,712 13,495,480
- ------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, at end of year $ 1,133,595 $ 3,280,195 $ 4,562,712
============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 70
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. (the
"Company") (a Delaware corporation) and 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.
DESCRIPTION OF BUSINESS
The Company provides integrated pharmaceutical management services to
patients with chronic medical conditions which may be complicated by a higher
risk of patient noncompliance 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, assistance in insurance coverage, verification
and reimbursement. The Company has expanded its business primarily through
acquisitions to include the oncology, HIV/AIDS, infertility and
schizophrenia markets.
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 5, the Company is in violation of its loan agreements,
resulting in the related debt being classified as current liabilities.
Transworld HealthCare, Inc. ("Transworld"), formerly Transworld Home
HealthCare, Inc., acquired the Company's term and revolving credit loans and
Transworld's majority stockholder, Hyperion Partners II L.P. ("Hyperion"),
assumed the Company's subordinated note payable and certain supplier accounts
payable. Effective January 13, 1997, Transworld acquired 49% of the
Company's common stock (Note 9(a)) and received an option to purchase at $1
per share a number of shares of the Company's outstanding common stock such
that upon exercise Transworld would
F-9
<PAGE> 71
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
own 51% of the Company's common stock. The Company is subject to a
forbearance agreement assumed by Transworld, which expired on July 15, 1997.
The Company's merger agreement with Transworld for the acquisition of the
remaining outstanding common stock of the Company was approved by the
Company's stockholders on July 11, 1997 and is pending approval and closing
by Transworld. The merger agreement is subject to termination by either
party for any reason after July 31, 1997. Also, as described in Note 8(d),
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.
The Company's ability to continue as a going concern depends on (a) the
consummation of the merger agreement with Transworld and the continuing
financial and operating support of Transworld or, should the merger not
occur, alternative means of financial and operating support; (b) continuing
satisfactory relations with its suppliers; and (c) the satisfactory
resolution of the litigation discussed in Note 8(d). Accordingly, there
continues to be substantial doubt about the Company's ability to continue as
a going concern.
If the forbearance agreement is not extended, the merger is not consummated
or the other matters discussed above are not adequately resolved, the Company
may seek protection under federal bankruptcy laws. Should the Company seek
bankruptcy, it is likely the carrying value of assets will be adversely
affected. See Note 12(b).
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.
F-10
<PAGE> 72
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Approximately 40% of the Company's revenues are currently attributable to the
sale of three products which are manufactured solely by one pharmaceutical
manufacturer. If the Company were unable to purchase these three products,
its results of operations would be materially and adversely affected. In
addition, the Company has credit limitations with this and other suppliers.
If this credit were further reduced or eliminated the operations of the
Company could be adversely impacted.
CREDIT RISK
Financial instruments which potentially subject the Company to concentrations
of credit risk consist principally of temporary cash investments 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 Corporation 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 revenues in the
years ended April 30, 1997, 1996 and 1995. Approximately 57%, 44% and 40% of
the Company's revenues are reimbursed under arrangements with federal and
state medical assistance programs for the years ended April 30, 1997, 1996
and 1995, respectively. Such arrangements are subject to audit by the
applicable authorities, which may require subsequent adjustment (Note
8(d)(2)). At April 30, 1997 and 1996, approximately 54% and 43%,
respectively, 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 ("FIFO") method. Inventories are principally
comprised of prescription and over-the-counter drugs.
F-11
<PAGE> 73
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 terms, respectively, ranging from 3 to 7
years for equipment and 5 years to the life of the lease for improvements.
Accelerated methods (double declining balance methods) are used for both book
and tax purposes for all classes except for leasehold improvements, which
are amortized using the 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 combinations, accounted for as purchases
(Note 2), and is amortized on a straight-line basis over the estimated period
to be benefitted - 30 years.
The carrying value of long-lived assets is 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. Long-lived assets acquired in
business combinations accounted for using the purchase method include the
goodwill that arose in those transactions allocated on a pro rata basis using
the relative fair values of the long-lived assets, identifiable intangibles
acquired and liabilities assumed at the acquisition date. Generally, the
Company uses its best current estimate of future undiscounted cash flows for
evaluating the carrying value of its goodwill. See Note 6(d).
F-12
<PAGE> 74
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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
consolidated financial statements. The differences relate principally to the
allowance for doubtful accounts, unusual charges, settlement costs, net
operating loss carryforward and goodwill. A valuation allowance is
established to the extent Company management believes future realization of
deferred tax assets is unlikely.
EARNINGS (LOSS) PER SHARE
Earnings (loss) 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 result mainly from considering the
shares issuable upon the conversion of the convertible subordinated
debentures and adjusting the net income by adding back the after-tax effect
of the interest expense thereon.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"), in
February 1997, effective for fiscal years ending after December 15, 1997.
This statement provides for a different method of calculating earnings per
share, which includes (a) basic earnings per share with no dilution, computed
as income or loss per common share divided by the weighted average number of
common shares outstanding for the period and (b) diluted earnings per share
which reflects the potential dilution of securities that could share in the
earnings of an entity. Management does not anticipate a significant effect,
if any, on the earnings (loss) per share as a result of implementing SFAS
No. 128.
F-13
<PAGE> 75
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of certain financial instruments, including cash,
accounts receivable and nonaffiliated accounts payable, approximate fair
value as of April 30, 1997 because of the relatively short-term maturity of
these instruments. In light of the related party relationship with certain
creditors and the Company's current financial condition, which has
deteriorated since 1996, it is not practical to estimate the fair value of
the debt and other obligations. In November and December 1996, Transworld
and Hyperion assumed certain of the Company's debt and payables (Notes 5 and
11) at discounts of approximately $14.1 million or approximately 30% of
the carrying value of the related obligations.
STOCK-BASED COMPENSATION
The Financial Accounting Standards Board Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No.
123"), became effective in 1996. SFAS No. 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 SFAS No. 123, the Company has and will retain its prior
accounting policy under APB Opinion Number 25, "Accounting for Stock Issued
to Employees", in 1997 and future years. The Company has concluded that
certain disclosures required by SFAS No. 123, including the pro forma effect
on net loss and net loss per share as if the fair-value based method was
applied, would not be meaningful because (a) of the deteriorating financial
condition of the Company; (b) currently outstanding options, all at exercise
prices substantially greater than current market prices, will be cancelled
upon consummation of the merger agreement with Transworld, if it occurs; and
(c) the pro forma effect would not be material.
RECLASSIFICATIONS
Certain 1996 and 1995 amounts have been reclassified to conform to the 1997
presentation.
F-14
<PAGE> 76
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. ACQUISITIONS
(a) On March 31, 1995, HMI Illinois, Inc., 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.
See Note 6(d).
The unaudited pro forma condensed combined statement of income for the year
ended April 30, 1995, giving effect to the acquisition of CPMB by the Company
as if it had occurred as of the beginning of the year, is as follows:
Year ended April 30, 1995
--------------------------------------------------
(in thousands)
Revenues $ 133,178
==================================================
Income $ 6,237
==================================================
Net income $ 3,505
==================================================
Earnings per share
Primary $ 0.37
Fully diluted $ 0.37
==================================================
F-15
<PAGE> 77
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
(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 $1,359,375.
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. See Note 6(d).
Certain assets related to the retail pharmacies acquired in this acquisition
were sold during the fiscal year ended April 30, 1997 for approximately $1
million. (See Notes 2(c) and 6).
F-16
<PAGE> 78
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(c) Goodwill at April 30, 1997 and 1996 is summarized as
follows:
<TABLE>
<CAPTION>
April 30, 1997 1996
----------------------------------------------------------------------
<S> <C> <C>
Goodwill resulting from the
acquisitions of
CPMB $ - $ 22,860,251
Maryland pharmacies - 2,453,959
Murray Pharmacy, Inc. and
Murray Pharmacy Too, Inc.
acquired in 1994 - 10,099,860
Other - 250,000
----------------------------------------------------------------------
- 35,664,070
Less accumulated amortization - 1,655,574
----------------------------------------------------------------------
$ - $ 34,008,496
======================================================================
</TABLE>
As a result of the closing or sale of three retail pharmacies in fiscal 1997,
$2,352,000 of goodwill was written off in 1997 (Note 6) and $500,000 of
proceeds from one of the sales was used to reduce the related goodwill.
See Note 6(d) with respect to events occurring after April 30, 1997 resulting
in the write-off of goodwill in fiscal 1997.
F-17
<PAGE> 79
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------
3. IMPROVEMENTS AND EQUIPMENT
Improvements and equipment consist of the following:
<TABLE>
<CAPTION>
April 30, 1997 1996
-------------------------------------------------------------------
<S> <C> <C>
Furniture and equipment $ 2,708,597 $ 2,485,068
Computer equipment and software 3,082,978 2,689,619
Leasehold improvements 417,280 365,743
-------------------------------------------------------------------
6,208,855 5,540,430
Less accumulated depreciation and
amortization 3,882,175 1,714,456
-------------------------------------------------------------------
$ 2,326,680 $ 3,825,974
===================================================================
</TABLE>
During the year ended April 30, 1997, the Company provided additional
depreciation of $950,000 to write down assets, to their estimated
realizable value, related to certain facilities expected to be closed or
sold in fiscal 1998 (Note 6(d)). Depreciation for the years ended April 30,
1997, 1996 and 1995 was $1,431,813, $951,063 and $375,368, respectively.
4. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
April 30, 1997 1996
-------------------------------------------------------------------
<S> <C> <C>
Compensation, benefits and related
expenses $ 2,021,130 $ 741,583
Interest 840,000 352,626
Professional fees 1,054,033 -
Other 127,888 431,910
-------------------------------------------------------------------
$ 4,043,051 $ 1,526,119
===================================================================
</TABLE>
F-18
<PAGE> 80
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
At April 30, 1996, accrued legal and professional fees generally related
to litigation and restatements of fiscal 1995 financial statements and were
included in accrued unusual charges and settlement costs (Note 6).
5. DEBT AND OTHER OBLIGATIONS
Debt and other obligations consist of the following:
<TABLE>
<CAPTION>
April 30, 1997 1996
--------------------------------------------------------------------
<S> <C> <C>
Term loan and revolving credit (a) $ 26,317,766 $ 28,350,000
Forbearance fee due Transworld (a) 650,000 -
Advance from Transworld for
litigation settlement (b) 3,200,000 -
Subordinated note payable (c) 3,000,000 3,000,000
Amounts due New York State
Department of Social Services
related to certain overpayments,
due in installments through
November 1998, plus interest at
10.25% (Note 8(d)(2)). 750,000 -
Capitalized leases and notes payable
requiring monthly payments of
$38,400, including assumed interest
ranging from 3.2% to 24%,
collateralized by equipment with
a book value of $1,142,945
(Note 8(a)). 1,076,285 1,402,105
--------------------------------------------------------------------
34,994,051 32,752,105
Less current maturities 34,058,140 28,746,028
--------------------------------------------------------------------
$ 935,911 $ 4,006,077
====================================================================
</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)). In November 1996,
Transworld acquired the
F-19
<PAGE> 81
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------------------------------------------------
outstanding balance under this term loan and the revolving credit agreement,
which aggregated $28.35 million. The terms of the indebtedness remained
unchanged as a result of this transaction. Transworld is charging interest
at the prime rate (8.5% at April 30, 1997) plus 1-1/2%.
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 credit agreement contains restrictions and financial covenants, as well
as principal payment provisions, of which the Company is in default.
Accordingly, all borrowings due Transworld and Hyperion are due on demand and
classified as current in the accompanying 1997 consolidated financial
statements.
In addition, Transworld assumed, in November 1996, the forbearance agreement
which the Company had with its senior lender. Under this agreement,
Transworld agreed, subject to certain conditions, to forbear from exercising
any of its contractual or equitable rights or remedies in respect of any of
the existing events of default. The forbearance agreement also provided a
revolving credit facility up to $5 million. However, the amounts borrowed
under this credit facility were paid in January 1997 and the credit facility
was not available through April 30, 1997. Subsequent to April 30, 1997,
the Company borrowed $1.4 million through July 30, 1997 under the credit
facility. Transworld has periodically extended the forbearance agreement in
short-term intervals, the last of which expired July 15, 1997.
The Company may owe Transworld $650,000 as a fee under the initial
forbearance agreement, which is accrued as of April 30, 1997 and included in
interest expense in the fourth quarter of fiscal 1997.
F-20
<PAGE> 82
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------
(b) In April 1997, Transworld advanced the Company $3.2 million which the
Company placed in escrow for the settlement of the class action litigation
(Note 8(d)(1)). This advance is due on demand and carries interest at the
prime rate plus 1-1/2%.
(c) In connection with the CPMB acquisition (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. This obligation was
acquired by Hyperion in November 1996.
