<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
Amendment No. 2
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) January 14, 1997
Transworld Home HealthCare, Inc.
(Exact name of Registrant as specified in its charter)
New York
(State or other jurisdiction of incorporation)
1-11570 13-3098275
(Commission File Number) (I.R.S. Employer Identification No.)
75 Terminal Avenue, Clark, New Jersey 07066
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (908) 340-1144
(Former name or former address, if changed since last report.)
The registrant hereby amends the following items, financial statements,
exhibits or other portions of its Current Report on Form 8-K filed on or about
January 22, 1997 as set forth in the pages attached hereto: Item 7. Financial
Statements, Pro Forma Financial Information and Exhibits. This filing also
includes new information under Item 2.
<PAGE> 2
Item 2. ACQUISITION OR DISPOSITION OF ASSETS.
On March 26, 1997, Transworld Home HealthCare, Inc. (the
"Company") and Health Management, Inc. ("HMI") amended the previously announced
merger agreement (the "Merger Agreement") in order to, among other things,
decrease from $1.50 to $0.30 the amount per share that HMI stockholders (other
than the Company and its subsidiaries) will receive upon closing of the merger.
In addition, an agreement has been reached to amend the settlement of the
outstanding class action lawsuit against HMI to reduce the settlement amount to
$4,550,000 (a reduction from $7,200,000), subject to documentation, final court
approval and certain other conditions. Consummation of the Merger Agreement is
subject to various conditions, including approval of the Company's lenders under
its senior secured revolving credit facility, receipt of certain regulatory
approvals and approval by HMI's stockholders.
Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND
EXHIBITS.
The following are filed as part of this Form 8-K/A:
<TABLE>
<CAPTION>
Page
No.
----
<S> <C>
(a) Financial Statements of Health Management, Inc.
Years Ended April 30, 1996, 1995 and 1994
Report of Independent Certified Public Accountants 4
Consolidated Balance Sheets as of April 30, 1996
and 1995 5
Consolidated Statements of Operations for the Years
Ended April 30, 1996, 1995 and 1994 6
Consolidated Statements of Stockholders' Equity for
the Years Ended April 30, 1996, 1995 and 1994 7
Consolidated Statements of Cash Flows for the Years
Ended April 30, 1996, 1995 and 1994 8
Notes to Financial Statements 10
Report of Independent Certified Public Accountants 33
Schedule II - Valuation and Qualifying Accounts and Reserves 34
Nine Months Ended January 31, 1997
Condensed Consolidated Balance Sheets as of
January 31, 1997 (Unaudited) and April 30, 1996 35
Condensed Consolidated Statements of Operations for
the Three and Nine Months Ended January 31, 1997
and 1996 (Unaudited) 37
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended January 31, 1997 and 1996
(Unaudited) 38
Condensed Consolidated Statement of Stockholders' Equity
for the Nine Months Ended January 31, 1997 39
Notes to Financial Statements (Unaudited) 40
</TABLE>
Page 2
<PAGE> 3
(b) Unaudited Pro Forma Combined Financial Statements. 44
Pro Forma Combined Condensed Statement of Operations 45
for the Year Ended October 31, 1996 (Unaudited)
Pro Forma Combined Condensed Statement of Operations for the 46
Three Months Ended January 31, 1997 (Unaudited)
Notes to the Pro Forma Combined Financials (Unaudited) 47
(c) Exhibits.
1. Letter agreement dated March 26, 1997 amending the Merger
Agreement between the Company and HMI.
Page 3
<PAGE> 4
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Health Management, Inc. and Subsidiaries
Buffalo Grove, Illinois
We have audited the consolidated balance sheets of Health Management, Inc. and
Subsidiaries as of April 30, 1996 and 1995 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended April 30, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of financial
statements. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Health Management,
Inc. and Subsidiaries at April 30, 1996 and 1995 and the results of their
operations and cash flows for each of the three years in the period ended April
30, 1996 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Notes 1 and 7
to the accompanying consolidated financial statements, the Company is not in
compliance with the provisions of certain loan agreements and is the defendant
in significant litigation. These matters raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are described in Notes 1 and 7. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
BDO Seidman, LLP
Mitchel Field, New York
July 22, 1996, except for Note 4(a)
which is as of July 26, 1996
Page 4
<PAGE> 5
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
=============================================================================================
April 30, 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS (NOTE 4(A))
CURRENT:
Cash and cash equivalents $ 3,280,195 $ 4,562,712
Accounts receivable, less allowance for doubtful
accounts of approximately $10,070,000 and
$7,998,000 36,457,199 31,339,809
Inventories 6,800,820 7,787,661
Tax refund receivable (Note 6) 8,037,030 1,827,000
Deferred taxes (Note 6) 1,807,000 3,133,300
Prepaid expenses and other 655,358 1,163,541
- ---------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 57,037,602 49,814,023
IMPROVEMENTS AND EQUIPMENT, LESS ACCUMULATED
DEPRECIATION AND AMORTIZATION (NOTES 3 AND 4) 3,825,974 2,136,062
GOODWILL (NOTE 2) 34,008,496 35,464,260
OTHER 1,043,607 1,275,775
- ---------------------------------------------------------------------------------------------
$ 95,915,679 $88,690,120
=============================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT:
Accounts payable $ 20,714,836 $12,329,991
Accrued unusual charges (Note 5) 3,559,000 --
Accrued expenses 1,526,119 1,862,407
Current maturities of long-term debt (Note 4) 28,746,028 23,135,267
- ---------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 54,545,983 37,327,665
LONG-TERM DEBT, LESS CURRENT MATURITIES (NOTE 4) 4,006,077 3,191,123
- ---------------------------------------------------------------------------------------------
TOTAL LIABILITIES 58,552,060 40,518,788
- ---------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTE 7)
STOCKHOLDERS' EQUITY (NOTE 8):
Preferred stock - $.01 par value - shares authorized
1,000,000; issued and outstanding, none --
Common stock - $.03 par value - shares authorized
20,000,000; issued and outstanding 9,328,240
and 9,316,017 279,848 279,481
Additional paid-in capital 38,138,771 38,019,510
Retained earnings (deficit) (1,055,000) 9,872,341
- ---------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 37,363,619 48,171,332
- ---------------------------------------------------------------------------------------------
$ 95,915,679 $88,690,120
=============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
Page 5
<PAGE> 6
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
=======================================================================================================
Year ended April 30, 1996 1995 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES $ 158,859,638 $ 88,456,028 $ 44,249,516
COST OF SALES (INCLUDING UNUSUAL CHARGES OF
$2,840,000 IN 1996) (NOTE 5) 120,223,528 63,708,021 28,643,460
- -------------------------------------------------------------------------------------------------------
GROSS PROFIT 38,636,110 24,748,007 15,606,056
- -------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Selling 4,649,697 2,898,208 1,847,197
General and administrative 30,639,096 18,626,981 7,209,342
Unusual charges (Note 5) 14,000,000 -- --
- -------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 49,288,793 21,525,189 9,056,539
- -------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS (10,652,683) 3,222,818 6,549,517
INTEREST EXPENSE (2,717,155) (269,316) (88,215)
INTEREST INCOME 37,651 333,077 290,341
- -------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (13,332,187) 3,286,579 6,751,643
INCOME TAXES (NOTE 6) (2,404,846) 1,340,391 2,750,685
- -------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (10,927,341) $ 1,946,188 $ 4,000,958
=======================================================================================================
EARNINGS (LOSS) PER SHARE OF COMMON STOCK
- primary $ (1.16) $ .21 $ .54
=======================================================================================================
- fully diluted $ (1.16) $ .21 $ .53
=======================================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING
- primary 9,414,500 9,408,300 7,383,040
=======================================================================================================
- fully diluted 9,414,500 9,420,816 7,593,465
=======================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
Page 6
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HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED APRIL 30, 1996 (NOTE 8)
<TABLE>
<CAPTION>
Common Stock Unearned
$.03 Par Value Retained Restricted
---------------------------- Additional Earnings Stock
Shares Amount Paid-in Capital (Deficit) Compensation
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, MAY 1, 1993 6,076,063 $182,281 $ 5,647,475 $ 3,925,195 $ --
Common stock issued upon exercise of
stock options 2,833 85 12,663 -- --
Common stock issued upon exercise of
stock warrants 40,330 1,210 216,572 -- --
Common stock issued upon conversion
of subordinated debentures 357,145 10,715 364,288 -- --
Common stock issued upon public
offering 2,000,000 60,000 21,922,258 -- --
Common stock issued upon acquisition
of Murray Group 617,060 18,512 7,676,230 -- --
Restricted stock issued to consultants 11,000 330 113,795 -- (114,125)
Compensation under restricted stock -- -- -- -- 57,060
Net income for the year ended April 30,
1994 -- -- -- 4,000,958 --
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, APRIL 30, 1994 9,104,431 273,133 35,953,281 7,926,153 (57,065)
Common stock issued upon acquisition
of:
Pharmaceutical Marketing Alliance 20,000 600 242,775 -- --
Maryland Pharmacies 108,757 3,263 1,356,112 -- --
Common stock issued upon exercise of
stock warrants 78,996 2,370 424,208 -- --
Common stock issued upon exercise of
stock options 2,833 85 24,414 -- --
Common stock issued to directors 1,000 30 18,720 -- --
Compensation under restricted stock -- -- -- -- 57,065
Net income for the year ended April 30,
1995 -- -- -- 1,946,188
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, APRIL 30, 1995 9,316,017 279,481 38,019,510 9,872,341 --
Common stock issued upon exercise of
stock options 12,223 367 119,261
Net loss for the year ended April 30,
1996 (10,927,341)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, APRIL 30, 1996 9,328,240 $279,848 $38,138,771 $ (1,055,000) $ --
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
Page 7
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HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(NOTE 9)
<TABLE>
<CAPTION>
=======================================================================================================
Year ended April 30, 1996 1995 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($10,927,341) $ 1,946,188 $ 4,000,958
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 2,127,400 846,869 453,149
Provision for doubtful accounts
receivable 14,714,606 7,978,189 1,781,000
Deferred taxes 1,326,300 (2,516,300) (701,315)
Write-off of improvements and
equipment 263,563
Write-off of goodwill 552,432
Write-off of organizational costs 134,161
Loss from disposition of rental
equipment -- 287,287 --
Compensation under restricted stock -- 57,065 57,060
Common stock issued to director -- 18,750 --
Increase (decrease) in cash flows from
changes in operating assets and
liabilities, net of effects of purchase of
CPMB and other acquisitions in 1995
and Murray Group in 1994:
Accounts receivable (19,831,996) (16,706,549) (9,624,966)
Tax refund receivable (6,210,030) (1,827,000) --
Inventories 986,841 (1,826,911) 205,220
Prepaid expenses and other 508,183 (976,058) (205,307)
Other assets 98,008 (239,758) (249,281)
Accounts payable 8,384,845 4,870,054 99,675
Accrued unusual charges 3,559,000 -- --
Accrued expenses (336,288) 396,332 203,075
Income taxes payable (1,759,590) 280,467
- -------------------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (4,650,316) (9,451,432) (3,700,265)
- -------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash used in acquisition of CPMB (324,366) (20,630,212) --
Cash used in acquisition of Murray Group -- -- (7,500,000)
Other acquisitions -- (2,167,500) (250,000)
Collection of receivable from the seller of
Murray Group -- 1,444,426 --
Capital expenditures (1,491,722) (948,368) (565,815)
Proceeds from sale of rental equipment -- 214,598 --
- -------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (1,816,088) (22,087,056) (8,315,815)
- -------------------------------------------------------------------------------------------------------
</TABLE>
Page 8
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HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(NOTE 9)
<TABLE>
<CAPTION>
=================================================================================================
Year ended April 30, 1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 16,450,000 23,000,000 --
Principal payments on long-term debt (11,000,000) -- --
Net payment on capital leases (385,741) (123,357) (44,202)
Decrease in bank loan - net -- -- (200,000)
Proceeds from issuance of common stock -- -- 21,982,258
Cash paid for deferred borrowing fees -- (722,000) --
Proceeds from exercise of warrants -- 426,578 217,782
Proceeds from exercise of options 119,628 24,499 12,748
- -------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 5,183,887 22,605,720 21,968,586
- -------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (1,282,517) (8,932,768) 9,952,506
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR 4,562,712 13,495,480 3,542,974
- -------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 3,280,195 $ 4,562,712 $ 13,495,480
=================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
Page 9
<PAGE> 10
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES
ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include Health Management, Inc. (formerly
Homecare Management, Inc.) (the "Company"), (a Delaware corporation), its
wholly-owned subsidiaries Home Care Management, Inc. (HMI-NY), HMI Pennsylvania,
Inc., HMI Retail Corp. Inc., Health Reimbursement Corp., HMI PMA Inc., HMI
Maryland Inc., and HMI Illinois, Inc. All material intercompany accounts and
transactions have been eliminated in consolidation.
