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1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1996 COMMISSION FILE NO. 1-11570
TRANSWORLD HOME HEALTHCARE, INC.
(Exact name of registrant as specified in its charter)
NEW YORK 13-3098275
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
75 TERMINAL AVENUE
CLARK, NEW JERSEY (908) 340-1144 07066
(Address of principal executive offices) (Registrant's telephone number, (Zip Code)
including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 par value
(Title of Class)
Warrants, each entitling the holder to
purchase one share of Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock (Common Stock) held by
non-affiliates of the registrant as of January 22, 1997 was approximately
$50,919,360 based on the closing sale price of $10.8125 on such date, as
reported by the Nasdaq National Market(R).
The number of shares outstanding of the registrant's Common Stock, as
of January 22, 1997, was 10,017,443.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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TRANSWORLD HOME HEALTHCARE, INC.
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended October 31, 1996
TABLE OF CONTENTS
PART I
Item 1. Business................................................................................................. 1
General.................................................................................................. 1
History of the Company................................................................................... 1
Strategy................................................................................................. 6
Services and Products.................................................................................... 6
Respiratory Therapy, Home Medical Equipment and Specialized
Mail-Order Pharmacy and Medical Supplies Operations...................................................... 7
Patient Services......................................................................................... 8
Infusion Therapy......................................................................................... 8
Quality Assurance; JCAHO, CHAP and Other Accreditations.................................................. 9
Sales and Marketing Activities........................................................................... 9
Recruiting and Training of Personnel..................................................................... 10
Third-Party Reimbursement................................................................................ 10
Government Regulation.................................................................................... 12
Suppliers................................................................................................ 14
Insurance................................................................................................ 14
Competition.............................................................................................. 15
Patents and Trademarks................................................................................... 15
Employees................................................................................................ 15
Certain Additional Information Concerning HMI............................................................ 15
Item 2. Properties............................................................................................... 19
Item 3. Legal Proceedings........................................................................................ 20
Item 4. Submission of Matters to a Vote of Security Holders...................................................... 23
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................................... 23
Item 6. Selected Financial Data.................................................................................. 24
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................................... 26
General.................................................................................................. 26
Results of Operations.................................................................................... 29
Year Ended October 31, 1996 vs. Year Ended October 31, 1995.............................................. 29
Year Ended October 31, 1995 vs. Year Ended October 31, 1994.............................................. 30
Liquidity and Capital Resources.......................................................................... 32
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Impact of Recent Accounting Standards.................................................................... 39
Inflation................................................................................................ 40
Item 8. Financial Statements and Supplementary Data.............................................................. 40
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure................................................................................. 40
PART III
Item 10. Directors and Officers of the Registrant................................................................. 40
Board Committees......................................................................................... 44
Compliance With Section 16(a) of the Securities Exchange Act of 1934..................................... 45
Item 11. Executive Compensation................................................................................... 45
Summary Compensation Table............................................................................... 45
Option Grants in Fiscal 1996............................................................................. 47
Aggregate Option Exercises in Fiscal 1996 and 1996 Fiscal Year-End Option Values......................... 48
Employment Agreements; Termination of Employment and Change-in-Control
Arrangements............................................................................................. 48
Compensation Committee Interlocks and Insider Participation.............................................. 49
Stock Option Plans....................................................................................... 49
Executive Bonus Plan..................................................................................... 51
Indemnification.......................................................................................... 51
Item 12. Security Ownership of Certain Beneficial Owners and Management........................................... 52
Item 13. Certain Relationships and Related Transactions........................................................... 53
Transactions with Principal Shareholders................................................................. 53
Transactions with Directors and Executive Officers....................................................... 55
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................................... 56
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forwardlooking statements. This Annual Report contains certain
forwardlooking statements and information that are based on the beliefs of
management as well as assumptions made by and information currently available to
management. The statements contained in this Annual Report relating to matters
that are not historical facts are forwardlooking statements that involve risks
and uncertainties, including, but not limited to, future demand for the
Company's products and services, general economic conditions, government
regulation, competition and customer strategies, capital deployment, the impact
of pricing and reimbursement and other risks and uncertainties. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated or expected.
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PART I
ITEM 1. BUSINESS.
GENERAL
Transworld Home HealthCare, Inc. (the "Company") is a regional
provider of a broad range of alternate site health care services and products.
The Company provides the following services and products to patients in their
homes or in an outpatient setting: (i) respiratory therapy, home medical
equipment and specialized mail-order pharmaceuticals and medical supplies,
including respiratory and diabetic medications and supplies, wound care
dressings and ostomy and orthotic products; (ii) patient services, including
nursing and paraprofessional services and radiation therapy; and (iii) infusion
therapy. During fiscal 1996, the Company derived 61.8% of its revenues from
respiratory therapy, home medical equipment and specialized mail-order sales,
25.1% from patient services, and 13.1% from infusion therapy. The Company
provides services and products in New York, New Jersey, Florida and Maryland and
the Company's specialized mail-order pharmacy and medical supplies operations
provide products to patients nationwide. In January 1997, the Company acquired a
49% interest in Health Management, Inc. ("HMI"), and has entered into an
agreement providing for the acquisition of the remainder of HMI, subject to the
satisfaction of the conditions contained therein. HMI provides integrated
pharmaceutical management services to patients with chronic medical conditions.
The Company believes that as a full-service alternate site health care provider
it can be more responsive and flexible in dealing with the needs of referral
sources, patients and attending physicians, distinguishing it from competitors
who provide a more limited range of services.
The Company's principal executive offices are located at 75
Terminal Avenue, Clark, New Jersey 07066, and the Company's telephone number at
that location is (908) 340-1144.
HISTORY OF THE COMPANY
The Company was incorporated in New York in November 1981 and
commenced operations in May 1982 through its wholly-owned subsidiary,
Steri-Pharm, Inc. ("Steri"), a provider of infusion therapy and related services
in the New York metropolitan area.
TNI and CHCS Acquisitions. During the later part of 1991, the
Company embarked on a strategy to broaden the range of services it could offer.
In furtherance of this strategy, on June 8, 1992, a wholly-owned subsidiary of
the Company merged with Transworld Nurses, Inc. ("TNI") (now known as Transworld
Home HealthCare-Nursing Division, Inc.), a provider of nursing and
para-professional services to patients in their homes in New Jersey and in
Orlando and Melbourne, Florida. In connection with the merger, TNI exchanged
100% of its outstanding shares (1,159,000 shares) for 2,425,000 shares of common
stock, par value $0.01 per share (the "Common Stock") of the Company. The merger
combined the home infusion therapy services of the Company with the home nursing
and para-professional services of TNI. In June 1993, the Company acquired
substantially all of the assets and assumed certain liabilities of Complete
Health Care Services, Inc. ("CHCS") for $1,000,000 in cash. CHCS provided
nursing and para-professional services to patients in their homes through
offices in East Brunswick, Morristown and Eatontown, New Jersey. The Company
believes that the CHCS acquisition enabled it to further develop its geographic
coverage area for nursing services in New Jersey by adding two incremental
nursing service branches in central and northern New Jersey to the Company's
existing New Jersey operations.
PromptCare Acquisition. In September 1993, the Company
acquired The PromptCare Companies, Inc. ("PromptCare") for an aggregate
consideration of $3,419,000, consisting of $2,051,000 in cash and 228,146 shares
of Common Stock valued at $1,368,000. The acquisition of PromptCare added
infusion therapy and respiratory therapy (approximately 80% of revenues) as well
as home medical equipment capabilities in New Jersey to the Company's operations
and provided the Company with a geographically important presence in central and
northern New Jersey.
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RespiFlow/MK Acquisition. Effective April 1, 1994, the Company
acquired all of the issued and outstanding capital stock of RespiFlow, Inc.
("RespiFlow") and MK Diabetic Support Services, Inc. ("MK"). RespiFlow is a
specialized mail-order pharmacy, which provides home health care patients with
respiratory, diabetic, ophthalmic and other commonly prescribed medications. MK
provides home health care patients with diabetic supplies, such as glucose
monitors and ancillary supplies. The Company consummated the acquisition for
$16,850,000, consisting of $1,000,000 in cash, $4,000,000 in promissory notes
(which were paid in full in August 1994) and an additional payment of
$11,850,000. During fiscal 1995, the Company paid $5,877,000 of the additional
payment and on January 10, 1996 paid the balance of $5,973,000. In addition, on
August 5, 1994, the Company paid in full the indebtedness of RespiFlow and MK to
the sellers in the aggregate principal amount of $2,504,000, which principal
amount had been evidenced by promissory notes bearing interest at the rate of 7%
per annum.
Radamerica Acquisition. On August 5, 1994, the Company
acquired all of the issued and outstanding capital stock of Radamerica, Inc.
("Radamerica"). Radamerica operates five radiation therapy centers in the
Baltimore, Maryland metropolitan area. The aggregate purchase price for
Radamerica was $13,000,000, consisting of $8,000,000 in cash and 250,000 shares
of Common Stock valued at $5,000,000. The Company also agreed, under certain
circumstances, to make certain price support payments with respect to the value
of the shares of Common Stock when sold by the sellers. At closing, the Company
loaned to two Radamerica sellers an aggregate of $1,100,000 in connection with
the repayment of certain indebtedness owed to a former shareholder of Radamerica
whose shares had been purchased by them. The principal and interest of the loans
are due and payable on the date any price support payment is paid to these
sellers, or if no price support payment is due, on February 1, 1998, and are
secured by a pledge of an aggregate of 83,334 shares of Common Stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
DermaQuest Acquisition. Effective November 1, 1994, the
Company acquired all of the issued and outstanding capital stock of DermaQuest
Surgical Supply, Inc. ("DermaQuest") (now known as DermaQuest, Inc.). The
selling shareholders of DermaQuest are the same individuals as the selling
shareholders of RespiFlow and MK. DermaQuest provides home care patients and
nursing homes with wound care dressings and ostomy products through its
mail-order operations. The Company consummated the acquisition for $11,832,000,
consisting of $3,000,000 in promissory notes (which were paid in full in March
1995) and an additional payment of $8,832,000. The additional payment was
satisfied in fiscal 1996 and consisted of $5,000,000 in cash and 370,219 shares
of Common Stock valued (per the acquisition agreement) at $10.35 per share. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
DVLC Acquisition. Effective January 1, 1995, the Company
acquired certain of the assets and assumed certain liabilities of the Pulmonary
Division of the Delaware Valley Lung Center, P.A. ("DVLC"), a pulmonary
rehabilitation and diagnostics center, for a purchase price of $500,000. The
DVLC operations serve patients in New Jersey's Camden, Gloucester and Burlington
counties and treat patients with chronic obstructive pulmonary diseases such as
emphysema, chronic bronchitis and asthma.
Precision Acquisition. Effective March 1, 1995, the Company
acquired certain of the assets and assumed certain liabilities of Precision
Health Care, Inc. ("Precision"), an orthotics distribution company. In addition,
Precision provides trained nurses who assess patients' needs, recommend
appropriate orthotics to the patients' physicians and render on-site clinical
support for wound care dressings. Pursuant to the Precision purchase agreement,
as amended, the purchase price for the assets acquired from Precision was
$360,000. Of such amount, $30,000 was paid on June 6, 1995 with the balance
payable in 33 equal monthly installments.
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Health Meds Acquisition. Effective October 1, 1996, the
Company acquired certain of the assets and assumed certain liabilities of Health
Meds, Inc. ("Health Meds"), which operates a respiratory mail-order pharmacy in
Florida. The aggregate consideration paid in connection with the acquisition was
$1,400,000.
USNJ Acquisition. Effective October 1, 1996, the Company
acquired certain of the assets and assumed certain liabilities of U.S. HomeCare
Infusion Therapy Services Corporation of New Jersey ("USNJ"), a subsidiary of
U.S. HomeCare Corporation. USNJ provides infusion therapy products, skilled
nursing and other related services to patients in their homes in the New York
metropolitan area. The aggregate consideration paid in connection with such
acquisition was $2,000,000, subject to adjustment as provided in the purchase
agreement.
Pending Acquisitions. The VIP Companies. In June 1994, the
Company entered into two stock purchase agreements, as amended, to acquire all
of the issued and outstanding capital stock of VIP Health Services, Inc. and
Kwik Care, Ltd. (collectively, the "VIP Companies"). The VIP Companies provide
temporary nursing and related home health services in the New York metropolitan
area. The aggregate consideration payable in connection with the acquisition of
the VIP Companies (the "VIP Acquisition") is $11,000,000, consisting of
$10,250,000 in cash, payable at the closing of the VIP Acquisition (the "VIP
Closing") (of which $750,000 has been paid by the Company as a contract deposit
with the balance of $9,500,000 to be paid at the VIP Closing) and 145,455 shares
of Common Stock valued at $750,000 (also issued as a contract deposit and being
held in escrow to be delivered at the VIP Closing). The cash portion of the
contract deposit has, with the Company's consent, been loaned to the VIP
Companies to be used for working capital purposes. In addition, the Company will
assume all stated liabilities of the VIP Companies as of the VIP Closing
($8,434,000 at September 30, 1996, which includes approximately $3,000,000 of
amounts due to officers/shareholders). The consummation of the VIP Acquisition
is subject to, among other things, various closing conditions, including the
receipt of necessary governmental approvals (including the submission and
approval of a plan of financing), the approval of the lenders under the Credit
Facility, the accuracy at closing of various representations and warranties and
the compliance by the sellers with certain covenants and agreements contained in
the stock purchase agreements. In July 1996, the Company announced that the
consummation of the VIP Acquisition would not occur concurrently with the Second
Closing (as defined herein) under the Purchase Agreement (as defined herein)
with HPII (as defined herein), in that, among other things, the approvals and
consents necessary to consummate the transactions had not been and could not be
obtained at that time. The Company believes that the sellers are not in
compliance with certain provisions contained in the stock purchase agreements
concerning the VIP Companies and has notified the sellers of the VIP Companies
regarding the same. The Company cannot predict when or whether all of the
requisite consents and approvals will be obtained and the other closing
conditions will be satisfied, and, regardless, when or whether the transaction
will ultimately be consummated. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
HMI. On November 13, 1996, the Company entered into a series
of agreements providing for the acquisition of HMI by the Company in a series of
transactions described herein. As described more fully below, HMI is a Buffalo
Grove, Illinois based provider of integrated pharmacy management services to
patients with chronic medical conditions and to health care professionals, drug
manufacturers and third-party payors involved in such patients' care. For the
year ended April 30, 1996 and the six months ended October 31, 1996 (unaudited),
HMI reported $158,860,000 and $40,523,000 of net sales and net (loss) income of
($10,927,000) and $432,000, respectively. Included in the year ended April 30,
1996 net loss are charges of $16,840,000, resulting from: (i) a write-off of
medical device inventory ($2,840,000); (ii) an additional provision reflecting a
change in the estimation of the allowance for doubtful accounts ($8,400,000);
(iii) costs associated with organizational consolidation and other cost
reduction programs ($3,600,000); and (iv) professional fees related to HMI's
litigation and restatement of fiscal 1995 financial statements ($2,000,000).
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On November 13, 1996, the Company acquired from HMI's senior
lenders (collectively the "Lenders") for a purchase price of $21,262,500, the
senior secured indebtedness of HMI under the credit agreement (the "HMI Credit
Agreement") dated March 31, 1995 between HMI, its subsidiaries and the Lenders.
In addition, subject to the terms and conditions of an agreement between the
Company and HMI dated November 13, 1996, as amended (the "Supplemental
Agreement"), the Company also agreed to lend to HMI from time to time, up to
$5,000,000 for working capital purposes and to forebear from exercising any
remedies under the HMI Credit Agreement until January 31, 1997. As of January
22, 1997, the Company had advanced $4,649,285 to HMI for working capital
purposes.
On November 13, 1996, the Company and HMI also entered into a
stock purchase agreement, as amended (the "Stock Purchase Agreement"), pursuant
to which the Company acquired on January 14, 1997, 8,964,292 newly issued HMI
common shares representing approximately 49% of HMI's outstanding common stock
for a cash purchase price of $8,964,292, which actual cash outlay was reduced by
the $4,649,285 advanced for working capital purpose pursuant to the Supplemental
Agreement. At the closing of the Stock Purchase Agreement, the Company and HMI
also entered into a registration rights agreement (the "HMI Registration
Agreement") providing for the registration under the Securities Act of 1933,
commencing on the earlier of June 30, 1997 or the date on which the Merger
Agreement (as defined and described below) is terminated, of the shares of HMI
common stock acquired by the Company pursuant to the Stock Purchase Agreement
and issuable upon exercise of the Option (as defined and described below). On
November 13, 1996, HMI also issued to the Company an option (the "Option"),
until January 14, 1998, to purchase newly issued shares representing up to an
additional 2% of HMI's then outstanding common stock for a purchase price of
$1.00 per share (less amounts advanced pursuant to the Supplemental Agreement
and not deducted under the Stock Purchase Agreement).
On November 13, 1996, the Company and HMI also entered into an
agreement and plan of merger, as amended (the "Merger Agreement"), whereby HMI
will be acquired by the Company at a purchase price of $1.50 per share for each
outstanding share of HMI common stock not already owned by the Company.
Consummation of the Merger Agreement is subject to various conditions, including
receipt of financing by the Company sufficient to complete the merger and
approval of the lenders under the Company's senior secured revolving credit
facility, receipt of certain regulatory approvals and approval by HMI's
shareholders. See "--Certain Additional Information Concerning HMI."
Financings. On December 14, 1992, the Company completed an
initial public offering of 1,600,000 units, each unit consisting of one share of
Common Stock and one public stock purchase warrant (the "Public Warrants")
entitling the holder thereof to purchase one share of Common Stock at a price of
$6.50 per share. The Public Warrants expire on December 6, 1997. During 1994,
the Company repurchased 500,000 of the Public Warrants. The Company received
$6,691,000 in net proceeds from the initial public offering.
In August 1994, the Company entered into a credit agreement
with Banque Paribas, as agent (the "Paribas Credit Agreement"), which provided
the Company with a $28,000,000 senior secured credit facility, which was amended
and restated in March 1995 to increase the amount available to $35,000,000.
On July 31, 1996, the Company completed a new $100,000,000
senior secured revolving credit facility, underwritten by Bankers Trust Company
who is also acting as Agent Bank (the "Credit Facility"). The new Credit
Facility replaced the Company's existing Paribas Credit Agreement. On July 31,
1996, the Paribas Credit Agreement was repaid out of proceeds from the Second
Closing and borrowings under the Credit Facility (which closed concurrently). In
connection with the repayment of the Paribas Credit Agreement, the Company
recorded a non-cash, after-tax, extraordinary charge of $1,435,000 (net of tax
benefit of $879,000), in the fiscal year ended October 31, 1996, relating to the
write-off of the deferred financing costs and discount associated with the
Paribas Credit Agreement. Pursuant to the Credit Facility and subject to the
terms thereof, up to
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$85,000,000 of the total facility may be used by the Company for the acquisition
of other alternate site health care providers with the balance not used for
acquisitions to be used for working capital. The loans under the Credit Facility
are secured by, among other things, a lien on substantially all of the Company's
and its subsidiaries' assets, a pledge of the Company's ownership interest in
its subsidiaries and guaranties by the Company's subsidiaries. The loans mature
on July 31, 2001 with reductions in availability of funds commencing on July 31,
1998 through maturity. The Credit Facility provides that subject to the terms
thereof, the Company may make borrowings either at the Base Rate (as defined in
the Credit Facility), plus 1% or the Eurodollar Rate, plus 2%. As of January 22,
1997, Eurodollar Rate borrowings were at a rate of 7.5% per annum. As of
January 22, 1997, the Company had outstanding borrowings of $43,838,857 under
the Credit Facility. Availability under the Credit Facility was $56,161,143 as
of January 22, 1997.
HPII Transaction. On November 20, 1995, the Company entered
into a purchase agreement (the "Purchase Agreement") with Hyperion Partners II
L.P. ("HPII") pursuant to which HPII agreed, subject to the conditions stated in
the Purchase Agreement, to purchase up to an aggregate of 4,400,000 units (the
"Units"), at a purchase price of $9.00 per Unit for an aggregate purchase price
of up to $39,600,000. The Units consisted of one share of the Company's
restricted Common Stock and 0.6818 of a stock purchase warrant (each whole
warrant entitles the holder thereof to purchase one share of Common Stock at an
exercise price of $12.45 per share (the "Warrants"). The Warrants are
exercisable at any time after issuance thereof until the fifth anniversary of
the original issuance date. Consummation of the HPII transaction was subject to,
among other things, receipt of shareholder approval of the Purchase Agreement
(which approval was obtained at the annual meeting of shareholders of the
Company on April 16, 1996), and New York State Department of Health ("DOH")
approval with respect to ownership by HPII of more than 9.9% of the Company's
Common Stock (which approval was received in June 1996).
On May 30, 1996, HPII purchased from the Company at the
initial closing (the "Initial Closing") an aggregate of 600,000 Units for
$5,400,000. On July 31, 1996, the Company sold to HPII at a second closing (the
"Second Closing") an aggregate of 3,800,000 Units for $34,200,000. The total
number of Units sold to HPII was 4,400,000 for an aggregate purchase price of
$39,600,000, which represents 4,400,000 shares of Common Stock (representing
approximately 44% of the issued and outstanding shares of the Company) and
Warrants to purchase an additional 3,000,000 shares of Common Stock. The
aggregate number of shares represented (assuming all the Warrants are
exercised), therefore, by all of the Units sold to HPII in connection with the
Purchase Agreement was 7,400,000.
Pursuant to a registration rights agreement entered into at
the Initial Closing (the "Registration Agreement"), the Company granted to HPII
registration rights with respect to the shares of Common Stock included in the
Units and other shares of Common Stock, if any, acquired by HPII. The Company
will bear all expenses, other than underwriting discounts and commissions, in
connection with any such registrations.
The Purchase Agreement obligates the Company to grant to HPII
certain directorships on the Company's Board of Directors and contains certain
voting agreements with respect to: the voting of HPII's shares; the voting of
the shares of certain officers and directors of the Company for the approval of
HPII's directors; and the establishment of super-majority approval requirements
for certain actions of the Board of Directors.
On January 10, 1996, HPII loaned to the Company the principal
amount of $10,000,000 (the "Subordinated Loan"). The Subordinated Loan bore
interest at the rate of 20% per annum through May 29, 1996 and 12% thereafter
and was repaid on July 31, 1996 with proceeds from the Second Closing.
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On January 8, 1997, the Company entered into a stock purchase
agreement with HPII pursuant to which HPII agreed, subject to the conditions
stated therein, to purchase 898,877 shares of the Company's Common Stock (the
"Additional Shares") at a purchase price of $11.125 per share for an aggregate
purchase price of $10,000,000. Consummation of this transaction is subject to,
among other things, receipt of applicable regulatory approvals and may be
completed at the Company's request, either prior to or concurrent with the HMI
Merger Agreement subject to the terms of the stock purchase agreement. The
Additional Shares are also covered by the Registration Agreement.