As a result of the restatement of the Company's April 30, 1995 financial
statements and the provision of unusual charges (Note 6), 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 preceding the conversion date and the ten trading days
immediately subsequent to the conversion date. Based on the Company's
calculations, the note is convertible into approximately 264,532 shares of
common stock at approximately $11.87 per share. The Company has not received
notice from Hyperion for conversion.
The maximum amount of short-term borrowings outstanding during the years
ended April 30, 1996 and 1995 was $10,350,000 and $2,300,000, respectively.
The average amounts outstanding for the years ended April 30, 1996 and 1995
were $7,696,000 and $592,000, respectively. The average borrowing rates were
8.37% and 8.875% for the years ended April 30, 1996 and 1995, respectively.
During fiscal 1997, as a result of the Company being in default under
its principal loan agreements, the majority of its debt has been classified
as short-term.
F-21
<PAGE> 83
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------
Long-term debt matures as follows:
<TABLE>
<CAPTION>
Year ending April 30,
-------------------------------------
<S> <C>
1998 $ 34,058,140
1999 589,219
2000 269,024
2001 77,668
-------------------------------------
$ 34,994,051
=====================================
</TABLE>
Interest expense in 1997 includes $2,869,000 for obligations due to
affiliates, including the forbearance fee discussed in (a) above and interest
accrued on certain accounts payable due Hyperion.
6. UNUSUAL CHARGES, SETTLEMENT COSTS AND OTHER CHARGES
The unusual charges, settlement costs and other charges included in the
accompanying consolidated statements of operations are as follows:
<TABLE>
<CAPTION>
Year ended April 30, 1997 1996 1995
----------------------------------------------------------------------------
<S> <C> <C> <C>
Included in cost of sales
Write-off of medical device
inventory (a) $ - $ 2,840,000 $ -
============================================================================
Included in the provision for
doubtful accounts
Additional provisions reflect-
ing changes in estimation
of the allowance
for doubtful accounts (b) $10,000,000 $ 8,400,000 $ -
============================================================================
</TABLE>
F-22
<PAGE> 84
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended April 30, 1997 1996 1995
----------------------------------------------------------------------------
<S> <C> <C> <C>
Unusual charges
Write-off of goodwill and
certain facilities for
impairment in value (d) $ 30,944,067 $ - $ -
Costs and other expenses
related to the closing
or sale of three retail
pharmacies, including a
goodwill write-off of
approximately $2.4 million
(Note 2(c)) 2,812,720 - -
Costs associated with
overpayments from New
York State Medicaid
(Note 8 (d)(2)) 1,400,000 - -
Costs associated with organi-
zational consolidation and
other cost reduction
programs (c) - 3,600,000 -
Professional fees related to
litigation and restatements
of fiscal 1995 financial
statements - 2,000,000 -
----------------------------------------------------------------------------
$ 35,156,787 $ 5,600,000 $ -
============================================================================
Settlement costs
Estimated for the settlement
of stockholder class
action (Note 8(d)(1)) $ 4,550,000 $ - $ -
Other (Note 8(d)(4)) 275,000 - -
----------------------------------------------------------------------------
$ 4,825,000 $ - $ -
============================================================================
</TABLE>
F-23
<PAGE> 85
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------
(a) Through January 31, 1996, the Company purchased approximately $3.5
million of medical device inventory under a purchase agreeement 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 evaluations of its allowance for doubtful accounts
completed in the third quarters of fiscal 1997 and 1996, using a statistical
sampling approach of its receivables. Based on the result of this sampling,
the Company concluded that its allowance for doubtful accounts was
understated by $10 million in 1997 and $8.4 million in 1996. Accordingly,
the Company provided additional allowances during the quarters ended January
31, 1997 and 1996 when it revised its estimates of the required allowance
for doubtful accounts.
F-24
<PAGE> 86
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------------------------------
(c) The organizational consolidation costs of $3,600,000 include termination
benefits accrued totaling $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.
The remaining organizational consolidation costs and other cost reduction
programs, totaling $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 was closed in fiscal
1997. The write-off of PMA goodwill represents the carrying value of
goodwill of HMI-PMA, which was closed in fiscal 1996. HMI-PMA acquired
certain assets of Pharmaceutical Marketing Alliance in June 1994. 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. 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 was in default.
The majority of the costs accrued at April 30, 1996 were paid in fiscal 1997.
F-25
<PAGE> 87
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(d) As a result of a July 1997 advisory committee recommendation to the Food
and Drug Administration ("FDA"), it is probable that the frequency of blood
monitoring of Clozaril patients will be decreased from its current weekly
monitoring to bi-weekly after six months of therapy and monitoring after one
year may become voluntary. While this preliminary recommendation is subject
to approval by the FDA, the Company believes it is probable that the future
profitability and cash flows of the CPMB business have been impaired
sufficiently to result in a write-off of the related goodwill. Further,
given the significance of the CPMB business to the total cash flows of the
Company and the deteriorating financial condition of the Company, it is
likely the Company will need to restructure its future operations with or
without the potential merger with Transworld. The Company's estimate of
future cash flows was based on their best estimate for the next five years.
While definitive restructuring plans have not been finalized, the Company
has concluded to write off, in the fourth quarter of fiscal 1997, the
remainder of its goodwill and approximately $950,000 of assets related to
facilities expected to be closed or sold (Note 3).
7. INCOME TAXES
The income tax expense (benefit) comprises the following:
<TABLE>
<CAPTION>
Year ended April 30, 1997 1996 1995
--------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $(1,807,000) $ (4,398,902) $ 2,793,223
State and local 276,390 667,756 1,063,468
--------------------------------------------------------------------
(1,530,610) (3,731,146) 3,856,691
--------------------------------------------------------------------
Deferred
Federal 1,807,000 989,000 (1,851,000)
State and local - 337,300 (665,300)
--------------------------------------------------------------------
1,807,000 1,326,300 (2,516,300)
--------------------------------------------------------------------
Total income tax expense
(benefit) $ 276,390 $ (2,404,846) $ 1,340,391
====================================================================
</TABLE>
F-26
<PAGE> 88
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following reconciles the federal statutory tax rate with the actual
effective rate:
<TABLE>
<CAPTION>
Year ended April 30, 1997 1996 1995
--------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate (34)% (34)% 34%
Increase in tax rate resulting from
State and local taxes, net of federal
benefit - 5 7
Change in deferred tax assets
valuation allowance 34 11 -
--------------------------------------------------------------------------
Effective rate -% (18)% 41%
==========================================================================
</TABLE>
<TABLE>
<CAPTION>
Deferred tax assets (liabilities) consist of the following:
- --------------------------------------------------------------------------------
April 30, 1997 1996
--------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets resulting from
Allowance for doubtful accounts $ 5,005,000 $ 4,532,000
Net operating loss carryforward 4,700,000 -
Unusual charges and settlement
costs, except goodwill 788,000 535,000
Alternative minimum tax credit
carryforward 482,000 -
Other 714,000 -
Deferred tax asset (liability) -
difference in carrying value
of goodwill for book and tax 10,027,000 (734,000)
--------------------------------------------------------------------------
Total 21,716,000 4,333,000
Valuation allowance (21,716,000) (2,526,000)
--------------------------------------------------------------------------
Deferred tax asset $ - $ 1,807,000
==========================================================================
</TABLE>
F-27
<PAGE> 89
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A valuation allowance for the deferred tax assets was provided because of the
uncertainty as to future realization of the net deferred tax assets
(exclusive of the remaining carryback benefit in 1996), as a result of the
substantial doubt about the Company's ability to continue as a going concern
(Note 1).
As of April 30, 1997, the Company recorded a $2.9 million tax refund
receivable, for the estimated refund claim due to the 1997 net operating loss
carryback. The April 30, 1996 tax refund receivable of $8.0 million
consisted of $5.5 million refund claims for 1996 and 1995 and $2.5 million
for estimated taxes paid in 1996.
The Company has a net operating loss carryforward of approximately $13.9
million, which expires in 2012. The utilization of this net operating loss
carryforward is subject to certain limitations.
8. 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 (Notes 3 and 5).
F-28
<PAGE> 90
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------
As of April 30, 1997, future net minimum lease payments under capital leases
and noncancellable operating lease agreements are as follows:
<TABLE>
<CAPTION>
Capital Operating
--------------------------------------------------------------------
<S> <C> <C>
1998 $ 460,730 $ 1,001,016
1999 380,492 713,218
2000 287,327 695,032
2001 76,456 140,030
--------------------------------------------------------------------
Total minimum lease payments 1,205,005 2,549,296
Less amounts representing
interest 128,720 -
--------------------------------------------------------------------
Net minimum lease payments $ 1,076,285 $ 2,549,296
====================================================================
</TABLE>
Rent expense for the years ended April 30, 1997, 1996 and 1995 amounted to
$1,300,382, $1,544,788 and $364,448, respectively, which included rent
expense for buildings owned by two shareholders amounting to $97,500,
$106,400 and $106,410 for the years ended April 30, 1997, 1996 and 1995,
respectively.
(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 $185,245, $178,844 and $71,281 for the years ended April 30,
1997, 1996 and 1995, respectively.
F-29
<PAGE> 91
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------------------------------------------------
(c) Employment Agreements
The Company has in effect employment agreements with two key officers, with
compensation to be paid through 1998. Total salaries under these
agreements amount to approximately $525,000 annually, excluding certain
bonuses relating to the consummation of the merger with Transworld.
(d) Litigation and Other Matters
(1) The Company, certain of its former directors and officers and its outside
auditors, BDO Seidman, LLP, have been named as defendants in a consolidated
class action 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 alleged 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 represented 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 action sought
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 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 million in cash, the issuance of 2.2 million
shares of the Company's common stock and warrants to purchase 2.2 million
shares of the Company's common stock. As a condition to Transworld's
obligation to close the Stock Purchase Agreement, preliminary court approval
was obtained with respect to a modified
F-30
<PAGE> 92
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------
settlement providing for a $7.2 million cash payment in lieu of the
consideration provided in the Original Settlement, to be paid after the
merger is consummated. This settlement was further amended on April 23,
1997, to provide for the settlement of such consolidated action for a reduced
settlement amount of $4.55 million, of which $1.35 million is conditioned on
the merger with Transworld being consummated. Court approval was received on
June 9, 1997. The $4.55 million is included in settlement costs in the
accompanying consolidated statement of operations for the year ended April
30, 1997 (Note 6). The recorded settlement amount was reduced to $4.55
million in the fourth quarter of fiscal 1997 from the $7.2 million recorded
in the second quarter of fiscal 1997. The Company placed $3.2 million in
escrow on April 29, 1997, with respect to this settlement, which was released
from escrow when the court's approval became final. This $3.2 million was
borrowed by the Company from Transworld (Note 5(b)), with the remaining $1.35
million included in accrued unusual charges and settlement costs at April 30,
1997. The Company is in the process of negotiating with its directors and
officers liability insurance carrier with respect to coverages for damages in
connection with the stockholder class action lawsuit. Certain payments,
if any, received from such carrier may reduce the Company's liability with
respect to such settlement. No amounts have been recorded with respect to
any such potential recoveries.
F-31
<PAGE> 93
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------
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 serve a presuit
demand upon the Company's Board of Directors and that plaintiffs will lose
standing upon the consummation of the merger with Transworld. A hearing on
the Company's motion is currently scheduled to take place on October 17,
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, LLP 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, LLP arising out of alleged misrepresentations and omissions
contained in certain of the Company's previous securities
F-32
<PAGE> 94
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------
filings. BDO Seidman, LLP 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.
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. The Company is fully cooperating with
this investigation and has responded to the Commission's requests for
documentary evidence.
(2) 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 $0.5 million was held in escrow by the
State. The remaining amounts will be paid in installments through November
1998, plus interest (Note 5). The $1.4 million is included in unusual
charges for the year ended April 30, 1997 in the accompanying consolidated
statements of operations (Notes 5 and 6).
(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 action were alleged, each for up to $10 million in
damages. By motion dated March 12,
F-33
<PAGE> 95
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------
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 and has filed its initial brief on the matter.
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 consolidated 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 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.
(4) The Company and Transworld had 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
F-34
<PAGE> 96
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------
Bergman v. Health Management, Inc. and Transworld Home HealthCare, Inc., CA
No. 15609NC. The plaintiff in that case sought reimbursement and
advancement of legal fees and expenses and, on April 29, 1997, that suit was
settled for $275,000 (Note 6).
(5) 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. The Company has not responded
to the complaint and the plaintiff has indicated that it will file an
amended complaint by September 2, 1997. The Company intends to vigorously
defend itself in such action.
F-35
<PAGE> 97
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------
(6) 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.
As of April 30, 1997, no amounts have been accrued related to these expenses.