BASIS OF PRESENTATION
The Company's consolidated financial statements have been presented on a going
concern basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. As more fully discussed in Note 4,
the Company is in violation of its loan agreements resulting in the related debt
being classified as current liabilities. The Company and its lenders have agreed
to a forbearance period during which management intends to attempt to arrange
for a refinancing of the current debt. Also, as described in Note 7, the Company
is a defendant in significant litigation and is the subject of an investigation
by the Enforcement Division of the Securities and Exchange Commission. These
matters raise substantial doubt about the Company's ability to continue as a
going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
USE OF ESTIMATES AND CONCENTRATION
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Approximately 46% of the Company's revenues are currently attributable to sale
of two products which are manufactured solely by one pharmaceutical
manufacturer. If the Company were unable to purchase these two products, its
results of operations would be materially and adversely affected.
Page 10
<PAGE> 11
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of temporary cash investments, tax-exempt
obligations and trade receivables. The Company places its temporary cash
investments with high credit quality financial institutions and limits the
amount of credit exposure to any one financial institution. At times, such cash
investments exceed the Federal Deposit Insurance Corp. insurance limit.
Concentrations of credit risk with respect to trade receivables are limited due
to the diverse group of patients whom the Company services. No single customer
accounted for a significant amount of the Company's sales in the years ended
April 30, 1996, 1995 and 1994. Approximately 44%, 40% and 35% of the Company's
revenues are reimbursed under arrangements with Federal and State medical
assistance programs for the years ended April 30, 1996, 1995, and 1994. At April
30, 1996 and 1995, approximately 43%, and 36% of the Company's accounts
receivable are from Federal and State medical assistance programs. The Company
establishes an allowance for doubtful accounts based upon factors surrounding
the credit risk of specific customers, historical trends and other information.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined by the
first-in, first-out method (FIFO). Inventories are principally comprised of
prescription and over-the-counter drugs.
REVENUE RECOGNITION
Revenues are recognized on the date services and related products are provided
to patients and are recorded at amounts estimated to be received from patients
or under reimbursement arrangements with third party payors.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
IMPROVEMENTS AND EQUIPMENT
Improvements and equipment are stated at cost. Depreciation of equipment and
amortization of leasehold improvements are computed over the estimated useful
lives of the assets and the lease term, respectively, ranging from 3 to 7 years
for equipment and 13 years for improvements. Accelerated methods are used for
both book and tax purposes.
Page 11
<PAGE> 12
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GOODWILL AND OTHER LONG-LIVED ASSETS
Goodwill represents the excess of the purchase price over the fair value of net
assets acquired through business combination, accounted for as purchases (see
Note 2) and is amortized on a straight-line basis over the estimated period to
be benefitted - thirty years. During the fiscal year ended April 30, 1996, the
Company elected the early adoption of SFAS No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
Prior to the adoption of SFAS No. 121, the carrying value of goodwill was
reviewed periodically based on the projected gross profits of the businesses
acquired over the remaining amortization period.
In accordance with SFAS No. 121 the carrying value of long-lived assets will be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. Long-lived assets acquired in
business combinations accounted for using the purchase method includes the
goodwill that arose in those transactions allocated on a pro rata basis using
the relative fair values of the long-lived assets and identifiable intangibles
acquired at the acquisition date. Based on the Company's analysis under SFAS No.
121, the Company believes that, other than the write-off of goodwill related to
the Pharmaceutical Marketing Alliance acquisition (see Note 2) totalling
$553,000, no impairment of the carrying value of its long-lived assets inclusive
of allocated goodwill existed at April 30, 1996. The Company's analysis at April
30, 1996 has been based on an estimate of future undiscounted net cash flows.
Should the results forecasted not be achieved, future analyses may indicate
insufficient future undiscounted net cash flows to recover the carrying value of
the Company's long-lived assets inclusive of allocated goodwill, in which case
SFAS No. 121 would require the carrying value of such assets to be written down
to fair value if lower than carrying value.
INCOME TAXES
Deferred taxes are recorded to reflect the temporary differences in the tax
bases of assets and liabilities and their reported amounts in the financial
statements. The differences relate principally to the allowance for doubtful
accounts and unusual charges.
Page 12
<PAGE> 13
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EARNINGS PER SHARE
Earnings per share are computed on the basis of the weighted average number of
common shares and common stock equivalents outstanding during the year. Fully
diluted earnings per share results mainly from considering the shares issuable
upon the conversion of the convertible subordinated debentures and adjusting the
net income by adding back the after-tax effect of the interest expense thereon.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of certain financial instruments, including cash, accounts
receivable and accounts payable, approximate fair value as of April 30, 1996
because of the relatively short-term maturity of these instruments. The carrying
value of long-term debt, including the current portion, approximates fair value
as of April 30, 1996 based upon the borrowing rates currently available to the
Company for bank loans with similar terms and average maturities.
STOCK-BASED COMPENSATION
The Financial Accounting Standards Board Issued Statement of Financial
Accounting Standard Number 123 "Accounting for Stock-Based Compensation" ("SFAS
Number 123") in October 1995. Statement Number 123 encourages companies to
recognize expense for stock options and other stock-based employee compensation
plans based on their fair value at the date of grant. As permitted by Statement
Number 123, the Company plans to continue to apply its current accounting policy
under APB Opinion Number 25 "Accounting for Stock Issued to Employees" in 1996
and future years, and will provide disclosure of the pro forma impact on net
income and earnings per share as if the fair value-based method had been
applied.
2. ACQUISITIONS
(a) On March 31, 1995, HMI Illinois, a wholly-owned subsidiary of the Company,
acquired certain assets subject to certain liabilities of Caremark Inc.'s
Clozaril Patient Management Business ("CPMB"). The aggregate purchase
price was approximately $23,260,000 consisting of $20,060,000 in cash
provided by bank financing, a $200,000 escrow deposit, and a $3,000,000
five year subordinated note with an annual interest rate of 8% payable
semi-annually.
Page 13
<PAGE> 14
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The acquisition has been accounted for by the purchase method of accounting. The
purchase price has been allocated to the assets acquired based on the estimated
fair values of each asset and liability. The purchased assets consist primarily
of inventory and equipment. The excess of purchase price over fair value of the
assets acquired was approximately $22,860,000.
The unaudited pro-forma condensed combined statement of income for the year
ended April 30, 1995 giving effect to the acquisition of CPMB by the Company as
if it had occurred as of the beginning of the year is as follows:
<TABLE>
<CAPTION>
Year ended April 30, 1995
- --------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C>
Revenues $133,178
- --------------------------------------------------------------------------------
Income $6,237
- --------------------------------------------------------------------------------
Net income $3,505
- --------------------------------------------------------------------------------
Earnings Per Share
Primary $.37
Fully Diluted $.37
- --------------------------------------------------------------------------------
</TABLE>
Pro-forma adjustments included in the pro-forma condensed combined statement of
income consisted of amortization of goodwill of $666,000, interest expenses of
$2,340,000, allowance for doubtful accounts of $634,000 and increase in cost of
sales of $500,000.
Page 14
<PAGE> 15
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(b) On February 6, 1995, the Company acquired substantially all of the assets,
subject to certain liabilities, of two specialty pharmacies located in
Maryland. Immediately following this acquisition, the Company contributed
all of the acquired assets, subject to assumed liabilities, to HMI,
Maryland, Inc., a newly formed subsidiary wholly-owned by the Company
("HMI-Maryland"). The aggregate purchase price for the two specialty
pharmacies approximated $3,172,000 and consisted of $1,812,500 in cash and
cash equivalents and 108,757 newly-issued shares of common stock of the
Company discounted at 25% and valued at $1,359,500.
The acquisition has been accounted for by the purchase method of
accounting. The purchase price has been allocated to the assets acquired
based on the estimated fair value of each asset. The excess of purchase
price over fair value of the assets was approximately $2,454,000.
(c) On June 16, 1994, the Company acquired certain assets of Pharmaceutical
Marketing Alliance, Inc. (PMA) for a total purchase price of $598,375
which is comprised of cash of $355,000 and 20,000 shares of common stock.