STRATEGY
The Company's growth strategy is to capitalize on
consolidation in the alternate site health care industry by aggressively
pursuing acquisitions of alternate site health care companies in selected
services, products and markets where the Company believes it has the opportunity
to create a comprehensive delivery network. Once it enters a new market, the
Company's strategy is to use its acquired operations as a platform to: (i) offer
comprehensive services and products by cross-marketing its various businesses;
(ii) compete aggressively by traditional referral sources and entering into
managed care contracts as a preferred provider; and (iii) leverage its sales and
marketing efforts, maximize referral networks and achieve operational
efficiencies. The Company further seeks to develop market concentrations in each
of its services in order to achieve levels of coverage which make the services
attractive to a variety of payors and patients.
Consistent with this business strategy, over the past four
years the Company has, among other things, expanded its services in New Jersey
and New York, introduced respiratory therapy services and pulmonary
rehabilitation and diagnostic services in New Jersey and radiation therapy in
Baltimore, Maryland. It also has expanded the range of products it offers
through the acquisitions of a specialized mail-order pharmacy in Jacksonville
and Quincy, Florida and medical supplies operations in Philadelphia,
Pennsylvania and contracted to purchase a company which provides nationally,
integrated pharmacy management services to patients with chronic medical
conditions and to healthcare professionals, drug manufacturers and third-party
payors involved in such patients' care and two home nursing companies serving
the New York metropolitan area. See "--History of the Company."
SERVICES AND PRODUCTS
The Company derives substantially all its revenues from the
alternate site health care segment of the domestic health care industry and
provides the following services and products: (i) respiratory therapy, home
medical equipment and specialized mail-order pharmaceuticals and medical
supplies, including respiratory and diabetic medications and supplies, wound
care dressings and ostomy and orthotic products; (ii) patient services,
including nursing and para-professional services and radiation therapy; and
(iii) infusion therapy. The Company provides patients with a variety of services
and related products, many of which are essential to the proper implementation
of a physician's treatment plan. The services provided by the Company include
training patients and their caregivers at home, monitoring patient compliance
with the treatment plan, reporting to physicians, maintaining equipment and
processing claims to third-party payors. During fiscal 1996, the Company derived
61.8% of its revenues from respiratory therapy, home medical equipment and
specialized mail-order sales, 25.1% from patient services, and 13.1% from
infusion therapy.
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RESPIRATORY THERAPY, HOME MEDICAL EQUIPMENT AND SPECIALIZED MAIL-ORDER
PHARMACY AND MEDICAL SUPPLIES OPERATIONS
Respiratory Therapy. The Company provides home respiratory
services to patients with a variety of conditions, including chronic obstructive
pulmonary disease (e.g., emphysema, chronic bronchitis and asthma), cystic
fibrosis and neurologically-related respiratory conditions. The Company employs
a clinical staff of six full and part-time respiratory care professionals to
provide support to its home respiratory therapy patients. These professionals
manage the needs of the Company's patients according to physician-directed plans
of care. The Company's respiratory therapy revenues are derived primarily from
the provision of oxygen systems, nebulizers (devices to aerosolize medication),
home ventilators and respiratory medication on a unit dose basis. The Company
offers its respiratory therapy services principally in New Jersey and the New
York metropolitan area.
Home Medical Equipment. The Company's product offerings in
home medical equipment consist of patient room equipment (such as hospital beds,
patient lifts and commodes), ambulatory aids (such as walkers and canes) and
bathroom safety items. The Company generally purchases this equipment from
manufacturers and rents it to patients. The Company's broad range of product
offerings provides patients requiring either infusion, nursing or respiratory
services access to needed home medical equipment through a single source.
Accordingly, the Company generally promotes its home medical equipment business
as an ancillary product line in each of the markets where it also provides
patient services and infusion or respiratory therapy.
Specialized Mail-Order Pharmacy and Medical Supplies
Operations. The Company operates mail-order pharmacy and medical supplies
operations in Jacksonville and Quincy, Florida and Puerto Rico, which specialize
in supplying diabetic patients with glucose monitors and test strips and with
respiratory, diabetic, ophthalmic and other commonly prescribed medications. The
Company believes that its patients elect to receive their prescription drugs and
supplies via mail-order primarily because of convenience and cost. The Company
provides physician-prescribed respiratory medication in pre-mixed, pre-measured
unit doses thereby reducing the risk of over or underdosing, or contamination
through having to mix the medication with saline. As part of its service to
patients, the Company provides direct billing to Medicare, Medicaid and private
insurance, thereby reducing or eliminating cash outlays for the patient. The
Company also contacts its patients on a regular basis, usually one week before
the last shipment is scheduled to be exhausted, to verify that the patient is
ready to receive the next order and to monitor patient compliance. In addition,
the Company provides free monthly home delivery, eliminating trips to the local
pharmacy. The Company also provides wound care products and ostomy and orthotic
products to nursing homes and patients in their homes through its specialized
mail-order medical supplies operations. The Company provides wound care
dressings, such as hydrogels, calcium alginates, gauze and foam, and ostomy
products such as drainable pouches.
On January 14, 1997, the Company acquired 49% of the
outstanding shares of HMI common stock and has also entered into the Merger
Agreement to acquire the remaining outstanding shares of HMI. Completion of this
acquisition is subject to the satisfaction of various closing conditions,
including the receipt by the Company of financing sufficient to complete the
transaction, approval of the lenders under the Credit Facility, receipt of
applicable governmental approvals and approval of HMI's shareholders. HMI
provides integrated pharmacy management services to patients with chronic
medical conditions. See "History of the Company -- Pending Acquisitions".
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PATIENT SERVICES
Nursing and Para-Professional Services. The Company offers a
broad range of professional nursing and para-professional services to meet a
patient's medical and personal needs, principally in the home. These services
include pediatric and adult care, such as ventilator and dialysis care;
administration of infusion therapies, including chemotherapy, antibiotics,
enteral and parenteral feeding; standard skilled nursing services such as
changing dressings, injections, catheterization and administration of
medication; physical, respiratory, occupational and speech therapy; home health
aide services, such as assistance with personal hygiene, dressing and feeding;
and homemaker services, such as the preparation of meals, light house cleaning
and shopping. The services provided generally are available 24 hours a day,
seven days a week, on a live-in, hourly or shift basis. In addition, the
Company's services include training patients in their own care, monitoring
patient compliance with treatment plans, reporting to physicians and processing
reimbursement claims to third-party payors. The Company offers its nursing
services through four branches in New Jersey and three in Florida.
In addition, the Company has entered into a definitive
agreement to acquire the VIP Companies. Completion of the acquisition is subject
to the satisfaction of various closing conditions, including the review of the
accuracy at closing of various representations and agreements of the sellers,
action by the sellers to insure compliance with such representations and
agreements, and approval of the lenders under the Company's Credit Facility. The
VIP Companies provide temporary nursing and related home health care services
through six branch locations in New York. See "History of the Company -- Pending
Acquisitions".
Radiation Therapy. Radiation therapy, sometimes called
radiotherapy, is the treatment of cancer and other diseases with high-energy
radiation. Radiation therapy is used alone and in conjunction with surgery,
chemotherapy and, to a lesser extent, hormone therapy and immunotherapy.
Radiation therapy is used both to cure cancer by destroying and eliminating
cancer cells and, when curing the cancer is not possible, as a palliative
treatment to shrink the tumors in order to reduce pain and other symptoms.
The Company provides radiation therapy services in the
Baltimore, Maryland metropolitan area through its operation of five centers, all
of which are located in close proximity to major hospitals. Three of these
centers are free standing structures while the other two centers are located
within their respective associated hospitals (Mercy Hospital Center and Good
Samaritan Hospital). The Company employs medical physicists, oncology nurses,
radiotherapy technologists, dosimetrists, radiologic engineers, as well as an
administrative and clerical staff to provide radiotherapy services. The Company
has contracted with physicians to provide radiation oncology services. The
Company's centers utilize technologically advanced radiotherapy equipment. Each
center utilizes a megavoltage linear accelerator for treatment and a
radiographic fluoroscopic simulator for treatment planning. The Company also
provides the following services for specialized clinical situations: high dose
rate remote afterloading, dedicated CAT scanning, radioisotope therapy and
computerized treatment planning.
INFUSION THERAPY
Infusion therapy involves the intravenous administration of
nutrients, antibiotics or other medications to patients in their homes usually
as a continuation of treatment initiated in the hospital. The infusion therapies
provided by the Company include antibiotic and related therapies (therapies used
to treat various infections and diseases); parenteral nutrition therapy (the
intravenous feeding of life sustaining nutrients to patients with impaired or
altered digestive tracts due to gastrointestinal illness, such as an intestinal
obstruction or inflammatory bowel disease); blood products; enteral nutrition
therapy (the administration of nutrients through a feeding tube to patients who
cannot eat as a result of an obstruction to the digestive tract or because
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they are otherwise unable to feed themselves orally); chemotherapy (the
intravenous administration of cancerinhibiting drugs through either rapid or
continuous infusion); pain management (the administration of pain controlling
drugs such as morphine and Demerol to terminally or chronically ill patients);
and other therapies. The Company offers these therapies to patients in the New
York metropolitan area and New Jersey markets from its facility located in
Clark, New Jersey. The Company's related support services include patient
training in the self-administration of infusion therapies, nursing support,
pharmacy operations and related delivery services and insurance reimbursement
assistance.
QUALITY ASSURANCE; JCAHO, CHAP AND OTHER ACCREDITATIONS
The Company maintains quality assurance policies and
procedures and closely monitors operations in order to provide high quality care
with respect to the services it offers. The Joint Commission on Accreditation of
Healthcare Organizations ("JCAHO"), a not-for-profit private organization that
has established standards for health care organizations, has granted
accreditation status to the Company's Clark and Northfield, New Jersey
facilities and has granted accreditation to its Baltimore, Maryland radiation
therapy facilities. All branches of the Company's nursing division are fully
accredited with commendation by the Community Health Accreditation Program, Inc.
("CHAP"), a subsidiary of the National League for Nursing, a national
accreditation organization for home community health care. The Company believes
that accreditations by JCAHO, CHAP and other recognized accreditation
organizations will be an increasingly important prerequisite for entering into
contracts with managed care providers and other intermediaries and for obtaining
and maintaining required licensure or certification.
The Company's radiation therapy facilities also have received
accreditation from the Accreditation Association for Ambulatory Health Care and
the American College of Radiology. The Company voluntarily sought this
accreditation because it believes the accreditation provides its business with a
rating of quality for referral sources to examine, which the Company believes
helps distinguish it from its competitors.
SALES AND MARKETING ACTIVITIES
The Company primarily markets its services and products to
referral sources such as physicians, hospital discharge planners and social
service workers, insurance companies, prepaid health plans, health maintenance
organizations ("HMOs"), county medical services and private charitable
organizations. Fundamental to the Company's ability to obtain and retain
referral sources is establishing and maintaining a reputation for quality
service and responsiveness to the requirements of the referral sources.
The Company currently employs full-time sales representatives
for its infusion therapy, home medical equipment and respiratory products and
services and relies on branch administrators and regional sales directors to
market its nursing and para-professional services. The Company uses primarily
the same sales force to cross-market its products and services. The Company uses
full and part-time sales employees for its mail-order pharmacy and medical
supplies operations.
In general, the sales representatives market the Company's
services through direct contact with referral sources in the form of meetings,
telephone calls and solicitations. The representatives maintain continual
contact with these sources in order to strengthen their relationships. While the
sales representatives strive to develop exclusive provider relationships,
referral sources frequently utilize the services of several alternate site
health care companies. The sales representatives are trained by the Company to
provide information to referral
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sources concerning the quality of the Company's alternate site health care
services and the cost-saving advantages of such services. Primarily due to
escalating pressures to contain health care costs, third-party payors are
participating to a greater extent in decisions regarding health care
alternatives and are consequently becoming more important in the referral and
case management process. The inability to obtain and maintain managed care
contracts may have a material adverse effect on the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
General."
During the latter part of 1996, there continued to be a
changing regulatory environment with respect to certain of the Company's product
lines, including, for example, the prohibition of pharmacy support arrangements
in the respiratory medications segment of the Company's business. The Company
has increased its internal and external sales and marketing staff, as well as
developed new marketing programs in order to meet these new standards. Because
of the recent impact of these changes, there can be no assurance as to the
success of these new marketing initiatives.
RECRUITING AND TRAINING OF PERSONNEL
The Company recruits, trains, provides continuing education
for, and offers benefits and other programs to, its personnel. Recruiting is
conducted primarily through advertising, employment fairs, direct contact with
community groups and employment programs and through the use of competitive
salary and benefit packages.
The health care industry periodically faces shortages of
certain qualified personnel. Accordingly, the Company has experienced and may
experience intense competition from other companies in recruiting qualified
health care personnel for its operations. The Company's success to date has
depended, to a significant degree, on its ability to recruit and retain
qualified health care personnel. Most of the registered and licensed nurses and
health care para-professionals who are employed by the Company also are
registered with, and accept placements from time to time through, competitors of
the Company. The Company believes it is able to compete successfully for nursing
and para-professional personnel by aggressive recruitment through newspaper
advertisements, flexible work schedules and competitive compensation
arrangements. There can be no assurance, however, that the Company will be able
to continue to attract and retain qualified personnel.
THIRD-PARTY REIMBURSEMENT
Substantially all of the Company's revenues are attributable
to third-party payors, including Medicare and Medicaid, private insurers,
managed care plans, and HMOs. The amounts received from government programs and
private third-party payors are dependent upon the specific benefits included
under the program or the patient's insurance policies. Like other medical
service providers, the Company is subject to lengthy reimbursement delays as a
result of third-party payment procedures. The Company generally collects
payments from third-party payors within four months after services are rendered,
but pays its accounts payable and employees currently. Delays in reimbursement
may cause working capital constraints on the Company's operations. In the past,
the Company has been able to obtain financing through bank borrowings and
internally generated funds to meet its working capital requirements. However,
there can be no assurance that bank borrowings or other suitable methods of
financing will be available when needed or, if available, will be on terms
acceptable to the Company. Any substantial delays in reimbursement could
adversely affect the Company's business, financial condition, cash flows and
results of operations. Accordingly, management of accounts receivable through
effective billing and reimbursement procedures is critical to the Company's
results of operations.
The billing and reimbursement process involves the collection,
review and approval of a significant number of required documents. Certain
payors such as Medicare, Medicaid and some managed care plans require very
specific procedures and documentation prior to approving any request for
reimbursement. Regional reimbursement specialists of the Company work together
to assess patient coverage, review the adequacy of documentation, submit
documentation and claims to the third-party payors and expedite payment.
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The Company accepts assignment of insurance benefits from the patient, and in
most instances the third-party payors pay the Company directly.
Because alternate site health care is generally less costly to
third-party payors than hospital-based care, alternate site health care
providers have generally benefited from cost containment initiatives aimed at
reducing the costs of medical care. However, as the alternate site market
becomes a larger percentage of the total health care market, cost containment
initiatives aimed at reducing the costs of delivering services at non-hospital
sites are increasing and may adversely affect the profitability of alternate
site health care providers. A significant reduction in the coverage or payment
rates of third-party payors, or from patients enrolled in the Medicare or
Medicaid programs, would have a material adverse effect on the Company's
revenues and profitability. The level of revenues and profitability of the
Company, like those of other health care companies, are affected by the
continuing efforts of third-party payors to contain or reduce the costs of
health care by lowering reimbursement rates, increasing case management review
of services and negotiating reduced contract pricing.
For the year ended October 31, 1996, 49.8% and 11.8%,
respectively, of the Company's revenues were directly attributable to the
Medicare and Medicaid programs. For the year ended October 31, 1995, 48.1% and
10.8%, respectively, of the Company's revenues were directly attributable to the
Medicare and Medicaid programs. The increase in the percentage of revenues
directly attributable to Medicare during the year ended October 31, 1996 was
primarily the result of an increase in revenues attributable to the Company's
specialized mail-order pharmacy and medical supplies operations which derives a
greater percentage of revenue from Medicare than does the rest of the Company.
The Company's payor mix may fluctuate in the future as a result of any
acquisitions completed by it, and such fluctuations will be dependent, to a
large degree, on the relative payor mix of acquired companies.
Government reimbursement programs are subject to statutory and
regulatory changes, retroactive rate adjustments, administrative rulings and
governmental funding restrictions, all of which may materially increase or
decrease the rate of program payments to the Company for its services. In
addition to being subject to frequent changes in Federal and state laws
governing Medicare and Medicaid coverage and reimbursement policies, the Company
is subject to governmental audit of the reimbursements it receives under the
Medicare and Medicaid programs. Any significant audit adjustment could have a
material adverse effect on the Company's business, financial condition, cash
flows or results of operations. There can be no assurance that payments under
governmental and private third-party payor programs will remain at levels
comparable to present levels or will, in the future, be sufficient to cover the
costs allocable to patients eligible for reimbursement pursuant to such
programs.
Payment reform for post-acute care services is a top Medicare
priority. The U.S. Department of Health and Human Services ("HHS") is studying,
among other things, the feasibility of changing the Medicare reimbursement
system for home health care from cost reimbursement to prospective payment
(i.e., a fixed fee for services rendered per episode of illness). The impact of
such a change, if implemented, on the Company's results of operations cannot be
predicted at this time and will depend, to a large extent, on the reimbursement
methodology ultimately established. The U.S. Congress and President Clinton have
each proposed significant reductions in Medicare and Medicaid spending in
connection with efforts to balance the budget of the United States. Although the
Company cannot predict whether these or other Federal or state cost containment
proposals will be adopted, the adoption of any such proposals could have a
material adverse effect on the Company's business, financial condition, cash
flows and results of operations.
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GOVERNMENT REGULATION
General. The Company's business is subject to extensive
Federal and state regulation. Federal regulation covers, among other things,
Medicare and Medicaid billing and reimbursement, reporting requirements,
certification standards for certain home health agencies and other types of
health care providers, limitations on ownership and other financial
relationships between a provider and its referral sources and approval by the
Food and Drug Administration of the safety and efficacy of pharmaceuticals and
medical devices. In addition, the requirements that the Company must satisfy to
conduct its businesses vary from state to state. The Company believes that its
operations comply with applicable Federal and state laws and regulations in all
material respects. However, changes in the law or new interpretations of
existing laws can have a material effect on permissible activities of the
Company, the relative costs associated with doing business and the amount of
reimbursement for the Company's products and services paid by government and
other third-party payors.
Health Care Reform. Political, economic and regulatory
influences are subjecting the health care industry in the United States to
fundamental change. Although Congress has failed to pass comprehensive health
care reform legislation, the Company anticipates that Congress and state
legislatures will continue to review and assess alternative health care delivery
and payment systems and may in the future propose and adopt legislation
effecting fundamental changes in the health care delivery system. Legislative
debate is expected to continue in the future. The Company cannot predict the
ultimate timing, scope or effect of any legislation concerning health care
reform. Any proposed Federal legislation, if adopted, could result in
significant changes in the availability, delivery, pricing and payment for
health care services and products, including alternate site health care. Various
state agencies also have undertaken or are considering significant health care
reform initiatives. Although it is not possible to predict whether any health
care reform legislation will be adopted or, if adopted, the exact manner and the
extent to which the Company will be affected, it is likely that the Company will
be affected in some fashion, and there can be no assurance that any health care
reform legislation, if and when adopted, will not have a material adverse effect
on the Company's business, financial condition, cash flows or results of
operations.
Permits and Licensure. Certain of the Company's facilities are
subject to state licensure laws. Federal laws require certain of the Company's
facilities to comply with rules applicable to controlled substances. These rules
include an obligation to register with the Drug Enforcement Administration of
the United States Department of Justice and to meet certain requirements
concerning security, record keeping, inventory controls, prescription and order
forms and labeling. The Company's pharmacists, nurses, and certain of its
radiology equipment also are subject to state licensing requirements. The
Company believes that it is in compliance with all applicable licensure
requirements.
Anti-kickback and Fraud and Abuse Laws. The Company is subject
to Federal and state laws prohibiting direct or indirect payments for patient
referrals for items and services reimbursed under Medicare, Medicaid and state
programs as well as in relation to private payors.
The Federal Medicare and Medicaid "Anti-kickback Statute"
prohibits certain conduct involving improper payments in connection with the
delivery of items or services covered by a number of Federal and state health
care programs. Among other things, these prohibitions apply to anyone who
knowingly and willfully solicits, receives, offers, or pays any remuneration in
return for referring an individual to another person for the furnishing, or
arranging for the furnishing, of any item or service that may be paid, in whole
or in part, by the Medicare, Medicaid or other Federal health care programs. To
date, courts have interpreted the Anti-kickback Statute to apply to a broad
range of financial relationships between providers and referral sources,
including physicians and other direct health care providers, as well as persons
who do not have a direct role in the
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provision of health care services. Violations of the statute may result in civil
and criminal penalties, including fines of up to $25,000 for each violation,
exclusion from participation in the Medicare and Medicaid programs, and
imprisonment for up to five years.
HHS has adopted regulations creating "safe harbors" from
Federal criminal and civil penalties under the Anti-kickback Statute by
identifying certain types of ownership interests and other financial
arrangements that do not appear to pose a threat of Medicare and Medicaid
program abuse. Additional safe harbors have also been proposed, and HHS has
recently solicited proposals for developing new and modifying existing safe
harbors. Transactions covered by the Anti-kickback Statute that do not conform
to an applicable safe harbor are not necessarily in violation of the
Anti-kickback Statute, but such arrangements would risk scrutiny and may be
subject to civil sanctions or criminal enforcement action.
The Federal "Stark Law" provides that where a physician has a
"financial relationship" with a provider of "designated health services"
(including, among other things, parenteral and enteral nutrients, equipment and
supplies, home health services, radiation therapy, outpatient prescription drugs
and home medical equipment, which are products and services provided by the
Company), the physician will be prohibited from referring a Medicare or Medicaid
patient to the health care provider, and the provider will be prohibited from
billing Medicare or Medicaid, for the designated health service. In August 1995,
regulations were issued pursuant to the Stark Law as it existed prior to its
amendment in 1993. The preamble to these regulations indicates that the Health
Care Financing Administration ("HCFA") intends to rely on the language and
interpretations in the regulations when reviewing compliance under the Stark
Law, as amended (the "Amended Stark Law"). Certain exceptions from the referral
prohibitions are available under the Amended Stark Law, including the referral
of patients to providers owned by certain qualifying publicly-traded companies
in which a referring physician owns an investment security. At this time,
however, the ownership of investment securities (including common and preferred
stock, bonds, debentures, notes and other debt instruments) in the Company does
not qualify for this exception as the Company does not have presently
shareholder equity of at least $75 million. Submission of a claim that a
provider knows or should know is for services for which payment is prohibited
under the Amended Stark Law could result in refunds of any amounts billed, civil
money penalties of not more than $15,000 for each such service billed, and
possible exclusion from the Medicare and Medicaid programs.