(7) On May 22, 1997, a Writ of Summons was sent to the Company in respect of
action brought in the Superior Court at Nashua, New Hampshire, entitled
Linley v. Health Management, Inc. Mr. Linley alleges, among other things,
breach of contract, estoppel, negligent misrepresentation, fraud and breach
of fiduciary duties and obligation of good faith and fair dealing in
connection with an alleged joint venture between plaintiff and the Company.
Management believes this action to be without merit and not material to the
Company's consolidated results of operations or financial condition.
As of April 30, 1997, the Company has recorded the estimated minimum losses
expected to result from the litigation discussed above. The final resolution
of these matters could have a material adverse effect in the near term on
the Company's consolidated financial position and results of operations.
If the merger with Transworld 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.
F-36
<PAGE> 98
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
-----------------------------------------------------------------------------
9. CAPITAL TRANSACTIONS
(a) 1997 Common Stock Issuances
During the fiscal year ended April 30, 1997, the Company (a) issued 1,942
common shares (valued at $7,000), primarily for the purchase of a marketing
product and (b) sold 8,964,292 newly issued unregistered common shares (49%
of the Company's outstanding common stock) to Transworld, effective January
13, 1997, at $1 per share, less related expenses of $883,291.
(b) Options and Warrants
Stock options and warrants activities are shown below:
<TABLE>
<CAPTION>
Omnibus Incentive
Incentive Stock
Stock Option Directors' Other
Option Plan (2) Warrants Options (3) Plans (5)
Plan (1)
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Shares covered 1,000,000 50,000 130,662 54,000 3,750,000
===========================================================================================
Outstanding at May 1, 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 -
Granted 487,500 - - 32,500 -
Exercised - - - - -
Cancelled (725,167) (8,999) - - -
-------------------------------------------------------------------------------------------
Outstanding at April 30,
1997 701,333 - 11,336 58,500 -
===========================================================================================
</TABLE>
F-37
<PAGE> 99
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Omnibus
Incentive Incentive
Stock Stock
Option Option Directors' Other
Plan (1) Plan (2) Warrants Options (3) Plans (5)
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
At April 30, 1997
Price range $ 4.16- $ .90 $ 5.40 $ 1.62- -
$ 16.25 $ 4.50 $ 18.84
Shares exercisable 503,834 - 11,336 45,500 -
Available for grant - - - - -
Weighted average
exercise price $ 2.94 - $ 5.40 $ 7.65 -
</TABLE>
(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.
The Company granted a total of 487,500 options at an exercise price of
$4.16 on September 9, 1996.
(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. The remaining options were cancelled during the year
ended April 30, 1997.
F-38
<PAGE> 100
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------
(3) During the years ended April 30, 1997, 1996 and 1995, the Company granted
a total of 32,500, 3,000 and 4,000 options, respectively, to its outside
directors at an exercise price of $1.62, $18.84 and $16.77, respectively, the
market price on the date of the grant.
(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.
The per-share exercise price for the stock options is a price equal to the
average closing price of the shares for the five trading days preceding
September 30, 1996 or $4.16. The vesting schedule for each of the stock
options is one-half upon the appointment of the permanent Chief Executive
Officer (May 1, 1996) and one-half on May 1, 1997.
(5) On November 6, 1996, the Company's stockholders approved the 1996
Employee Stock Option Plan, the 1997 Employee Stock Purchase Plan and the
1996 Nonemployee Director Stock Option Plan.
F-39
<PAGE> 101
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------
(a) The Company has reserved 2,000,000 shares of common stock under the 1997
Employee Stock Purchase Plan. The plan is available to all eligible
employees, with the first offering period from January 1, 1997 to June 30,
1997. The purchase price for shares shall be the lesser of 85% of the
closing price at the beginning of the offering period or 85% of the closing
price at the end of the offering period. Share purchases are limited to
$25,000 per calendar year or 5% of voting power. No shares or options were
granted or issued for the year ended April 30, 1997.
(b) The Company has reserved 1,500,000 shares of common stock for issuance
under the 1996 Employee Stock Option Plan for key employees and members of
the board of directors. The exercise period for an option shall not exceed
10 years from the date of grant. The option price per share shall not be
less than 100% of the fair market value on the date of grant. No shares
or options were granted or issued for the year ended April 30, 1997.
(c) The Company has reserved 250,000 shares of common stock for issuance
under the 1996 Nonemployee Director Stock Option Plan for new nonemployee
directors elected after the 1996 annual meeting. The exercise period for an
option shall not exceed 10 years from the date of grant and the options shall
become exercisable in four equal annual installments. The option price
per share shall be 100% of the fair market value on the date of grant. No
shares or options were granted or issued for the year ended April 30, 1997.
As a condition of completing the merger agreement with Transworld (Note 11),
the Company's stock option plans will be terminated.
F-40
<PAGE> 102
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------
10. SUPPLEMENTAL CASH FLOW INFORMATION
(a) Supplemental disclosures of cash flow information:
<TABLE>
<CAPTION>
Year ended April 30, 1997 1996 1995
---------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash paid for interest expense $ 3,599,000 $ 2,382,000 $ 174,000
Cash (refunded) paid for income
taxes (6,286,000) 1,949,000 7,745,000
</TABLE>
(b) Supplemental disclosures of noncash investing and financing activities:
(1) The Company financed $1,361,000 and $177,000 of new equipment during
the years ended April 30, 1996 and 1995, respectively.
(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 nonregistered common stock in connection with
acquisitions.
(4) During the year ended April 30, 1997, 1,942 shares of common stock
were issued, primarily for the purchase of a marketing product
(Note 9(a)).
11. OTHER MATTERS
The Company entered into Stock Purchase and Merger 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, have assumed the Company's senior debt (approximately $28.35
million), debt previously owed to Caremark, Inc. ($3 million) and certain
supplier accounts payable (approximately $15.3 million), as well as acquiring
49% of the Company's common stock (Note 9(a)), with an option to acquire
additional shares at $1 per share, which option, if exercised,
F-41
<PAGE> 103
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------
would result in Transworld owning 51% of the outstanding shares of common
stock of the Company.
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 and an amendment to the
merger agreement among Transworld, IMH Acquisition Corporation (a wholly
owned subsidiary of Transworld) and the Company was executed. The merger
agreement was approved by the Company's stockholders on July 11, 1997 and
is pending, among other things, approval of Transworld's lenders and a
closing. The merger agreement is subject to termination by either party for
any reason after July 31, 1997. See Note 12(b).
12. SUBSEQUENT EVENTS
(a) In June 1997, the Company announced the closing of three pharmaceutical
locations. The estimated cost of these closings is approximately $261,000.
(b) On August 1, 1997, Transworld indicated that it was unable to obtain the
consent of its bank to conclude the merger with the Company. Neither
Transworld or the Company has terminated the merger agreement; however, the
merger agreement is subject to termination by either party for any
reason. Transworld and the Company are discussing potential alternative
transactions.
If (a) the Company is unsuccessful in pursuing alternative transactions or
extending the forbearance agreement with Transworld, which expired July 15,
1997, or (b) Transworld elects to exercise its rights under the credit
agreement (Note 5(a)), which is in default, the Company may seek protection
under the federal bankruptcy laws.
F-42
<PAGE> 104
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On August 14, 1997 Transworld announced an agreement with Counsel
Corporation ("Counsel"), a Canadian corporation, to potentially sell the
Company's business and operations to Counsel. The letter agreement calls
for the purchase of a substantial portion of the Company's assets by Counsel
for cash of approximately $40 million. As a part of the agreement,
Transworld would guarantee the collection of at least $20 million of the
Company's accounts receivable. Counsel does not intend to assume any of the
Company's liabilities other than obligations under real property leases,
etc. related to facilities acquired. The purchase is subject to various
conditions and the Company has agreed to refrain from pursuing potential
alternative transactions until September 30, 1997 or such earlier date after
September 3, 1997, as instructed by Transworld. The agreement is also
subject to approval by Transworld's banks. Also, prior to any closing of
the purchase, Transworld will either have acquired the remaining common
stock of the Company not already owned or determine an alternative method to
sell the Company's assets to Counsel.
F-43
<PAGE> 105
HEALTH MANAGEMENT, INC.
AND SUBSIDIARIES
-----------------------------------------
FORM 10-K ITEM 14(d)
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
APRIL 30, 1997
<PAGE> 106
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
--------------------------------------------------------
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS S-3
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND
RESERVES S-4
S-2
<PAGE> 107
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
Health Management, Inc. and Subsidiaries
Buffalo Grove, Illinois
The audits referred to in our report dated July 30, 1997, except for Note 12(b)
which is as of August 14, 1997, relating to the consolidated financial
statements of Health Management, Inc. and subsidiaries, which is contained in
Item 8 of this Form 10-K, included the audit of the accompanying schedule of
valuation and qualifying accounts. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement schedule based upon our audits.
In our opinion such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
BDO Seidman, LLP
Chicago, Illinois
July 30, 1997
S-3
<PAGE> 108
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING
ACCOUNTS AND RESERVES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Balance at Additions
Beginning of Charged to Balance at
Classification Year Operations Deductions End of Year
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
Year ended April 30, 1997 $ 10,070,000 $ 23,901,000* $ (17,951,000) $ 16,020,000
=========================================================================================================
Year ended April 30, 1996 $ 7,998,000 $ 14,714,000 $ (12,642,000) $ 10,070,000
=========================================================================================================
Year ended April 30, 1995 $ 2,206,000 $ 7,978,000 $ (2,186,000) $ 7,998,000
=========================================================================================================
</TABLE>
* Includes $4,990,000 of contractual allowances, which are contra revenue
accounts, and $18,911,000 provision for doubtful account.
S-4
<PAGE> 109
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
HEALTH MANAGEMENT, INC.
August 27, 1997 /s/ JAMES R. MIESZALA
James R. Mieszala, Chief
Executive Officer, President
(Principal Executive Officer) and
Assistant Secretary
August 27, 1997 /s/ DENNIS CONLEY
Dennis Conley, Vice
President - Finance and Treasurer
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
August 27, 1997 /s/ ANDRE C. DIMITRIADES
Andre C. Dimitriades, Chairman of the
Board
August 27, 1997 /s/ W. JAMES NICOL
W. James Nicol, Director and Secretary
August 27, 1997 /s/ D. MARK WEINBERG
D. Mark Weinberg, Director
August 27, 1997 /s/ DR. TIMOTHY TRICHE
Dr. Timothy Triche, Director
<PAGE> 110
INDEX TO EXHIBITS
EXHIBIT PAGE
------- ----
3.1 Certificate of Incorporation of the Company, as
filed with the Secretary of State of Delaware on March
25, 1986 (incorporated by reference to Registration
Statement on Form S-1, Registration No. 33-04485).
3.2 Certificate of Amendment to Certificate of
Incorporation of the Company, as filed with the Secretary
of State of Delaware on March 9, 1988 (incorporated by
reference to Form 10-K for year ended April 30, 1988).
3.3 Certificate of Amendment to Certificate of
Incorporation of the Company, as filed with the Secretary
of State of Delaware on March 31, 1992 (incorporated by
reference to Registration Statement on Form S-1, No.
33-46996).
3.4 Certificate of Amendment to Certificate of
Incorporation of the Company, as filed with the Secretary
of State of Delaware on October 27, 1994 (incorporated by
reference to Form 10-K for year ended April 30, 1995).
3.5 Certificate of Amendment of Certificate of
Incorporation of the Company, as filed with the Secretary
of State of Delaware on November 8, 1996 (incorporated by
reference to Form 10-Q for the quarter ended January 31,
1997).
3.6 Amended and Restated By-Laws of the Company
(incorporated by reference to Form 10-Q for the quarter
ended January 31, 1996).
4.1 Form of 10% Convertible Subordinated Debenture
(incorporated by reference to Form 8-K dated March 4,
1991).
4.2 Specimen Form of Certificate for Common Stock
(incorporated by reference to Registration
Statement on Form S-1, Registration No. 33-46996).
<PAGE> 111
4.3 Form of Representatives' Purchase Warrant
(incorporated by reference to Amendment Number 2 to
Registration Statement on Form S-1, Registration No.
33-46996).
4.4 Form of Selling Shareholders' Power of Attorney
(incorporated by reference to Registration Statement on
Form S-1, Registration No. 33-46996).
4.5 Form of Selling Shareholders' Custody Agreement
(incorporated by reference to Registration Statement on
Form S-1, Registration No. 33-46996).
10.1 Stock Purchase Agreement dated December 8, 1988
(incorporated by reference to Form 8-K dated December 23,
1988).
10.3* 1989 Stock Option Plan (incorporated by reference
to Registration Statement on Form S-1, Registration No.
33-46996).