Immediately following this acquisition, the Company contributed all of the
acquired assets, subject to assumed liabilities to HMI-PMA, Inc., a
newly-formed wholly-owned subsidiary. The Company also entered into a
three-year employment agreement with three employees of PMA at an
aggregate of $225,000 per annum.
The operations of HMI-PMA were closed during fiscal year 1996. Costs
associated with this closure, including write-off of goodwill of $553,000
and termination of employment agreements were recorded in the year ended
April 30, 1996. The write-off and the related charges were part of the
$3,600,000 charge discussed in Note 5.
Page 15
<PAGE> 16
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(d) On April 1, 1994, the Company acquired substantially all of the net assets
of Murray Pharmacy, Inc. and Murray Pharmacy Too, Inc. (collectively
"Murray Group"), for total consideration of up to $16,195,000, comprised
of cash of $7,500,000, 617,060 shares of non-registered common stock of
the Company, discounted at 25% and valued at $7,695,000, and a $1,000,000
earn-out based on performance of the companies for the year ended April
30, 1995. The $1,000,000 earn-out was not recorded because the specified
performance level was not achieved.
In connection with the acquisition, the Company entered into employment
agreements with the two shareholders of the Murray Group. The Company also
entered into leases for buildings owned by the two Murray Group's
shareholders (see Note 6(a)).
The acquisition has been accounted for by the purchase method of
accounting. The purchase price has been allocated to the assets acquired
based on the estimated fair value of each asset. The purchased assets
consist primarily of accounts receivable and inventory. The excess of
purchase price over the fair value of the assets acquired was
approximately $10,100,000.
As a result of the above acquisitions, total excess of purchase price in excess
of net assets acquired are as follows:
<TABLE>
<CAPTION>
April 30, 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C>
Goodwill resulting from acquisition of:
CPMB $22,860,251 $22,535,855
Maryland pharmacies 2,453,959 2,453,959
PMA - 581,507
Murray group 10,099,860 10,099,860
Other 250,000 250,000
- -----------------------------------------------------------------------------
35,664,070 35,921,181
Less: accumulated amortization 1,655,574 456,921
- -----------------------------------------------------------------------------
$34,008,496 $35,464,260
=============================================================================
</TABLE>
Page 16
<PAGE> 17
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, 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Furniture and equipment $2,380,978 $1,575,503
Transportation equipment 104,090 88,906
Computer equipment 2,689,619 777,133
Leasehold improvements 365,743 491,108
- ------------------------------------------------------------------------------
5,540,430 2,932,650
Less accumulated depreciation and
amortization 1,714,456 796,588
- ------------------------------------------------------------------------------
$3,825,974 $2,136,062
==============================================================================
</TABLE>
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
April 30, 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C>
Term loan (a) $18,000,000 $21,000,000
Revolving credit (a) 10,350,000 2,000,000
Subordinated note payable (b) 3,000,000 3,000,000
Capitalized leases and notes payable
requiring monthly payments of
$42,252 including assumed interest
ranging from 3.2% to 21%,
collateralized by equipment with a
book value of $1,354,708. 1,402,105 326,390
- -----------------------------------------------------------------------------
32,752,105 26,326,390
Less current maturities 28,746,028 $23,135,267
- -----------------------------------------------------------------------------
$ 4,006,077 $ 3,191,123
=============================================================================
</TABLE>
Page 17
<PAGE> 18
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(a) On April 4, 1995, the Company borrowed $21,000,000 on a term loan to fund
the cash portion of the acquisition of CPMB (Note 2(a)). The term loan
bears interest at a rate of .5% above the Alternative Base Rate (as
defined by the Credit Agreement and was 8.75% at April 30, 1996) and is
convertible into Eurodollar loans. The principal was payable over five
years in quarterly installment payments of $750,000 through March 31,
1996; $1,000,000 through March 31, 1997, $1,250,000 through March 31, 1999
and $1,000,000 through March 21, 2000.
The Credit Agreement provided for a revolving credit facility of up to
$15,000,000, including up to a $1,000,000 letter of credit facility. This
agreement had an original expiration date of March 1997. Borrowings under
this facility bear interest at the Alternative Base Rate (as defined in
the Credit Agreement) and is convertible into Eurodollar loans. At April
30, 1996, the Company had borrowings under this line of credit of
$10,350,000 bearing interest at 8.25% on $6,350,000 and 7.5% on
$4,000,000.
The term loan and the revolving credit facility are collateralized by an
assignment of a security interest in all assets of the Company and its
subsidiaries.
The agreements contains restrictions relating to the payment of dividends,
liens, indebtedness, investments and capital expenditures. In addition,
the Company must maintain certain financial ratios and a minimum net
worth. As a result of the matters discussed in Note 7(d) and the unusual
charges described in Note 5, the Company was in violation of certain
provisions of the Credit Agreement. Accordingly, all borrowings under the
term loan and the revolving credit facility are classified as current.
Page 18
<PAGE> 19
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On July 26, 1996, the Company and the lenders under the agreements entered
into a forbearance agreement covering the period from July 26, to November
15, 1996. Under this agreement, the lenders agreed subject to certain
conditions, to forbear from exercising any of their legal, contractual or
equitable rights of remedies in respect of any of the existing events of
default during the above forbearance period and the Company agreed to
certain revised financial covenants and reporting requirements. The
forbearance agreement also reduced the availability under the revolving
credit facility to a maximum of $1,500,000 over the borrowings currently
outstanding.
Concurrently, the Company engaged National Westminster Bank PLC ("Nat
West") to act as its financial advisor to explore a variety of strategic
and financial alternatives. The Company requires additional financing to
remedy the default condition of its term loan and borrowings under
revolving credit facility. In order to satisfy such obligations the
Company may consider engaging in a public or private offering of
securities of the Company. There is no assurance that such financing can
be obtained.
(b) In connection with the CPMB acquisition (see Note 2(a)), the Company is
obligated on a $3,000,000 unsecured subordinated note, bearing interest at
an annual rate of 8% and maturing March 31, 2000.
As a result of the restatement of the Company's April 30, 1995 financial
statements and the provision of unusual charges (see Note 5), the Company
did not meet certain of the financial ratios as required by the note. As a
result, the note became convertible into the Company's common stock upon
notice received from the holder of the note. The conversion price is based
upon the average closing price of the Company's common stock for the ten
trading days immediately proceeding the conversion date and the ten
trading days immediately subsequent to the conversion date. The Company
has not received notice from the noteholder for conversion.
Page 19
<PAGE> 20
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The maximum amount of short-term borrowings outstanding during the years ended
April 30, 1996, 1995 and 1994 was $10,350,000, $2,300,000 and $2,000,000,
respectively. The average amounts outstanding for the years ended April 30,
1996, 1995 and 1994 were $7,696,000, $592,000 and $796,000, respectively. The
average borrowing rates were 8.37%, 8.875% and 7% for the years ended April 30,
1996, 1995 and 1994, respectively.
Long term debt matures as follows:
<TABLE>
<CAPTION>
Year ended April 30,
- ---------------------------------------------------------------------
<S> <C>
1997 $28,746,028
1998 377,771
1999 315,873
2000 3,245,162
2001 67,271
- ---------------------------------------------------------------------
$32,752,105
======================================================================
</TABLE>
5. UNUSUAL CHARGES
The following unusual charges were incurred during the year ended April 30,
1996:
<TABLE>
<S> <C>
Included in costs of sales:
. Write-off of medical device inventory $2,840,000
========================================================================
</TABLE>
Page 20
<PAGE> 21
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Included in operating expenses:
<TABLE>
<S> <C>
. Additional provision reflecting a change in the
estimation of the allowance for doubtful
accounts 8,400,000
. Cost associated with organizational consolidation
and other cost reduction programs * 3,600,000
. Professional fees related to the Company's
litigation and restatement of fiscal 1995 financial
statements (see Note 7(d)) 2,000,000
- ------------------------------------------------------------------------
$14,000,000
========================================================================
</TABLE>
* The organizational consolidation costs include termination benefits
accrued totalling $1,271,000 related to the Company's January 1996 plan of
termination of approximately 30 employees as part of the consolidation of
the Company's accounting and executive offices in Buffalo Grove, Illinois.
Through April 30, 1996, $545,000 of such benefits had been paid leaving a
balance of $726,000.
The remaining organizational consolidation costs and other cost reduction
programs, totalling $2,329,000, related to lease termination costs, write
off of related fixed assets, and the write off of goodwill and related
long-lived assets relating to the PMA acquisition (see Note 2). Through
April 30, 1996, write-off of fixed assets, goodwill and related long lived
assets amounted to $950,000, leaving a balance of $1,379,000.
The above remaining liabilities of $726,000 and $1,379,000 and the unpaid
professional fees of $1,454,000 as of April 30, 1996 were included in
accrued unusual charges.
Page 21
<PAGE> 22
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INCOME TAXES
The income tax expenses (benefits) are comprised of the following:
<TABLE>
<CAPTION>
Year ended April 30, 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $(4,398,902) $ 2,793,223 $ 2,640,000
State and local 667,756 1,063,468 812,000
- ----------------------------------------------------------------------------------------------------------
(3,731,146) 3,856,691 3,452,000
- ----------------------------------------------------------------------------------------------------------
Deferred
Federal 989,000 (1,851,000) (580,000)
State and local 337,300 (665,300) (121,315)
- ----------------------------------------------------------------------------------------------------------
1,326,300 (2,516,300) (701,315)
- ----------------------------------------------------------------------------------------------------------
Total income taxes $(2,404,846) $ 1,340,391 $ 2,750,685
==========================================================================================================
</TABLE>
The following reconciles the federal statutory tax rate with the actual
effective rate:
<TABLE>
<CAPTION>
Year ended April 30, 1996 1995 1994
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate (34%) 34% 34%
Increase (decrease) in tax rate
resulting from:
State and local taxes, net of
federal benefit 5% 7 7
Change in deferred tax assets
valuation allowance 11% -- --
- ---------------------------------------------------------------------------------------------
Effective rate (18%) 41% 41%
=============================================================================================
</TABLE>
Deferred tax assets (liabilities) consist of the following:
<TABLE>
<CAPTION>
April 30, 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets resulting from:
Allowance for doubtful accounts $ 4,532,000 $ 3,163,000
Unusual charges 535,000 --
Deferred tax liability - difference in
carrying value of goodwill for book and
tax (734,000) (29,700)
- -----------------------------------------------------------------------------------------------------
4,333,000 3,133,300
Valuation allowance (2,526,000) --
- -----------------------------------------------------------------------------------------------------
$ 1,807,000 $ 3,133,300
=====================================================================================================
</TABLE>
Page 22
<PAGE> 23
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A valuation allowance for the deferred tax assets was provided because of
uncertainty as to future realization of the deferred tax assets (exclusive of
the remaining carryback benefit) as a result of the substantial doubt about the
Company's ability to continue as a going concern.