A number of Federal laws impose civil and criminal liability
for knowingly presenting or causing to be presented a false or fraudulent claim,
or knowingly making a false statement to get a false claim paid or approved by
the government. Under one such law, the "False Claims Act," civil damages may
include an amount that is three times the amount of claims falsely made or the
government's actual damages, and up to $10,000 per false claim. In addition, a
civil penalty of up to $15,000 may be assessed for engaging in other activities
prohibited by this statute. Actions to enforce the False Claims Act may be
commenced by a private citizen on behalf of the Federal government, and such
private citizens receive between 15 and 30 percent of the recovery. Efforts have
been made (with mixed success) to assert that any claim resulting from a
relationship in violation of the Anti-kickback Statute or the Amended Stark Law
is false or fraudulent under the False Claims Act. The Company carefully
monitors its submissions of Medicare and Medicaid claims and all other claims
for reimbursement to assure that they are not false or fraudulent, and as noted
above, believes that it is not in violation of the Anti-kickback Statute or the
Amended Stark Law.
The Office of Inspector General ("OIG") of HHS instituted
"Operation Restore Trust" in May 1995 in the five states with the highest
Medicare expenditures (California, Florida, New York, Texas and Illinois).
Operation Restore Trust is intended to counter health care fraud, waste and
abuse in targeted areas that HHS believes to be particularly vulnerable to fraud
and abuse, including home health care, nursing homes and home medical equipment.
In connection with this program, the OIG has issued "Fraud Alerts" relating to
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improper business practices in home health care and the provision of medical
supplies to nursing homes, and is expected to issue additional Fraud Alerts in
the future. In addition, providers of home health care, home medical equipment,
wound care supplies and other products and services are expected to be subject
to increased scrutiny for practices involving fraud and abuse.
Many states, including the states in which the Company
operates, have adopted statutes and regulations prohibiting payments for patient
referrals and other types of financial arrangements with health care providers,
which, while similar in certain respects to the Federal legislation, vary from
state to state. Sanctions for violating these state restrictions may include
loss of licensure and civil and criminal penalties. Certain states also have
begun requiring health care practitioners to disclose to patients any financial
relationship with a provider, including advising patients of the availability of
alternative providers.
The Company continues to review all aspects of its operations
and believes that it complies in all material respects with applicable
provisions of the Anti-kickback Statute, the Amended Stark Law and applicable
state laws, although because of the broad and sometimes vague nature of these
regulations, there can be no assurance that an enforcement action will not be
brought against the Company or that the Company will not be found to be in
violation of one or more of these regulatory provisions. The Company intends to
monitor developments under Federal and state fraud and abuse laws, including the
Amended Stark Law. At this time, the Company cannot anticipate what impact, if
any, subsequent administrative or judicial interpretation of the Amended Stark
Law may have on the Company's business, financial condition, cash flows or
results of operations.
The Company has employment agreements with certain of its
medical advisors. The Company believes that it has structured these arrangements
to comply with applicable Federal and state laws.
SUPPLIERS
The Company purchases its equipment and supplies, including
drugs, home medical equipment, nutritional solutions and other materials
required in connection with its therapies and specialized mail-order pharmacy
and medical supplies operations, from various suppliers. The sole supplier of
generic One Touch(TM) equivalent diabetic testing strips suspended shipments
indefinitely while it reviews with the FDA its quality control procedures.
Approximately 30% of MK patients use this strip. Not knowing how long said
suspension will last, the Company is taking steps to convert the patients using
this product to another brand, which can be provided to such patients at
approximately the same cost. A lengthy suspension of these shipments coupled
with the Company's inability to convert a significant portion of the affected
patients could have a material adverse effect on the Company's results of
operations and cash flows.
INSURANCE
Participants in the health care market are subject to lawsuits
alleging negligence, product liability or other similar legal theories, many of
which involve large claims and significant defense costs. The Company, from time
to time, is subject to such suits as a result of the nature of its business. The
Company maintains general liability insurance, professional liability insurance
and excess liability coverage. Each of these policies provides coverage on an
"occurrence" basis and has certain exclusions from coverage. The Company's
insurance policies must be renewed annually. While the Company has been able to
obtain liability insurance in the past, such insurance varies in cost, is
difficult to obtain and may not be available in the future on terms acceptable
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to the Company, if it is available at all. The failure to maintain insurance
coverage or a successful claim not covered by or in excess of the Company's
insurance coverage could have a material adverse effect on the Company's
business, financial condition, cash flows or results of operations. In addition,
claims, regardless of their merit or eventual outcome, may have a material
adverse effect on the Company's reputation. There can be no assurance that the
Company's insurance will be sufficient to cover liabilities that it may incur in
the future.
COMPETITION
The alternate site health care market is highly fragmented and
consists of numerous providers, relatively few of which are national or regional
in scope. The Company competes with a large number of companies in all areas in
which it conducts business. The Company believes that the principal competitive
factors in its industry are quality of care, including responsiveness of
services and quality of professional personnel; breadth of services offered;
referrals from physicians, hospitals and HMOs; general reputation with
physicians, other referral sources and potential patients; and price. The
Company believes that its competitive strengths have been the quality,
responsiveness and breadth of services it offers, and to some extent price
competition, as well as its reputation with physicians, referral sources and
patients.
The Company's home nursing, respiratory and home medical
equipment, mail-order medical supplies and home infusion services compete with
numerous local, regional and national companies. The Company's radiation therapy
services in the Baltimore, Maryland metropolitan area compete with other free
standing and hospital-based radiotherapy centers. The Company believes that
there are no dominant competitors in the diabetic and respiratory generic drug
market. The Company's primary competition for its mail-order sales of diabetic
and respiratory drugs is generated from retail pharmacies. The Company competes
primarily on the basis of convenience.
PATENTS AND TRADEMARKS
The Company owns no patents. The Company owns the following
servicemarks: "Steri-Pharm," "Transworld Nurses, Inc.," "Advocate Home Care,"
"RespiFlow," "DermaQuest," and "Radamerica." The Company does not believe that
its business is dependent upon the use of any patent or trademark or similar
property.
EMPLOYEES
As of January 22, 1997, the Company had approximately 400
full-time employees and approximately 85 part-time employees. In addition, the
Company maintains registries of approximately 170 registered and licensed nurses
and approximately 155 nurses' aides and home health care aides available for
staffing home nursing assignments on a temporary basis. The Company considers
its relationship with its employees to be satisfactory.
CERTAIN ADDITIONAL INFORMATION CONCERNING HMI
The following information relating to HMI is derived from
information contained in HMI's Annual Report on Form 10-K for the fiscal year
ended April 30, 1996 (the "HMI 10-K"), filed with the Securities
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and Exchange Commission (the "Commission") on or about July 29, 1996 and HMI's
Quarterly Report on Form 10-Q for the quarter ended October 31, 1996 (the "HMI
10-Q"), filed with the Commission on or about December 20, 1996. The
information contained herein is qualified in its entirety by reference to the
HMI 10-K and the HMI 10-Q.
Business of HMI
General
HMI provides integrated pharmaceutical management services to
patients with chronic medical conditions, which may be complicated by a higher
risk of patient non-compliance with the prescribed pharmaceutical regimen, and
to the health care professionals, pharmaceutical manufacturers and third-party
payors involved in the care of such patients. Services offered include the
distribution of prescription drugs, drug utilization review, patient compliance
monitoring, psychosocial support and assistance in insurance coverage,
verification and reimbursement. HMI also services the oncology, HIV/AIDS,
infertility, multiple sclerosis, schizophrenia and neurology markets.
Lifecare(TM) Program. Through its Lifecare(TM) Program, HMI
provides integrated pharmaceutical management programs servicing specific
patient populations. These services include patient education programs, the
preparation, delivery and administration of prescribed outpatient drug
therapies, patient compliance programs and data management. HMI provides
continuity of care to patients as they move from acute care hospital settings to
home-based care programs.
Pharmaceutical Therapies. HMI provides services to individuals
with chronic medical conditions who require at least one continual drug therapy
and may also require additional oral and/or injectable drug therapies. For
example, organ transplant recipients require a continual drug therapy consisting
of immunosuppressants and other drugs in order to prevent rejection of the
transplanted organ. These individuals also require other oral and, on occasion,
injectable drug therapies to combat or control other conditions arising from
transplant surgery, the disease or medical condition that led to the transplant
or side effects of the immunosuppressant drugs. HMI's licensed pharmacists and
other health care professionals are available via a toll-free number 24 hours
per day for assistance of consultation. HMI's pharmacists prepare and dispense
all drug therapies in compliance with the regimen prescribed by each patient's
physician.
Drug Monitoring and Screening. According to HMI, a substantial
portion of the costs associated with treating the chronically ill is
attributable to hospitalizations and medical procedures necessitated by
non-compliance and adverse drug interactions. In addition to the direct costs
associates with non-compliance, including hospital admissions or organ
rejections, there are indirect costs associated with non-compliance which result
from work disability and deteriorated health status. To monitor patient
compliance, HMI maintains a proprietary patient database that contains patient
profiles, including demographics, listings of all medications with dosages and
directions for use, laboratory results and drug delivery schedules with the aim
of enhancing compliance. An HMI pharmacist consults with the patient's
physician or primary health care professional to determine the patient's plan of
treatment, including drug therapy, support service and delivery requirements.
Throughout the course of treatment, an HMI pharmacist reviews each patient's
drug profile, evaluates patient compliance with the physician's orders and
screens for potential interactions among new drug orders or with existing
medications in the patient's profile.
Psychosocial Support. According to HMI, it has designed a
regimen of support services to meet the psychological and social needs of its
patients and their families. These services are designed to complement
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each patient's medical care program and assist both the patient and the
patient's family in managing the psychological and social challenges presented
by the patient's chronic and sometimes lifelong conditions. Such patients and
their families often may need reliable and immediate information, counseling on
a wide range of concerns regarding treatment, and assistance with insurance and
financial matters. The support services offered by HMI include: (1) education
seminars and videotapes for the patients and others involved in their care; (2)
creation, direction and/or sponsorship of patient support groups that provide
patients with support and information exchange; (3) newsletters containing
medical and non-medical information relevant to patients and health care
professionals; and (4) a national, toll-free, 24 hours per day telephone hotline
providing counseling and educational information to patients.
Services Provided to Pharmaceutical Companies. HMI has several
current contracts with pharmaceutical companies to provide a variety of
services, such as health care reimbursement investigation and verification for
both patients and professionals, compliance monitoring and data management
services related to specific drugs or clinical programs. HMI believes that these
services will enable it to establish, maintain and expand its relationships with
pharmaceutical companies and to become an integral component of future
comprehensive disease management programs.
Organ Transplantation. In order to promote growth in the
referrals of transplant recipients, HMI selectively targets hospital-based
transplant programs that direct the outpatient care of their transplant
recipients to outside, third-party service groups. HMI has increased the number
of transplant programs that it serves from 25 at the end of fiscal year 1991 to
100 at the end of fiscal year 1996. HMI has established contractual arrangements
with a number of health care providers and payors to provide services at
negotiated rates and HMI also intends to continue to expand its Lifecare(TM)
Program by continuing to work with medical professionals and organizations to
educate the public on the need for organ donations.
Schizophrenia. Schizophrenia is a psychotic disorder. HMI's
services include distribution and monitoring of antipsychotic medications
including, clozapine and risperidone. Monitoring services include data
administration, phlebotomy services and laboratory analysis. Clozapine is
prescribed primarily for schizophrenia patients who have not responded to
first-line antipsychotic medications. Because of potentially severe side effects
associated with clozapine, patients receiving clozapine require close weekly
monitoring of their white blood cell levels. HMI's Clozaril(R) Patient
Management Business contains multiple components, including weekly blood draws
to test for side effects associated with the drug clozapine. HMI understands
that the FDA may be contemplating a reduction in blood draw monitoring, which,
with no other changes in the way that HMI participates in this market, could
have a substantial negative impact on HMI's earnings and cash flow. HMI expects
several new antipsychotic drugs to be introduced by pharmaceutical companies in
the next year. HMI anticipates providing these new drugs to schizophrenic
patients as it broadens its Lifecare(TM) Program to treat additional mental
health patients.
Infertility. According to HMI, the primary treatments for
infertility are ovulatory induction and artificial reproductive technology,
often coupled with the use of fertility drugs to maximize success rates and the
average number of monthly cycles of treatment per year for women seeking such
treatment is approximately 2.5.
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Neurology. HMI has initiated several programs in this market.
Target markets include amyotrophic lateral sclerosis (Lou Gehrig's disease),
multiple sclerosis ("MS"), Alzheimer's Disease and Parkinson's Disease. Primary
drug therapies for MS patients are Betaseron (R) and Avonex (R) . These drug
therapies and related services are currently being provided through HMI's MS
Lifecare(TM) Program.
Oncology. Drug therapies provided by HMI include: oral
medications such as etoposide, methotrexate, melphalan and cyclophosphamide;
intravenous therapies such as 5-fluorouracil and Taxol(R); and injectables such
as Neupogen(R) and Intron-A(R).
HIV and AIDS. According to HMI, available drug protocols
believed to slow the progression of the disease include first line drugs like
AZT and the new protease inhibitors (Invirase(R), Norvir(R) and Crixivan(R)). In
addition, drugs like pentamidine, intravenous and oral antibiotics, parenteral
nutrition, Neupogen(R) and Doxil(R) are used to treat opportunistic infections
and counteract adverse reactions from the disease and its therapies,
respectively.
Competition
According to HMI, the markets in which it operates are highly
competitive and are experiencing substantial consolidation. Although HMI
believes that its package of services distinguishes it from its competition,
there are several other companies that deliver prescription and non-prescription
medications to its patient populations. These companies include regional and
national pharmacies, some of which have greater financial resources and name
recognition than HMI. Competition is based on a number of factors, including
price, quality of care and service, reputation within the medical community, the
ability to develop and maintain relationships with patients and referral sources
and geographical scope. Competition has also been affected by the decisions of
third-party payors and case managers to become more active in monitoring and
directing the care delivered to their beneficiaries. Relationships with such
groups, as well as inclusion within a contracted network has affected and will
continue to affect HMI's ability to serve many of its patients. The introduction
of new services, the enhancement of current services and the development of
strategic relationships by HMI's competitors could cause a significant decline
in sales, the loss of market acceptance of HMI's services, intense price
competition, or render HMI's services noncompetitive. HMI expects to continue
to encounter increased competition in the future, which, if not matched by HMI
initiatives, could limit its ability to maintain or increase its market share.
Such increased competition could have a material adverse effect on the business,
financial condition and results of operations of HMI.
Recent Events Concerning HMI
Financial Condition. As a result of the restatements and
special charges recorded in HMI's financial statements for the fiscal years
ended April 30, 1995 and 1996, HMI recorded significant charges to its balance
sheet including reductions of HMI's working capital, retained earnings and
stockholders' equity. As of January 22, 1997, HMI was also in default under its
credit agreement, which was acquired by the Company on November 13, 1996.
Additionally, concerns about HMI's financial condition have resulted in less
favorable credit terms from HMI's vendors and may, in HMI's opinion, result in
declining customer referrals. According to HMI, if it is unsuccessful in
consummating the Merger Agreement, or in continuing satisfactory relationships
with its suppliers, it is likely that HMI will seek protection under the Federal
Bankruptcy laws.
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Introduction of New Antipsychotic Drugs. In October, 1996,
Olanzapine, a new antipsychotic agent for the treatment of schizophrenia, was
introduced into the market. HMI also expects several additional antipsychotic
drugs to be introduced in the next year. HMI anticipates providing these new
drugs to schizophrenic patients as it broadens its Lifecare(TM) Program. To
date, management of HMI believes that the introduction of Olanzapine has been a
factor in the recent decline of HMI's Clozapine customer base as physicians
preferentially prescribe Olanzapine for treatment of schizophrenia. Because
Olanzapine does not require weekly blood monitoring, and therefore is less
costly than Clozapine, and because the relative efficacy of Olanzapine is still
uncertain, HMI cannot predict the ultimate effect on its customer base and, in
turn, its financial condition from the introduction of Olanzapine. HMI also
cannot predict the effect on its financial condition of the introduction of
other antipsychotic drugs.
Changes in Management. HMI has experienced substantial
turnover of its senior management group over the past twelve months and several
of HMI's executive officers have been in their current positions for only a
limited period of time. Paul S. Jurewicz, HMI's Executive Vice President and
Chief Financial Officer, resigned, effective January 10, 1997, to assume a new
position. HMI expects that W. James Nicol, the President and Chief Executive
Officer of HMI, will assume, on an interim basis, the additional duties of Chief
Financial Officer.
Reimbursement. According to HMI, to date, HMI's arrangements
with managed care organizations have mostly been on a discounted fee-for-service
basis and according to HMI, it does not currently have any significant capitated
arrangements. In addition, HMI has experienced downward pricing pressures and an
inability to participate in certain managed care networks and HMI may continue
to experience these pressures in the future.
See "Legal Proceedings" with respect to certain legal
proceedings concerning HMI.
ITEM 2. PROPERTIES.
The Company leases a total of 20 facilities in four states and
Puerto Rico. The Company believes that its existing leases will be renegotiated
as they expire or that alternative properties can be leased on acceptable terms.
The Company also believes that its present facilities are well maintained and
are suitable for it to continue its existing operations.
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23
The following table describes the location and current use of
each of the Company's leased facilities as of January 22, 1997:
LOCATION DESCRIPTION
FLORIDA FACILITIES
Orlando.................................. Nursing and Para-Professional Services
West Melbourne........................... Nursing and Para-Professional Services
Jacksonville............................. Mail-Order Pharmacy and Medical Supplies
Quincy................................... Mail-Order Pharmacy and Medical Supplies
Daytona Beach............................ Nursing and Para-Professional Services
MARYLAND FACILITIES
Baltimore (three facilities)............. Radiation Therapy
Glen Burnie.............................. Radiation Therapy
Fallston................................. Administration
Towson................................... Radiation Therapy
NEW JERSEY FACILITIES
Clark (two facilities)................... Corporate Offices, Infusion Therapy,
Respiratory Therapy and
Home Medical Equipment
East Brunswick........................... Nursing and Para-Professional Services
Fair Lawn................................ Nursing and Para-Professional Services
Toms River............................... Nursing and Para-Professional Services
Wall Township............................ Nursing and Para-Professional Services
Cherry Hill.............................. Respiratory Therapy and Rehabilitation
Services
NEW YORK FACILITY
Hawthorne................................ Infusion Therapy and Corporate Offices
PUERTO RICO FACILITY
Santurce................................. Mail-Order Pharmacy and Medical Supplies
ITEM 3. LEGAL PROCEEDINGS.
On November 2, 1994, an action was filed in the Supreme Court
of the State of New York, County of Westchester by Celia M. Consiglio,
individually and as administratrix of her husband's estate against the Company,
alleging that one of its drivers negligently caused the death of the plaintiff's
husband while operating his motor vehicle during a delivery for the Company. The
plaintiffs are seeking $12,580,000 in damages for wrongful death, pain and
suffering, loss of consortium and related claims. The Company has tendered a
defense of this action to its insurance carrier and management of the Company
and counsel to the insurance carrier intend to vigorously defend this lawsuit.
As the case is in a preliminary stage, the Company is not able to estimate any
potential exposure or range of exposure and has not recorded any amounts in its
financial statements. It is reasonably possible that irrespective of insurance
coverage, the ultimate outcome of this action may be materially unfavorable to
the Company's consolidated results of operations, financial position or cash
flows. However, the Company believes that the ultimate liability, if any, will
be within the policy limits
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of its insurance policies, and will not have a material adverse effect on the
Company's consolidated financial position, results of operations or cash flows.
The Company is involved in various other legal proceedings
incidental to its business, none of which the Company believes will have a
material adverse effect on its business.
---------------
The following information relating to certain legal
proceedings concerning HMI is derived from information contained in the HMI
10-K, filed with the Commission on or about July 29, 1996 and the HMI 10-Q,
filed with the Commission on or about December 20, 1996. The information
contained herein is qualified in its entirety by reference to the HMI 10-K and
the HMI 10-Q.
HMI and certain of its past and current directors and officers
have been named as defendants in a consolidated 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). This lawsuit alleges claims under
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, arising out of
alleged misrepresentations and omissions by HMI in connection with certain of
its securities filings. HMI entered into a stipulation of partial
settlement with the plaintiffs' counsel and, on September 18, 1996, such
stipulation received preliminary court approval (the "Original Settlement"). The
Original Settlement was subsequently amended to, among other things, reduce the
consideration being paid by HMI to the plaintiff class. As a condition to the
Company's obligation to close the Stock Purchase Agreement and the Merger
Agreement, preliminary court approval and final court approval, respectively, is
required with respect to the amended settlement providing for a $7,200,000 cash
payment in lieu of the consideration provided in the Original Settlement. An
amended stipulation of partial settlement to this effect was executed on
December 19, 1996, preliminary approval by the U.S. District Court for the
Eastern District of New York thereof was granted on December 20, 1996, and a
hearing for final approval is currently scheduled for March 14, 1997.
Certain of HMI's current and former officers and directors
have been named as defendants, and HMI 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 HMI's securities
filings as more fully alleged in the lawsuit described above. The consolidated
action seeks unspecified monetary damages on behalf of HMI, as well as
declaratory and injunctive relief. An amended consolidated complaint was served
on HMI on August 12, 1996. HMI has not yet filed its response to the amended
consolidated complaint. Under HMI's Certificate of Incorporation and Bylaws,
certain officers and directors may be entitled to
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indemnification, or advancement of expenses for legal fees in connection with
the above suits from HMI.
BDO Seidman, LLP has been named as a defendant, and
HMI 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, LLP
arising out of alleged misrepresentations and omissions contained in certain of
HMI's previous securities filings. BDO Seidman, LLP was HMI'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 HMI, as well as declaratory and
injunctive relief. Pursuant to stipulation, HMI's time to answer or otherwise
move against the complaint in this action has been adjourned without date.
The parties to the above described derivative actions have
reached settlement in principle of all claims against all defendants. HMI
expects that a fully executed settlement agreement will be submitted to the
courts for approval on or before February 7, 1997.
The enforcement division of the Commission has a formal order
of investigation relating to matters arising out of HMI's public announcement on
February 27, 1996 that HMI would have to restate its financial statements for
prior periods as a result of certain accounting irregularities. HMI is
cooperating fully with this investigation and has responded to the Commission's
requests for documentary evidence.
On April 3, 1995, American Preferred Prescription, Inc.