10.4 Lease dated April 20, 1990 on Company's Ronkonkoma,
New York facility between the Company and Four L Realty
Co (incorporated by reference to Registration Statement
on Form S-1, Registration No. 33-46996).
10.5 Amendment, dated March 16, 1992 to Lease dated
April 20, 1990 on Company's Headquarters between the
Company and Four L Realty Co. (incorporated by reference
to Form 10-K for year ended April 30, 1992).
10.6* Company 401(k) Plan (incorporated by reference to
Amendment Number 1 to Registration Statement on Form S-1,
Registration No. 33-46996).
10.7* Employment Agreement, dated as of May 1, 1996, between
the Company and W. James Nicol (incorporated by reference
to Annual Report on Form 10-K for the fiscal year ended
April 30, 1996).
10.8* Letter Agreement dated November 13, 1996, between W.
James Nicol and the Company and guaranteed by
Transworld Home HealthCare, Inc. (incorporated by
reference to Form 10-Q for the quarter ended January 31,
1997).
10.9*+ Severance Agreement dated August 10, 1997,
<PAGE> 112
between W. James Nicol and the Company.
10.10* Employment Agreement, dated as of September 9, 1996,
between the Company and James R. Mieszala (incorporated
by reference to Current Report on Form 8-K dated
September 16, 1996).
10.11* Letter Agreement dated November 13, 1996, between James
R. Mieszala and the Company and guaranteed by Transworld
Home HealthCare, Inc. (incorporated by reference to Form
10-Q for the quarter ended January 31, 1997).
10.12* Employment Agreement, dated as of September 9, 1996,
between the Company and Paul S. Jurewicz (incorporated by
reference to Current Report on Form 8-K dated September
16, 1996).
10.13* Letter Agreement dated November 13, 1996, between Paul
S. Jurewicz and the Company and guaranteed by Transworld
Home HealthCare, Inc. (incorporated by reference to Form
10-Q for the quarter ended January 31, 1997).
10.14 Assets Purchase Agreement, dated as of March 27, 1994,
between the Registrant, Murray Pharmacy Too, Inc. and the
Shareholders named therein (incorporated by reference to
Current Report on Form 8-K dated April 1, 1994).
10.15 Assets Purchase Agreement, dated as of March 27, 1994,
between HMI Retail Corp., Murray Pharmacy, Inc. and the
Shareholders named therein (incorporated by reference to
Annual Report on Form 10-K filed August 2, 1994).
10.16 First Amendment to Asset Purchase Agreement, dated as of
March 31, 1995, between Caremark Inc. and Health
Management, Inc. (incorporated by reference to Current
Report on Form 8-K dated April 14, 1995).
10.17 Transition Agreement, dated as of March 31, 1995, between
Caremark Inc. and HMI Illinois (incorporated by reference
to Current Report on Form 8-K dated April 14, 1995).
10.18 Credit Agreement, dated as of March 31, 1995 among Health
Management, Inc., Home Care Management, Inc., HMI
Pennsylvania, Inc., HMI Illinois, Inc.,
<PAGE> 113
Chemical Bank, and the Guarantors and Lenders named therein
(incorporated by reference to Current Report on Form 8-K dated April
14, 1995).
10.19 Security Agreement, dated as of March 31, 1995, among Health
Management, Inc., Home Care Management, Inc., Health Reimbursement
Corporation, HMI Retail Corp., Inc., HMI Pennsylvania, Inc. and HMI
Maryland, Inc. and Chemical Bank for itself and the Lenders named
therein (incorporated by reference to Current Report on Form 8-K dated
April 14, 1995).
10.20 Security Agreement and Mortgage Trademarks and Patent, dated as of
March 31, 1994, among Health Management, Inc., Home Care Management,
Inc., Health Reimbursement Corporation, HMI Retail Corp., Inc., HMI
Pennsylvania, Inc. and HMI Maryland, Inc. and Chemical Bank for itself
and the Lenders named therein (incorporated by reference to Current
Report on Form 8-K dated April 14, 1995).
10.21 Forbearance Agreement, dated July 26, 1996 among Health
Management, Inc., Home Care Management, Inc., HMI Illinois, Inc., HMI
Pennsylvania, Inc., Health Reimbursement Corporation, HMI Retail
Corp., Inc., HMI PMA, Inc., HMI Maryland, Inc., Chase Manhattan Bank,
as lender and agent, and European American Bank, as lender
(incorporated by reference to Annual Report on Form 10-K for the
fiscal year ended April 30, 1996).
10.22 Forbearance Agreement, dated as of November 13, 1996, between the
Company and Transworld Home Healthcare, Inc. (incorporated by
reference to the Form 8-K dated November 13, 1996).
10.23 Agreement of Lease by and between Joseph M. Rosenthal and the
Company dated December 13, 1994 (incorporated by reference to Form
10-K for the year ended April 30, 1995).
10.24 Lease by and between Irwin Hirsh and Lloyd N. Myers and HMI
Pennsylvania, Inc. dated March 27, 1994 (incorporated by reference to
Form 10-K for the year ended April 30, 1995).
10.25 Lease by and between Irwin Hirsh and HMI
<PAGE> 114
Retail Corp., Inc. dated March 27, 1994 (incorporated by reference to
Form 10-K for the year ended April 30, 1995).
10.26 Stipulation of Partial Settlement dated September 16, 1996,
between the Company and the Representative Plaintiffs (incorporated by
reference to Form 8-K dated September, 1996).
10.27 Amended Stipulation of Partial Settlement dated December 19,
1996, between the Company and the Representative Plaintiffs
(incorporated by reference to Form 8-K, dated December 23, 1996).
10.28 Agreement and Plan of Merger, dated November 13, 1996, as
amended, among IMH Acquisition Corp., Transworld Home HealthCare, Inc.
and the Company (incorporated by reference to Annex I to the
definitive Proxy Statement on Schedule 14A dated June 16, 1997).
10.29 Stock Purchase Agreement dated as of November 13, 1996, between
the Company and Transworld Home HealthCare, Inc. (incorporated by
reference to Form 8-K dated November 13, 1996).
10.30* 1996 Non-Employee Director Stock Option Plan (incorporated by
reference to Schedule 14A dated October 9, 1996).
10.31* 1996 Employee Stock Option Plan (incorporated by reference to
Schedule 14A dated October 9, 1996)
10.32* 1997 Employee Stock Purchase Plan (incorporated by reference to
Schedule 14A dated October 9, 1996)
10.33+ Restated Stipulation of Partial Settlement, dated April 23, 1997,
between the Company and the Representative Plaintiffs.
10.34+ Amendment to Merge Agreement dated July 7, 1997, between the
Company, Transword HealthCare, Inc. and IMH Acquisition Corp.
10.35 Letter Agreement, dated August 13, 1997, between the Company and
Counsel Corporation (incorporated by reference to Form 8-K dated
August 15, 1997).
11+ Statement re Computation of Per Share Earnings.
27+ Financial Data Schedule
99.1+ Final Judgement and Order of Partial Dismissal of Action, dated
June 9, 1997.
<PAGE> 1
EXHIBIT 10.33
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
- ----------------------------------------------X
IN RE HEALTH MANAGEMENT, INC. Master File No.
SECURITIES LITIGATION 96-CV-889 (ADS)
CLASS ACTION
- ----------------------------------------------X
RESTATED STIPULATION OF PARTIAL SETTLEMENT
<PAGE> 2
TABLE OF CONTENTS
PAGES
-----
I. TERMS OF RESTATED STIPULATION AND AGREEMENT OF
SETTLEMENT .......................................................... -1-
1. Definitions ..................................................... -2-
II. THE RESTATED STIPULATION ............................................ -6-
2. Events Leading To The Restated Stipulation ...................... -6-
3. The Settlement Fund and Rights
With Respect Thereto ........................................... -10-
4. Administration of The Settlement Fund .......................... -10-
A. The Escrow Agent ........................................... -10-
B. Taxes ...................................................... -12-
C. Termination ................................................ -14-
5. Additional Settlement Consideration ............................ -15-
6. Notice Order and Settlement Hearing ............................ -16-
7. Releases ....................................................... -20-
8. Administration And Calculation Of Claims,
Final Awards And Supervision And Distribution
Of Settlement Fund ............................................. -21-
9. Representative Plaintiffs' Counsel's
Attorneys' Fees And Reimbursement Of Expenses .................. -24-
10. Conditions Of Settlement, Effect Of
Disapproval, Cancellation Or Termination ....................... -26-
11. Miscellaneous Provisions ....................................... -30-
i
<PAGE> 3
This Restated and Amended Stipulation of Partial Settlement (the
"Restated Stipulation"), dated as of April 23, 1997, is made and entered by and
among the following parties to the above-entitled litigation: (i) the
Representative Plaintiffs (on behalf of themselves and each of the Settlement
Class Members), by and through their counsel of record in the litigation; and
(ii) the Settling Defendant, by and through its counsel of record in the
litigation. The Restated Stipulation is intended by the Settling Parties to
fully, finally and forever resolve, discharge and settle the Released Claims
against the Settling Defendant (as defined herein), and its subsidiaries only,
upon and subject to the terms and conditions hereof. The terms of the
Stipulation of Partial Settlement dated September 16, 1996 and of the Amended
Stipulation of Partial Settlement dated December 19, 1996 are amended and
restated as follows:
I. TERMS OF RESTATED STIPULATION AND AGREEMENT OF SETTLEMENT
NOW, THEREFORE, IT IS HEREBY STIPULATED AND AGREED by and among the
Representative Plaintiffs (for themselves and the Settlement Class Members),
and the Settling Defendant, by and through their respective counsel or attorneys
of record, that, subject to the approval of the Court, the Released Claims
shall be finally and fully compromised, settled and released, and the Released
Claims shall be dismissed on the merits and with prejudice, as to the Settling
Defendant and its subsidiaries only, upon and subject to the terms and
conditions of the Restated Stipulation, as follows:
-1-
<PAGE> 4
1. Definitions
As used in the Restated Stipulation the following terms have the
meanings specified below:
1.1 "Authorized Claimant" means any Settlement Class Member (or duly
authorized representative) who files a Proof of Claim and Release in such form
and manner, and within such time, as the Court prescribes.
1.2 "Claims Administrator" means the Garden City Group.
1.3 "Effective Date" means the first date by which all of the
events and conditions specified in Section 10.1 of the Restated Stipulation
have been met and have occurred.
1.4 "Escrow Agent" means Kaplan, Kilsheimer & Fox LLP.
1.5 "Final" means: (i) The date of final affirmance on an appeal
from the Judgment, the expiration of the time for a petition for a writ of
certiorari to review the Judgment and, if certiorari be granted, the date of
final affirmance of the Judgment following review pursuant to that grant; or
(ii) the date of final dismissal of any appeal from the Judgment or the final
dismissal of any proceeding on certiorari to review the Judgment; or (iii) if
no appeal is filed, the expiration date of the time for the filing or noticing
no appeal is filed, the expiration date of the time for the filing or noticing
any appeal from the Court's Judgment approving the Restated Stipulation
substantially in the form of Exhibit "B" hereto, i.e., thirty (30) days after
entry of the Judgment or such longer time as may be allowed by Court order
extending the time for appeal. Any proceeding or order, or any appeal or
petition for a writ of certiorari
-2-
<PAGE> 5
pertaining solely to any plan of allocation and/or application for attorneys'
fees, costs or expenses, shall not in any way delay or preclude the Judgment
from becoming Final.
1.6 "Health Management" or the "Company" means Health Management,
Inc.
1.7 "Judgment" means the judgment to be rendered by the Court,
substantially in the form attached hereto as Exhibit "B."
1.8 "Merger Effective Date" means the date upon which any merger
between Health Management and Transworld or any subsidiary of Transworld is
effective.
1.9 "Non-Settling Defendants" means Clifford E. Hotte, Drew W.
Bergman, Virginia Belloise, Irwin Hirsh, Lloyd Myers and BDO Seidman LLP.
1.10 "Person" means an individual, corporation, partnership, limited
partnership, association, joint stock company, estate, legal representative,
trust, unincorporated association, government or any political subdivision or
agency thereof, and any business or legal entity and their spouses, heirs,
predecessors, successors, representatives, or assignees.
1.11 "Plaintiffs' Settlement Counsel" means the following counsel
for Representative Plaintiffs in the Litigation:
Kaplan, Kilsheimer & Fox LLP, Robert N. Kaplan, Frederic S. Fox, and
Joel B. Strauss, 685 Third Avenue, New York, New York, 10017, Telephone:
212/687-1980; Zwerling, Schachter & Zwerling, LLP, Jeffrey C. Zwerling, 767
Third Avenue, New York, New York, 10017, Telephone: 212/223-3900.