As of April 30, 1996, the Company recorded a $8,037,030 tax refund receivable,
which consisted of $1,344,000 of tax refund receivable from amended 1995 tax
returns as a result of the restatement of fiscal 1995 financial statements,
$2,530,030 of excessive estimate taxes paid in 1996 and $4,163,000 estimated
refund claim due to 1996 net operating loss carryback.
7. COMMITMENTS AND CONTINGENCIES
(a) LEASES
The Company leases its offices, warehouse and retail pharmacies under
operating leases expiring at various times through August 2002. The
Company also leases data processing equipment under agreements which
expire at various times through 2000. These leases have been classified as
capital leases (Note 3).
As of April 30, 1996, future net minimum lease payments under capital
leases and noncancellable operating lease agreements are as follows:
<TABLE>
<CAPTION>
Capital Operating
- ---------------------------------------------------------------------------
<S> <C> <C>
1997 $ 416,241 $1,296,629
1998 389,908 1,088,500
1999 312,249 765,575
2000 227,870 680,728
2001 68,405 177,447
Thereafter - 97,654
- ---------------------------------------------------------------------------
Total minimum lease payments 1,414,673 4,106,533
Less amounts representing
interest 179,803 -
- ---------------------------------------------------------------------------
Net minimum lease payments $1,234,870 $4,106,533
- ---------------------------------------------------------------------------
</TABLE>
Page 23
<PAGE> 24
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Rent expense for the years ending April 30, 1996, 1995, and 1994 amounted to
$1,544,788, $364,448 and $252,534, respectively which included rent expense for
the buildings owned by the two Murray Group shareholders amounted to $106,400,
$106,410 for the years ended April 30, 1996 and 1995.
(b) RETIREMENT PLAN
Effective August 1, 1990, the Company established a 401(K) plan for
eligible salaried employees. The contribution for any participant may not
exceed statutory limits. After one year of employment, the Company will
match 40% of each employee participant's contributions up to the first 5%
of compensation. The total matching contributions charged against
operations amounted to $178,844, $71,281 and $22,935 for the years ended
April 30, 1996, 1995 and 1994.
(c) EMPLOYMENT AGREEMENTS
The Company has in effect employment agreements with certain key officers
and employees, which expire at various dates through May, 1999. Total
salaries under these agreements amount to approximately $900,000 annually.
Page 24
<PAGE> 25
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(d) LITIGATION
(1) The Company and certain of its past and current directors and
officers have been named as defendants in eleven class action
securities fraud lawsuits filed in the United States District Court
for the Eastern District of New York. These lawsuits will be
consolidated shortly into one action. These actions allege claims
under Sections 10(b) and 20(a) of the Securities and Exchange Act of
1934, arising out of alleged misrepresentations and omissions by the
Company in connection with certain of its disclosure statements.
These actions purport to represent a class of persons who purchased
the Company's common stock during a period ending February 27, 1996,
the date the Company announced that it would have to restate certain
of its financial statements. These actions seek unspecified monetary
damages reflecting the decline in the trading price of the Company's
stock that allegedly resulted from the Company's February 1996
announcements. Pursuant to the proposed Order of Consolidation, the
Company will not be required to answer or otherwise move in the
consolidated action until thirty days after it is served with an
amended consolidated complaint, which has not yet been served on the
Company.
Certain of the Company's current and former officers and directors
have been named as defendants, and the Company has been named as a
nominal defendant, in a consolidated derivative action filed in the
United States District Court for the Eastern District of New York.
The consolidated action alleges claims for breach of fiduciary duty
and contribution against the individual director defendants arising
out of alleged misrepresentations and omissions contained in certain
of the Company's corporate filings, as more fully alleged in the
above-described class action lawsuit. The consolidated action seeks
unspecified monetary damages on behalf of the Company as well as
declaratory and injunctive relief. Pursuant to the Stipulation and
Order of Consolidation, the Company is not required to answer or
otherwise move in the consolidated action until sixty days after it
is served with an amended consolidated complaint, which has not yet
been served on the Company.
Page 25
<PAGE> 26
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's auditors have been named as a defendant, and the
Company has been named as a nominal defendant, in a derivative
lawsuit filed in the Supreme Court for the State of New York, County
of New York. The complaint against the Company's auditors alleges
claims for misrepresentations and omissions contained in certain of
the Company's corporate filings. The complaint seeks unspecified
monetary damages on behalf of the Company as well as declaratory and
injunctive relief. Pursuant to stipulation, the Company's time to
answer or otherwise move against the complaint in this action has
been indefinitely adjourned.
The enforcement division of the Securities and Exchange Commission
has a formal order of investigation relating to matters arising out
of the Company's public announcement on February 27, 1996 that the
Company would have to restate its financial statements for prior
periods as a result of certain accounting irregularities and the
Company is fully cooperating with this investigation and has
responded to the commission's requests for documentary evidence.
(2) The Company has been named as a defendant in an action pending in
the United States District Court for the Eastern District of New
York entitled Bindley Western Industries, Inc. vs. Health Management
Inc., 96 Civ. 2330 (ADS). The action alleges claims for breach of
contract and accounts stated arising out of a dispute regarding
payments for certain goods. The action seeks damages in the amount
of $3,187,157.35 together with interest, costs and disbursements.
The Company has answered the complaint, complied with its automatic
disclosures obligations and has reduced the accounts payable to
approximately $2,100,000 as of July 29, 1996.
Page 26
<PAGE> 27
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) On April 3, 1995, American Preferred Prescription, Inc. ("APP")
filed a complaint against the Company, Preferred Rx, Inc., Community
Prescription Services and Sean Strub in the New York Supreme Court
for tortious interference with existing and prospective contractual
relationships, for lost customers and business opportunities
resulting from allegedly slanderous statements and for allegedly
false advertising and promotions. Four separate causes of actions
are alleged, each for up to $10 million in damages. APP had
previously filed a similar suit in the United States Bankruptcy
Court of the Eastern District of New York, which was dismissed and
the court abstained from exercising jurisdiction. The Company has
answered the complaint and counterclaimed for libel and slander
predicated upon a false press release issued by APP and added as
defendants the principals of APP. By stipulation dated January 29,
1996, the Company discontinued its counterclaim against APP and its
third-party claims against the principals of APP. In addition, by
motion dated March 12, 1996, APP moved, in the Supreme Court of the
State of New York, to amend its complaint to add, among other
things, a cause of action against the Company alleging that a
proposed plan of reorganization presented by the Company to the
Bankruptcy Court in APP's bankruptcy case was based on fraudulent
financial statements. The motion also seeks to amend the state court
complaint to add certain other defendants. These proposed
defendants, by notice of removal dated March 22, 1996, removed the
state court action to the Bankruptcy Court of the Eastern District
of New York. By motion dated April 2, 1996, APP requested that the
Bankruptcy Court remand the action to the State Court, which the
Bankruptcy Court granted. HMI opposed the motion to amend the
complaint in the State Court. The motion is currently pending before
the State Court. Management believes APP's suit against it to be
without merit, intends to defend the proceeding vigorously and
believes the outcome will not have a material adverse effect on the
Company's results of operations or financial position.
Page 27
<PAGE> 28
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On or about August 4, 1995, APP commenced an action in the Supreme
Court of the State of New York, County of Nassau, against a former
APP employee who is currently employed by the Company, and Charles
Hutson, Susan Hutson and Hutson Consulting Services (collectively,
the "Hutsons"). The Company is not named as a defendant in this
lawsuit. The complaint in this action alleges, among other things,
that the employee provided to the Hutsons, who formed and
subsequently discontinued a joint marketing venture with APP,
confidential information which was disclosed to competitors of APP.
On September 1, 1995, the Hutsons removed the action to the
Bankruptcy Court. The employee answered the complaint on December
27, 1995. No depositions have taken place, nor have any documents
been produced. APP moved to remand this case to the Supreme Court
for the County of Nassau. In a hearing which took place before the
Bankruptcy Court on June 27, 1996, the Bankruptcy Court preliminary
ruled to grant APP's remand motion, but provided the Hutsons a
further opportunity to submit a written response to the motion.
The Company is presently unable to determine the possible outcome and
costs of the final resolution of the litigation discussed above.
Accordingly, it has not provided for a possible loss. The resolution of
these matters could have a material adverse effect on the Company's
financial position and future results of operations in the near term.
Page 28
<PAGE> 29
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. CAPITAL TRANSACTIONS
(a) PUBLIC OFFERINGS
On November 18, 1993, the Company completed a secondary public offering of
2,000,000 shares of stock at $12.00 per share. Proceeds from this
offering, net of expenses of the offering of $2,017,742, were $21,982,258.
(b) OPTIONS AND WARRANTS
Stock options and warrants activities are shown below:
<TABLE>
<CAPTION>
Omnibus Incentive
Incentive Stock Stock Option Directors'
Option Plan (1) Plan (2) Warrants Options (3)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares covered 1,000,000 50,000 130,662 26,000
=========================================================================================================
Outstanding at May
1, 1993 -- 12,221 130,662 --
Granted 420,000 2,500 -- 19,000
Exercised -- (2,833) (40,330) --
Cancelled -- (833) -- --
- ---------------------------------------------------------------------------------------------------------
Outstanding at April
30, 1994 420,000 11,055 90,332 19,000
Granted 132,500 -- -- 4,000
Exercised (2,000) (833) (78,996) --
Cancelled -- -- -- --
- ---------------------------------------------------------------------------------------------------------
Outstanding at April
30, 1995 550,500 10,222 11,336 23,000
Granted 709,000 -- -- 3,000
Exercised (11,000) (1,223) -- --
Cancelled (309,500)
- ---------------------------------------------------------------------------------------------------------
Outstanding at April
30, 1996 939,000 8,999 11,336 26,000
=========================================================================================================
At April 30, 1996:
Price range $4.98-$10.38 $.90-$4.50 $ 5.40 $10.875-$18.840
Shares exercisable 346,833 8,999 11,336 26,000
Available for grant -0- 5,669 -- --
</TABLE>
Page 29
<PAGE> 30
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) On May 26, 1993 the Compensation Committee authorized and on October 14,
1993, the stockholders approved the establishment of an omnibus incentive
stock option plan to provide incentives for key employees and members of
the Board of Directors. The maximum number of shares issuable under the
plan is 10% of the outstanding shares up to 1,000,000 shares. The exercise
period for an option shall not exceed ten years from the date of grant,
except in the case of a more than 10% stockholder such period shall not
exceed five years. The option price per share shall be not less than the
average market value or, in the case of a 10% stockholder with respect to
incentive stock options, 110% of fair value on the date of grant.