("APP") filed a complaint against HMI, Preferred Rx, Inc., Community
Prescription Services and Sean Strub in the New York Supreme Court for tortious
interference with existing and prospective contractual relationships, for lost
customers and business opportunities resulting from allegedly slanderous
statements and for allegedly false advertising and promotions. Four separate
causes of action are alleged, each for up to $10 million in damages. APP had
previously filed a similar suit against HMI in the United States Bankruptcy
Court of the Eastern District of New York, which was dismissed and the court
abstained from exercising jurisdiction. HMI 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, HMI 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 HMI
alleging that a proposed plan of reorganization presented by HMI to the
Bankruptcy Court in APP's bankruptcy case was based on fraudulent financial
statements and to add certain other defendants. These defendants caused the
removal of the state court action to the Bankruptcy Court of the Eastern
District of New York. By motion dated April 12, 1996, APP requested that the
Bankruptcy Court remand the action to the State Court, which the Bankruptcy
Court granted. HMI opposed this motion, which is currently pending before the
State Court. Management of HMI 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 HMI's results of operations or financial
position.
As a result of a New York State Medicaid audit, HMI is in
discussions with the New York State Department of Social Services regarding
certain overpayments to HMI. HMI has established a reserve of $1.4 million in
respect thereof.
According to HMI, the outcomes of certain of these lawsuits
and the investigation are uncertain and the ultimate outcomes could have a
material adverse effect on HMI.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of the fiscal year ended October 31,
1996, no matters were submitted by the Company to a vote of its stockholders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Common Stock is quoted on the Nasdaq National Market (the
"NASDAQ/NM") and is traded under the symbol "TWHH." The following table sets
forth the high and low sales price of the Common Stock on the NASDAQ/NM for the
fiscal years ended October 31, 1995 and 1996, and the first quarter of fiscal
1997, through January 22, 1997.
PERIOD HIGH LOW
Year Ended October 31, 1995:
First Quarter.................................... $15-7/8 $ 8-1/2
Second Quarter................................... 19-3/4 15-3/8
Third Quarter ................................... 17-3/4 14-1/2
Fourth Quarter................................... 15-1/6 6-3/4
Year Ended October 31, 1996:
First Quarter.................................... 13-1/2 8-1/8
Second Quarter................................... 10-6/8 7-6/8
Third Quarter.................................... 10-3/8 8
Fourth Quarter................................... 11-1/4 8-5/8
Year Ended October 31, 1997:
First Quarter
(through January 22, 1997)....................... 12-5/8 9-3/8
As of January 22, 1997, there were approximately 207
stockholders of record of the Common Stock.
The Company has neither declared nor paid any dividends on its
Common Stock and does not anticipate paying dividends in respect of its Common
Stock in the foreseeable future. Any payment of future dividends will be at the
discretion of the Company's Board of Directors and will depend upon, among other
things, the Company's earnings, financial condition, cash flows, capital
requirements and other relevant considerations, including the extent of its
indebtedness and any contractual restrictions with respect to the payment of
dividends. Under the terms of the Company's Credit Facility, the Company is
prohibited from paying dividends or making other cash distributions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
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ITEM 6. SELECTED FINANCIAL DATA.
The financial data for the years ended October 31, 1996, 1995
and 1994 and balance sheet data as of October 31, 1996 and 1995 as set forth
below have been derived from the audited consolidated financial statements of
the Company and should be read in conjunction with those financial statements
and notes thereto included elsewhere in this Annual Report on Form 10-K. In
addition, the selected financial data should be read in conjunction with
"Business -- General" and "History of the Company" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Ten Months
Year Ended Ended
October 31, October 31,
------------------------------------------------------- --------
1996(1) 1995(2) 1994(3) 1993(4) 1992(5)
-------- -------- -------- -------- --------
(in thousands, except per share data)
FINANCIAL DATA:
Net patient services $ 19,164 $ 18,870 $ 12,150 $ 6,991 $ 4,621
Net infusion services 9,970 9,935 10,551 8,688 2,655
Net respiratory, medical
equipment and supplies sales 47,170 42,782 17,022 732 --
-------- -------- -------- -------- --------
Total revenues 76,304 71,587 39,723 16,411 7,276
Cost of revenues 34,680 32,730 18,809 8,286 4,042
-------- -------- -------- -------- --------
Gross profit 41,624 38,857 20,914 8,125 3,234
Selling, general and administrative
expenses 33,552 29,774 15,968 6,528 2,592
Non-recurring charges -- 3,898 (6) -- -- --
-------- -------- -------- -------- --------
Operating income 8,072 5,185 4,946 1,597 642
Interest expense (income), net 4,352 3,699 809 (90) 107
Provision for income taxes 1,702 627 1,656 736 232
-------- -------- -------- -------- --------
Income before extraordinary item
and cumulative effect of an
accounting change 2,018 859 2,481 945 303
Extraordinary item (1,435)(7) -- -- -- 36
Cumulative effect of an
accounting change -- -- 300 -- --
-------- -------- -------- -------- --------
Net income $ 583 $ 859 $ 2,781 $ 945 $ 339
======== ======== ======== ======== ========
Income per share before extra-
ordinary item and
cumulative effect of an
accounting change:
Primary $ 0.26 $ 0.13 $ 0.50 $ 0.25 $ 0.18
======== ======== ======== ======== ========
Fully diluted $ 0.26 $ 0.13 $ 0.47 $ 0.25 $ 0.18
======== ======== ======== ======== ========
Net income per share:
Primary $ 0.08 $ 0.13 $ 0.56 $ 0.25 $ 0.20
======== ======== ======== ======== ========
Fully diluted $ 0.07 $ 0.13 $ 0.53 $ 0.25 $ 0.20
======== ======== ======== ======== ========
Weighted average number of shares
outstanding:
Primary 7,741 6,776 5,006 3,766 1,662
======== ======== ======== ======== ========
Fully diluted 7,833 6,832 5,205 3,847 1,662
======== ======== ======== ======== ========
October 31,
-------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ------------- ------------ ------------
BALANCE SHEET DATA:
Working capital..................... $26,201 $(4,706)(8) $(4,113)(9) $6,597 $1,854
Accounts receivable, net............ 24,414 18,906 10,514 5,988 3,088
Total assets........................ 90,727 74,912 58,249 17,442 4,678
Long-term debt...................... 12,505 20,264 13,758 530 16
Total shareholders' equity.......... 67,225 24,086 20,371 11,026 2,022
- ------------------------------------
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(1) The financial data for the year ended October 31, 1996 includes the
results of operations of Health Meds and USNJ from their dates of
acquisition (effective October 1, 1996).
(2) The financial data for the year ended October 31, 1995 includes the
results of operations of DermaQuest (effective November 1, 1994), DVLC
(effective January 1, 1995) and Precision (effective March 1, 1995) from
their respective dates of acquisition.
(3) The financial data for the year ended October 31, 1994 includes the
results of operations of RespiFlow and MK (effective April 1, 1994) and
Radamerica (acquired August 5, 1994) from their respective dates of
acquisition.
(4) The financial data for the year ended October 31, 1993 includes the
results of operations of CHCS (acquired in June 1993) and PromptCare
(acquired in September 1993) from their respective dates of
acquisition.
(5) The financial data for the ten months ended October 31, 1992 includes the
results of operations of the Company with TNI from the date of the merger
(June 8, 1992). TNI became a wholly-owned subsidiary of the Company on
June 8, 1992 pursuant to the merger. The merger was accounted for as a
reverse acquisition of the Company by TNI under the purchase method of
accounting. Accordingly, the financial data for the ten months ended
October 31, 1992 are that of TNI and include the results of operations of
the Company from the date of the merger.
(6) The Company reported non-recurring charges totaling $3,898,000 resulting
from a write-off of expenses related to an abandoned public offering
($2,808,000), a write-off of expenses related to abandoned acquisitions
($605,000) and expenses related to the consolidation of certain of the
Company's facilities ($485,000).
(7) The Company recorded a non-cash, after-tax, extraordinary charge of
$1,435,000 (net of tax benefit of $879,000) in the fiscal year ended
October 31, 1996 in connection with the repayment of the Paribas Credit
Agreement.
(8) Includes a $5,973,000 acquisition payable in connection with the
acquisition of RespiFlow and MK and a $8,832,000 acquisition payable in
connection with the acquisition of DermaQuest.
(9) Includes a $10,750,000 acquisition payable in connection with the
acquisition of RespiFlow and MK.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
GENERAL
The Company is a regional provider of a broad range of
alternate site health care services and products. The Company provides the
following services and products to patients in their homes or in an outpatient
setting: (i) respiratory therapy, home medical equipment and specialized
mail-order pharmaceuticals and medical supplies, including respiratory and
diabetic medications and supplies, wound care dressings and ostomy and orthotic
products; (ii) patient services, including nursing and para-professional
services and radiation therapy; and (iii) infusion therapy. During fiscal 1996,
the Company derived 61.8% of its revenues from respiratory therapy, home medical
equipment and specialized mail-order sales, 25.1% from patient services and
13.1% from infusion therapy.
The Company's growth strategy is to capitalize on
consolidation in the alternate site health care industry by aggressively
pursuing acquisitions of alternate site health care companies in selected
services, products and markets where the Company believes it has the opportunity
to create a comprehensive delivery network. Once it enters a new market, the
Company's strategy is to use its acquired operations as a platform to: (i) offer
comprehensive services and products by cross-marketing its various businesses;
(ii) compete aggressively by traditional referral sources and entering into
managed care contracts as a preferred provider; and (iii) leverage its sales and
marketing efforts, maximize referral networks and achieve operational
efficiencies. The Company further seeks to develop market concentrations in each
of its services in order to achieve levels of coverage which make the services
attractive to a variety of payors and patients.
Since its merger with TNI in June 1992, the Company has
completed the following ten acquisitions of alternate site health care
providers.
Company Date of Acquisition Nature and Location of Business
CHCS June 1993 Nursing and para-professional services -
New Jersey
PromptCare September 1993 Respiratory therapy, infusion therapy and
home medical equipment - New Jersey
RespiFlow April 1994 Specialized mail-order pharmacy - National
MK April 1994 Mail-order diabetic supplies - National
Radamerica August 1994 Radiation therapy - Maryland
DermaQuest November 1994 Mail-order medical supplies - National
DVLC January 1995 Pulmonary therapy - New Jersey
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Company Date of Acquisition Nature and Location of Business
Precision March 1995 Mail-order orthotic products - National
Health Meds October 1996 Respiratory mail order pharmacy -
National
USNJ October 1996 Infusion therapy - New York Metropolitan
area
These ten completed acquisitions contributed in the aggregate
approximately $65,110,000 or 85.3% of fiscal 1996 net revenues, while enhancing
the Company's presence in the New York Metropolitan market place, establishing
its presence in Maryland and adding the following products and services: (i)
specialized mail-order pharmaceuticals and medical supplies, including
respiratory and diabetic medications and supplies, wound care dressings and
ostomy and orthotic products; (ii) respiratory therapy and home medical
equipment; and (iii) radiation therapy services. On January 14, 1997, the
Company acquired 8,964,292 newly issued HMI common shares representing
approximately 49% of HMI's outstanding common stock for a purchase price of
$8,964,292. The Company has also entered into the Merger Agreement to acquire
the balance of HMI not already owned by the Company and stock purchase
agreements to acquire the VIP Companies. See "-- Liquidity and Capital
Resources." The Company believes that a substantial number of acquisition
opportunities may continue to arise as managed care and other competitive
pressures encourage further industry consolidation.
The Company's revenue mix and payor mix will be influenced to
a significant degree by the relative contribution of acquired businesses and
their respective payor profiles. The following table shows the percentage of net
revenues represented by each of the Company's product lines:
Year Ended October 31,
--------------------------------
1996 1995 1994
------ ------ ------
Net patient services............................ 25.1% 26.3% 30.5%
Net infusion services........................... 13.1 13.9 26.6
Net respiratory, medical
equipment and supplies sales.................. 61.8 59.8 42.9
------ ------ ------
Total revenues......................... 100.0% 100.0% 100.0%
====== ====== ======
The increase in net respiratory, medical equipment and
supplies sales (and corresponding decline in net patient services and net
infusion services as a percentage of total revenues) from the year ended October
31, 1994 to October 31, 1995 resulted primarily from the acquisition of
DermaQuest (effective November 1, 1994) and inclusion of Respiflow and MK
(effective April 1, 1994) for an entire fiscal year, which collectively
contributed approximately $38,447,000 or 53.7% of total revenues for
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31
fiscal 1995. Subsequent acquisitions, when completed, will continue to impact
the relative mix of revenues. Assuming the Company owned 100% of HMI on November
1, 1995, HMI would have accounted for approximately 67.9% of the combined pro
forma revenue ($237,858,000) for the year ended October 31, 1996.
The following table shows the payor mix for the Company's net
revenues for the periods presented.
Year Ended October 31,
-----------------------
1996 1995 1994
------- ------ ------
Payor
- -----
Medicare............................... 49.8% 48.1% 35.6%
Medicaid............................... 11.8 10.8 15.7
Private payors*........................ 38.4 41.1 48.7
------- ------ ------
Total revenues................ 100.0% 100.0% 100.0%
======= ====== ======
The increase in Medicare as a percentage of total revenues for
the year ended October 31, 1996 as compared to 1995 and 1994 is primarily a
result of an increase in revenues attributable to the Company's specialized
mail-order pharmacy and medical supplies operations, which derives a
greater percentage of revenues from Medicare than does the rest of the Company.
The Company believes that its payor mix in the future will be determined
primarily by the payor profile of completed acquisitions and, to a lesser
extent, from shifts in existing business among payors. On a pro forma basis,
assuming the Company owned 100% of HMI on November 1, 1995, the payor mix for
the year ended October 31, 1996 (including HMI) would have been as follows:
Medicare 22.2%; Medicaid 27.5%; and private payors 50.3%.
The Company's revenues and profitability are affected by the
on-going efforts of third-party payors to contain health care costs by lowering
reimbursement rates, increasing case management review and negotiating reduced
contract pricing. In addition, certain private payors, such as managed care
providers, are able to negotiate lower rates than those paid by other payors.
The Company believes that a substantial portion of its revenues derived from
private payors in fiscal 1996 was subject to case management and managed care
and that this relationship will continue in the future. The Company maintains a
diversified offering of alternate site services and products in an attempt to
insulate the Company against potential reimbursement reductions for specific
products or services. Additionally, the Company is continuously exploring
alternatives to lower its operating costs, such as negotiating more favorable
supply contracts and identifying operating efficiencies at the branch level.
After years of consideration, a specific policy relating to
the coverage of respiratory medications has finally been released by Medicare.
This policy appears to reduce somewhat the number of patients qualifying for
Medicare coverage, sets specific reimbursement rates for compounded, generic and
branded respiratory medications, and requires, effective December 1, 1996, that
only licensed pharmacies may bill Medicare for Part B Medicare reimbursed
medications, including, but not limited to, respiratory medications. While the
implementation of this policy should reduce the overall number
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* Includes managed care payors.
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of competitors in the respiratory medications market place over the next year or
so, the Company cannot predict at this time the extent of the positive or
negative effect that this policy may have on the number of patients serviced,
Respiflow's pharmacy based operations or the marketing opportunities created
thereby.
The Company's gross margins will be influenced by the revenue
mix of its product lines and by changes in reimbursement rates. The Company
historically has recognized higher gross margins from its specialized mail-order
and medical supplies pharmacy, respiratory therapy and radiation therapy
operations than from its nursing and infusion therapy operations. Upon the
consummation of the pending acquisition of HMI, the Company believes that it
will derive a greater percentage of its revenues from chronic care
operations. As a result, the Company anticipates a reduction in the overall
gross margin with the amount of the reduction being dependent upon the ultimate
contribution of chronic care to the total mix of revenues. On a pro forma
basis, assuming the Company owned 100% of HMI on November 1, 1995, the gross
profit margin for the year ended October 31, 1996 (including HMI) would have
been 32.8% versus the actual 54.5% for the same period. Subsequent
acquisitions, when completed, will continue to impact the relative mix of
revenues and overall gross margin.
The Company amortizes goodwill over a period of 40 years. The
Company has selected the forty-year amortization convention based on the likely
period of time over which related economic benefits will be realized. The
Company believes its estimated goodwill life is reasonable given, among other
factors, the continuing movement of patient care to non-institutional settings,
expanding demand due to demographic trends, the emphasis of the Company on
establishing coverage in each of its local and regional markets and the
consistent practice of other alternate site health care companies. At each
balance sheet date, management assesses whether there has been a permanent
impairment in the value of goodwill and the amount of any impairment by
comparing anticipated undiscounted future cash flows from operating activities
with the carrying value of goodwill. The factors considered by management in
estimating future cash flows include current operating results, trends and
prospects of acquired businesses, as well as the effect of demand, competition,
market and other economic factors.
RESULTS OF OPERATIONS
YEAR ENDED OCTOBER 31, 1996 VS. YEAR ENDED OCTOBER 31, 1995
Revenues. Total revenues increased by $4,717,000 or 6.6% to
$76,304,000 for the year ended October 31, 1996 from $71,587,000 for the year
ended October 31, 1995. This increase was primarily attributable to an increase
of $4,388,000 or 10.3% in net respiratory, medical equipment and supplies sales
resulting primarily from an increase in the number of patients serviced in the
Company's specialty mail-order pharmacy and medical supplies operations.
Cost of Revenues. Cost of revenues increased by $1,950,000 or
6.0% to $34,680,000 for the year ended October 31, 1996 from $32,730,000 for the
year ended October 31, 1995. As a percentage of total revenues, cost of revenues
remained relatively constant at 45.5% and 45.7% for the year ended October 31,
1996 and 1995, respectively. Cost of revenues as a percentage of sales remained
relatively constant for respiratory, medical equipment and supplies sales (39.2%
for the year ended October 31, 1996 versus 39.3% for the corresponding 1995
period), but increased for patient services
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(53.1% for the year ended October 31, 1996 versus 52.1% for the corresponding
1995 period) and decreased for infusion services (60.4% for the year ended
October 31, 1996 versus 61.4% for the corresponding 1995 period).
Selling, General and Administrative Expenses. Selling, general
and administrative expenses increased by $3,778,000 or 12.7% to $33,552,000 for
the year ended October 31, 1996 from $29,774,000 for the comparable 1995 period.
This increase was primarily attributable to an increase in selling, general and
administrative expenses at the Company's specialty mail-order pharmacy and
medical supplies operations ($2,816,000) which increased principally as a
result of the building of infrastructure (such as payroll and payroll
related expenses and office expenses) in order to support the increased patient
volumes ($1,849,000). The remaining increase was primarily attributable to an
increase of $978,000 in corporate expenses including a charge of $456,000 in
connection with the resignation of the Company's former Chief Executive
Officer.
Interest Expense, Net. Interest expense, net increased by
$653,000 to $4,352,000 for the year ended October 31, 1996 from $3,699,000 for
the comparable 1995 period. This increase was primarily attributable to an
increase in interest expense due to borrowings under the Subordinated Loan
($1,003,000), partially offset by a decrease in interest expense due to lower
average borrowings and lower average interest rates under the senior secured
credit facilities ($262,000).
Provision for Income Taxes. Provision for income taxes as a
percentage of income before income taxes was 45.8% for the year ended October
31, 1996 and 42.2% for the year ended October 31, 1995. The increase in the
effective tax rate from the 1995 period to the 1996 period was primarily
attributable to higher levels of non-deductible expenses, primarily goodwill
amortization.
Net deferred tax assets, net of a valuation allowance, were
$2,425,000 at October 31, 1996, an increase of $200,000 from net deferred tax
assets of $2,225,000 at October 31, 1995, primarily as a result of an increase
in the provision for doubtful accounts. A valuation allowance, as required by
Statements of Financial Accounting Standards ("SFAS") No. 109, was provided for
deferred tax assets where it was not likely that such assets would be realized
through future income levels nor future or prior tax liabilities. During fiscal
1996, the Company decreased the valuation allowance by $155,000 primarily
due to the realization of state deferred tax assets based on current levels of
income. Based on current levels of income, management expects that levels of
future income should be sufficient to realize the net deferred tax assets.
Income Before Extraordinary Loss. As a result of the
foregoing, income before extraordinary loss increased by $1,159,000 to
$2,018,000 for the year ended October 31, 1996 from $859,000 for the year ended
October 31, 1995. Income before extraordinary loss for 1995 includes
non-recurring charges of $2,376,000 after tax. Income before extraordinary loss
decreased by $1,217,000 to $2,018,000 for the year ended October 31, 1996 from
$3,235,000 for the year ended October 31, 1995, excluding the nonrecurring
charges.
Extraordinary Loss - Early Extinguishment of Debt. An
extraordinary loss (net of tax benefit of $879,000) of $1,435,000 was recorded
in the 1996 results of operations, as a result of the write-off of the deferred
financing costs and discount associated with the early extinguishment of
borrowings under the Paribas Credit Agreement.
Net Income. As a result of the foregoing, net income decreased
by $276,000 or 32.1% to $583,000 for the year ended October 31, 1996 from
$859,000 for the year ended October 31, 1995. Net income in 1996 includes an
extraordinary loss on early extinguishment of debt of $1,435,000 after tax,
while net income for 1995 includes non-recurring charges of $2,376,000 after
tax. Excluding this loss and charges, net income for the year ended October 31,
1996 would have been $2,018,000, a decrease of $1,217,000 or 37.6% from
$3,235,000 for the year ended October 31, 1995.
YEAR ENDED OCTOBER 31, 1995 VS. YEAR ENDED OCTOBER 31, 1994
Revenues. Total revenues increased by $31,864,000 or 80.2% to
$71,587,000 for the year ended October 31, 1995 from $39,723,000 for the year
ended October 31, 1994. This increase was attributed to: (i) the inclusion of
DermaQuest for the year ended October 31, 1995 ($11,643,000 or 29.3%); (ii) the
inclusion of RespiFlow and MK for the year ended October 31, 1995 (whereas
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RespiFlow and MK were only included for seven months in the year ended October
31, 1994) ($10,552,000 or 26.5% for the five months ended March 31, 1995 and an
increase of $3,167,000 or 8.0% for the seven months ended October 31, 1995 over
the comparable period in 1994 due to increased volumes of respiratory and
diabetic sales); (iii) the inclusion of Radamerica for the year ended October
31, 1995 (whereas Radamerica was only included for three months in the year
ended October 31, 1994) ($5,491,000 or 13.8% for the nine months ended July 31,
1995 with relatively flat revenues for the three months ended October 31, 1995
over the comparable period in 1994); and (iv) the remaining $1,011,000 or 2.6%,
primarily as a result of increased revenues in TNI's nursing and
para-professional services due to higher levels of patients serviced ($1,252,000
or 3.2%) and, to a lesser extent, due to the inclusion of DVLC for seven months
from the date of acquisition ($364,000 or .9%). These increases were offset by a
decline of $616,000 or 1.6% in comparable infusion service revenues.