-3-
<PAGE> 6
1.12 "Plan of Allocation" means the plan or formula of allocation of
the Settlement Fund as described in the Notice of Proposed Restated Partial
Settlement of Class Action and Settlement Hearing whereby the Settlement Fund
shall be distributed to Authorized Claimants after payment of expenses of
notice and administration of the settlement, any taxes, penalties or interest
or tax preparation fees owed by the Settlement Fund, and such attorneys' fees,
costs, expenses and interest as may be awarded by the Court. Any Plan of
Allocation is not part of the Restated Stipulation.
1.13 "Released Claims" means and includes any and all claims or
causes of action, demands, rights, liabilities, and causes of action of every
nature and description whatsoever, asserted or which could have been asserted
by the Representative Plaintiffs or the Settlement Class Members, or any of
them, against the Released Person based upon or related to both the purchase of
Health Management common stock by the Representative Plaintiffs or the
Settlement Class Members during the Settlement Class Period and the facts,
transactions, events, occurrences, disclosures, statements, acts or omissions
or failures to act which were alleged in the Litigation.
1.14 "Released Person" means the Settling Defendant and its
subsidiaries, successors or assigns.
1.15 "Representative Plaintiffs" means the lead plaintiffs as
designated by the Court in Pre-trial Order No. 1: Charles T. Labozzetta,
Albert Buthman, Michael Zurkan, Lillian Pfaender,
-4-
<PAGE> 7
Lewis Steven Cohen, Bharat Dave, Kurt W. Grimm, Kenneth Holmes, Charles
DiLustro, John Cappazzi and Thomas Druetzler.
1.16 "Settlement Class" means all Persons (except the Settling
Defendant and the Non-Settling Defendants, members of their immediate families,
any entity in which any such defendant has a controlling interest, and their
legal representatives, heirs, successors or assigns) who purchased Health
Management common stock during the Settlement Class Period (the "Class"),
excluding those persons who timely and validly requested exclusion from the
Settlement Class pursuant to the Notice of Pendency and Partial Settlement of
Class Action sent to the Class on or about September 24, 1996.
1.17 "Settlement Class Member" or "Member of the Settlement Class"
means a Person who falls within the definition of the Settlement Class as set
forth in this Restated Stipulation.
1.18 "Settlement Class Period" means the period from August 25, 1994
through February 26, 1996, inclusive.
1.19 "Settlement Fund" means:
(a) A payment by Transworld to the Escrow Agent of
$3,200,000 to be paid within five (5) business days after the execution
of this Restated Stipulation; and
(b) An additional payment by the Settling Defendant or
Transworld to the Escrow Agent of $1,350,000 to be paid within five (5)
business days after the Merger Effective Date.
-5-
<PAGE> 8
1.20 "Settling Defendant" means Health Management only, and
specifically excludes any and all of the Non-Settling Defendants (and any
members of any of the Non-Settling Defendants' families and any Person or
entity owned or controlled by any of the Non-Settling Defendants), and any
other Person.
1.21 "Settling Defendant's Counsel" means McDermott Will & Emery, John
D. Lovi, 50 Rockefeller Plaza, New York, New York 10020, (212) 547-5400.
1.22 "Settling Parties" means, collectively, the Settling Defendant
and the Representative Plaintiffs on behalf of themselves and the Members of
the Settlement Class.
1.23 Transworld means Transworld Home HealthCare, Inc., a New York
corporation.
II. THE RESTATED STIPULATION
2. Events Leading To The Restated Stipulation
2.1 On November 1, 1996 the Settling Defendant issued a press release
which stated, inter alia, that cash flow problems had forced it to consider
options for the Company including a sale, merger, or bankruptcy filing. Health
Management common stock, which had been trading for approximately $4-1/2 per
share, lost 58 percent of its value and closed that day at $1-15/16 per share.
2.2 Subsequently, on or about November 4, 1996 Settling Defendants
Counsel informed Plaintiffs Settlement Counsel that because of these
developments the Settling Defendant would be
-6-
<PAGE> 9
unable to fund the original settlement and, that absent a sale of the Company,
it would shortly file for bankruptcy protection.
2.3 By letter dated November 6, 1996, Plaintiffs Settlement Counsel
informed the Court that, because Health Management could not fund the original
settlement, Plaintiffs Settlement Counsel could no longer support the original
settlement and requested that the Court postpone the final approval hearing
which had been scheduled for November 8, 1996, so that Plaintiffs Settlement
Counsel could explore other possible alternatives for the Class.
2.4 Plaintiffs Settlement Counsel were informed that there was a
company that was interested in acquiring Health Management. The potential
acquirer was later identified as Transworld. Plaintiffs Settlement Counsel
engaged in extensive negotiations with counsel for Transworld and Health
Management. Absent an agreement, Health Management would file for bankruptcy
protection.
2.5 On November 11, 1996, an agreement in principle was reached
whereby upon the completion of an acquisition of Health Management by
Transworld, Transworld would cause Health Management to pay plaintiffs and the
Class $7.2 million cash in lieu of the $2 million in cash and approximately $14
million in stock and warrants to be issued under the original settlement.
2.6 On or about November 14, 1996 Transworld acquired the senior debt
of Health Management and also announced that it had agreed to purchase 49% of
the common stock of Health Management. Health Management and Transworld also
entered into a merger
-7-
<PAGE> 10
agreement, pursuant to which a newly formed subsidiary of Transworld will merge
into Health Management.
2.7 On December 19, 1996 Representative Plaintiffs and Health
Management entered into an Amended Stipulation of Partial Settlement (the
"Amended Stipulation") pursuant to which certain sums were to be paid to the
Escrow Agent on behalf of the Settlement Class in full settlement of all
Released Claims against Health Management. However, payment of the sums under
the Amended Stipulation was dependent upon the merger and was due only upon the
occurrence of the Merger Effective Date. This Court granted preliminary
approval to the Amended Stipulation on or about December 20, 1996 and notice was
provided to Settlement Class Members.
2.8 Thereafter, on March 17, 1997 Health Management disclosed that it
would restate its financial statements for the first and second quarters of its
1997 fiscal year to correct certain errors relating to cost of goods sold,
which was understated by about $1.8 million and $800,000 respectively, and that
it would take a charge of about $13 million in its third fiscal quarter,
including of a writeoff of approximately $2.8 million of good will and a
writedown of about $10 million in accounts receivable. Health Management also
disclosed that is would report substantial operating losses for the third
fiscal quarter and the first nine months of fiscal 1997. Upon this disclosure,
Transworld informed Plaintiffs' Settlement Counsel that, because of this
material change in circumstance, Transworld
-8-
<PAGE> 11
would withdraw from the proposed merger with Health Management unless the
Amended Stipulation were revised and its merger agreement with Health
Management were renegotiated. Such withdrawal would cause the Merger Effective
Date never to occur and thus the consideration payable under the Amended
Stipulation would not be paid. Thereafter, Health Management disclosed that it
would seek bankruptcy protection unless the merger agreement with Transworld
were renegotiated.
2.9 During the subsequent period, Plaintiffs' Settlement Counsel
conducted further negotiations with counsel for Settling Defendant and
Transworld relating to the settlement of the claims against Health Management.
2.10 On or about March 25, 1997 an agreement in principle was reached
to settle the Released Claims as against the Settling Defendant for the total
amount in cash of $4.55 million, of which $3.2 million was contingent solely
upon the Court's final approval of the Restated Stipulation, and $1.35 million
would be paid at the time of any merger between Health Management and
Transworld.
2.11 On March 27, 1997, Health Management announced that it had
renegotiated the merger agreement with Transworld, and that one condition of
said merger was the final approval by the Court of this Restated Stipulation.
-9-
<PAGE> 12
3. The Settlement Fund and Rights
With Respect Thereto
-------------------------------
3.1 Subject to the provisions of this Restated Stipulation,
Transworld will transmit to the Escrow Agent $3.2 million within five (5)
business days after the execution of this Restated Stipulation by Settling
Parties. Thereafter, if a merger between Health Management and Transworld or a
subsidiary of Transworld occurs, Health Management or Transworld will transmit
to the Escrow Agent the sum of $1.35 million within five (5) business days
after the Merger Effective Date.
3.2 In the event that all or part of the Settlement Fund is not
transmitted to the Escrow Agent when due (i.e. within five (5) business days
after the execution of the Restated Stipulation or within five (5) business
days after the Merger Effective Date), interest on said unpaid amount shall
begin to accrue for the benefit of plaintiffs and the Class at the rate of 10
percent per annum until paid. In the event that said amounts remain unpaid
after 10 days notice and opportunity to cure plaintiffs may, at their option,
either terminate this Restated Stipulation, or commence proceedings before the
Court to enforce the terms hereof.
4. Administration of The Settlement Fund
A. The Escrow Agent
4.1 The Escrow Agent shall invest the Settlement Fund in
instruments backed by the full faith and credit of the United States Government
or fully insured by the United States
-10-
<PAGE> 13
Government or an agency thereof and shall reinvest the proceeds of these
instruments as they mature in similar instruments at the current market rates.
All interest received shall become part of the Settlement Fund.
4.2 The Escrow Agent shall not disburse the Settlement Fund except
as provided in the Restated Stipulation, or by an Order of the Court.
4.3 Subject to such further order and direction by the Court as may
be necessary, the Escrow Agent is authorized to execute such transactions on
behalf of the Settlement Class Members as are consistent with the terms of the
Restated Stipulation.
4.4 All funds held by the Escrow Agent shall be deemed and
considered to be in custodia legis of the Court, and shall remain subject to the
jurisdiction of the Court, until such time as such funds shall be distributed
pursuant to the Restated Stipulation and/or further order(s) of the Court.
4.5 Upon payment of the Settlement Fund or any portion thereof to
the Escrow Agent, and preliminary approval of the Restated Stipulation, the
Escrow Agent may transfer from the Settlement Fund into a Notice and
Administration Fund, the sum of up to $50,000 to pay costs and expenses
reasonably and actually incurred in connection with providing notice to the
Settlement Class, locating Settlement Class members, soliciting Settlement
Class claims, assisting with the filing of claims, administering and
distributing the Settlement Fund to the Members of the
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Settlement Class, processing Proofs of Claim and Release and paying escrow fees
and costs, if any.
4.6 On the Effective Date, any balance (including interest) then
remaining in the Notice and Administration Fund, less expenses incurred but not
yet paid, shall be transferred by the Escrow Agent to, and deposited and
credited as part of, the Settlement Fund to be applied as set forth in Paragraph
8.2 below. Thereafter, Plaintiffs' Settlement Counsel shall have the right to
use such portions of the Settlement Fund as are, in their exercise of reasonable
judgment, necessary to carry out the purposes set forth in Paragraph 4.5.
B. Taxes
4.7 (a) The Settling Parties, Transworld, and the Escrow Agent
agree to treat the Settlement Fund as being at all times a "qualified
settlement fund" within the meaning of Treas. Reg. Section 1.468B-1. In
addition, the Escrow Agent and, as required, the Settling Defendant and/or
Transworld shall jointly and timely make the "relation-back election" (as
defined in Treas. Reg. Section 1.468B-1) back to the earliest permitted date.
Such election shall be made in compliance with the procedures and requirements
contained in such regulations. It shall be the responsibility of the Escrow
Agent to timely and properly prepare, and deliver the necessary documentation
for signature by all necessary parties, and thereafter to cause the appropriate
filing to occur.
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(b) For the purposes of Section 468B of the Internal Revenue Code
of 1986, and Treas. Reg. Section 1.468B-2(k)(3), the "administrator" shall be
the Escrow Agent. The Escrow Agent shall timely and properly file all
informational and other tax returns necessary or advisable with respect to the
Settlement Fund (including without limitation the returns described in Treas.
Reg. Section 1.468B-2(l)). Such returns (as well as the election described in
Paragraph 4.7(a)) shall be consistent with this Paragraph 4.7 and in all events
shall reflect that all taxes (including any estimated taxes, interest or
penalties) on the income earned by the Settlement Fund shall be paid out of the
Settlement Fund as provided in Paragraph 4.7(c) hereof.
(c) All (i) taxes (including any estimated taxes, interest or
penalties) arising with respect to the income earned by the Settlement Fund,
("Taxes") and (ii) expenses and costs incurred in connection with the operation
and implementation of this Paragraph 4.7 (including, without limitation,
expenses of tax attorneys and/or accountants and mailing and distribution costs
and expenses relating to filing (or failing to file) the returns described in
this Paragraph 4.7) ("Tax Expenses"), shall be paid out of the Settlement
Fund; in all events the Settling Defendant and Transworld shall not have any
liability or responsibility for the Taxes, the Tax Expenses, or the filing of
any tax returns or other documents with the Internal Revenue Service or any
other state or local taxing authority. The Escrow Agent shall indemnify and
hold the Settling Defendant and Transworld harmless
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for Taxes and Tax Expenses (including, without limitation, Taxes payable by
reason of any such indemnification). Further, Taxes and the Tax Expenses
shall be treated as, and considered to be, a cost of administration of the
settlement and shall be timely paid by the Escrow Agent out of the Settlement
Fund without prior order from the Court, and the Escrow Agent shall be
obligated (notwithstanding anything herein to the contrary) to withhold from
distribution to Authorized Claimants any funds necessary to pay such amounts
(as well as any amounts that may be required to be withheld under Treas. Reg.