(2) On February 16, 1990, the Company approved the adoption of an incentive
stock option plan covering 50,000 common shares. The options are
exercisable over a ten year period.
(3) During the years ended April 30, 1996, 1995 and 1994, the Company granted
a total of 19,000, 4,000 and 3,000 options to its outside directors at an
exercise price of $18.84, $16.77, and $10.875 to $12.088, the market price
on the date of the grant, respectively.
(4) Pursuant to a special meeting of the executive committee of the board of
directors on April 3, 1996, members of the special committee of the board
of directors were granted a total of 25,000 options and 75,000 stock
appreciation rights.
The per share exercise price for the stock options and appreciation rights
is a price equal to the average closing price of the shares for the five
trading days preceding April 3, 1996 or $4.8375. The vesting schedule for
each of the stock options and stock appreciation rights is one-half upon
the appointment of the permanent Chief Executive Officer and one-half on
May 1, 1997.
At April 30, 1996, shares of the Company's authorized and unissued common stock
were reserved for issuance upon exercise of options and warrants, which included
1,009,335 shares for outstanding options and warrants and 5,669 shares for
options available for grant.
Page 30
<PAGE> 31
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(d) RESTRICTED STOCK
On May 1, 1993, the Company awarded 11,000 shares of restricted common
stock to three outside consultants. The shares awarded are subject to
certain restrictions and forfeiture. Vesting occurs over a two year period
from the date the shares are awarded. The shares were recorded at their
quoted market value at the date of grant of $10.375 per share, or
$114,125. The compensation element related to the awarding of such shares
is recognized ratably over the two-year restriction period. Compensation
expense recognized related to such shares for the years ended April 30,
1996, 1995 and 1994 were $-0-, $57,065 and $57,060, respectively.
9. SUPPLEMENTAL CASH FLOW INFORMATION
(a) Supplemental disclosures of cash flow information:
<TABLE>
<CAPTION>
Year ended April 30, 1996 1995 1994
--------------------------------------------------------------------------
<S> <C> <C> <C>
(1) Cash paid for
interest expense $2,381,667 $ 174,430 $ 94,468
(2) Cash paid for
income taxes $1,949,491 $7,745,067 $3,157,483
</TABLE>
(b) Supplemental disclosures of non-cash investing and financing activities:
(1) The Company financed $1,361,455 and $177,286 of new equipment during
the years ended April 30, 1996 and 1995.
(2) During the year ended April 30, 1995, $3,000,000 of the purchase
price of CPMB was a five year subordinated note (Note 2(a)).
(3) During the year ended April 30, 1995, the Company issued 128,757
shares of non-registered common stock in connection with the
acquisition of Maryland pharmacies and PMA (Note 2(b) and (c)).
(4) During the year ended April 30, 1994, holders of $374,999 of the
Company's convertible subordinated debentures converted their debt
into 357,145 shares of common stock.
Page 31
<PAGE> 32
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) During the year ended April 30, 1994, the Company awarded 11,000
shares of restricted common stock to three outside consultants.
(Note 7(d)).
(6) During the year ended April 30, 1994, the Company issued 617,060
shares of non-registered common stock in connection with the Murray
acquisition. (Note 2(d)).
10. QUARTERLY FINANCIAL INFORMATION (UNAUDITED, IN THOUSANDS, EXCEPT FOR PER
SHARE DATA)
The following table summarizes quarterly results:
<TABLE>
<CAPTION>
Year Ended April First Second Third Fourth
30, 1996 Quarter Quarter Quarter Quarter Year
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUE $38,294 $39,275 $ 40,801 $ 40,490 $ 158,860
GROSS PROFIT 11,761 9,155 7,331* 10,389 38,636
INCOME (LOSS)
BEFORE INCOME
TAXES 2,700 239 (16,786)* 514 (13,333)
NET INCOME
(LOSS) 1,589 139 (9,904)* (2,751)** (10,927)
EARNINGS (LOSS)
PER COMMON
SHARE .17 .01 (1.06) (.28) (1.16)
<CAPTION>
Year Ended April First Second Third Fourth
30, 1995 Quarter Quarter Quarter Quarter Year
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUE: 17,216 20,884 21,982 28,374 88,456
GROSS PROFIT: 4,986 6,103 6,813 6,846 24,748
INCOME (LOSS)
BEFORE INCOME
TAXES: 545 1,807 2,248 (1,313) 3,287
NET INCOME
(LOSS): 304 1,044 1,455 (857) 1,946
EARNINGS (LOSS)
PER COMMON
SHARE .03 .11 .15 (.09) .21
</TABLE>
* The Company incurred unusual charges of $16,840,000 in the third quarter
of fiscal 1996 (see Note 5).
** The Company provided an adjustment of $2,526,000 to its valuation
allowance for deferred tax assets in the fourth quarter of fiscal 1996
(see Note 6).
Page 32
<PAGE> 33
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
Health Management, Inc. and Subsidiaries
Buffalo Grove, Illinois
The audits referred to in our report dated July 22, 1996, except for Note 4(a)
which is as of July 26, 1996 relating to the consolidated financial statements
of Health Management, Inc. and subsidiaries, which is contained in Item 8 of
this From 10-K, included the audit of the accompanying schedule of valuation
and qualifying accounts. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement schedule based upon our audits.
In our opinion such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
BDO Seidman, LLP
Mitchel Field, New York
July 22, 1996
Page 33
<PAGE> 34
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING
ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
=======================================================================================================
BALANCE AT ADDITIONS
BEGINNING OF CHARGED TO BALANCE AT END OF
CLASSIFICATION YEAR OPERATIONS DEDUCTIONS YEAR
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
Year ended April 30, 1996 $7,998,000 $14,714,000 $12,642,000 $10,070,000
=======================================================================================================
Year ended April 30, 1995 $2,206,000 $ 7,978,000 $ 2,186,000 $ 7,998,000
=======================================================================================================
Year ended April 30, 1994 $ 925,000 $ 1,781,000 $ 500,000 $ 2,206,000
=======================================================================================================
</TABLE>
Page 34
<PAGE> 35
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
January 31, 1997 April 30, 1996
---------------- --------------
(Unaudited) (Audited)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 3,121,818 $ 3,280,195
Accounts Receivable, Less Allowance for
Doubtful Accounts of Approximately
$ 15,829,000 and $10,070,000, respectively 28,377,209 36,457,199
Inventories 8,324,892 6,800,820
Tax Refund Receivable 1,327,106 8,037,030
Deferred Taxes 2,917,000 1,807,000
Prepaid Expenses and other 142,502 655,358
----------- -----------
TOTAL CURRENT ASSETS 44,210,527 57,037,602
IMPROVEMENTS and EQUIPMENT, Less
Accumulated Depreciation and Amortization 3,336,870 3,825,974
GOODWILL 30,766,995 34,008,496
OTHER 140,938 1,043,607
----------- -----------
$78,455,330 $95,915,679
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
Page 35
<PAGE> 36
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
January 31, 1997 April 30, 1996
--------------- --------------
(Unaudited) (Audited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts Payable, Including Amounts
to Affiliates in 1997 $20,284,119 $20,714,836
Accrued Unusual Charges and Settlement Costs 8,507,930 3,559,000
Accrued Expenses 3,205,378 1,526,119
Current Maturities of Long Term Debt, Including
Amounts to Affiliates in 1997 31,709,108 28,746,028
----------- -----------
TOTAL CURRENT LIABILITIES 63,706,535 54,545,983
Long Term Debt, Less Current Maturities 645,052 4,006,077
----------- -----------
TOTAL LIABILITIES 64,351,587 58,552,060
COMMITMENTS and CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred Stock - $0.01 Par Value:
Shares Authorized - 1,000,000
Issued and Outstanding, none
Common Stock - $0.03 Par Value:
Shares Authorized - 39,000,000
Issued and Outstanding - 18,294,474 and 9,328,240
shares, respectively 548,834 279,848
Additional Paid-in Capital 45,957,786 38,138,771
Accumulated Deficit (32,402,877) (1,055,000)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 14,103,743 37,363,619
----------- -----------
$78,455,330 $95,915,679
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
Page 36
<PAGE> 37
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
January 31, January 31,
--------------------------- -----------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $39,767,175 $40,801,405 $120,030,137 $118,370,222
Cost of Sales 32,904,097 33,469,977 97,225,469 90,122,957
------------ ----------- ------------ -----------
Gross Profit 6,863,078 7,331,428 22,804,668 28,247,265
------------ ----------- ------------ -----------
Operating Expenses:
Selling 1,389,916 1,335,396 4,189,665 3,627,031
General & Administrative 7,670,665 6,669,369 20,031,826 17,660,956
Provision for Doubtful Accounts 12,063,831 9,837,259 15,492,760 13,267,160
Unusual Charges 2,812,720 5,600,000 4,212,720 5,600,000
------------ ----------- ------------ -----------
Total Operating Expenses 23,937,132 23,442,024 43,926,971 40,155,147
Loss from Operations (17,074,054) (16,110,596) (21,122,303) (11,907,882)
Settlement Costs 175,000 -- 7,375,000 --
Interest Expense 1,290,701 675,594 2,753,932 1,938,456
------------ ----------- ------------ -----------
Loss Before Income Taxes (18,539,755) (16,786,190) (31,251,235) (13,846,338)
Income Taxes (25,315) (6,882,546) 96,642 (5,670,954)
------------ ----------- ------------ -----------
Net Loss ($18,514,440) ($9,903,644) ($31,347,877) ($8,175,384)
============ =========== ============ ===========
Loss Per Common Share:
Primary ($1.66) ($1.06) ($3.15) ($0.87)
Full Diluted ($1.66) ($1.06) ($3.15) ($0.87)
Weighted Average Shares
Outstanding:
Primary 11,161,596 9,384,732 9,939,574 9,399,984
Fully Diluted 11,161,596 9,384,732 9,939,574 9,399,984
</TABLE>
See Notes to Condensed Consolidated Financial Statements
Page 37
<PAGE> 38
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
For the Nine Months Ended January 31
<TABLE>
<CAPTION>
(Unaudited)
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net Loss ($31,347,877) ($8,175,384)
Adjustments to Reconcile Net Loss to
Net Cash Used In
Operating Activities:
Depreciation and Amortization 1,917,835 1,313,692
Provision for Doubtful Accounts 15,492,760 13,267,160
Unusual charges 2,534,634 -
Deferred Taxes (1,110,000) (3,795,168)
Increase (Decrease) in Cash Flows
From Changes in Operating Assets
and Liabilities:
Accounts Receivable (7,412,770) (16,178,070)
Inventory (1,524,072) (1,909,973)
Prepaid Expenses and Other 512,856 (404,357)
Other Assets 811,169 518,447
Accounts Payable (430,717) 5,907,519
Accrued Expenses 1,679,259 8,153,926
Accrued Unusual Charges and Settlement Costs 4,955,930 -
Tax Refund Receivable 6,709,924 (4,270,527)
---------- -----------
NET CASH USED IN OPERATING ACTIVITIES (7,211,069) (5,572,735)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures (630,364) (1,575,631)
---------- -----------
NET CASH USED IN INVESTING ACTIVITIES (630,364) (1,575,631)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (Payments) on Credit Facility (361,025) 5,925,768
Principal Payments on Long-Term Debt (36,920) -
Proceeds from Sale of Stock 8,081,001 -
Proceeds from Exercise of Stock Options - 57,378