Cost of Revenues. Cost of revenues increased by $13,921,000 or
74.0% from $18,809,000 for the year ended October 31, 1994 to $32,730,000 for
the year ended October 31, 1995. As a percentage of total revenues, cost of
revenues decreased from 47.4% to 45.7% for the years ended October 31, 1994 and
1995, respectively. This decrease was due to the higher mix of respiratory,
medical equipment and supply sales as a result of the inclusion of RespiFlow, MK
and DermaQuest for the year ended October 31, 1995, which generally have lower
cost of revenues as a percentage of revenues (39.3%) than revenues derived from
patient services (52.1%) and infusion services (61.4%). Respiratory, medical
equipment and supply sales increased from 42.9% of total revenues for the year
ended October 31, 1994 to 59.8% in the comparable 1995 period.
Selling, General and Administrative Expenses. Selling, general
and administrative expenses increased by $13,806,000 or 86.5% from $15,968,000
for the year ended October 31, 1994 to $29,774,000 for the comparable 1995
period. This increase was attributable to: (i) the inclusion of DermaQuest for
the year ended October 31, 1995 ($5,498,000 or 34.4%); (ii) the inclusion of
RespiFlow and MK for the year ended October 31, 1995 (whereas RespiFlow and MK
were only included for seven months in the year ended October 31, 1994)
($4,115,000 or 25.8% for the five months ended March 31, 1995 and an increase of
$906 or 5.7% for the seven months ended October 31, 1995 over the comparable
period in 1995 due primarily to an increase in incentive compensation under a
management agreement); and (iii) the inclusion of Radamerica for the year ended
October 31, 1995 (whereas Radamerica was only included for three months in the
year ended October 31, 1994) (approximately $2,825,000 or 17.7%).
Non-Recurring Charges. The Company recorded non-recurring
charges totaling $3,898,000 in fiscal 1995 related to the write-off of costs
related to an abandoned public offering ($2,808,000), abandoned acquisitions
($605,000) and the consolidation of certain of the Company's facilities
($485,000).
Interest Expense, Net. Interest expense, net increased from
$809,000 for the year ended October 31, 1994 to $3,699,000 for the comparable
1995 period. This increase was attributable to: (i) an increase in interest
expense due primarily to interest expense on borrowings under the Paribas Credit
Agreement ($2,758,000) which includes amortization of discounts and deferred
financing costs ($902,000 in fiscal 1995); (ii) an increase in interest
expense-related parties, net ($95,000); and (iii) a decrease in interest income
primarily due to lower average cash balances ($37,000). See "--Liquidity and
Capital Resources."
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Provision for Income Taxes. Provision for income taxes as a
percentage of income before income taxes and cumulative effect of an accounting
change was 42.2% for the year ended October 31, 1995 and 40.0% for the year
ended October 31, 1994. The increase in the effective tax rate from the 1994
period to the 1995 period was attributable to a shift in the percentage mix of
the Company's profits to jurisdictions with higher state tax rates.
Net deferred tax assets, net of a valuation allowance, were
$2,225,000 at October 31, 1995, an increase of $1,866,000 from net deferred tax
assets of $359,000 at October 31, 1994, primarily as a result of an increase in
the provision for doubtful accounts. A valuation allowance, as required by
SFAS No. 109, was provided for deferred tax assets where it was not likely that
such assets would be realized through future income levels nor future or prior
tax liabilities. During fiscal 1995, the Company increased the valuation
allowance by $232,000 primarily as a result of the establishment of state net
operating loss carryforwards. Based on current levels of income, management
currently expects that levels of future income should be sufficient to realize
the net deferred tax assets.
Net Income. As a result of the foregoing, net income decreased
by $1,922,000 or 69.1% from $2,781,000 for the year ended October 31, 1994 to
$859,000 for the year ended October 31, 1995. Net income for 1995 includes
non-recurring charges of $2,376,000 after tax, while net income for 1994
includes a $300,000 benefit for the cumulative effect of an accounting change
for the adoption of SFAS No. 109. Excluding these charges and benefit, net
income for the year ended October 31, 1995 would have been $3,235,000, an
increase of $754,000 or 30.4% from $2,481,000 for the year ended October 31,
1994.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1996, the Company experienced cash outflows from
operations of $3,263,000, primarily as a result of an increase in accounts
receivable of $5,032,000 (net of increases in allowance for doubtful accounts
and receivables acquired in purchase transactions). The Company utilized
$13,903,000 in investing activities, consisting of $11,078,000 for payments on
acquisitions payable, $1,785,000 for acquisitions (primarily the acquisition of
Health Meds), net of cash acquired, and $1,040,000 for capital expenditures.
During fiscal 1995, the Company experienced cash outflows from operations
of $1,335,000, primarily as a result of an increase in accounts receivable of
$6,258,000 (net of increases in allowance for doubtful accounts and receivables
acquired in purchase transactions). The Company utilized $10,391,000 in
investing activities, consisting of $5,957,000 for payments on acquisitions
payable, $3,529,000 for acquisitions, net of cash acquired, and $1,066,000 for
capital expenditures, offset by $161,000 of payments received on notes
receivable-related parties. During fiscal 1994, the Company generated positive
cash flow from operations of $3,748,000 and utilized $15,163,000 in investing
activities (including $12,832,000 for acquisitions, net of cash acquired, and
$456,000 for capital expenditures).
Cash requirements during the year ended October 31, 1996 for
operating and investing activities were met through borrowings under the Paribas
Credit Agreement, the Credit Facility and the $10,000,000 Subordinated Loan from
HPII as well as with proceeds from the issuance of 4,400,000 Units to HPII at
the Initial and Second Closings. Additional cash requirements in the 1995 and
1994 fiscal years were met through borrowings under the Paribas Credit
Agreement.
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At October 31, 1996, the Company had positive working capital
of $26,201,000 reflecting an increase of $30,907,000 from October 31, 1995 as a
result of the payment of $14,805,000 of acquisitions payable and current
maturities of long-term debt primarily due to the proceeds from issuance of
Common Stock to HPII. At October 31, 1995, the Company had a working capital
deficit of $4,706,000 as a result of acquisitions payable of $15,062,000
(including $5,973,000 related to RespiFlow/MK and $8,832,000 related to
DermaQuest). Excluding acquisitions payable, the Company had positive working
capital of $10,356,000. On January 10, 1996, the $5,973,000 acquisition payable
related to Respiflow/MK was paid in cash. The Company paid the $8,832,000
acquisition payable during the fiscal year ended October 31, 1996 as follows:
$4,000,000 was paid in cash through drawing of the letter of credit which was
issued as collateral for DermaQuest contingent payments; $3,832,000 was paid
through the issuance of 370,219 shares of Common Stock valued at $10.35 per
share; and the remaining $1,000,000 acquisition payable balance plus accrued
interest in cash through proceeds from the Initial Closing.
The Company does not have pending any material commitments
regarding capital expenditures, and any additional capital expenditures will be
subject to applicable restrictions under the Credit Facility. Based on current
planned capital expenditures, the Company believes it has adequate capital
resources to conduct its operations for the next twelve months.
It is anticipated that, until the acquisition of HMI is
consummated by the Company pursuant to the Merger Agreement, HMI will be able to
meet its ordinary cash operating needs. If, however, HMI incurs additional or
unusual costs, payment on its receivables slows, and/or it does not receive
ordinary credit terms for the purchase of pharmaceutical product, as
anticipated, it may require additional cash to fund operations, and there can be
no assurance that such funds will be available to the Company, or if available,
will be on terms acceptable to the Company. According to HMI, if the Merger
Agreement is not consummated or HMI does not continue satisfactory relationships
with its suppliers, it is likely that HMI will seek protection under the Federal
Bankruptcy laws.
Further expansion of the Company's business (particularly
through acquisitions) may require the Company to incur additional debt or offer
additional equity if cash generated from operations, cash on hand and amounts
available under the Credit Facility are inadequate or not available to meet its
needs. There can be no assurance that any such additional debt or equity will be
available to the Company, or if available, will be on terms acceptable to the
Company. In addition, covenants contained in the Credit Facility restrict the
Company from entering into transactions not in the ordinary course of business,
including making acquisitions and issuing capital stock, without consent.
Accounts Receivable. The Company maintains a cash management
program that focuses on the reimbursement function, as growth in accounts
receivable has been the main operating use of cash historically. At October 31,
1996 and 1995, $24,414,000 (26.9%) and $18,906,000 (25.2%), respectively, of the
Company's total assets consisted of accounts receivable substantially from
third-party payors. Such payors generally required substantial documentation in
order to process claims. The collection time for accounts receivable is
typically the longest for services that relate to new patients or additional
services requiring medical review for existing patients.
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Accounts receivable increased by $5,508,000 from October 31,
1995 to October 31, 1996 principally for the following reasons: (i) an increase
of $3,332,000 at DermaQuest, discussed below; and (ii) an increase of $2,961,000
at RespiFlow and MK related primarily to higher sales levels, partially offset
by; (iii) a decrease of $785,000 in other miscellaneous activity.
During fiscal 1996, the Company experienced a significant
increase in accounts receivable at its DermaQuest operation whose main product
lines include wound care and orthotic products. Medicare, to whom substantially
all DermaQuest claims are initially submitted for payment, has subjected these
claims to an extensive review process and, in many cases, has required
DermaQuest to pursue payment through the fair hearing process of the Medicare
intermediary. This has created significant delays in payments, in many cases
extending beyond twelve months, leading to the significant buildup in accounts
receivable and corresponding negative impact on cash flow. The Company believes
that this trend will continue through the 1997 fiscal year. In establishing the
net realizable value of its accounts receivable for DermaQuest, the Company has
relied on its historical payment experience which includes its highly favorable
outcomes in the fair hearing process. The Company believes that based on such
prior favorable payment experience, current regulations and its billing and
related documentation practices, there is no current basis to indicate that
DermaQuest would be any less successful in the collection of its accounts
receivable as reported.
Management's goal is to maintain accounts receivable levels
equal to or less than industry averages, which will tend to mitigate the
risk of recurrence of negative cash flows from operations by reducing the
required investment in accounts receivable and thereby increasing cash flows
from operations. Days sales outstanding ("DSOs") is a measure of the average
number of days taken by the Company to collect its accounts receivable,
calculated from the date services are rendered. For each of the years ended
October 31, 1996, 1995 and 1994, the Company's average DSOs were 109, 97 and 65,
respectively, with the increase for the year ended October 31, 1996 principally
due to the factors previously discussed. As the proportion of third-party
payors' claims related to alternate site health care increases, the Company
believes that third-party payors are likely to increase their review of such
claims, the effect of which would be to generally increase DSOs.
Credit Facility. In March 1995, the Company amended and
restated the Paribas Credit Agreement with Banque Paribas, as agent, which
provided the Company with a $35,000,000 senior secured credit facility. On July
31, 1996, the Company completed a new $100,000,000 senior secured revolving
credit facility, underwritten by Bankers Trust Company who is also acting as
Agent Bank. The new Credit Facility replaced the Company's existing Paribas
Credit Agreement, which was repaid out of proceeds from the Second Closing with
HPII and borrowings under the Credit Facility (which closed concurrently). In
connection with the repayment of the Paribas Credit Agreement, the Company
recorded a non-cash, after-tax, extraordinary charge of $1,435,000 (net of tax
benefit of $879,000) in the fiscal year ended October 31, 1996, relating to the
write-off of the deferred financing costs and discount associated with the
Paribas Credit Agreement.
Pursuant to the Credit Facility and subject to the terms
thereof, up to $85,000,000 of the total facility may be used by the Company for
the acquisition of other alternate site health care providers with the balance
not used for acquisitions to be used for working capital. Unused portions of the
revolving loans may be borrowed and reborrowed at the Company's discretion
subject to applicable provisions of the Credit Facility. The loans under the
Credit Facility are secured by, among other things, a lien on substantially all
of the Company's and its subsidiaries assets, a pledge of the Company's
ownership interest in its subsidiaries and guaranties by the Company's
subsidiaries. The
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loans mature on July 31, 2001 with reductions in availability of funds
commencing on July 31, 1998 through maturity. The Credit Facility provides that
subject to the terms thereof, the Company may make borrowings either at the Base
Rate (as defined in the Credit Facility), plus 1% or the Eurodollar Rate, plus
2%. As of October 31, 1996 and January 22, 1997, Eurodollar Rate borrowings bore
interest at a rate of 7.375% and 7.5% per annum, respectively. As of January 22,
1997, the Company had outstanding borrowings of $43,838,857 under the Credit
Facility. Availability under the Credit Facility was $56,161,143 as of
January 22, 1997.
The Company agreed to changes to its Credit Facility with its
senior lenders in order to accommodate the purchase of the senior secured
indebtedness of HMI and the 8,964,292 shares of HMI common stock purchased by
the Company pursuant to the Stock Purchase Agreement. The principal changes
include temporary adjustments to certain financial covenants until April 30,
1997, by which time the Company believes it will have either consummated the
acquisition pursuant to the Merger Agreement and/or have obtained additional
capital, such that it will be in compliance with the terms of the Credit
Facility at that time. The Company also agreed that, until the acquisition of
HMI has been consummated, any additional acquisitions would be subject to the
specific approval of its senior lenders.
Subject to certain exceptions, the Credit Facility prohibits
or restricts, among other things, the incurrence of liens, the incurrence of
indebtedness, certain fundamental corporate changes, dividends, the making of
specified investments and certain transactions with affiliates. In addition, the
Credit Facility contains affirmative and negative financial covenants
customarily found in agreements of this kind, including the maintenance of
certain financial ratios, such as interest coverage, debt to earnings before
interest, taxes, depreciation and amortization ("EBITDA") and minimum EBITDA. At
October 31, 1996, the Company was in compliance with all financial covenants
contained in the Credit Facility.
RespiFlow/MK. During fiscal 1995, the Company paid
approximately $5,877,000 of the $11,850,000 acquisition payable to the sellers
in cash. The remaining acquisition payable of $5,973,000 as of October 31, 1995
was paid to the sellers on January 10, 1996 in cash, plus interest from its due
date of August 15, 1995.
Radamerica Price Support Payment. In connection with the
Company's acquisition of Radamerica, the Company agreed that in the event the
market value of the Common Stock on August 5, 1997 is less than $20 per share,
the Company will pay to each Radamerica seller, for each share of Common Stock
held by them at such time, an amount equal to the difference between the market
value on such date and $20 (the "Radamerica Price Support Payment"). Based upon
the closing price of the Common Stock on January 22, 1997, the Company's
obligation under the Radamerica Price Support Payment would have been
$2,296,875. The Company may pay the Radamerica Price Support Payment in whole or
in part in shares of Common Stock or in cash within 30 days following a seller's
demand therefor, which demand must be exercised by February 5, 1998. Any portion
of the Radamerica Price Support Payment not paid when due will bear interest at
the rate of 12% per annum.
At the Radamerica closing, the Company loaned to two
Radamerica sellers an aggregate of $1,100,000 in connection with the repayment
of certain indebtedness owed to a former shareholder of Radamerica whose shares
had been purchased by them. The principal and interest of the loans are due and
payable on the date the Radamerica Price Support Payment is paid, or if no
Radamerica Price Support Payment is due, on February 1, 1998, and are secured by
a pledge of an aggregate of 83,334
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shares of Common Stock. $136,000 of the loans had been repaid as of October 31,
1996. See "Business -- History of the Company."
DermaQuest Acquisition. In connection with the Company's
acquisition of DermaQuest, the Company recorded an acquisition payable of
$8,832,000 at October 31, 1995 based on a formula applied to DermaQuest's 1995
pretax earnings. The Company paid such acquisition payable as follows: on
January 16, 1996, $4,000,000 was paid in cash through drawings of the letter of
credit which was issued as collateral for any DermaQuest contingent payments;
$3,832,000 was paid through the issuance of 370,219 shares of Common Stock on
February 1, 1996 valued at $10.35 per share; and on May 30, 1996, the Company
paid the remaining $1,000,000 acquisition payable balance plus accrued interest
in cash through proceeds from the Initial Closing.
There are no additional payments required to be paid to the
DermaQuest sellers based upon 1996 pretax earnings.
If, by the first anniversary of the issuance of shares, the
sellers have sold any such shares and the sale price of such shares is less than
90% of their initial valuation on the date of issuance, then the amount of such
difference shall be paid to the sellers either in whole or in part at the option
of the Company, in cash or in additional shares of Common Stock. If the sale
price exceeds the initial valuation by more than 110%, then the difference shall
be paid to the Company by the sellers in cash and shares of Common Stock in the
same proportion of cash and Common Stock as the $8,832,000 was paid.
The Company has agreed that from November 1, 1995 to October
31, 1999, RespiFlow, MK and DermaQuest will be managed by E/L Associates, an
affiliate of certain selling shareholders of those entities. Pursuant to a
management agreement, E/L Associates is entitled to receive an annual management
fee of $240,000 for the fiscal year commencing November 1, 1995, increasing to
$390,000 on November 1, 1996 and $490,000 on November 1, 1997 and an incentive
fee with respect to RespiFlow, MK and DermaQuest equal to 7% of their
annual pretax earnings, payable based on achieving minimum pretax earnings of
$3,800,000 at RespiFlow and MK combined and $3,000,000 at DermaQuest (in each
case, without giving effect to interest charged on the Company's investment
in RespiFlow, MK and DermaQuest). The Company has guaranteed the obligations of
RespiFlow, MK and DermaQuest under this management agreement.
Pending VIP Acquisition. Pursuant to the stock purchase
agreements, the Company is required to pay to the sellers of the VIP Companies
at the VIP Closing, $10,250,000 in cash (of which $750,000 and 145,455 shares of
Common Stock valued at $750,000 has been posted as a contract deposit). The cash
portion of the contract deposit has, with the Company's consent, been loaned to
the VIP Companies to be used for working capital purposes. In addition, at the
VIP Closing the Company will assume all stated liabilities of the VIP Companies
as of the VIP Closing ($8,434,000 at September 30, 1996, which includes
approximately $3,000,000 due to officers/ shareholders). The Company expects
that some portion of such liabilities will be repaid with cash flows generated
through operating activities of the VIP Companies. However, to the extent such
cash flows are not sufficient, it may be necessary for the Company to use its
own funds or obtain additional financing to repay the balance of such assumed
liabilities, principally the amounts due to the former officers/shareholders.
As of January 22, 1997, the Company has not received approval
from its lenders under the Credit Facility to consummate the VIP Acquisition and
there can be no assurance that such
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approval will be obtained or, if obtained, will be on terms satisfactory to the
Company. In addition, the consummation of the VIP Acquisition is subject to,
among other things, various closing conditions, including the receipt of
necessary governmental approvals (including the submission and approval of a
plan of financing), the accuracy at closing of various representations and
warranties and the compliance by the sellers with certain covenants and
agreements contained in the stock purchase agreements. In July 1996, the Company
announced that the consummation of the VIP Acquisition would not occur
concurrently with the Second Closing under the Purchase Agreement with HPII, in
that, among other things, the approvals and consents necessary to consummate the
transactions had not been and could not be obtained at that time. The Company
believes that the sellers are not in compliance with certain provisions
contained in the stock purchase agreements concerning the VIP Companies and has
notified the sellers of the VIP Companies regarding the same. The Company cannot
predict when or whether all of the requisite consents and approvals will be
obtained and the other closing conditions will be satisfied, and, regardless,
when or whether the transaction will ultimately be consummated.
If the Company defaulted under the VIP Acquisition agreements,
it could suffer a loss of its contract deposit which has been posted as
liquidated damages. In the event that the transaction is not consummated for
reasons other than a Company default, the deposit is refundable to the Company.
In any event, the Company's liquidity will not be materially adversely impacted
because the cash portion of the deposit was paid by the Company in the 1994
fiscal year.
HPII Transaction. On November 20, 1995, the Company entered
into the Purchase Agreement with HPII pursuant to which HPII agreed, subject to
the conditions stated in the Purchase Agreement, to purchase up to an aggregate
of 4,400,000 Units, at a purchase price of $9.00 per Unit for an aggregate
purchase price of up to $39,600,000.
On January 10, 1996, HPII loaned to the Company the principal
amount of $10,000,000. The Subordinated Loan bore interest at the rate of 20%
per annum through May 29, 1996 and 12% thereafter and was repaid on July 31,
1996 with proceeds from the Second Closing. The use of the proceeds of the loan
was as follows: (i) $6,217,000 to satisfy the remaining balance, plus accrued
interest on the RespiFlow/MK acquisition payable; (ii) $350,000 for expenses
relating to the HPII transaction; and (iii) the balance of $3,433,000 to be used
for general corporate and working capital purposes.
On May 30, 1996, HPII purchased from the Company at the
Initial Closing an aggregate of 600,000 Units for $5,400,000. The use of the
proceeds of the issuance was as follows: (i) $1,027,000 to satisfy the remaining
balance plus accrued interest on the DermaQuest acquisition payable; (ii)
$802,000 of accrued interest on the Subordinated Loan; (iii) $1,350,000 to
satisfy accounts payable; (iv) $340,000 for expenses related to the HPII
transaction; and (v) the balance of $1,881,000 to be used for general corporate
and working capital purposes.
On July 31, 1996, the Company sold to HPII at a Second Closing
an aggregate of 3,800,000 Units for $34,200,000, in addition to the Units sold
at the Initial Closing described above. The use of the $34,200,000 proceeds of
the issuance plus borrowings of $8,992,000 under the Credit Facility (which
closed concurrently) were as follows: (i) $29,832,000 to satisfy the remaining
balance plus accrued interest and fees under the Paribas Credit Agreement; (ii)
$10,201,000 to satisfy the remaining balance plus accrued interest on the
Subordinated Loan; (iii) $3,012,000 for expenses related to the Credit Facility;
(iv) $125,000 to satisfy accounts payable; and (v) $22,000 for expenses related
to the HPII transaction.
The total number of Units sold to HPII was 4,400,000 which
represents 4,400,000 shares of Common Stock and Warrants to purchase an
additional 3,000,000 shares of Common Stock. The
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aggregate number of shares represented (assuming all the Warrants are
exercised),therefore, by all of the Units sold to HPII in connection with the
Purchase Agreement was 7,400,000.
The Warrants contained in the Units grant the holder thereof
the right to purchase a share of Common Stock upon payment of the exercise price
of $12.45 per share of Common Stock. The Warrants are exercisable at any time
after issuance thereof until the fifth anniversary of the original issuance
date. The Warrants contain provisions that protect the holders thereof against
dilution by adjustment of the exercise price therefore (and, in certain
instances, a related change in the number of shares of Common Stock underlying
each Warrant) upon the occurrence of certain events, such as stock dividends,
stock splits, mergers, a sale of substantially all of the Company's assets and
other extraordinary events, as well as the issuance by the Company of shares of
Common Stock at a purchase price below the then effective exercise price of the
Warrants (which initially is $12.45 per share).
Pursuant to the Registration Agreement entered into at the
Initial Closing, the Company granted to HPII registration rights with respect to
the shares of Common Stock included in the Units and other shares of Common
Stock, if any, acquired by HPII (collectively, the "Registrable Securities").