Section 1.468B-2(l)(2)); the Settling Defendant and Transworld are not
responsible and shall have no liability therefor, or for any reporting
requirements that may relate thereto. The Settling Parties and Transworld
agree to cooperate with the Escrow Agent, each other, and their tax attorneys
and accountants to the extent reasonably necessary to carry out the provisions
of this Paragraph 4.7.
C. Termination
4.8 In the event that the Restated Stipulation is not approved, or
is terminated, cancelled, or fails to become effective for any reason, or the
Effective Date does not occur, the Settlement Fund (including accrued
interest), less expenses not to exceed $100,000 actually incurred or due and
owing in connection with the settlement provided for herein, shall be returned
to Transworld within five (5) business days.
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5. Additional Settlement Consideration
5.1 The Settling Defendant agrees to (i) maintain in the normal
course of business all relevant documents during the pendency of this
litigation and to produce same to Plaintiffs' Settlement Counsel upon request
and (ii) to be otherwise subject to discovery by plaintiffs under the Federal
Rules of Civil Procedure as if it were still a party to the litigation.
5.2. The Settling Defendant shall undertake reasonable efforts to
voluntarily make its employees, directors and others subject to its control
(other than any of the Non-Settling Defendants) available at reasonable times
and places for interviews with Plaintiffs' Settlement Counsel and will continue
to be reasonably available to Plaintiffs' Settlement Counsel on an ongoing
basis throughout the pendency of this litigation.
5.3 The Settling Defendant agrees to undertake reasonable efforts to
have its employees, directors and others under its control (other than any of
the Non-Settling Defendants) voluntarily appear at the trial of this action if
requested by Plaintiffs' Settlement Counsel at the sole cost and expense of the
Settling Defendant.
5.4 The Settling Defendant agrees to undertake reasonable efforts to
make its directors, employees and others under its control (other than any of
the Non-Settling Defendants) voluntarily available for depositions at the
request of Plaintiffs' Settlement Counsel who shall bear the costs and expenses
of the same exclusive of any legal fees and expenses.
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5.5 The Settling Defendant's failure to (1) deliver any portion of
the Settlement Fund when due or (2) prior to the Effective Date provide the
Additional Settlement Consideration as set forth above in this paragraph 5 shall
be, after 10 days written notice and an opportunity to cure, deemed a material
breach of this agreement and grounds for its termination by plaintiffs. In the
event of any such material breach and failure to cure any judgment entered in
favor of the Settling Defendant shall, at the option of Plaintiffs' Settlement
counsel, be vacated, and at the option of Plaintiffs' Settlement Counsel, this
agreement shall be terminated in accordance with paragraph 10.5. If the
Settling Defendant fails to continue to provide the Additional Settlement
Consideration after the Effective Date, after 10 days written notice and an
opportunity to cure, it shall be deemed a breach of this agreement. This Court
shall retain jurisdiction over the Settling Defendant with respect to any
action plaintiffs may commence for monetary or equitable relief.
6. Notice Order and Settlement Hearing
6.1 Promptly after execution of the Restated Stipulation, but in no
event later than fifteen (15) days after the Restated Stipulation is signed
(unless such time is extended by the written agreement of Plaintiffs'
Settlement Counsel and counsel for the Settling Defendant), the Settling
Parties shall submit the Restated Stipulation, together with its Exhibits to
the Court and shall jointly apply for entry of an order (the "Notice Order"),
substantially in the form of Exhibit "A" hereto,
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requesting the preliminary approval of the settlement set forth in the Restated
Stipulation, and approval for the mailing and publication of a Restated Notice
of Partial Settlement of Class Action which shall include the general terms of
the settlement set forth in the Restated Stipulation, the proposed Plan of
Allocation, the general terms of the Fee and Expense Application (as defined in
paragraph 9.1) and the date of the Settlement Hearing (as defined below in
paragraph 6.2).
6.2 The Settling Parties shall request that, after notice is given,
the Court hold a Hearing (the "Settlement Hearing") to consider whether to
grant final approval to the settlement set forth in the Restated Stipulation.
At or after the Settlement Hearing, Representative Plaintiffs' counsel also will
request that the Court approve the proposed Plan of Allocation and the Fee and
Expense Application.
6.3 The Notice Order shall specifically include provisions that,
among other things, will:
(a) Certify the Settlement Class solely for purposes of this
settlement;
(b) Preliminarily approve the Restated Stipulation and the
settlement set forth herein as being fair, reasonable and adequate;
(c) Approve the form of Restated Notice of Restated Partial
Settlement of Class Action (the "Notice") (substantially in the form of Exhibit
"A-1" hereto) for mailing to members of the Settlement Class and the form of
summary notice ("Summary
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Notice") (substantially in the form of Exhibit "A-2" hereto) for publication;
(d) Direct Plaintiffs' Settlement Counsel to mail or cause to be
mailed by first class mail the Notice to those Persons in the Settlement Class
who can be identified through reasonable effort, on or before the date to be
specified in the Notice Order;
(e) Direct Plaintiffs' Settlement Counsel to cause the Summary
Notice to be published once in the national edition of The New York Times;
(f) Request that nominees who purchased Health Management common
stock during the Settlement Class Period either (i) send the Notice to all
beneficial owners of such Stock within ten (10) days after receipt of the
Notice or (ii) send a list of the names and addresses of such beneficial owners
to Plaintiffs' Settlement Counsel within ten (10) days of receipt of the Notice
and, in the event of the latter, direct Plaintiffs' Settlement Counsel to send
the Notice to all beneficial owners identified by the nominee within ten (10)
days after receipt of the list from the nominee;
(g) Provide that Settlemen Class Members who wish to participate
in the settlement provided for in this Restated Stipulation shall complete and
file a Proof of Claim and Release form pursuant to the instructions contained
therein if they have not already done so;
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(h) Find that the notice given pursuant to subparagraphs (d)
through (f), above, constitutes the best notice practicable under the
circumstances, including individual notice to all Persons in the Class who can
be identified upon reasonable effort, and constitutes valid, due and sufficient
notice to all Persons in the Settlement Class, complying fully with the
requirements of Rule 23 of the Federal Rules of Civil Procedure, the
Constitution of the United States, and any other applicable law;
(i) Schedule and hold the Settlement Hearing to consider and
determine whether (i) the proposed settlement of the litigation against the
Settling Defendant as contained in the Restated Stipulation should be approved
as fair, reasonable and adequate; and (ii) the Judgment approving the
settlement, including the bar order, should be entered;
(j) Provide that at or after the Settlement Hearing, the Court
shall determine whether the proposed Plan of Allocation should be approved;
(k) Provide that at or after the Settlement Hearing the Court shall
determine and enter an order regarding whether and in what amount attorneys'
fees and reimbursement of expenses should be awarded to the Representative
Plaintiffs' counsel;
(l) Provide that pending final determination of whether the
settlement contained in the Restated Stipulation should be approved, neither
the Representative Plaintiffs, nor any Settlement Class Member, either
directly, representatively,
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or in any other capacity shall commence or prosecute any action or proceeding
in any court or tribunal asserting any of the Released Claims against the
Released Person;
(m) Provide that any objections to (i) the proposed
settlement contained in the Restated Stipulation; (ii) entry of the Judgment
approving the settlement, including the bar order; (iii) the proposed Plan of
Allocation; and (iv) the Representative Plaintiffs' Counsel's Fee and Expense
Application, shall be heard and any papers submitted in support of said
objections shall be received and considered by the Court at the Settlement
Hearing only if, on or before a date to be specified in the Notice Order,
Persons making objections shall file and serve on all parties notice of
their intention to appear (which shall set forth each objection and the basis
therefor) and copies of any papers in support of their position as set
forth in the Notice Order;
(n) Provide that the Settlement Hearing may, from time to
time and without further notice to the Settlement Class, be continued or
adjourned by Order of the Court.
7. Releases
7.1 Upon the Effective Date, the Representative Plaintiffs shall
and each of the Settlement Class Members shall be deemed to have, and by
operation of the Judgment shall have, fully, finally, and forever released,
relinquished and discharged all Released Claims against the Released Person,
whether or not such
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Settlement Class Member executes and delivers the Proof of Claim and Release.
7.2 Upon the Effective Date, the Released Person shall be deemed to
have, and by operation of the Judgment shall have, fully, finally, and forever
released, relinquished and discharged each and all of the Representative
Plaintiffs, the Settlement Class Members, and counsel to the Representative
Plaintiffs from all claims, arising out of, relating to, or in connection with
the institution, prosecution, assertion or resolution of the litigation or the
Released Claims.
7.3 Only those Settlement Class Members filing valid and timely
Proofs of Claim and Release shall be entitled to participate in the settlement
and receive any distributions from the Settlement Fund. The Proofs of Claim
and Release to be executed by the Settlement Class Members shall release all
Released Claims against the Released Person. All members of the Settlement
Class shall be bound by the releases set forth therein whether or not they
submit a valid and timely Proof of Claim and Release.
8. Administration And Calculation Of Claims,
Final Awards And Supervision And Distribution
Of Settlement Fund
---------------------------------------------
8.1 Plaintiffs' Settlement Counsel, or their authorized agents,
acting on behalf of the Settlement Class, and subject to the supervision,
direction and approval of the Court, shall administer and calculate the claims
submitted by Settlement Class Members and shall oversee distribution of that
portion of the
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Settlement Fund that is finally awarded by the Court to the Settlement Class
Members.
8.2 The Settlement Fund shall be applied as follows:
(i) To pay all unpaid costs and expenses reasonably and
actually incurred in connection with providing notice to the Settlement Class
including: locating Settlement Class members, soliciting Settlement Class
claims, assisting with the filing of claims, administering and distributing the
Settlement Fund to the Settlement Class, processing Proofs of Claim and
Release, and paying escrow fees and costs, if any;
(ii) To pay Taxes and Tax Expenses;
(iii) To pay counsel to Representative Plaintiffs' attorneys'
fees, expenses and costs, with interest thereon, if and to the extent allowed
by the Court; and
(iv) To distribute the balance of the Settlement Fund (the
"Net Settlement Fund") to Authorized Claimants as allowed by the Restated
Stipulation, the Plan of Allocation or the Court.
8.3 After the Effective Date and subject to such further approval
and further order(s) of the Court as may be required, the Net Settlement Fund
shall be distributed to Authorized Claimants, subject to and in accordance with
the following:
(a) Each person claiming to be an Authorized Claimant shall
be required to submit to the Claims Administrator a separate completed Proof of
Claim and Release, signed under penalty of perjury and supported by such
documents as specified
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in the Proof of Claim and Release and as are reasonably available to the
Authorized Claimant.
(b) Except as otherwise ordered by the Court, all
Settlement Class Members who fail to timely submit a valid Proof of Claim and
Release within such period, or such other period as may be ordered by the
Court, or who have not already done so, shall be forever barred from receiving
any payments of money pursuant to the Restated Stipulation and the settlement
set forth herein, but will in all other respects be subject to and bound by the
provisions of the Restated Stipulation, the settlement and releases contained
herein, and the Judgment.
(c) The Net Settlement Fund shall be distributed to the
Authorized Claimants in accordance with and subject to the Plan of Allocation
to be described in the Notice mailed to Settlement Class Members. The proposed
Plan of Allocation shall not be a part of the Amended Stipulation.
8.4 The Settling Defendant and Transworld shall not have any
responsibility for, interest in, or liability whatsoever with respect to the
investment or distribution of the Settlement Fund, the Plan of Allocation, the
determination, administration of taxes, or any losses incurred in connection
therewith. No Person shall have any claim of any kind against the Settling
Defendant, Transworld or their counsel with respect to the matters set forth in
this paragraph; and the Settlement Class Members and Plaintiffs' Settlement
Counsel release the Settling Defendant and Transworld from any and all
liability and claims arising from or
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with respect to the investment or distribution of the Settlement Fund.
8.5 No Person shall have any claim against Plaintiffs' Settlement
Counsel, the Claims Administrator, or any other agent designated by Plaintiffs'
Settlement Counsel or the Settling Defendant or its counsel, based on the
distributions made substantially in accordance with the Restated Stipulation
and the settlement contained herein, the Plan of Allocation or further orders
of the Court.