---------- -----------
NET CASH FROM FINANCING ACTIVITIES 7,683,056 5,983,146
---------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (158,377) (1,165,220)
Cash and Cash Equivalents, at Beginning of Period 3,280,195 4,562,712
---------- -----------
Cash and Cash Equivalents, at End of Period $3,121,818 $ 3,397,492
========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid for Interest $2,826,558 $1,510,928
Cash Paid (Refund) for Taxes ($5,005,694) $2,099,047
</TABLE>
See Notes to Condensed Consolidated Financial Statements
Page 38
<PAGE> 39
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For The Nine Months Ended January 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Common Stock
$.03 Par Value
-------------- Additional
Paid-in Accumulated
Shares Amount Capital Deficit
------ ------ ---------- -----------
<S> <C> <C> <C> <C>
Balance May 1, 1996 9,328,240 $ 279,848 $38,138,771 ($ 1,055,000)
Issuance of Common Shares 1,942 58 6,942
Sale of Common Stock to
Transworld Home Health
Care, Inc., Net of Expenses 8,964,292 268,928 7,812,073
Net Loss for the Nine
Months Ended
January 31, 1997 (31,347,877)
---------- --------- ----------- ------------
Balance, January 31, 1997 18,294,474 $ 548,834 $45,957,786 ($32,402,877)
========== ========= =========== ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements
Page 39
<PAGE> 40
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
The condensed consolidated financial statements include Health Management,
Inc., a Delaware corporation, and its wholly-owned subsidiaries, including
Homecare Management, Inc., a New York corporation, HMI Pennsylvania, Inc., a
Delaware corporation, HMI Retail Corp., Inc., a Delaware corporation, HMI PMA,
Inc., a Delaware corporation, Health Reimbursement Corp., a Delaware
corporation, HMI Maryland, Inc., a Delaware corporation, and HMI Illinois,
Inc., a Delaware corporation (collectively, the "Company"). All intercompany
accounts and transactions have been eliminated in consolidation.
The condensed consolidated financial statements have been prepared assuming the
Company will continue as a going concern (Note 5).
Certain 1996 amounts have been reclassified to conform to the 1997
presentation.
The condensed consolidated financial statements included herein are unaudited
and include all adjustments which, in the opinion of management, are necessary
for a fair presentation of the results of operations of the interim period
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These condensed financial statements
should be read in conjunction with the Company's Annual Report on Form 10-K for
the year ended April 30, 1996. The results of operations for the interim
periods are not necessarily indicative of the operating results for the whole
year.
NOTE 2: CONTINGENCIES
The Company, certain of its past and current directors and officers and its
outside auditors, BDO Seidman, LLP have been named as defendants in a
consolidated class action securities fraud lawsuit filed in the United States
District Court for the Eastern District of New York entitled In re Health
Management, Inc. Securities Litigation, Master File No. 96 Civ. 0889 (ADS).
The consolidated actions allege claims under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, arising out of alleged misrepresentations and
omissions by the Company in connection with certain of its previous securities
filings. The consolidated actions purport to represent a class of persons who
purchased the Company's common stock between August 25, 1994 and February 27,
1996, the date the Company announced that it would have to restate certain of
its financial statements. The consolidated actions seek unspecified monetary
damages reflecting the decline in the trading price of the Company's stock that
allegedly resulted from the Company's February 1996 announcements. 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
Page 40
<PAGE> 41
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Common Stock. As a condition to Transworld Home HealthCare, Inc.'s
("Transworld") obligation to close the Stock Purchase Agreement, preliminary
court approval was obtained with respect to a modified settlement providing for
a $7,200,000 cash payment in lieu of the consideration provided in the Original
Settlement to be paid after the merger is consummated. The $7.2 million is
included in settlement costs in the accompanying Condensed Consolidated
Statement of Operations for the nine months ended January 31, 1997 (Note 3).
An Amended Stipulation of Partial Settlement to this effect was executed on
December 19, 1996 and preliminary approval by the U.S. District Court for the
Eastern District of New York thereof was granted on December 20, 1996. The
hearing for final approval of the Amended Stipulation of Partial Settlement,
which was scheduled for March 14, 1997, was rescheduled to April 11, 1997. In
connection with the negotiations between the Company and Transworld regarding
further amendments to the Merger Agreement, the Company and Transworld are also
renegotiating with the plantiffs in the consolidated stockholder class action
to further amend the Stipulation of Partial Settlement to provide for a
reduction in the consideration to be paid to the plantiff class.
Certain of the Company's current and former officers and directors, including
Messrs. Bergman, Hotte, Clifton and Dimitriadis and Ms. Belloise, have been
named as defendants, and the Company has been named as a nominal defendant, in
a consolidated derivative action filed in the United States District Court for
the Eastern District of New York entitled In re Health Management, Inc.
Stockholders' Derivative Litigation, Master File No. 96 Civ. 1208 (TCP). The
consolidated action alleges claims for breach of fiduciary duty and
contribution against the individual director defendants arising out of alleged
misrepresentations and omissions contained in certain of the Company's previous
securities filings. The consolidated action seeks unspecified monetary damages
on behalf of the Company, as well as declaratory and injunctive relief. An
amended consolidated complaint was served on the Company on August 12, 1996.
The Company's time to answer or move with respect to the amended consolidated
complaint has been extended pursuant to stipulation until May, 1997. The
Company has recorded an estimated settlement cost of $175,000 related to this
derivative action in the three months ended January 31, 1997 in the
accompanying Condensed Consolidated Statement of Operations (Note 3).
BDO Seidman, LLP has been named as a defendant, and the Company has been named
as a nominal defendant, in a derivative lawsuit filed in the Supreme Court for
the State of New York, County of New York entitled Howard Vogel, et al. v. BDO
Seidman, LLP, et al., Index No. 96-603064. The complaint alleges claims for
breach of contract, professional malpractice, negligent misrepresentation,
contribution and indemnification against BDO Seidman arising out of alleged
misrepresentations and omissions contained in certain of the Company's previous
securities filings. BDO Seidman was the Company's auditor at the time those
filings were made and has continued to serve as such. The complaint seeks
unspecified monetary damages on behalf of the Company as well as declaratory
and injunctive relief. Pursuant to stipulation, the Company's time to answer or
otherwise move against the complaint in this action has been adjourned
indefinitely.
Under the Company's Certificate of Incorporation and Bylaws, certain officers
and directors may be entitled to indemnification, or advancement of expenses
for legal fees in connection with the above suits. The Company may be required
to make payments in respect thereof in the future. The Company and Transworld
have been named as defendants in a lawsuit filed on March 11, 1997 in the
Chancery Court of the State of Delaware for New Castle County entitled Drew
Bergman v. Health Management, Inc. and Transworld Home HealthCare, Inc., CA No
15609NC. The plantiff in that case seeks reimbursement and advancement of
legal fees and expenses. A hearing on this matter has not yet been scheduled
by the court.
Page 41
<PAGE> 42
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The enforcement division of the Securities and Exchange Commission has a formal
order of investigation relating to matters arising out of the Company's public
announcement on February 27, 1996 that the Company would have to restate its
financial statements for prior periods as a result of certain accounting
irregularities and the Company is fully cooperating with this investigation and
has responded to the commission's requests for documentary evidence.
As a result of a New York State Medicaid audit, the Company settled with the New
York State Department of Social Services regarding certain overpayments to the
Company. The Company's liability was approximately $1.4 million, of which
approximately $.5 million was held in escrow by the State. The remaining
amounts will be paid in installments through November 1998, plus interest. The
$1.4 million is included in unusual charges for the nine months ended January
31, 1997 in the accompanying Condensed Consolidated Statements of Operations
(Note 3).
NOTE 3: UNUSUAL CHARGES, SETTLEMENT COSTS AND OTHER CHARGES.
The unusual charges, settlement costs and other charges included in the
accompanying Condensed Consolidated Statements of Operations are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
January 31, January 31,
--------------------- ------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Included in Cost of Sales:
Writeoff of medical device inventory $ - $2,840,000 $ - $2,840,000
=========== ========== =========== ==========
Included in the Provision for Doubtful
Accounts:
Additional provisions reflecting changes
in estimation of the allowance
for doubtful accounts $10,000,000 $8,400,000 $10,000,000 $8,400,000
=========== ========== =========== ==========
Unusual Charges:
Costs associated with overpayments from
New York State Medicaid (Note 2) $ - $ - $ 1,400,000 $ -
Costs and other expenses related to the
closing or sale of three retail pharmacies,
including a goodwill write-off
approximately $2.4 million 2,812,720 - 2,812,720 -
Costs associated with organizational
consolidation and other cost
reduction programs - 3,600,000 - 3,600,000
Professional fees related to litigation
and restatements of fiscal 1995 financial
statements - 2,000,000 - 2,000,000
----------- ---------- ----------- ----------
$ 2,812,720 $5,600,000 $ 4,212,720 $5,600,000
=========== ========== =========== ==========
</TABLE>
Page 42
<PAGE> 43
HEALTH MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
January 31, January 31,
------------------ -----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Settlement Costs (Note 2):
Estimated for the
settlement of -
Stockholder class action $ - $ - $7,200,000 $ -
Derivative action 175,000 - 175,000 -
-------- --- ---------- ---
$175,000 $ - $7,375,000 $ -
======== === ========== ===
</TABLE>
NOTE 4: STOCKHOLDERS' EQUITY
During the second quarter of fiscal 1997, the Company issued 1,942 shares
(valued at $7,000), primarily for the purchase of a marketing product. During
the third quarter of fiscal 1997, Transworld acquired 8,964,292 of newly issued,
unregistered common shares (49% of the Company's outstanding common stock),
effective January 13, 1997, at $1 per share, less related expenses of $883,291.