The Registration Agreement also grants to the holders of Registrable Securities
certain "piggyback" rights to have Registrable Securities included in a
registration statement to be filed by the Company for either its own benefit or
for the registration of securities for the account of other shareholders of the
Company. The Company will bear all expenses, other than underwriting discounts
and commissions, in connection with any such registrations.
On January 8, 1997, the Company entered into a stock purchase
agreement with HPII pursuant to which HPII agreed, subject to the conditions
stated therein, to purchase 898,877 shares of the Company's Common Stock (the
"Additional Shares") at a purchase price of $11.125 per share for an aggregate
purchase price of $10,000,000. Consummation of this transaction is subject to,
among other things, receipt of applicable regulatory approvals and may be
completed at the Company's request, either prior to or concurrent with the HMI
Merger Agreement subject to the terms of the stock purchase agreement. The
Additional Shares are also covered by the Registration Agreement.
Pending HMI Acquisition. On November 13, 1996, the Company
acquired the senior secured indebtedness of HMI from HMI's Lenders. In addition,
subject to the terms and conditions of the Supplemental Agreement, the Company
also agreed to lend to HMI from time to time, up to $5,000,000 for working
capital purposes and to forebear from exercising any remedies under the HMI
Credit Agreement until January 31, 1997. As of January 22, 1997, the Company had
advanced $4,649,285 to HMI for working capital purposes. Pursuant to the Stock
Purchase Agreement, on January 14, 1997, the Company acquired 8,964,292 shares
of HMI common stock, representing approximately 49% of HMI's outstanding common
stock for a cash purchase price of $8,964,292, which actual cash outlay
was reduced by the $4,649,285 advanced for working capital purposes pursuant to
the Supplemental Agreement. At the closing of the Stock Purchase Agreement, the
Company and HMI also entered into the HMI Registration Agreement providing for
the registration under the Securities Act of 1933, commencing on the earlier of
June 30, 1997 or the date on which the Merger Agreement is terminated, of the
shares of HMI common stock acquired by the Company pursuant to the Stock
Purchase Agreement and issuable upon the exercise of the Option. On November
13, 1996, HMI also issued to the Company the Option and the Company and HMI
entered into the Merger Agreement, as amended, whereby HMI will be acquired by
the Company at a price of $1.50 per share for each outstanding share of HMI
common stock not already owned by the Company.
Consummation of the Merger Agreement is subject to various
conditions, including receipt of financing by the Company sufficient to complete
the merger and approval
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of the lenders under the Credit Facility, receipt of certain regulatory
approvals and approval by HMI's shareholders. See "Business -- History of the
Company."
The aggregate amount necessary to complete all aspects of the
pending HMI acquisition (after giving effect to the purchase of HMI's senior
debt, the Stock Purchase Agreement, the Merger Agreement (including professional
fees) and settlement of certain shareholder litigation, but exclusive of trade
payables aggregating approximately $10,000,000) is approximately $60,000,000,
all of which has been, or the Company anticipates, will be provided through
borrowing's under the Credit Facility and the sale of $10,000,000 of the
Additional Shares to HPII.
Litigation. On November 2, 1994, an action was filed in the
Supreme Court of the State of New York, County of Westchester by Celia M.
Consiglio, individually and as administratrix of her husband's estate against
the Company, alleging that one of its drivers negligently caused the death of
the plaintiff's husband while operating his motor vehicle during a delivery for
the Company. The plaintiffs are seeking $12,580,000 in damages for wrongful
death, pain and suffering, loss of consortium and related claims. The Company
has tendered a defense of this action to its insurance carrier and management of
the Company and counsel to the insurance carrier intend to vigorously defend
this lawsuit. As the case is in a preliminary stage, the Company is not able to
estimate any potential exposure or range of exposure and has not recorded any
amounts in its financial statements. It is reasonably possible that irrespective
of insurance coverage, the ultimate outcome of this action may be materially
unfavorable to the Company's consolidated results of operations, financial
position or cash flows. However, the Company believes that the ultimate
liability, if any, will be within the policy limits of its insurance and will
not have a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows.
See "Legal Proceedings" with respect to certain legal
proceedings concerning HMI.
IMPACT OF RECENT ACCOUNTING STANDARDS
In March 1995, the FASB issued SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," which requires that long-lived assets and certain identifiable intangible
assets' carrying values be evaluated based on the future (undiscounted and
without interest charges) cash flows expected to be realized from the use of the
asset and its eventual disposition. If the sum of the expected future cash flows
from an asset is less than the carrying value, an impairment loss must be
recognized. SFAS No. 121 is effective for fiscal years commencing after December
15, 1995. The impact of adopting SFAS No. 121 in fiscal 1997, is not expected to
have any impact on the Company's financial position or results of operations.
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation," which prescribes a new method of accounting for
stock-based compensation that determines compensation expense based on fair
value measured at the grant date. SFAS No. 123 gives companies that grant stock
options or other equity instruments to employees, the option of either
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adopting the new rules or continuing current accounting under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
however disclosure would be required of the pro forma amounts as if the new
rules had been adopted. SFAS No. 123 is effective for transactions entered into
in fiscal years beginning after December 15, 1995. The Company intends to
continue current accounting and provide the disclosure only, as permitted under
SFAS No. 123, beginning with its annual financial statements for the year ending
October 31, 1997.
INFLATION
Inflation has not had a significant impact on the Company's
operations to date.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements and required financial
statements schedule of the Company are located beginning on page F-i of this
Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT.
The following table sets forth certain information concerning
the Company's directors and officers:
NAME AGE POSITIONS WITH THE COMPANY
Timothy M. Aitken............................ 52 Chairman of the Board and Chief Executive
Officer
Robert W. Fine............................... 60 President, Chief Operating Officer and Director
Vincent J. Caruso............................ 49 Executive Vice President and Chief
Administrative Officer
Wayne A. Palladino........................... 38 Senior Vice President and Chief Financial
Officer
H. Gene Berger............................... 56 Executive Vice President
Michael P. Garippa........................... 41 Vice President
Kevin M. Buhrman............................. 45 Vice President
Leslie J. Levinson........................... 41 Secretary
Richard A. Yoken............................. 46 Director
Elliott H. Vernon............................ 54 Director
Scott A. Shay................................ 39 Director
David M. Golush.............................. 52 Director
Robert Zalaznick............................. 39 Director
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Certain biographical information regarding each director and
officer of the Company is set forth below:
Timothy M. Aitken has served as Chairman of the Board and
Chief Executive Officer of the Company since January 15, 1997. Prior to joining
the Company, Mr. Aitken served as an independent consultant to the health care
industry from November 1996 until January 1997. From June 1995 until November
1996, Mr. Aitken served as the vice chairman and president of Apria Healthcare
Group, Inc., a California based home health care company. Since September 1995,
he has also served as chairman of the board of Omnicare Plc, a publicly listed
company in the United Kingdom. From 1990 until June 1995, Mr. Aitken served as
chairman of the board, president and chief executive officer of Abbey Healthcare
Group Inc., a California based home health care company.
Robert W. Fine has been a Director of the Company since July
1988. Mr. Fine has served as Chief Operating Officer since June 1993, President
of the Company since August 1995 and Acting Chief Executive Officer from May
1996 to January 1997. From June 1993 until August 1995, he also served as a Vice
President of the Company. From November 1990 until June 1993, Mr. Fine was the
president of the domestic operations of Fortress Company, a manufacturer of
wheelchairs and related equipment. Since September 1988, Mr. Fine has been the
president and a principal shareholder of Alternative Care Systems, Inc., a
company which provides consulting services to the health care industry,
including the Company. Prior thereto, he served as president of Conac Corp.,
which also provides consulting services to the health care industry.
Vincent J. Caruso has been Executive Vice President and Chief
Administrative Officer of the Company since January 1996. From 1988 through
1995, Mr. Caruso served in various executive capacities at the Travelers Group
(formerly The Travelers Companies) and several of its subsidiaries, including:
executive vice president, chief financial and operations officer and director of
The Copeland Companies; vice president finance and group chief financial officer
- -- investment operations of The Travelers Companies; and executive vice
president and chief financial officer of The Travelers Mortgage Services Inc.
From 1987 through 1988, Mr. Caruso was chief financial and administrative
officer and a director of TSG Holdings, Inc., the U.S. management company of a
London Stock Exchange listed investment company. From 1975 through 1987, Mr.
Caruso served in various financial management positions at Long Island Trust
Company, N.A. and NABAC Investment Services Corp., including senior vice
president and chief financial officer.
Wayne A. Palladino has been a Vice President and Chief
Financial Officer of the Company since February 1991 and Senior Vice President
since September 1996. From September 1989 until joining the Company, he served
as the vice president-finance and chief financial officer of ESC Electronics
Corp., an electronics manufacturer. From December 1985 until January 1991, he
was a principal in Pennwood Capital Corporation, a private investment concern.
From January 1984 through
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December 1985, Mr. Palladino was a senior associate in the business development
unit of W.R. Grace & Co., Inc.
H. Gene Berger has been Executive Vice President of the
Company since July 1995 and served as a Vice President from June 1992 until July
1995. From June 1992 until November 1993, Mr. Berger was the principal officer
in charge of operations at Steri, a subsidiary of the Company. From October 1991
to June 1992, Mr. Berger was the President, Chief Operating and Executive
Officer of the Company. Prior thereto, from January 1990, Mr. Berger was
president of Jayile Associates, a consulting firm to the health care industry.
Beginning in January 1987, Mr. Berger was employed by Biotech Capital
Corporation, a venture capital firm, and was designated by such firm to serve as
president of three affiliated companies in the health care sector. From January
1984 through November 1986, Mr. Berger was chairman of the board, chief
executive officer and president of Clinical Sciences, Inc., a company in the
immunodiagnostics and biotechnology fields.
Michael P. Garippa has been a Vice President of the Company
and the principal officer in charge of the Company's infusion therapy,
respiratory therapy and home medical equipment operations since September 1993.
Since June 1985, Mr. Garippa has been the president of PromptCare, a subsidiary
of the Company.
Kevin M. Buhrman has been a Vice President of the Company
since June 1992. Since November 1993, Mr. Buhrman has been the principal officer
in charge of the Company's nursing and para-professional operations. From June
1992 until November 1993, Mr. Buhrman was the principal officer in charge of
TNI's operations. From February 1990 to June 1992, Mr. Buhrman was executive
vice president of TNI. From February 1988 to 1990, Mr. Buhrman was the corporate
administrator of TNI's New Jersey offices. From 1970 through 1988, he managed
the Respiratory Care Department of Riverview Medical Center in Red Bank, New
Jersey.
Leslie J. Levinson has served as Secretary of the Company
since October 1990. Since June 1991, he has been a partner in the law firm of
Baer Marks & Upham LLP, which firm serves as counsel to the Company. From
January 1988 until June 1991, he was a partner in the law firm of Dow, Lohnes &
Albertson, which firm served as counsel to the Company.
Richard A. Yoken has been a Director of the Company since June
1992. Since May 1990, Mr. Yoken has been the chairman, president and chief
executive officer of The Portfolio Strategy Group, Inc., an investment
consulting firm. Since July 1984, he also has been the president and principal
shareholder of Yoken & Company, Inc., a corporate and personal financial
consulting firm.
Elliott H. Vernon has been a Director of the Company since
December 1992. Since July 1992, he has been the chairman of the board, president
and chief executive officer of HealthCare Imaging Services, Inc., a medical
diagnostic imaging services company. Since January 1993, Mr. Vernon has been of
counsel to the New Jersey law firm of Schottland, Aaron & Manning, Esqs.
(formerly Schottland, Vernon, Aaron, Plaza & Costanzo, Esqs., of which he was a
senior partner for more than
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five years). Additionally, Mr. Vernon was the executive vice president and
general counsel of Aegis Holdings Corporation, a company offering financial
services through its investment management subsidiary and its capital markets
consulting subsidiary on an international basis.
Scott A. Shay has been a Director of the Company since January
1996 and served as Acting Chairman of the Board from September 1996 until
January 1997. Since March 1995, Mr. Shay has been the executive vice president
of Hyperion Funding II Corp., the general partner of the general partner of
HPII. Since 1988, Mr. Shay has been a control person of Hyperion Partners L.P.,
an affiliate of HPII, and has at various times acted as a director of various
entities owned directly and indirectly by Hyperion Partners L.P., including,
currently, Bank United Corp. and Hyperion Capital Management, Inc. Since 1988,
Mr. Shay also has been a managing director of Ranieri & Co., Inc., an investment
consulting firm. Prior to joining Ranieri & Co., Mr. Shay was a director of
Salomon Brothers Inc where he was employed from 1980 until 1988, and where he
was responsible at various times for the firm's thrift mergers and acquisition
practice and for mortgage banking financing and mergers and acquisitions.
David M. Golush has been a Director of the Company since July
1996. Since January 1988, Mr. Golush has been a managing director of Ranieri &
Co., Inc. He is an officer of direct and indirect subsidiaries of Hyperion
Partners L.P. and HPII and is currently a director of Bank United Corp. Prior to
joining Ranieri & Co., Inc., Mr. Golush was vice president of Salomon Brothers
Inc., where he was employed from 1972 until 1988. From 1984 until 1987, he was
chief administrative officer of Salomon's Mortgage and Real Estate Department.
Robert Zalaznick has been a Director of the Company since July
1996. Since July 1996, Mr. Zalaznick has been the administrator of the Gene
Therapy Core Facility at Cornell University Medical College. He also serves as
the divisional administrator, Department of Medicine/Division of Pulmonary and
Critical Care Medicine at the New York Hospital -- Cornell Medical Center, a
position he has also held since April 1994. Since July 1992, he has been the
president of Robert Zalaznick Associates, Inc., a healthcare consulting firm.
From 1988 until 1994, Mr. Zalaznick was associated with St. Luke's - Roosevelt
Hospital Center as consultant to the Faculty Practice Plan; business manager,
West Side Medical Emergency Services, P.C., and consulting business manager to
Psychiatric Associates of Manhattan, P.C.
All directors of the Company are elected by the shareholders
for a one-year term and hold office until the next annual meeting of
shareholders of the Company and until their successors are elected and
qualified. There are no family relationships among the directors and officers of
the Company. All directors who are not employees of the Company are entitled to
receive a fee of $10,000 per annum. In addition, all directors are reimbursed
for all reasonable expenses incurred by them in acting as a director or as a
member of any committee of the Board of Directors. Officers are chosen by and
serve at the discretion of the Board of Directors. All of the Company's
executive officers other than Kevin M. Buhrman have employment agreements with
the Company. See "Executive Compensation -- Employment Agreements; Termination
of Employment and Change-in-Control Arrangements."
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In May 1996, Joseph J. Raymond resigned as Chief Executive
Officer of the Company. In order to facilitate an orderly transition of
responsibilities, Mr. Raymond remained as Chairman of the Board until August 15,
1996. Effective with Mr. Raymond's resignation, Mr. Fine assumed the additional
role of Acting Chief Executive Officer and in September 1996, Mr. Shay became
Acting Chairman. Messrs. Fine and Shay relinquished such additional duties
effective January 15, 1997, when Mr. Aitken joined the Company.
In connection with Mr. Raymond's resignation as Chief
Executive Officer of the Company, on May 14, 1996 the Company entered into an
agreement with Mr. Raymond, which provided for, among other things: a cash
payment to Mr. Raymond of $350,000 (which payment was made on May 23, 1996); the
vesting of 46,667 unvested stock options previously granted to Mr. Raymond;
until April 30, 2000, the voting of all shares of Common Stock held by Mr.
Raymond in the same proportion as the votes cast by other shareholders at all
meetings of shareholders; and the continuation of certain non-compete provisions
applicable to him as well as other provisions customarily found in agreements of
this kind. The Company also entered into a consulting agreement with Mr.
Raymond, whereby among other things, Mr. Raymond will provide consulting
services to the Company until April 30, 2000. Mr. Raymond will be compensated
for such services at a rate equal to $150,000 per annum, less the amount by
which certain amounts paid to or on his behalf exceed $60,000 per annum. In
addition, on June 7, 1996, TWHH Funds L.P., a subsidiary of HPII, loaned the sum
of $1,100,000 to Mr. Raymond until May 29, 1997, which loan is secured by a
pledge of 150,000 shares of Common Stock owned by him.
Pursuant to a shareholders' agreement, dated as of August 5,
1994, by and among the Company, Paribas Principal, Inc., an affiliate of Banque
Paribas, the Company's former principal senior lender ("Paribas Principal") and
Mr. Raymond, upon the request of Paribas Principal, the Company and Mr. Raymond
have agreed to use their best efforts to cause a representative of Paribas
Principal to be elected to the Board of Directors.
Concurrent with the closing of, and pursuant to the terms of,
the Subordinated Loan, Scott A. Shay, a designee of HPII, became a Director of
the Company. Concurrent with the Second Closing of the Purchase Agreement,
Messrs. Golush and Zalaznick, two additional designees of HPII became members of
the Company's Board of Directors. See "Certain Relationships and Related
Transactions -- Transactions with Principal Shareholders."
BOARD COMMITTEES
The Company's Board of Directors has an Audit Committee and a
Compensation Committee but does not have a nominating committee. The members of
each committee are appointed by the Board of Directors.
Audit Committee. The Audit Committee recommends to the Board
of Directors the auditing firm to be selected each year as independent auditors
of the Company's financial statements and to perform services related to the
completion of such audit. The Audit Committee also has responsibility for: (i)
reviewing the scope and results of the audit; (ii) reviewing the Company's
financial condition and results of operations with management; (iii) considering
the adequacy of the internal accounting and control procedures of the Company;
and (iv) reviewing any non-audit services and special engagements to be
performed by the independent auditors and considering the effect of such
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performance on the auditors' independence. Messrs. Golush, Zalaznick and Vernon
currently serve as members of the Audit Committee.
Compensation Committee. The Compensation Committee reviews and
approves overall policy with respect to compensation matters, including such
matters as compensation plans for employees and employment agreements and
compensation for executive officers. The Compensation Committee currently
consists of Messrs. Shay and Yoken.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
The Commission has comprehensive rules relating to the
reporting of securities transactions by directors, officers and shareholders who
beneficially own more than 10% of the Company's Common Stock (collectively, the
"Reporting Persons"). These rules are complex and difficult to interpret. Based
solely on a review of Section 16 reports received by the Company from Reporting
Persons, the Company believes that no Reporting Person has failed to file a
Section 16 report on a timely basis during the most recent fiscal year other
than (i) Wayne A. Palladino, the Senior Vice President and Chief Financial
Officer of the Company, who filed a Form 4 late with respect to two transactions
that occurred in December 1995, (ii) H. Gene Berger, an Executive Vice President
of the Company, who filed a Form 4 late with respect to one transaction that
occurred in March 1996, (iii) Joseph J. Raymond, the former Chairman and Chief
Executive Officer of the Company, who filed a Form 4 late with respect to one
transaction that occurred in April 1996, (iv) Michael P. Garippa, a Vice
President of the Company, who filed two Form 4s late with respect to two
transactions that occurred in December 1995 and April 1996, and (v) Kevin M.
Buhrman, a Vice President of the Company, who filed a Form 4 late with respect
to one transaction that occurred in April 1996.
ITEM 11. EXECUTIVE COMPENSATION.
The following table summarizes all compensation earned by or
paid to the Company's Chief Executive Officer and each of the four other most
highly compensated executive officers of the Company whose annual salary and
bonus exceeded $100,000 (collectively, the "Named Officers") for services
rendered in all capacities to the Company for the three years ended October 31,
1996.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION AWARDS
-----------------------
Annual Restricted Securities
NAME AND Fiscal Compensation Stock Underlying ALL OTHER
PRINCIPAL POSITION Year Salary Bonus Awards Options COMPENSATION
- -------------------------------- ------ ------ -------- ---------- ----------- --------------
Joseph J. Raymond(1) 1996 $158,654 $ -- $-- -- $415,577 (2)
Former Chairman of the Board 1995 272,621 -- -- 70,000 --
and Chief Executive Officer 1994 151,036 150,000 -- -- --
Robert W. Fine(3) 1996 $228,461 $ -- $-- -- $ --
President and 1995 218,000 -- -- 15,000 --
Chief Operating Officer 1994 135,000 100,000 -- 100,000 --
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SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION AWARDS
-----------------------
Annual Restricted Securities
NAME AND Fiscal Compensation Stock Underlying ALL OTHER
PRINCIPAL POSITION Year Salary Bonus Awards Options COMPENSATION
- ------------------ ------ ------ -------- ---------- ----------- --------------
Vincent J. Caruso(4) 1996 $161,538 $ -- $-- 50,000 $ 10,267 (5)
Executive Vice President 1995 -- -- -- -- --
and Chief Administrative Officer 1994 -- -- -- -- --
H. Gene Berger 1996 $181,731 $ -- $-- -- $ --
Executive Vice President 1995 175,293 -- -- 15,000 --
1994 151,250 50,000 -- 25,000 --
Wayne A. Palladino 1996 $181,731 $ -- $-- -- $ --
Senior Vice President and 1995 174,134 -- -- 15,000 --
Chief Financial Officer 1994 126,677 50,000 -- 50,000 --
Michael P. Garippa 1996 $129,087 $ 87,500 $-- 10,000 $ --
Vice President 1995 125,000 87,500 -- -- --
1994 123,154 87,500 -- -- --
- ------------------------------------
(1) Mr. Raymond resigned as Chief Executive Officer of the Company
effective May 1996 and as Chairman of the Board effective August 1996.
(2) Includes $65,577 earned in respect of consulting services provided to
the Company from May through October 1996 and $350,000 in a one-time
payment pursuant to Mr. Raymond's termination agreement.
(3) Mr. Fine served as Acting Chief Executive Officer from May 1996 until
January 1997.
(4) Mr. Caruso has been an Executive Vice President of the Company since
January 1996.
(5) Reflects reimbursements for moving expenses.
The following table sets forth certain information regarding
individual options granted in fiscal 1996 to each of the Named Officers pursuant
to the Company's 1992 Stock Option Plan. In accordance with the rules of the
Commission, the table sets forth the hypothetical gains or "option spreads" that
would exist for the options at the end of their respective terms. These gains
are based on assumed rates of annual compound stock price appreciation of 5% and
10% from the date the option was granted to the end of the option's term.
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OPTION GRANTS IN FISCAL 1996
Percentage of Potential Realizable Value at
Securities Total Options Assumed Annual Rates of
Underlying Granted to Stock Price Appreciation for
Options Employees in Exercise Price Expiration Option Term(3)
NAME Granted Fiscal Year Per Share Date 5% 10%
---- --------- ------------- ----------- ------ ------------------------------
Vincent J. Caruso........ 50,000(1) 71.4% $ 8.875 1/10/01 $122,600 $270,914
Michael P. Garippa....... 10,000(2) 14.3 10.000 4/26/01 26,628 61,051
- ------------------------------------
(1) Exercisable in three equal installments commencing immediately and then
on the next two successive anniversaries of January 10, 1996.