8.6 It is understood and agreed by the Settling Parties that any
proposed Plan of Allocation of the Net Settlement Fund, including, without
limitation, any adjustments to an Authorized Claimant's claim set forth therein
is not a part of the Restated Stipulation and is to be considered by the Court
separately from the Court's consideration of the fairness, reasonableness and
adequacy of the settlement set forth in the Restated Stipulation, and any order
or proceedings relating to the Plan of Allocation shall not operate to
terminate or cancel the Restated Stipulation or affect the finality of the
Court's Judgment approving the Amended Stipulation and the settlement set forth
herein, or any other orders entered pursuant to the Restated Stipulation.
9. Representative Plaintiffs' Counsel's
Attorneys' Fees And Reimbursement Of Expenses
9.1 The Representative Plaintiffs or their counsel may submit an
application or applications (the "Fee and Expense Application") for
distributions to them from the Settlement Fund for: (i) an award of attorneys'
fees in an amount up to 33-1/3
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percent of the Settlement Fund; plus (ii) reimbursement of all expenses and
costs, including the fees of any experts or consultants incurred in connection
with prosecuting the Litigation, plus interest on such attorneys' fees, costs
and expenses at the same rate and for the same periods as earned by the
Settlement Fund (until paid), as may be awarded by the Court.
9.2 The attorneys' fees, expenses and costs, including the fees of
experts and consultants, as awarded by the Court (the "Fee and Expense Award"),
shall be transferred to Plaintiffs' Settlement Counsel from the Settlement
Fund, within three (3) business days after the later of (i) the Effective Date
or (ii) the date on which the Order awarding such fees and expenses becomes
final, and no longer subject to appeal, or as otherwise ordered by the Court.
Plaintiffs' Settlement Counsel shall thereafter allocate the Fee and Expense
Award amongst Representative Plaintiffs' Counsel in a manner in which
Plaintiffs' Settlement Counsel in good faith believe reflects the contributions
of such counsel to the prosecution and settlement of the Litigation.
9.3 The Settling Defendant shall have no responsibility for, and no
liability whatsoever with respect to, the allocation among Plaintiffs'
Settlement Counsel, and any other Person who may assert some claim thereto, of
any Fee and Expense Awards that the Court may make in this litigation.
9.4 The procedure for and the allowance or disallowance by the
Court of any applications by any of the counsel to the
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Representative Plaintiffs for attorneys' fees, costs and expenses, including
the fees of experts and consultants, to be paid out of the Settlement Fund, are
not part of the settlement set forth in the Restated Stipulation, and are to be
considered by the Court separately from the Court's consideration of the
fairness, reasonableness and adequacy of the settlement set forth in
the Restated Stipulation, and any order or proceedings relating to the Fee and
Expense Application, or any appeal from any order relating thereto, shall not
operate to terminate or cancel the Restated Stipulation, or affect or delay the
finality of the Judgment approving the Restated Stipulation and the partial
settlement of the Litigation set forth herein.
10. Conditions of Settlement, Effect Of Disapproval,
Cancellation Or Termination
10.1 The Effective Date of the Restated Stipulation shall be
conditioned on the occurrence of all of the following events;
(i) Transworld shall have timely transferred the sum of
$3,200,000 of the Settlement Fund to the Escrow Agent;
(ii) The Settling Defendant shall not be in breach of any of
its obligations set forth in Section 5 of this Agreement;
(iii) The Court has entered the Notice Order, as required by
Section 6 of this Agreement;
(iv) The Court has entered the Judgment, or a judgment,
including a bar order, substantially in the form of Exhibit "B"; and
(v) The Judgment has become Final.
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10.2 Upon the occurrence of all of the events referenced in
paragraph 10.1 above, any and all remaining interest or right of the Settling
Defendant and Transworld to the Settlement Fund to the extent it has been paid
shall be absolutely and forever extinguished, and Settling Defendant and
Transworld shall have no right to repayment of any part of the Settlement Fund
even if no merger between Health Management and Transworld occurs. The
occurrence of the Effective Date and the fact that the Judgment has become
final will not in any way diminish Transworld's obligation to make an
additional payment to the Escrow Agent of $1,350,000 upon the occurrence of the
Merger Effective Date, and such obligation shall survive the entry of such
Judgment.
10.3 Neither a modification nor reversal on appeal of any Plan of
Allocation or of any amount of attorneys' fees, costs, expenses and interest
awarded by the Court to any of the Representative Plaintiffs' counsel shall
constitute grounds for cancellation and termination of the Restated
Stipulation.
10.4 If all of the conditions specified in paragraph 10.1 are not
met, then the Restated Stipulation may be terminated by Plaintiffs unless
Plaintiffs' Settlement Counsel, Settling Defendant's Counsel and Transworld
mutually agree in writing to proceed with the Restated Stipulation. If the
Judgment does not become Final, then the Restated Stipulation may be terminated
by the Settling Defendant or Transworld.
10.5 Unless otherwise ordered by the Court, in the event the
Restated Stipulation shall terminate, or be canceled, or shall
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not become effective for any reason, within five (5) business days after
written notification of such event is sent by Settling Defendant's Counsel or
Plaintiffs' Settlement Counsel or Transworld to the Escrow Agent, the
Settlement Fund, less up to $100,000 of expenses and costs which have either
been incurred or disbursed pursuant to Section 4.5 hereto, and less any Taxes
or Tax Expenses incurred or paid pursuant to Section 4.7 hereto, shall be
refunded by the Escrow Agent pursuant to written instructions from Transworld
or its counsel. In such event Transworld shall be entitled to any tax refund
owing to the Settlement Fund. At the request of Transworld or its counsel, the
Escrow Agent or its designee shall apply for any such refund and pay the
proceeds to Transworld, less the cost of obtaining the tax refund.
10.6 In the event that the Restated Stipulation is not approved by the
Court or the settlement set forth in the Restated Stipulation is terminated or
fails to become effective in accordance with its terms, then upon payment of
the Settlement Fund to Transworld the Settling Parties shall be restored to
their respective positions in the litigation as of the date of this Agreement.
In such event, the terms and provisions of the Restated Stipulation, shall have
no further force and effect with respect to the Settling Parties and shall not
be used in this litigation or in any other proceeding for any purpose, and any
Judgment or Order entered by the Court in accordance with the terms of the
Restated Stipulation shall be treated as vacated, nunc pro tunc. No order of
the Court or modification or reversal
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on appeal of any order of the Court concerning the Plan of Allocation or the
amount of any attorneys' fees, costs, expenses and interest awarded by the
Court to the Representative Plaintiffs or any of their counsel shall constitute
grounds for cancellation or termination of the Restated Stipulation.
10.7 If the Effective Date does not occur, or if the Restated
Stipulation is terminated pursuant to its terms, neither the Representative
Plaintiffs nor any of their counsel shall have any obligation to repay any
amounts actually and properly disbursed. In addition, any expenses already
incurred and properly chargeable pursuant to Sections 4.5 and 4.7 hereof at the
time of such termination or cancellation but which have not been paid, shall be
paid by the Escrow Agent in accordance with the terms of the Restated
Stipulation prior to the balance being refunded in accordance with Section 10.5
above. Notwithstanding anything to the contrary in this Section 10.7, the
aggregate amount disbursed or paid from the Settlement Fund prior to the
Effective Date or any termination of the Restated Stipulation shall in no event
exceed $100,000 of expenses and costs plus Taxes and Tax expenses paid pursuant
to Section 4.7 hereof.
10.8 If a case is commenced in respect to Transworld or the Settling
Defendant under Title 11 of the United States Code (Bankruptcy), or a trustee,
receiver or conservator is appointed under any similar law, and in the event of
the entry of a final order of a court of competent jurisdiction determining the
transfer of the Settlement Fund, or any portion thereof, to be a
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<PAGE> 32
preference, voidable transfer, fraudulent conveyance or similar transaction,
then upon payment of the Settlement Fund to Transworld the releases given and
Judgment entered in favor of the Settling Defendant pursuant to this Restricted
Stipulation shall be null and void.
11. Miscellaneous Provisions
11.1 The Settling Parties (a) acknowledge that it is their intent
to consummate this agreement; and (b) agree to cooperate to the extent
necessary to effectuate and implement all terms and conditions of the Restated
Stipulation and to exercise their best efforts to accomplish the foregoing
terms and conditions of the Restated Stipulation.
11.2 Transworld will warrant that, at the time of the payment of the
Settlement Fund provided for herein is made, Transworld is not insolvent and
that the payment will not render it insolvent.
11.3 The Settling Defendant agrees that the amount of the Settlement
Fund, as well as the other terms of the settlement provided for herein reflect
a good faith settlement of Representative Plaintiffs' and the Settlement Class'
claims, reached voluntarily after consultation with experienced legal counsel.
Neither the Restated Stipulation nor the settlement contained therein, nor
any act performed or document executed pursuant to or in furtherance of the
Restated Stipulation or the settlement: (i) is or may be deemed to be or may
be used as an admission of, or evidence of, the validity of any Released Claim,
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<PAGE> 33
or of any wrongdoing or liability of the Released Person, or (ii) is or may be
deemed to be or may be used as an admission of, or evidence of, any fault or
omission of any Released Person in any civil, criminal or administrative
proceeding in any court, administrative agency or other tribunal. The Released
Person may file the Restated Stipulation and/or the Judgment from this action
in any other action that may be brought against them in order to support a
defense or counterclaim based on principles of res judicata, collateral
estoppel, release, good faith settlement, judgment bar or reduction or any
theory of claim preclusion or issue preclusion or similar defense or
counterclaim.
11.4 All of the Exhibits to the Restated Stipulation are material
and integral parts hereof and are fully incorporated herein by this reference.
11.5 The Restated Stipulation may be amended or modified only by a
written instrument signed by or on behalf of all Settling Parties or their
successors-in-interest and consented to in writing by Transworld.
11.6 The Restated Stipulation and the Exhibits attached hereto
constitute the entire agreement among the Settling Parties hereto and
Transworld and no representations, warranties or inducements have been made to
any party concerning the Restated Stipulation or its Exhibits other than the
representations, warranties and covenants contained and memorialized in such
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documents. Except as otherwise provided herein, each party shall bear its own
costs.
11.7 Plaintiffs' Settlement Counsel, on behalf of the Settlement
Class, are expressly authorized by the Representative Plaintiffs to take all
appropriate action required or permitted to be taken by the Settlement Class
pursuant to the Restated Stipulation to effectuate its terms and also are
expressly authorized to enter into any modifications or amendments to the
Restated Stipulation on behalf of the Settlement Class which they deem
appropriate.
11.8 Each counsel or other Person executing the Restated Stipulation
or any of its Exhibits on behalf of any party hereto hereby warrants that such
person has the full authority to do so.
11.9 The Restated Stipulation may be executed in one or more
counterparts. All executed counterparts and each of them shall be deemed to be
one and the same instrument. Counsel for the parties to the Restated
Stipulation shall exchange among themselves original signed counterparts and
a complete set of original executed counterparts shall be filed with the Court.
11.10 The Restated Stipulation shall be binding upon, any entity
which acquires ownership or control of more than 51 percent of the outstanding
stock of Health Management by any means, including but not limited to
Transworld and inure to the benefit of, the successors and assigns of the
Settling Parties hereto and Transworld.
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11.11 The Court shall retain jurisdiction with respect to implementation
and enforcement of the terms of the Restated Stipulation, and the Settling
Parties and Transworld submit to the jurisdiction of the Court for purposes of
implementing and enforcing the settlement embodied in the Amended Stipulation.
11.12 The Restated Stipulation and the Exhibits hereto shall be
considered to have been negotiated, executed and delivered, and to be wholly
performed, in the State of New York, and the rights and obligations of the
parties to the Restated Stipulation shall be construed and enforced in
accordance with the laws of the State of New York without giving effect to that
State's choice of law principles.
IN WITNESS WHEREOF, the Settling Parties hereto have caused the
Restated Stipulation to be executed, by their duly authorized attorneys, as of
the date first written above.
Dated: 4/23/97
KAPLAN, KILSHEIMER & FOX LLP
By: Frederic S. Fox
---------------------------------
Frederic S. Fox (FF-9102)
685 Third Avenue
New York, NY 10017
(212) 687-1980
ZWERLING, SCHACHTER & ZWERLING, LLP
By: Jeffrey C. Zwerling (by BF)
---------------------------------
Jeffrey C. Zwerling (JZ 7924)
767 Third Avenue
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New York, NY 10017
(212) 223-3900
Plaintiffs' Settlement Counsel
McDERMOTT, WILL & EMERY
By: John D. Lovi
----------------------------------
John D. Lovi (JL-5928)
50 Rockefeller Plaza
New York, NY 10020
(212) 547-5400
Attorneys for Defendant
Health Management, Inc.