NOTE 5: OTHER MATTERS
The Company entered into Stock Purchase and Merger Agreements ("Agreements")
with Transworld in November, 1996 for Transworld to eventually acquire all the
outstanding common stock of the Company. Transworld or its majority
stockholder, Hyperion Partners II, Ltd., have assumed the Company's senior debt
(approximately $28.3 million), debt previously owed to Caremark, Inc. ($3
million) and certain supplier accounts payable (approximately $15.2 million), as
well as acquiring 49% of the Company's common stock (Note 4), as of January 31,
1997.
If the Company is unable to (a) consummate the Merger Agreement with
Transworld; (b) continue satisfactory relations with its suppliers; (c) continue
to obtain extensions to its current Forbearance Agreement and obtain other
financing for ongoing operations and (d) settle its litigation in a satisfactory
manner, it is probable the Company will seek protection under the Federal
Bankruptcy laws. As a result, there continues to be substantial doubt about the
Company's ability to continue as a going concern. The condensed consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Page 43
<PAGE> 44
TRANSWORLD HOME HEALTHCARE, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Combined Financial Statements give effect
to: (A) the Company's acquisition on November 13, 1996, of Health Management,
Inc.'s ("HMI") senior secured indebtedness (the "Indebtedness") under the credit
agreement between HMI and its senior lenders (the "HMI Credit Agreement") for
$21,262,500; (B) the Company's acquisition on January 14, 1997 of 8,964,292
newly issued shares (the "Newly Issued Shares") of HMI's common stock,
representing approximately 49% of HMI's outstanding common stock (after giving
effect to the purchase of the Newly Issued Shares) for $1 per share or
$8,964,292, which actual cash outlay was reduced by $4,649,685, advanced to HMI
for working capital purposes between November 12, 1996 and January 14,
1997; and (C) borrowings under the Company's $100 million senior secured
revolving credit facility (the "Credit Facility") to fund the transactions (the
"Borrowings") (collectively, the "Transactions").
An unaudited pro forma balance sheet as of January 31, 1997 is not presented
as the Transactions are reflected in the historical consolidated condensed
balance sheet of the Company as of January 31, 1997.
The Unaudited Pro Forma Combined Condensed Statement of Operations for the
year ended October 31, 1996 presents the historical operations of the Company
and the Pro Forma Combined Condensed Statement of Operations as if the
Transactions had occurred on November 1, 1995. The equity in losses of HMI is
derived from HMI's historical Statement of Operations for the twelve months
ended October 31, 1996 (Unaudited). Such statement was derived by taking HMI's
audited historical Statement of Operations for the year ended April 30, 1996,
subtracting the historical operations for the six months ended October 31, 1995
and adding the historical operations for the six months ended October 31, 1996.
The Unaudited Pro Forma Combined Condensed Statement of Operations for the
three months ended January 31, 1997 presents the historical operations of the
Company and the Pro Forma Combined Condensed Statement of Operations as if the
Transactions had occurred on November 1, 1995. The equity in losses of HMI is
derived from HMI's historical Statement of Operations (Unaudited) for the three
months ended January 31, 1997.
The acquisition of the Newly Issued Shares is accounted for under the
equity method of accounting. Pro forma adjustments include fair value
adjustments required under purchase accounting for the acquired assets and
liabilities of HMI and are subject to revision. The final allocation of purchase
price and the resulting amortization expense in the accompanying Unaudited Pro
Forma Combined Condensed Statement of Operations will differ from the
preliminary estimates due to the final allocation being based on: (i) actual
closing date amounts of assets and liabilities and (ii) final appraised values
of assets and liabilities.
Pro forma adjustments are based on Management's estimates of the financial
effects of the Transactions on the operations of the combined companies for the
periods presented. The Unaudited Pro Forma Combined Financial Statements should
be read in conjunction with the Company's historical consolidated financial
statements and notes thereto and "Managements Discussion and Analysis of
Financial Condition and Results of Operations" and the historical consolidated
financial statements of HMI and notes thereto (included in this Form 8-K) and
the related "Management's Discussion and Analysis of Financial Condition and
Results of Operations". The Unaudited Pro Forma Combined Statement of
Operations does not purport to present the results of operations of the Company
had the transactions assumed herein occurred at the beginning of fiscal 1996,
nor is it indicative of the results of operations which may be achieved in the
future.
Page 44
<PAGE> 45
TRANSWORLD HOME HEALTHCARE, INC.
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
Year Ended October 31, 1996
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Year Ended
October 31,
1996 Transworld
Transworld Home
Home Pro Forma HealthCare,Inc.
HealthCare,Inc. Adjustments Pro Forma
<S> <C> <C> <C>
Net revenues ........................................................ $76,304 $ -- $ 76,304
Cost of revenues .................................................... 34,680 -- 34,680
------- -------- --------
Gross profit ........................................................ 41,624 -- 41,624
Selling, general and administrative
expenses ........................................................ 33,552 -- 33,552
------- -------- --------
Operating income .................................................... 8,072 -- 8,072
Interest expense (income), net ...................................... 4,352 706 (a) 5,058
Equity in losses of HMI ............................................. -- 11,235 (b) 11,235
------- -------- --------
Income (loss) before income taxes and
extraordinary loss .............................................. 3,720 (11,941) (8,221)
Provision (benefit) for income taxes ................................ 1,702 (324)(c) 1,378
------- -------- --------
Income (loss) before extraordinary loss ................... $ 2,018 $(11,617) $ (9,599)
======= ======== ========
Income per share of common stock before extraordinary loss:
Primary ......................................................... $ 0.26 -- $ (1.24)
Fully diluted ................................................... $ 0.26 -- $ (1.23)
Weighted average number of shares outstanding:
Primary ......................................................... 7,741 -- 7,741
Fully diluted ................................................... 7,833 -- 7,833
</TABLE>
Page 45
<PAGE> 46
TRANSWORLD HOME HEALTHCARE, INC.
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
Three Months Ended January 31, 1997
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
January 31,
1997 Transworld
Transworld Home
Home Pro Forma HealthCare,Inc.
HealthCare,Inc. Adjustments Pro Forma
<S> <C> <C> <C>
Net revenues ........................................................ $20,297 $ -- $ 20,297
Cost of revenues .................................................... 9,489 -- 9,489
------- -------- --------
Gross profit ........................................................ 10,808 -- 10,808
Selling, general and administrative
expenses ........................................................ 8,486 -- 8,486
------- -------- --------
Operating income .................................................... 2,322 -- 2,322
Interest income ..................................................... (682) 301 (a) (381)
Interest expense .................................................... 998 140 (b) 1,138
Equity in losses of HMI ............................................. -- 8,379 (c) 8,379
------- -------- --------
Income (loss) before income taxes ................................... 2,006 (8,820) (6,814)
Provision (benefit) for income taxes ................................ 883 (195)(d) 688
------- -------- --------
Net income (loss) ......................................... $ 1,123 $ (8,625) $ (7,502)
======= ======== ========
Net income per share of common stock:
Primary ......................................................... $ 0.10 -- $ (.68)
Fully diluted ................................................... $ 0.10 -- $ (.68)
Weighted average number of shares outstanding:
Primary ......................................................... 11,083 -- 11,083
Fully diluted ................................................... 11,085 -- 11,085
</TABLE>
Page 46
<PAGE> 47
TRANSWORLD HOME HEALTHCARE, INC.
NOTES TO PRO FORMA COMBINED
CONDENSED STATEMENT OF OPERATIONS
For the Year Ended October 31, 1996
(In thousands, except per share data)
(Unaudited)
<TABLE>
<S> <C>
(a) Interest expense (income), net:
To book adjustments to interest expense to reflect interest charged on pro forma
debt under the Credit Facility as follows:
Interest expense on cash borrowed to acquire HMI's senior secured
indebtedness ($21,263) at 7% (rate at January 31,
1997, net of .5% unused commitment fee) . . . . . . . . . . . . . . . . . . $ 1,488
Interest expense on cash borrowed to acquire 8,964 shares of HMI's
common stock for a cash purchase price of $8,964 at 7% (net of
.5% unused commitment fee) . . . . . . . . . . . . . . . . . . . . . . . . . 628
To book adjustments to interest income to reflect:
Interest earned on HMI's senior secured indebtedness under the HMI
Credit Agreement, at face value ($28,350) at 9.75%, net of
inter-company interest income (49%). . . . . . . . . . . . . . . . . . . . . (1,410)
---------
$ 706
=========
A change in interest rates by one-eighth of a percent (1/8%) would impact interest expense by $38 and
interest income by $18.
(b) Equity in losses of HMI:
To record the amortization of goodwill associated with the stock purchase of
49% of HMI's outstanding common stock as follows:
Purchase price in cash for 8,964 (at $1.00 per share) of newly issued
shares of HMI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,964
Acquisition related costs (legal, tax and accounting contingencies) . . . . . . . . 1,225
Historical liabilities assumed (49%) . . . . . . . . . . . . . . . . . . . . . . . . 31,532
Fair value adjustments to historical liabilities assumed (49%): (3,473)
---------
Total cost of acquisition . . . . . . . . . . . . . . . . . . . . . . . . . 38,248
Less:
Historical assets (49%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,443
Fair value adjustments to historical assets (goodwill and deferred taxes)
(49%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (16,505)
---------
Goodwill associated with the stock purchase of 49% of
HMI's outstanding common stock . . . . . . . . . . . . . . . . . . . $ 16,310
=========
Amortization of goodwill straight line over thirty years . . . . . . . . . . . . . . . . . . . . . . $ 544
Elimination of HMI's goodwill amortization (49%) . . . . . . . . . . . . . . . . . . . . . . . . . . (595)
To record 49% of HMI's ($25,488) historical net loss for the twelve months ended
October 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,489
To record 49% of pro forma adjustments to HMI's selling, general and administrative
expenses (net of tax effect using HMI's historical effective tax rate for the period
of 12%) as follows:
Elimination of transaction related legal expenses (49%) . . . . . . . . . . . . . . . . (11)
Elimination of inter-company interest expense (49%) on HMI's senior secured
indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,192)
---------
11,235
=========
(c) Provision (benefit) for taxes:
Adjustment to tax expense on net taxable income attributable to pro forma
adjustments and to reflect a consolidated effective tax rate indicative of the
combined companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (324)
=========
</TABLE>
Page 47
<PAGE> 48
TRANSWORLD HOME HEALTHCARE, INC.