(2) Exercisable in three equal installments commencing on the next three
successive anniversaries of April 26, 1996.
(3) The 5% and 10% assumed annual compound rates of stock price
appreciation are mandated by the Commission and do not represent the
Company's estimate or projection of future Common Stock prices.
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AGGREGATE OPTION EXERCISES IN FISCAL 1996 AND 1996 FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ACQUIRED VALUE AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
NAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
Joseph J. Raymond 70,000 $183,750 0 / 0 $ 0 / $ 0
Robert W. Fine -- -- 128,045 / 5,000 762,337 / 12,813
Vincent J. Caruso -- -- 16,667 / 33,333 26,041 / 52,084
H. Gene Berger 49,941 354,331 94,768 / 5,000 610,829 / 12,813
Wayne A. Palladino 4,781 30,335 114,987 / 5,000 735,219 / 12,813
Michael P. Garippa -- -- 33,334 / 10,000 201,921 / 4,375
- ------------------------------------
(1) Calculated on the basis of $10.4375 per share, the closing sale price
of the Common Stock as reported on the NASDAQ/NM on October 31, 1996,
minus the exercise price.
EMPLOYMENT AGREEMENTS; TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
In January 1997, the Company entered into an employment
agreement with Mr. Aitken, which expires in January 1998. The agreement will
renew for one-year terms absent notice of non-renewal from either party. This
agreement provides for a base salary of $250,000, increasing to $300,000 if the
agreement is renewed. The agreement contains, among other things, customary
confidentiality and termination provisions and provides that in the event of the
termination of the executive following a "change of control" of the Company (as
defined therein), Mr. Aitken will be entitled to receive a cash payment of up to
2.9 times his average annual base salary during the preceding five years.
The Company has three-year employment agreements with Messrs.
Fine, Palladino and Berger, each of which expires in October 1997. These
employment agreements provide for base salaries of $220,000, $175,000 and
$175,000, respectively, which base salaries are subject to review and adjustment
by the Board of Directors of the Company. Each agreement contains, among other
things, customary non-compete, non-solicitation, confidentiality and termination
provisions and also provides that in the event of the termination of the
executive following a "change of control" of the Company (as defined therein) or
a significant change in the responsibilities of such person, each of Messrs.
Fine, Palladino and Berger will be entitled to receive a cash payment of up to
2.9 times his base salary then in effect plus any accrued and unpaid bonuses and
unreimbursed expenses.
In January 1996, the Company entered into a three-year
employment agreement with Mr. Caruso, which expires in January 1999. This
employment agreement provides for a base salary of $200,000, which base salary
is subject to review and adjustment by the Board of Directors of the Company.
The agreement contains, among other things, customary non-compete,
non-solicitation, confidentiality and termination provisions and also provides
that in the event of the termination of the executive, Mr. Caruso will be
entitled to receive a cash payment of one times his base salary then in effect,
except that, following a "change of control" of the Company (as defined therein)
or a significant change in the responsibilities of such person, Mr. Caruso will
be entitled to receive a cash payment of
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two times his base salary then in effect, plus any awarded and unpaid bonuses
and unreimbursed expenses.
The Company had a three-year employment agreement with Michael
P. Garippa which expired in October 1996 subject to automatic one-year
extensions absent notice of non-renewal from either party. Pursuant to such
agreement, Mr. Garippa's agreement has been extended for an additional one-year
period. The agreement provides for base compensation to Mr. Garippa of $125,000.
In addition, Mr. Garippa's base salary will be reviewed periodically by the
Compensation Committee and may be increased, subject to approval by such
committee. Under the employment agreement, Mr. Garippa may receive bonuses from
time to time as determined by the Compensation Committee. Mr. Garippa also is
entitled to an advance of $87,500 in each year, to be credited against any
bonuses he earns under his employment agreement. In the event Mr. Garippa fails
to earn a bonus sufficient to cover any advances taken in any given year, any
such deficiency will be carried forward to the next year and applied against
future bonuses, if any. In the event that, among other things, Mr. Garippa's
responsibilities are significantly diminished or upon his termination following
a "change of control" of the Company (as defined therein), Mr. Garippa will be
entitled to receive the remainder of his salary as then in effect together with
any unpaid bonuses for the remainder of the term of the agreement. The agreement
also contains, among other things, customary non-compete, non-solicitation,
confidentiality and termination provisions.
Concurrent with the closing of the Subordinated Loan, each of
Messrs. Fine, Palladino, Berger and Garippa waived any rights such individual
may have had under his employment agreement with the Company to terminate such
agreement and/or receive any severance payments thereunder as a result of any
transactions with HPII.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Until his resignation in August 1996, Mr. Raymond, the former
Chairman of the Board and Chief Executive Officer of the Company, was also a
member of the Compensation Committee. Mr. Raymond's prior employment agreement
(which was terminated in May 1996 in connection with Mr. Raymond's resignation
from the Company) was approved by the Compensation Committee and ratified by the
Board of Directors, although Mr. Raymond did not vote on the approval of his
employment agreement. Mr. Raymond's termination arrangement were approved by the
Board of Directors. See "Certain Relationships and Related Transactions" and
"Directors and Officers of the Registrant."
STOCK OPTION PLANS
1992 Stock Option Plan. In July 1992, the Company's Board of
Directors and shareholders approved the Company's 1992 Stock Option Plan (the
"1992 Option Plan"). The 1992 Option Plan provides for the grant of options to
key employees, officers, directors and non-employee independent contractors of
the Company. The 1992 Option Plan is administered by the Compensation Committee
of the Board of Directors. The number of shares of Common Stock available for
issuance thereunder is 1,500,000 shares.
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Options granted under the 1992 Option Plan may be either
incentive stock options ("Incentive Options"), which are intended to meet the
requirements of Section 422 of the Internal Revenue Code of 1986, as amended, or
options that do not qualify as Incentive Options ("NonQualified Stock Options").
Under the 1992 Option Plan, the Compensation Committee may grant (i) Incentive
Options at an exercise price per share which is not less than the fair market
value of a share of Common Stock on the date on which such Incentive Options are
granted (and not less than 110% of the fair market value in the case of any
optionee who beneficially owns more than 10% of the total combined voting power
of the Company) and (ii) Non-Qualified Stock Options at an exercise price per
share which is determined by the Compensation Committee (and which may be less
than the fair market value of a share of Common Stock on the date on which such
Non-Qualified Stock Options are granted). The 1992 Option Plan further provides
that the maximum period in which options may be exercised will be determined by
the Compensation Committee, except that Incentive Options may not be exercised
after the expiration of ten years from the date the Incentive Option was
initially granted (and five years in the case of any optionee who beneficially
owns more than 10% of the total combined voting power of the Company). Under the
1992 Option Plan, if an optionee's employment is terminated, generally the
unexercised Incentive Options must be exercised within three months after
termination. However, if the termination is due to the optionee's death or
permanent disability, the option must be exercised within one year of the
termination of employment. If the optionee's employment is terminated for cause
by the Company, or if the optionee voluntarily terminates his employment, his
options will expire as of the termination date. Any option granted under the
1992 Option Plan will be nontransferable, except by will or by the laws of
descent and distribution, and may be exercised upon payment of the option price
in cash or by delivery of shares of Common Stock with a fair market value equal
to the option price.
Shares delivered under the 1992 Option Plan will be available
from authorized but unissued shares of Common Stock or from shares of Common
Stock reacquired by the Company. Shares of Common Stock that are subject to
options under the 1992 Option Plan which have terminated or expired unexercised
will return to the pool of shares available for issuance under the 1992 Option
Plan.
Effective January 10, 1996 and January 14, 1997, respectively,
the Company granted to Mr. Caruso options under the 1992 Option Plan to purchase
50,000 shares and 25,000 shares of Common Stock at an exercise price of $8.875
per share and $12.00 per share, respectively.
On April 26, 1996 the Company granted to each of Messrs.
Garippa and Buhrman options under the 1992 Option Plan to purchase 10,000
shares of Common Stock at an exercise price of $10.00 per share.
Effective January 15, 1997, the Company granted to Mr. Aitken
options under the 1992 Option Plan to purchase 500,000 shares of Common Stock at
an exercise price of $11.375 per share.
1987 Stock Option Plan. The Company had a non-qualified stock
option plan pursuant to which 203,007 shares of Common Stock were reserved for
issuance (the "1987 Plan"). No additional options may be granted under the 1987
Plan and, as of January 22, 1997, there were no options outstanding under the
1987 Plan.
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EXECUTIVE BONUS PLAN
The Company has adopted a performance-based bonus plan
pursuant to which it may grant bonuses to each of the Company's executive
officers and certain other employees of the Company as may be designated by the
Board of Directors. Under the bonus plan, participants may receive a bonus of up
to 50% of their base salary. The grant of any bonus is within the sole
discretion of the Compensation Committee and such bonuses may be paid, in whole
or in part, in cash or in shares of Common Stock.
INDEMNIFICATION
As permitted under the Business Corporation Law of the State
of New York, the Company's Restated Certificate of Incorporation provides that a
director of the Company will not be personally liable to the Company or its
shareholders for monetary damages for breach of a fiduciary duty owed to the
Company or its shareholders. By its terms and in accordance with the law of the
State of New York, however, this provision does not eliminate or otherwise limit
the liability of a director of the Company for any breach of duty based upon (i)
an act or omission (A) resulting from acts committed in bad faith or involving
intentional misconduct or involving a knowing violation of law or (B) from which
the director personally derived a financial benefit to which he was not legally
entitled, or (ii) an improper declaration of dividends or purchases of the
Company's securities.
The Company's Restated Certificate of Incorporation and
By-Laws provide that the Company shall indemnify its directors and officers to
the fullest extent permitted by New York law. The Company also has entered into
indemnification agreements with each of its directors and officers.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the number and percentage of
shares of Common Stock beneficially owned, as of January 22, 1997, by (i) all
persons known by the Company to be the beneficial owner of more than 5% of the
outstanding Common Stock; (ii) each director of the Company; (iii) each of the
"named executive officers" as defined under the rules and regulations of the
Securities Act of 1933, as amended (the "Securities Act"); and (iv) all
directors and executive officers of the Company as a group (12 persons).
Numbers of Shares
Beneficially Percentage
NAME Owned Beneficially Owned
---- ------- ------------------
Timothy M. Aitken(1) ........................... 100,000 *
Joseph J. Raymond(2)(3) ........................ 702,970 7.0%
Robert W. Fine(4) .............................. 148,621 1.5%
Vincent J. Caruso(5) ........................... 41,667 *
Elliott H. Vernon(6) ........................... 21,376 *
Richard A. Yoken(6) ............................ 18,000 *
Wayne A. Palladino ............................. 89,190 *
H. Gene Berger(7)(8) ........................... 163,515 1.6%
Michael P. Garippa(9) .......................... 40,752 *
Scott A. Shay(10) .............................. 7,400,000 56.8%
David M. Golush ................................ -- --
Robert Zalaznick ............................... -- --
Hyperion Partners II L.P.(11) .................. 7,400,000 56.8%
All executive officers and directors as
a group (12 persons)(8)(10)(12) .......... 8,085,361 59.9%
- ------------------------------------
* Less than one percent.
(1) Includes 100,000 shares subject to options exercisable within 60 days
from January 22, 1997.
(2) The address of Mr. Raymond is 17140 Coral Cove Way, Boca Raton, Florida
33496.
(3) Includes an aggregate of 37,764 shares held by the following trusts:
(i) the James Richard Raymond Irrevocable Trust; (ii) the Jeffrey
Raymond Children's Irrevocable Trust; (iii) the Joseph J. Raymond
Children's Irrevocable Trust; and (iv) the Lori Mulligan Children's
Irrevocable Trust. Mr. Raymond and his wife are the sole trustees of
each of the foregoing trusts. Mr. Raymond disclaims beneficial
ownership of the shares held by each of the foregoing trusts.
(4) Includes 128,045 shares subject to options exercisable within 60 days
from January 22, 1997.
(5) Includes 41,667 shares subject to options exercisable within 60 days
from January 22, 1997.
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(6) Includes 15,000 shares subject to options exercisable within 60 days
from January 22, 1997.
(7) Includes 94,768 shares subject to options exercisable within 60 days
from January 22, 1997.
(8) Includes an aggregate of 2,000 shares and 3,100 shares issuable upon
exercise of the Company's Public Warrants owned by the wife and one
child of Mr. Berger, an Executive Vice President of the Company, as to
which Mr. Berger disclaims beneficial ownership. Also includes an
aggregate of 372 Public Warrants owned jointly by Mr. Berger and his
wife.
(9) Includes 33,334 shares subject to options exercisable within 60 days
from January 22, 1997.
(10) Includes 4,400,000 shares of Common Stock and the 3,000,000 shares of
Common Stock underlying the Warrants included in the Units which HPII
(an affiliate of Mr. Shay) has purchased and as to which Mr. Shay
disclaims beneficial ownership. Excludes any shares of Common Stock
included in the Additional Shares. See "Certain Relationships and
Related Transactions -- Transactions with Principal Shareholders".
(11) Includes 3,000,000 shares subject to Warrants exercisable within 60
days from January 22, 1997. The address of Hyperion Partners II L.P. is
50 Charles Lindbergh Parkway, Uniondale, New York 11553. Excludes any
shares of Common Stock included in the Additional Shares. See
"Certain Relationships and Related Transactions -- Transactions with
Principal Shareholders".
(12) Includes all shares held by Messrs. Aitken, Fine, Caruso, Vernon,
Yoken, Palladino, Berger, Garippa and one other executive officer, and
those shares subject to publicly traded warrants or options held by
such individuals exercisable within 60 days from January 22, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
TRANSACTIONS WITH PRINCIPAL SHAREHOLDERS
Effective January 7, 1994, Joseph J. Raymond, Elliott H.
Vernon, Kinder Investments, L.P. and a former director of the Company
(collectively, the "Holders") have been granted demand and piggyback
registration rights which presently cover approximately 709,346 shares of Common
Stock. The registration rights will expire on February 7, 1999. The Holders have
the right to cause the Company, on two separate occasions (the first at the
Company's expense and the second at the Holders' expense) to use its best
efforts to effect registration under the Securities Act of the shares of Common
Stock of the demanding Holders. Holders who in the aggregate hold at least 50%
of the subject Common Stock must make such demand in order for the Company to be
required to effect such registration. In addition, if the Company proposes to
register any of its Common Stock under the Securities Act, the Company is
required to notify the Holders and to use its best efforts to include in such
registration all shares of Common Stock of the Holders requested to be included
therein by the Holders.
On November 20, 1995, the Company entered into a Purchase
Agreement with HPII pursuant to which HPII purchased an aggregate of 4,400,000
Units, at a purchase price of $9.00 per Unit for an aggregate purchase price of
$39,600,000. Such Units represent an aggregate of 4,400,000 shares of Common
Stock and Warrants to purchase an additional 3,000,000 shares of Common Stock.
The aggregate number of shares represented (assuming all the Warrants are
exercised), therefore, by all of the Units sold to HPII in connection with the
Purchase Agreement was 7,400,000.
The Warrants issued to HPII grant the holder thereof the right
to purchase a share of Common Stock upon payment of the exercise price of $12.45
per whole share of Common Stock. The Warrants are exercisable at any time after
issuance thereof until the fifth anniversary of the original
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issuance date. The Warrants contain provisions that protect the holders thereof
against dilution by adjustment of the exercise price therefore (and, in certain
instances, a related change in the number of shares of Common Stock underlying
each Warrant) upon the occurrence of certain events, such as stock dividends,
stock splits, mergers, a sale of substantially all of the Company's assets and
other extraordinary events, as well as the issuance by the Company of shares of
Common Stock at a purchase price below the then effective exercise price of the
Warrants (which initially is $12.45 per share).
Pursuant to the Registration Agreement entered into at the
Initial Closing, the Company granted to HPII registration rights with respect to
the Registrable Securities. The Registration Agreement also grants to the
holders certain "piggyback" rights to have included in a registration statement
to be filed by the Company for either its own benefit or for the registration of
securities for the account of other shareholders of the Company. The Company
will bear all expenses, other than underwriting discounts and commissions, in
connection with any such registrations. The Registration Agreement precludes the
Company from granting any further registration rights without the consent of
HPII.
On January 10, 1996, HPII loaned to the Company the
Subordinated Loan. The Subordinated Loan bore interest at the rate of 20% per
annum through May 29, 1996 and 12% thereafter and was repaid on July 31, 1996
with proceeds from the Second Closing.
The Subordinated Loan provided that at the closing thereof the
number of directors constituting the Company's Board of Directors would be
increased to seven (7) and that HPII would have the right to designate one
director. Pursuant to such rights, HPII designated Mr. Shay to serve as a
director of the Company.
Concurrent with the Second Closing, the Purchase Agreement
provided that the Company's Board of Directors would continue to be comprised of
seven (7) members with two (2) additional designees to be appointed by HPII. At
the Second Closing, HPII designated Messrs. Golush and Zalaznick to serve on the
Board of Directors. HPII's right to designate such three (3) directors will
expire on the fifth anniversary of the Second Closing.
The Purchase Agreement also provides that for a period of five
(5) years commencing on the Initial Closing, all shares of Common Stock held by
HPII will be voted by HPII on any matter submitted to the shareholders in the
same proportion as the votes cast by the other holders of Common Stock.
Notwithstanding the foregoing, HPII retains its right to vote its shares of
Common Stock in any manner it chooses with respect to the following specified
matters: (i) the election to the Board of Directors of HPII's designees; (ii)
amendments to the Company's By-Laws or Certificate of Incorporation; (iii)
mergers and the sale, lease or exchange of the Company's assets; (iv) the
authorization or issuance of Company securities; (v) a reclassification of
securities or reorganization of the Company; (vi) the liquidation or dissolution
of the Company; and (vii) any affiliated party transaction. The Purchase
Agreement provides that the requirement that HPII votes its shares in proportion
with all other shareholders shall terminate in the event that the aggregate
number of shares of Common Stock owned by Messrs. Raymond, Fine, Palladino and
Berger shall be less than 415,000 shares or on the date when any person or group
unaffiliated with HPII becomes the beneficial owner of 25% or more of the
then-outstanding shares of the Company's capital stock.
Messrs. Raymond, Fine, Palladino and Berger have agreed in
their individual capacities to take all steps necessary, including voting their
shares for the election of HPII's designees to the Board
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of Directors, and to utilize their best efforts, to secure the election by the
Company's shareholders of HPII's designees to the Board of Directors. The
Company has also agreed to such provisions (other than the voting of shares).
The Purchase Agreement further provides that commencing on the
Second Closing, all actions to be taken by the Board of Directors will require
the affirmative vote of a majority of the directors present at a duly
constituted meeting (which is the status currently), except that it shall
require the affirmative vote of 66-2/3% of the entire Board of Directors to
authorize any action taken with respect to a proposed acquisition, whether by
purchase of stock or assets, of another company and any action to increase above
seven (7) the number of directors constituting the entire Board of Directors,
except in connection with the appointment of the Paribas Principal designee. See
"Directors and Officers of the Registrant."
In connection with the pending HMI acquisition, HPII has
purchased certain of HMI's trade payables aggregating approximately $18,000,000
at various discounts. Provided that the HMI acquisition is consummated, HPII has
agreed to extend a 10% discount of the outstanding face amount of such payables
to the Company. The members of the Company's Board of Directors who are not
affiliated with HPII approved such transaction on November 14, 1996.
On January 8, 1997, the Company entered into a stock purchase
agreement with HPII pursuant to which HPII agreed, subject to the conditions
stated therein, to purchase the Additional Shares. Consummation of this
transaction is subject to, among other things, receipt of applicable regulatory
approvals and completion of the HMI acquisition. The Additional Shares are also
covered by the Registration Agreement.
On August 5, 1994, the Company issued to Paribas Principal
225,000 shares of Common Stock and on December 12, 1994, Paribas Principal
purchased an additional 200,000 shares of Common Stock at a price of $8.43 per
share, pursuant to an agreement with the Company. The Company has also entered
into a shareholders agreement and a registration rights agreement with
Paribas Principal. The registration rights agreement precludes the Company from
granting further registration rights with respect to its Common Stock without
the consent of Paribas Principal. In addition, the Company paid approximately
$298,750 to Banque Paribas in fees and expenses in fiscal 1996 in connection
with the Paribas Credit Agreement.
TRANSACTIONS WITH DIRECTORS AND EXECUTIVE OFFICERS
On December 14, 1992, Mr. Fine and Robert P. Giuliano,
formerly a principal shareholder of the Company, each sold 6,666 shares of
Common Stock at a price of $5.00 per share to each of Messrs. Berger, Palladino
and Buhrman, respectively. On such date, the Company loaned Messrs. Berger,
Palladino and Buhrman the funds necessary to consummate such purchases. These
loans bear interest at the prime rate of the Company's principal lender plus 1%
per annum, are secured by a pledge of the purchased stock, but are otherwise
non-recourse to such purchasers. Interest only is payable on these loans, until
April 30, 1997, when the entire principal balance and all accrued interest
shall be due and payable.
Messrs. Raymond, Fine, Berger and Palladino (collectively, the
"Restricted Transferees") have entered into a stock restriction agreement (the
"Restriction Agreement"), pursuant to which they have agreed to limit the
transferability of their shares of Common Stock as well as other "Common
Equivalents" to the extent described therein. Unless otherwise consented to in
writing by HPII, none of the Restricted Transferees may transfer any of his
shares of Common Stock or other Common
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Equivalents owned by him if, at the time of such transfer or after giving effect
thereto, the Restricted Transferee's "Shareholder Percentage" would be less than
the lesser of 0.75 and the "HPII Percentage." For purposes of the Restriction
Agreement, the term "Shareholder Percentage" means a fraction, the denominator
of which is the number of Common Equivalents that such shareholder and his
related persons owned or had the right to acquire on the date of the Purchase
Agreement, and the numerator of which is the numerical amount of the denominator
less the number of Common Equivalents transferred by such Restricted Transferee;
and the term "HPII Percentage" means a fraction, the denominator of which is the
number of Common Equivalents purchased by HPII or which HPII has the right to
purchase pursuant to the Purchase Agreement, and the numerator of which is the
numerical amount of the denominator less the number of Common Equivalents
transferred by HPII. The effect of the Restriction Agreement, in general, is to
limit a Restricted Transferee's ability to sell his shares of Common Stock to
the extent that his shareholdings would be less than 75% of his current holdings
or, if less, the HPII Percentage.
Certain directors and executive officers of the Company have
been granted options to purchase shares of Common Stock under the Company's
stock option plans. See "Executive Compensation -- Stock Option Plans."
Mr. Raymond has received certain payments from the Company in
connection with his resignation as Chief Executive Officer and has also entered
into a consulting agreement with the Company. See "Directors and Officers of the
Registrant."