Transworld hereby agrees as follows:
1. On or before the fifth business day following execution
of this Restated Stipulation by the Settlement Parties and Transworld,
Transworld will transmit $3.2 million to the Escrow Agent, such amount to be
held and delivered by the Escrow Agent in accordance with the terms of the
above Restated Stipulation.
2. If (and only if) a merger between Health Management and
Transworld or a subsidiary of Transworld occurs, Health Management or Transworld
will transmit $1.35 million to the Escrow Agent within five business days
following the Merger Effective Date, such amount to be held and released by the
Escrow Agent in accordance with the terms of the above Restated Stipulation.
3. Transworld warrants and hereby represents that it is not
insolvent and that the payments it has agreed to make
-34-
<PAGE> 37
pursuant to paragraphs 1 and 2 above will not render it insolvent.
4. For the purposes of enforcing its obligations pursuant to
paragraph 1 and 2 above, Transworld submits to the jurisdiction of the United
States District Court for the Eastern District of New York.
Solely for the purpose of acknowledging its obligations under
the preceding four paragraphs, Transworld has caused this Restated Stipulation
to be executed, by its duly authorized attorneys, as of the date first above
written.
PROSKAUER ROSE GOETZ & MENDELSOHN LLP
By: /s/ Thomas Moore
--------------------------------
Thomas Moore (TM-1815)
1585 Broadway
New York, NY 10036
(212) 969-3000
Attorneys for Transworld Home
Healthcare, Inc.
-35-
<PAGE> 1
EXHIBIT 10.34
Transworld Healthcare, Inc.
75 Terminal Avenue
Clark, New Jersey 07066
July 7, 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, January 13, 1997, March
26, 1997 and June 12, 1997, among Transworld HealthCare, Inc. ("Transworld"),
IMH Acquisition corp. ("Newco"), and Health management, Inc. (as amended, the
"Merger Agreement").
The parties hereto agree to clarify the Merger Agreement as follows:
1. Section 1.4 of the merger Agreement is hereby amended to read
in tis entirety as follows:
At the Effective Time, the Certificate of Incorporation of the
Surviving Corporation shall be amended and restated to read identically to
Articles First through Fourth and Articles Sixth through Tenth (renumbered
Fifth through Ninth) of the Certificate of Incorporation of Newco, except that
the name of the Surviving Corporation shall continue to be "Health Management,
Inc." At the Effective time, the By-Laws of Newco shall be the By-Laws of the
Surviving Corporation."
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 July 31, 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).
<PAGE> 2
Health Management, Inc.
July 7, 1997
Page 2
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 HEALTHCARE, INC.
By /s/ Robert W. Fine
-------------------------------
Name: Robert W. Fine
Title: President
IMH ACQUISITION CORP.
By /s/ Robert W. Fine
-------------------------------
Name: Robert W. Fine
Title: President
AGREED TO:
HEALTH MANAGEMENT, INC.
/s/ Wm. James Nicol
- -----------------------------
Name: Wm. James Nicol
Title: President and Chief
Executive Officer
<PAGE> 1
EXHIBIT 11
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER SHARE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended April 30, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INCOME (LOSS) - primary and fully diluted $ (66,098,797) $ (10,927,341) $ 1,946,188
- ---------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES OUTSTANDING
Common stock 11,982,000 9,322,004 9,194,816
Common stock equivalents - 92,496 213,484
- ---------------------------------------------------------------------------------------------------
PRIMARY 11,982,000 9,414,500 9,408,300
Additional common stock equivalents - - 12,516
- ---------------------------------------------------------------------------------------------------
FULLY DILUTED 11,982,000 9,414,500 9,420,816
- ---------------------------------------------------------------------------------------------------
EARNINGS (LOSS) PER SHARE OF COMMON STOCK
Primary $ (5.52) $ (1.16) $ .21
Fully diluted $ (5.52) $ (1.16) $ .21
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE APRIL
30, 1997 CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-END> APR-30-1997
<CASH> 1,133,595
<SECURITIES> 0
<RECEIVABLES> 42,918,281
<ALLOWANCES> 16,020,000
<INVENTORY> 7,107,859
<CURRENT-ASSETS> 38,443,159
<PP&E> 6,208,855
<DEPRECIATION> 3,882,175
<TOTAL-ASSETS> 40,989,000
<CURRENT-LIABILITIES> 60,700,266
<BONDS> 34,994,051
0
0
<COMMON> 548,834
<OTHER-SE> (21,196,011)
<TOTAL-LIABILITY-AND-EQUITY> 40,989,000
<SALES> 158,419,205
<TOTAL-REVENUES> 158,419,205
<CGS> 128,719,403
<TOTAL-COSTS> 214,616,138
<OTHER-EXPENSES> 4,825,000
<LOSS-PROVISION> 18,910,557
<INTEREST-EXPENSE> 4,813,941
<INCOME-PRETAX> (65,822,407)
<INCOME-TAX> 276,390
<INCOME-CONTINUING> (66,098,797)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (66,098,797)
<EPS-PRIMARY> (5.52)
<EPS-DILUTED> (5.52)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
- --------------------------------------------X
[SEAL]
IN RE HEALTH MANAGEMENT, INC. Master File No.
SECURITIES LITIGATION 96-CV-889 (ADS)
CLASS ACTION
- --------------------------------------------X
FINAL JUDGMENT AND
ORDER OF PARTIAL DISMISSAL OF ACTION
KAPLAN, KILSHEIMER & FOX LLP
Robert N. Kaplan (RK-3100)
Frederic Fox (FF-9102)
Joel B. Strauss (JS-6585)
685 Third Avenue
New York, NY 10017
(212) 687-1980
ZWERLING, SCHACHTER
& ZWERLING, LLP
Jeffrey Zwerling (JZ-7924)
Joseph Lipofsky (JL-0971)
767 Third Avenue
New York, NY 10017
(212) 223-3900
Plaintiffs' Settlement Counsel
<PAGE> 2
This matter came on for hearing on June 9, 1997, upon the application
of the parties for approval of the Restated Partial Settlement set forth in
the Restated Stipulation of Partial Settlement (the "Restated Stipulation")
dated as of April 23, 1997. Due and adequate notice having been given to the
Settlement Class defined below, and the Court having considered the Restated
Stipulation, all papers filed and proceedings had herein and all oral and
written objections and comments received regarding the proposed settlement, and
having reviewed the entire record in the litigation, and good cause appearing.
IT IS HEREBY ORDERED, ADJUDGED AND DECREED AS FOLLOWS:
1. The Court, for purposes of the Final Judgment and order of Partial
Dismissal of Action (the "Final Judgment"), adopts all defined terms as set
forth in the Restated Stipulation.
2. The Court has jurisdiction over the subject matter of the Class
Action, the Representative Plaintiffs, the Settlement Class, and the Settling
Defendant.
3. The Court finds that the distribution of the Notice of Restated
Partial Settlement of Class Action and Settlement Hearing, and publication of
the Summary Notice as provided for in the Order Preliminarily Approving
Restated Partial Settlement. Approving Notice of Proposed Restated Settlement,
and setting Settlement Hearing constituted the best notice practicable under
the circumstances to all persons within the definition of the Settlement Class,
and fully met the requirements of Rule 23 of the
1
<PAGE> 3
Federal Rules of Civil Procedure, due process, the United States Constitution,
and any other applicable law.
4. The Court hereby certifies for settlement purposes only, a
class consisting of all persons and entities that purchased shares of Health
Management, Inc. ("Health Management") common stock during the period from and
including August 25, 1994 through and including February 26, 1996, inclusive,
excluding defendants, the members of the immediate families of each of the
individual defendants, their legal representatives, heirs, successors or
assigns, any entity in which any such defendant has a controlling interest and
the directors, officers, subsidiaries and successors of Health Management. The
Court further finds that the Lead Plaintiffs are adequate Class representatives.
5. Pursuant to and in accordance with the requirements of Rule 23
of the Federal Rules of Civil Procedure, the Court approves the Restated
Partial Settlement of the Class Action set forth in the Restated Stipulation,
each of the releases and other terms, as fair, reasonable, and adequate to the
Settlement Class. The parties to the Restated Stipulation shall complete and
finalize the settlement in accordance with the terms set forth in the Restated
Stipulation.
6. Except as to any individual claim of those Class Members
(identified in Exhibit 1 hereto) who have validly and timely requested
exclusion from the Settlement Class, the Released Claims are dismissed on the
merits and with prejudice, as to the Settling
2
<PAGE> 4
Defendant and its subsidiaries only, and the parties are to bear their own
costs.
7. All Settlement Class Members whether or not such Settlement
Class Member has filed a Proof of Claim, shall, as of the Effective Date,
conclusively be deemed to have released and forever discharged the Settling
Defendant and its subsidiaries from all Released Claims.
8. The Settling Defendant shall, as of the Effective Date,
conclusively be deemed to have released and forever discharged each of the
Representative Plaintiffs, the Settlement Class Members, and counsel to the
Representative Plaintiffs, as set forth in the Restated Stipulation.
9. All Settlement Class Members are permanently barred and
enjoined from instituting or prosecuting, in any capacity, any action or
proceeding that involves or asserts any of the Released Claims against the
Settling Defendant.
10. The Settling Defendant is permanently barred and enjoined from
instituting or prosecuting, in any capacity, any action or proceeding that
invokes or asserts any of the claims released in the Restated Stipulation.
11. All existing and future defendants and third-party defendants
in this or related actions, and all other persons, are permanently barred and
enjoined forever from asserting, commencing or maintaining against the Settling
Defendant and its subsidiaries (either directly or indirectly) any and all
claims (which claims now exist or may exist in the future), actions and
proceedings for
3
<PAGE> 5
contribution, indemnification (whether express, contractual, implied or common
law), offsets or claims-over arising out of the acts, facts, omissions or
circumstances alleged in the Amended Consolidated Complaint or any of the other
complaints in the litigation, whatever the theory or however denominated and
whether brought in the litigation or some other action. This bar extends,
without limitation, to any claim by which a person seeks to shift to another
person any portion of liability for causes of action asserted by the
Representative Plaintiffs. This injunction and bar apply to any form of action
or attempted action, including, without limitation, any claim by way of
third-party or subsequent-party complaint, collateral action, cross-claim,
counterclaim, separate claim or otherwise, in the litigation or in any other
court, arbitration, administrative agency or forum. All such claims are hereby
extinguished, discharged, satisfied and unenforceable.
12. The Court hereby bars all future claims for contribution arising
out of this action by settling party defendant Health Management against all
persons whose liability has not been extinguished by the settlement in this
case, which has been approved by this Court as of the date of this Final
Judgment.
13. If a verdict or judgment is entered against any Non-Settling
Defendant in the litigation, said verdict or judgment shall be reduced by an
amount equal to the greater of (a) an amount that corresponds to the percentage
of responsibility of the Settling Defendant; or (b) the actual amount paid
pursuant to the Restated Stipulation.
4
<PAGE> 6
14. All Persons who have filed valid and timely requests for
exclusion from the Settlement Class shall not be bound by this Final Judgment.
A list of the names of those persons who are not bound by this Final Judgment is
attached hereto.
15. The Court reserves exclusive and continuing jurisdiction over
the Class Action, the Representative Plaintiffs, the Settlement Class and the
Settling Defendant for the purposes of: (1) supervising the implementation,
enforcement, construction, and interpretation of the Restated Stipulation, the
Preliminary order, the proposed Plan of Allocation, and the Final Judgment; (2)
hearing and determining any application by Plaintiffs' Lead Counsel for an
award of attorney's fees, costs, and expenses; and (3) supervising the
distribution of the Settlement Fund.
16. Any Plan of Allocation to be submitted by Plaintiffs'
Settlement Counsel or any order to be entered regarding the attorneys' fees
application shall in no way disturb or affect this Final Judgment and shall be
considered separate from this Final Judgment.
17. Neither the Restated Stipulation nor the Restated Settlement
contained therein, nor any act performed or document executed pursuant to or in
furtherance of the Stipulation or the settlement: (i) is or may be deemed to
be or may be used as an admission of, or evidence of, the validity of any
Released Claim, or of any wrongdoing or liability of the Settling Defendant, or
(ii) is or may be deemed to be or may be used as an admission of, or evidence
of, any fault or omission of the Settling Defendant in
5
<PAGE> 7
any civil, criminal or administrative proceeding in any court, administrative
agency or other tribunal. The Settling Defendant may file the Restated
Stipulation and/or the judgment from this action in any other action that may
be brought against them in order to support a defense or counterclaim based on
principles of res judicata, collateral estoppel, release, good faith
settlement, judgment bar or reduction or any theory of claim preclusion or
issue preclusion or similar defense or counterclaim.
DATED: June 9, 1997 ARTHUR D. SPATT
----------------------------- ---------------------------
ARTHUR D. SPATT
UNITED STATES DISTRICT JUDGE