NOTES TO PRO FORMA COMBINED
CONDENSED STATEMENT OF OPERATIONS
For the Three Months Ended January 31, 1997
(In thousands, except per share data)
(Unaudited)
<TABLE>
<S> <C>
(a) Interest income:
To book adjustments to interest income to reflect:
Interest earned on HMI's senior secured indebtedness under the HMI
Credit Agreement, acquired by the Company, at face value ($28,350) at 9.75% from
November 1, 1996 through November 12, 1996 . . . . . . . . . . . . . . . . . . . . . $ (92)
Elimination of interest earned on cash loaned to HMI for working capital purposes
($4,649) at 9.75% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Elimination of inter-company interest (49%) of HMI's senior secured indebtedness . . . . . . 339
---------
$ 301
=========
A change in interest rates by one-eighth of a percent (1/8%) would impact interest income by $5.
(b) Interest expense:
To book adjustments to interest expense to reflect interest charged on pro forma
debt under the Credit Facility from November 1, 1996 to the date of
actual borrowing as follows:
Interest expense on cash borrowed to acquire HMI's senior secured
indebtedness ($21,263) at 7% (rate at January 31, 1997,
net of .5% unused commitment fee) . . . . . . . . . . . . . . . . . . . . . $ 50
Interest expense on cash borrowed to loan to HMI for working capital
purposes ($4,649) at 7% (net of .5% commitment fee) . . . . . . . . . . . . . 28
Interest expense on cash borrowed to acquire 8,964 shares of HMI's
common stock for a cash purchase price of $8,964, which actual cash
outlay was reduced by the $4,649 advanced for working capital purposes
($4,315) at 7% (net of .5% unused commitment fee). . . . . . . . . . . . . 62
---------
$ 140
=========
A change in interest rates by one-eighth of a percent (1/8%) would impact interest expense by $10.
(c) Equity in losses of HMI:
To record the amortization of goodwill associated with the stock purchase of
49% of HMI's outstanding common stock as follows:
Purchase price in cash for 8,964 (at $1.00 per share) of newly issued
shares of HMI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,964
Acquisition related costs (legal, tax and accounting contingencies) . . . . . . . . 1,225
Historical liabilities assumed (49%) . . . . . . . . . . . . . . . . . . . . . . . . 31,532
Fair value adjustments to historical liabilities assumed (49%): (3,473)
---------
Total cost of acquisition . . . . . . . . . . . . . . . . . . . . . . . . . 38,248
Less:
Historical assets (49%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,443
Fair value adjustments to historical assets (goodwill and deferred
taxes) (49%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (16,505)
---------
Goodwill associated with the stock purchase of 49% of
HMI's outstanding common stock . . . . . . . . . . . . . . . . . . . $ 16,310
=========
Amortization of goodwill straight line over thirty years . . . . . . . . . . . . . . . . . . . . . . $ 136
Elimination of HMI's goodwill amortization (49%) . . . . . . . . . . . . . . . . . . . . . . . . . . (145)
To record 49% of HMI's ($18,515) historical net loss for the three months ended
January 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,072
To record 49% of pro forma adjustments to HMI's selling, general and administrative
expenses (not tax effected as HMI historically booked no tax provision for the period)
as follows:
Elimination of transaction related legal and accounting expenses (49%) . .. . . . . . . (26)
Elimination of transaction related payments to executives (49%) . . . . . . . . . . . . (74)
Elimination of transaction related investment banking fees (49%) . . . . . . . . . . . . (245)
Elimination of inter-company interest expense (49%) of HMI's senior
secured indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (339)
---------
$ 8,379
=========
(d) Provision (benefit) for taxes:
Adjustment to tax expense on net taxable income attributable to pro forma
adjustments and to reflect a consolidated effective tax rate indicative of the
combined companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (195)
=========
</TABLE>
Page 48
<PAGE> 49
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Current Report on Form 8-K/A to be signed on
its behalf by the undersigned hereunto duly authorized.
Transworld Home HealthCare, Inc.
(Registrant)
Date: March 27, 1997 By: /s/ Wayne A. Palladino
--------------------------
Wayne A. Palladino
Senior Vice President and
Chief Financial Officer
Page 49
<PAGE> 1
TRANSWORLD HOME HEALTHCARE, INC.
75 TERMINAL AVENUE
CLARK, NEW JERSEY 07066
March 26, 1997
Health Management, Inc.
1371-A Abbott Court
Buffalo Grove, Illinois 60089
Ladies and Gentlemen:
Reference is made to the Agreement and Plan of Merger, dated
as of November 13, 1996, as amended by letter agreements, dated November 27,
1996, December 12, 1996, December 23, 1996, January 10, 1997 and January 13,
1997, among Transworld Home HealthCare, Inc. ("Transworld"), IMH Acquisition
Corp. ("Newco"), and Health Management, Inc. (the "Company") (as amended, the
"Merger Agreement"). Terms defined in the Merger Agreement shall have their
defined meanings herein, unless otherwise defined herein.
The parties have agreed that in view of the Company's publicly
announced restatement of its financial statements for the quarterly periods
ended July 31, 1996 and October 31, 1996, and the Company's publicly announced
charge for the quarterly period ended January 31, 1997, it is appropriate to
further amend the Merger Agreement, among other things, to further reduce the
Merger Consideration.
Accordingly, the parties hereto agree as follows:
1. Section 1.6(b) of the Merger Agreement is hereby amended by
changing the amount "$1.50" to "$0.30".
2. Section 7.1(e) of the Merger Agreement is hereby deleted
(it being acknowledged by Transworld for purposes hereof and Section 7.3(b) of
the Merger Agreement that the Company will not obtain a fairness opinion with
respect to the Merger Consideration, as reduced by this amendment).
3. Section 7.3(b) of the Merger Agreement is hereby amended in
its entirety and, as so amended, shall read as follows:
"The representations and warranties of the Company set forth
in this Agreement shall be true and correct in all material respects at and as
of the Effective Time as if made at and as of such time, except for changes
contemplated by this Agreement and by the Disclosure Schedule, the Deferred
Schedules, the Supplemental Disclosure Schedule dated January 13, 1997 and the
Supplemental Disclosure Schedule dated March 26, 1997 and changes
<PAGE> 2
Health Management, Inc.
March 26, 1997
Page 2
reflecting historical facts and current trends disclosed in the Company's
Quarterly Reports on Form 10-Q for the quarterly period ended January 31, 1997,
on Form 10-Q/A-2 for the quarterly period ended October 31, 1996 and on Form
10-Q/A for the quarterly period ended July 31, 1996 (it being agreed, however,
that (i) all descriptions therein as to the effect of Olanzapine or other
antipsychotic drugs shall be deemed superseded and replaced by the description
set forth in item A. of Section 3.19 of the Supplemental Disclosure Schedule
dated January 13, 1997 and (ii) notwithstanding the disclosure of a current
trend, a Material Adverse Effect may nevertheless be deemed to have occurred by
reason of a material change in such current trend), and except to the extent
that any such representation or warranty is made as of a specified date, in
which case such representation or warranty shall have been true and correct in
all material respects as of such date."
4. Section 7.3(h) of the Merger Agreement is hereby amended in
its entirety and, as so amended, shall read as follows:
"At or prior to April 11, 1997, the Amended Stipulation of
Partial Settlement of the consolidated class actions under the caption In re
Health Management, Inc. Securities Litigation, Master File No. 96-CV-889 (ADS),
dated December 19, 1996, shall have been further amended, in form and substance
satisfactory to Transworld and Newco, to provide for the settlement of such
actions for a reduced settlement amount not to exceed $4.55 million, and at or
prior to the Effective Time, such Amended Stipulation of Partial Settlement, as
so amended, shall have been finally approved by the United States District Court
and such Court shall have entered a judgment (including a bar order)
substantially in the form of Exhibit B to such Amended Stipulation and all
applicable proceedings for review, appeals, and rights of appeal of such
judgment (other than a proceeding or order, or any appeal or petition for a writ
of certiorari, pertaining solely to any plan of allocation and/or application
for attorneys' fees, costs, or expenses) shall have been exhausted or all
applicable waiting periods during which any appeal or other request for review
of such judgment (other than a proceeding or order, or any appeal or petition
for a writ of certiorari, pertaining solely to any plan of allocation and/or
application for attorneys' fees, costs, or expenses) may be made shall have
expired without any appeal having been filed."
5. Section 7.3(k) of the Merger Agreement is hereby deleted
(it being acknowledged by the Company that Transworld will not obtain an updated
opinion of UBS Securities LLC as to the fairness of the consideration being paid
by Transworld).
<PAGE> 3
Health Management, Inc.
March 26, 1997
Page 3
* * *
Except to the extent amended hereby, the Merger Agreement
shall remain in full force and effect and nothing herein shall affect, or be
deemed to be a waiver of, the other terms and provisions of the Merger
Agreement.
The effectiveness of this amendment shall be subject, at the
option of Transworld and Newco, to the receipt by Transworld of the written
consent to this amendment by the lenders (the "Banks") party to the Credit
Agreement, dated as of July 31, 1996, as amended, among Transworld, the Banks
and Bankers Trust Company, as agent. If the written consent of the Banks has not
been obtained on or prior to April 11, 1997, then at any time thereafter
Transworld may, in its sole discretion, terminate this amendment (in which case
this amendment shall be null and void ab initio) and terminate the Merger
Agreement.
<PAGE> 4
Health Management, Inc.
March 26, 1997
Page 4
If this letter correctly sets forth our understanding with
respect to the foregoing matters, kindly execute and return the enclosed copy of
this letter to evidence our binding agreement.
Very truly yours,
TRANSWORLD HOME HEALTHCARE, INC.
By /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.
By /s/ Wm. James Nicol
-------------------------------------
Name: Wm. James Nicol
Title: President and Chief
Executive Officer