The Company has agreed to pay to an affiliate of Mr. Aitken,
the sum of $96,000 for consulting services rendered in connection with potential
financing opportunities. Such amount will be paid in fiscal 1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
FINANCIAL STATEMENTS INDEX Page
----
Report of Independent Accountants F-1
Consolidated Balance Sheets -- October 31, 1996 and October 31, 1995 F-2
Consolidated Statements of Operations -- For the Years Ended
October 31, 1996, 1995 and 1994 F-3
Consolidated Statements of Changes in Stockholders' Equity -- For the
Years Ended October 31, 1996, 1995 and 1994 F-4
Consolidated Statements of Cash Flows -- For the Years Ended
October 31, 1996, 1995 and 1994 F-5
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Notes to Consolidated Financial Statements F-7
Quarterly Financial Information (Unaudited) F-32
(a)(2) Financial Statements Schedule Index
Schedule VIII -- Valuation and Qualifying Accounts S-1
Schedules other than those listed above are omitted because they are
not required or are not applicable or the information is shown in the audited
financial statements or related notes.
(b) Reports on Form 8-K
The Company filed a Form 8-K dated July 31, 1996 on or about
August 13, 1996, whereby in Item 5 it described the Credit
Facility.
(c) The exhibits listed in the Index to Exhibits below are filed
as part of this Annual Report on Form 10-K.
Exhibit
Number Title
------ -----
3.1 Restated Certificate of Incorporation of the Company,
as amended (incorporated herein by reference to
Exhibit 3.1 to the Company's Registration Statement
(No. 33-50876) on Form S-1).
3.2* Certificate of Amendment to the Restated Certificate
of Incorporation of the Company filed on June 28,
1995.
3.3* Certificate of Amendment to the Restated Certificate
of Incorporation of the Company filed on October 9,
1996.
3.4* Restated By-laws of the Company, as amended.
4.1 Specimen Certificate of Common Stock (incorporated
herein by reference to Exhibit 4.1 to the Company's
Registration Statement (No. 33-50876) on Form S-1).
4.2 Warrant Agreement, including form of Redeemable
Warrant, dated December 7, 1992 (incorporated herein
by reference to Exhibit 4.2 to the Company's
Registration Statement (No. 33-50876) on Form S-1).
4.3 Warrant Agreement, dated December 7, 1992, including
form of Warrant (incorporated herein by reference to
Exhibit 1.2 to the Company's Registration Statement
(No. 33-50876) on Form S-1).
10.1 Amended Credit Agreement, dated as of March 1, 1995,
by and among the Company and Banque Paribas, as Agent
(incorporated herein by reference to
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Exhibit 3 to the Company's Current Report on Form 8-K
dated August 5, 1994).
10.2 Subsidiaries Guaranty, dated as of August 5, 1994,
made by MK, PromptCare, Steri, TNI, RespiFlow and
Radamerica (incorporated herein by reference to
Exhibit 10.2 to the Company's Annual Report on Form
10-K for the year ended October 31, 1994).
10.3 Pledge Agreement, dated as of August 5, 1994, made by
the Company, MK, PromptCare, Steri, TNI, Radamerica,
RespiFlow and Banque Paribas, as Pledgee
(incorporated herein by reference to Exhibit 10.3 to
the Company's Annual Report on Form 10-K for the year
ended October 31, 1994).
10.4 Security Agreement, dated as of August 5, 1994, by
and among the Company, MK, PromptCare, Steri, TNI,
Radamerica, RespiFlow and Banque Paribas
(incorporated herein by reference to Exhibit 10.4 to
the Company's Annual Report on Form 10-K for the year
ended October 31, 1994).
10.5 Shareholders Agreement, dated as of August 5, 1994,
by and among the Company, Joseph J. Raymond and
Paribas Principal (incorporated herein by reference
to Exhibit 10.5 to the Company's Annual Report on
Form 10-K for the year ended October 31, 1994).
10.6 Registration Rights Agreement, dated as of August 5,
1994, by and among the Company and Paribas Principal
(incorporated herein by reference to Exhibit 10.6 to
the Company's Annual Report on Form 10-K for the year
ended October 31, 1994).
10.7 Employment Agreement, dated as of October 31, 1994,
between Joseph J. Raymond and the Company
(incorporated herein by reference to Exhibit 10.7 to
the Company's Annual Report on Form 10-K for the year
ended October 31, 1994).
10.8 Employment Agreement, dated as of October 31, 1994,
between Robert W. Fine and the Company (incorporated
herein by reference to Exhibit 10.8 to the Company's
Annual Report on Form 10-K for the year ended October
31, 1994).
10.9 Employment Agreement, dated as of October 31, 1994,
between Wayne A. Palladino and the Company
(incorporated herein by reference to Exhibit 10.9 to
the Company's Annual Report on Form 10-K for the year
ended October 31, 1994).
10.10 Employment Agreement, dated as of October 31, 1994,
between H. Gene Berger and the Company (incorporated
herein by reference to Exhibit 10.10 to the Company's
Annual Report on Form 10-K for the year ended October
31, 1994).
-58-
62
10.11 Lease Agreement, dated as of January 23, 1995,
between and among Liberty Property Limited
Partnership and RespiFlow & MK (incorporated herein
by reference to Exhibit 10.11 to the Company's Annual
Report on Form 10-K for the year ended October 31,
1994).
10.12 United States Home Health Care Corp. 1987
Nonqualified Stock Option Plan (incorporated herein
by reference to Exhibit 10.5(a) to the Company's
Registration Statement (No. 33-50876) on Form S-1).
10.13 Transworld Home HealthCare, Inc. 1992 Stock Option
Plan, as amended (incorporated herein by reference to
Exhibit 10.13 to the Company's Annual Report on Form
10-K for the year ended October 31, 1994).
10.14 Lease Agreement between RReef USA Fund-III and the
Company commencing April 7, 1995 (incorporated herein
by reference to Exhibit 10.14 to the Company's Annual
Report on Form 10-K for the year ended October 31,
1995).
10.15 Lease Agreement, dated August 28, 1992, between
Cynwyd Investments and TNI, as amended (incorporated
herein by reference to Exhibit 10.8 to the Company's
Registration Statement (No. 33-50876) on Form S-1).
10.16(a) Lease Agreement, dated July 29, 1991, between
Collingwood Plaza Associates and TNI (incorporated
herein by reference to Exhibit 10.9 to the Company's
Registration Statement (No. 33-50876) on Form S-1).
10.16(b) Amendment to Lease Agreement, dated February 4, 1992,
between Collingwood Plaza Associates and TNI
(incorporated herein by reference to Exhibit 10.16(b)
to the Company's Annual Report on Form 10-K for the
year ended October 31, 1994).
10.17 Agreement, dated June 5, 1992, among Kinder
Investments L.P., Richard Elkin, Joseph J. Raymond,
Elliott H. Vernon and United States Home Health Care
Corp. regarding Buy-Out and Registration Rights, as
amended (incorporated herein by reference to Exhibit
10.14 to the Company's Registration Statement (No.
33-50876) on Form S-1).
10.18 Employment Agreement, dated as of October 1, 1993,
between Michael P. Garippa and the Company
(incorporated herein by reference to Exhibit 10.13 to
the Company's Annual Report on Form 10-K for the year
ended October 31, 1993).
10.19* Lease Agreement between Transworld Home
HealthCare-Nursing Division, Inc. and Pond View
Associates dated November 4, 1996.
10.20 Lease Agreement, dated February 13, 1993, between
Tices Realty Associates Limited Partnership and CHCS
(incorporated herein by reference to Exhibit
10.14 to the Company's Annual Report on Form 10-K for
the year ended October 31, 1993).
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63
10.21 Lease Agreement, dated January 30, 1993, between
Villa Contracting Co., Inc. and PromptCare, and
related first lease addendum dated July 21, 1993
(incorporated herein by reference to Exhibit 10.15 to
the Company's Annual Report on Form 10-K for the year
ended October 31, 1993).
10.22 Lease Agreement, dated May 29, 1992, between George
and Arlene Groch d/b/a Gear Associates and PromptCare
(incorporated herein by reference to Exhibit 10.16 to
the Company's Annual Report on Form 10-K for the year
ended October 31, 1993).
10.23 Amended and Restated Management Agreement, dated as
of November 1, 1994, between MK, RespiFlow,
DermaQuest and E/L Associates (incorporated herein by
reference to Exhibit 10.23 to the Company's Annual
Report on Form 10-K for the year ended October 31,
1994).
10.24 Lease Agreement, dated March 6, 1992, between Saint
Joseph Hospital, Inc. and Radamerica (incorporated
herein by reference to Exhibit 10.24 to the Company's
Annual Report on Form 10-K for the year ended October
31, 1994).
10.25 Lease Agreement, dated October 31, 1989, by and
between GS Properties, Inc. and Radamerica
(incorporated herein by reference to Exhibit 10.25 to
the Company's Annual Report on Form 10-K for the year
ended October 31, 1994).
10.26(a) Lease Agreement, dated December 15, 1984, by and
between Whitesquare Limited Partnership and Seymour
Weiner, M.D., P.A. (incorporated herein by reference
to Exhibit 10.26 to the Company's Annual Report on
Form 10-K for the year ended October 31, 1994).
10.26(b) Addendum to Lease Agreement, dated May 14, 1985, by
and between Whitesquare Limited Partnership and
Seymour Weiner M.D., P.A. (incorporated herein by
reference to Exhibit 10.26(b) to the Company's Annual
Report on Form 10-K for the year ended October 31,
1994).
10.26(c) Assignment of Lease, dated June 10, 1989, by and
between Seymour Weiner, MD, P.A., Radamerica and
Whitesquare Limited Partnership (incorporated herein
by reference to Exhibit 10.26(c) to the Company's
Annual Report on Form 10-K for the year ended October
31, 1994).
10.26(d) Lease Extension Agreement, dated September 28, 1994,
by and between Whitesquare Limited Partnership and
Radamerica (incorporated herein by reference to
Exhibit 10.26(d) to the Company's Annual Report on
Form 10-K for the year ended October 31, 1994).
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64
10.27* Commercial Lease between Transworld Home
HealthCare-Nursing Division, Inc. and Ocean County
Investment, Inc. dated November 5, 1996.
10.28 Lease Agreement, dated March 14, 1994, between Watson
and Brutz I and TNI (incorporated herein by reference
to Exhibit 10.28 to the Company's Annual Report on
Form 10-K for the year ended October 31, 1994).
10.29* Sublease Agreement between the Company and Great
Valley Products-M, Inc. dated May 17, 1996.
10.30* Commercial Lease Agreement between the Company and
Goodwin Enterprises dated April 3, 1996.
10.31 Form of Indemnification Agreement with the Company
(incorporated herein by reference to Exhibit 10.31 to
the Company's Annual Report on Form 10-K for the year
ended October 31, 1994).
10.32 Incentive Bonus Program of the Company (incorporated
herein by reference to Exhibit 10.32 to the Company's
Annual Report on Form 10-K for the year ended October
31, 1994).
10.33* Lease between Transworld Nurses, Inc. and Pelican Bay
Professional Village Associates dated May 1, 1996.
10.34 Amendment Agreement, dated as of May 19, 1995, to the
Stock Purchase Agreement, dated as of June 30, 1995,
between Shlomo Appel and the Company (incorporated
herein by reference to Exhibit 10.34 to the Company's
Annual Report on Form 10-K for the year ended October
31, 1995).
10.35 Amendment Agreement, dated as of May 19, 1995, to the
Stock Purchase Agreement, dated as of June 30, 1995,
between Jack Schiff and the Company (incorporated
herein by reference to Exhibit 10.35 to the Company's
Annual Report on Form 10-K for the year ended October
31, 1995).
10.36 Amendment Agreement, effective as of May 5, 1995, to
the Stock Purchase Agreement, dated as of April 1,
1995, as amended, among the Company, Edward Mashek,
Walter Kraemer and Lorraine Andrews (incorporated
herein by reference to Exhibit 10.36 to the Company's
Annual Report on Form 10-K for the year ended October
31, 1995).
10.37 Amended and Restated Asset Purchase Agreement, dated
as of March 1, 1995, among DermaQuest, Precision, and
Les Capella (incorporated herein by reference to
Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended April 30, 1995).
10.38 Asset Purchase Agreement between PromptCare and DVLC
effective as of January 1, 1995 (incorporated herein
by reference to Exhibit 2 to the Company's Current
Report on Form 8-K filed on or about February 15,
1995).
-61-
65
10.39 Lease Agreement, effective as of January 1, 1995,
between PromptCare and DVLC (incorporated herein by
reference to Exhibit 10.39 to the Company's Annual
Report on Form 10-K for the year ended October 31,
1995).
10.40 DermaQuest Amendment Agreement, dated as of March 1,
1995, among the Company, Edward Mashek, Walter
Kraemer, Lorraine Andrews and E/L Associates
(incorporated herein by reference to Exhibit 10.2 to
the Company's Quarterly Report on Form 10-Q for the
quarter ended January 31, 1995).
10.41 Assumption Agreement, dated as of March 1, 1995, made
by DermaQuest to the Company, MK, PromptCare, Steri,
TNI, RespiFlow, Radamerica, and Banque Paribas
(incorporated herein by reference to Exhibit 10.41 to
the Company's Annual Report on Form 10-K for the year
ended October 31, 1995).
10.42 Subsidiary Acknowledgement, dated as of March 1,
1995, by MK, PromptCare, Steri, TNI, RespiFlow, and
Radamerica to Banque Paribas (incorporated herein by
reference to Exhibit 10.42 to the Company's Annual
Report on Form 10-K for the year ended October 31,
1995).
10.43 Borrower Acknowledgement, dated as of March 1, 1995,
by the Company to Banque Paribas (incorporated herein
by reference to Exhibit 10.43 to the Company's Annual
Report on Form 10-K for the year ended October 31,
1995).
10.44 Asset Purchase Agreement, dated as of May 28, 1993,
among TNI, CHCS and others (incorporated herein by
reference to Exhibit 2 to the Company's Quarterly
Report on Form 10-Q for the quarter ended April 30,
1993).
10.45 Exchange Offer and Confidential Investment Summary,
dated August 23, 1993, (incorporated herein by
reference to Exhibit 1 to the Company's Current
Report on Form 8-K dated September 30, 1993).
10.46 Stock Purchase Agreement, dated as of April 1, 1994,
among the Company, Edward Mashek, Walter Kraemer and
Lorraine Andrews (incorporated herein by reference to
Exhibit 1 to the Company's Current Report on Form 8-K
dated May 3, 1994).
10.47 Amendment, dated July 29, 1994, to the Stock Purchase
Agreement (incorporated herein by reference to
Exhibit 2 to the Company's Current Report on Form 8-K
dated August 5, 1994).
10.48 Stock Purchase Agreement, dated as of June 21, 1994,
as amended, among the Company, David P. Spearman,
Cengiz Aygun, M.D., Lawrence J. Scharf, M.D. and
Melvin Jeffers (incorporated herein by reference to
Exhibit 1 to the Company's Current Report on Form 8-K
dated August 5, 1994).
-62-
66
10.49 Amendment, dated November 28, 1994, to the Stock
Purchase Agreement, as amended (incorporated herein
by reference to Exhibit 1 to Amendment No. 2 to the
Company's Current Report on Form 8-K, originally
filed on May 3, 1994).
10.50 Stock Purchase Agreement, dated as of June 30, 1994,
between the Company and Shlomo Appel (incorporated
herein by reference to Exhibit 2.7 to the Company's
Annual Report on Form 10-K for the year ended October
31, 1994).
10.51 Stock Purchase Agreement, dated as of June 30, 1994,
between the Company and Jack Schiff (incorporated
herein by reference to Exhibit 2.8 to the Company's
Annual Report on Form 10-K for the year ended October
31, 1994).
10.52 Stock Purchase Agreement, dated as of November 1,
1994, by and among the Company, Edward Mashek, Walter
Kraemer and Lorraine Andrews (incorporated herein by
reference to Exhibit 1 to the Company's Current
Report on Form 8-K dated December 28, 1994).
10.53 Employment Agreement, dated as of January 2, 1996,
(and related letter agreement) between the Company
and Vincent J. Caruso. (incorporated herein by
reference to Exhibit 10.53 to the Company's Annual
Report on Form 10-K for the year ended October 31,
1995).
10.54 Amendment to Amended and Restated Management
Agreement, dated as of November 1, 1995, between the
Company and E/L Associates (incorporated herein by
reference to Exhibit 10.54 to the Company's Annual
Report on Form 10-K for the year ended October 31,
1995).
10.55 DermaQuest Amendment Agreement, dated as of November
1, 1995, which amended a Stock Purchase Agreement,
dated as of November 1, 1994, among the Company and
Edward Mashek, Walter Kraemer and Lorraine Andrews
(incorporated herein by reference to Exhibit 10.55 to
the Company's Annual Report on Form 10-K for the year
ended October 31, 1995).
10.56 Unit Purchase Agreement, dated as of November 20,
1995, as amended, by and between the Company and HPII
(incorporated herein by reference to Exhibit 10.56 to
the Company's Annual Report on Form 10-K for the year
ended October 31, 1995).
10.57 Subordinated Note Purchase Agreement, dated as of
January 10, 1996, between the Company and HPII
(incorporated herein by reference to Exhibit 10.57 to
the Company's Annual Report on Form 10-K for the year
ended October 31, 1995).
10.58 Credit Agreement among the Company, Various Lending
Institutions and Bankers Trust Company, as Agent
dated as of July 31, 1996 (incorporated
-63-
67
herein by reference to Exhibit 1 to the Company's
Current Report on Form 8-K dated July 31, 1996).
10.59* Pledge Agreement dated as of July 31, 1996 in favor
of Bankers Trust Company, as Collateral Agent.
10.60* Security Agreement among the Company, Various
Subsidiaries and Bankers Trust Company, as Collateral
Agent dated as of July 31, 1996.
10.61* Subsidiaries Guaranty dated as of July 31, 1996.
10.62 Agreement dated May 14, 1996 between the Company and
Joseph J. Raymond relating to resignation
(incorporated herein by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the
quarter ended April 30, 1996).
10.63 Agreement dated May 14, 1996 between the Company and
Joseph J. Raymond relating to consulting services
(incorporated herein by reference to Exhibit 10.2 to
the Company's Quarterly Report on Form 10-Q for the
quarter ended April 30, 1996).
10.64 Agreement dated May 14, 1996 between HPII and Joseph
J. Raymond relating to loan transaction (incorporated
herein by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
April 30, 1996).
10.65 Amendment dated February 16, 1996 to Subordinated
Note Purchase Agreement, dated January 10, 1996,
between the Company and HPII (incorporated herein by
reference to Exhibit 10.4 to the Company's Quarterly
Report on Form 10-Q for the quarter ended April 30,
1996).
10.66 Amendment dated May 30, 1996 to Subordinated Note
Purchase Agreement, dated as of January 10, 1996, as
amended on February 16, 1996, between the Company and
HPII (incorporated herein by reference to Exhibit
10.5 to the Company's Quarterly Report on Form 10-Q
for the quarter ended April 30, 1996).
10.67 Purchase and Sale Agreement, dated as of November 12,
1996, between the Company and European American Bank
(incorporated herein by reference to Exhibit 6 to the
Schedule 13D filed by the Company, HPII, Hyperion
Ventures II L.P., Hyperion Funding II Corp., Lewis S.
Ranieri and Scott A. Shay on or about November 22,
1996).
10.68 Purchase and Sale Agreement, dated of November 12,
1996, between the Company and the Chase Manhattan
Bank (incorporated herein by reference to Exhibit 7
to the Schedule 13D filed by the Company, HPII,
Hyperion Ventures II L.P., Hyperion Funding II Corp.,
Lewis S. Ranieri and Scott A. Shay on or about
November 22, 1996).
-64-
68
10.69 First Amendment to Credit Agreement and to Pledge
Agreement, dated as of November 13, 1996, between the
Company and Bankers Trust Company (incorporated
herein by reference to Exhibit 3 to the Schedule 13D
filed by the Company, HPII, Hyperion Ventures II
L.P., Hyperion Funding II Corp., Lewis S. Ranieri and
Scott A. Shay on or about November 22, 1996).
10.70 Agreement, dated as of November 13, 1996, between the
Company, HMI, Home Care Management, Inc., HMI
Illinois, Inc., HMI Pennsylvania, Inc., Health
Reimbursement Corporation, HMI Retail Corp., Inc.,
HMI PMA, Inc. and HMI Maryland, Inc. (incorporated
herein by reference to Exhibit 8 to the Schedule 13D
filed by the Company, HPII, Hyperion Ventures II
L.P., Hyperion Funding II Corp., Lewis S. Ranieri and
Scott A. Shay on or about November 22, 1996).
10.71* Subsidiary Assumption Agreement, dated as of November
13, 1996, among Transworld Acquisition Corp., IMH
Acquisition Corp. and Bankers Trust Company, as Agent
and as Collateral Agent.
10.72 Agreement and Plan of Merger, dated as of November
13, 1996, among the Company, IMH Acquisition Corp.
and HMI (incorporated herein by reference to Exhibit
4 to the Schedule 13D filed by the Company, HPII,
Hyperion Ventures II L.P., Hyperion Funding II Corp.,
Lewis S. Ranieri and Scott A. Shay on or about
November 22, 1996).
10.73 Stock Purchase Agreement, dated as of November 13,
1996, between HMI and the Company (incorporated
herein by reference to Exhibit 5 to the Schedule 13D
filed by the Company, HPII, Hyperion Ventures II
L.P., Hyperion Funding II Corp., Lewis S. Ranieri and
Scott A. Shay on or about November 22, 1996).
10.74* Lease between Farmacia Santurce and Transworld
Healthcare Puerto Rico, Inc. dated February 14, 1996.
10.75* Lease Agreement between Realty Sites and the Company
dated August 6, 1996.
10.76 Asset Purchase Agreement, dated as of October 14,
1996, between RespiFlow, Health Meds, O.W. Edwards
and Rick Hedrick (incorporated herein by reference to
Exhibit A to the Company's Current Report on Form 8-K
dated October 28, 1996).
10.77 Asset Purchase Agreement, dated as of October 31,
1996, between Transworld Acquisition Corp., the
Company, USNJ and U.S. HomeCare Corporation
(incorporated herein by reference to Exhibit B to the
Company's Current Report on Form 8-K dated October
28, 1996).
10.78 DermaQuest Amendment Agreement, dated as of February
1, 1996, among the Company, DermaQuest, Edward
Mashek, Walter Kraemer and Lorraine
-65-
69
Andrews (incorporated herein by reference to Exhibit
10 to the Company's Quarterly Report on Form 10-Q for
the quarter ended January 31, 1996).
10.79* Stock Purchase Agreement, dated January 8, 1997, by
and between the Company and HPII.
10.80* Employment Agreement, dated as of January 13, 1997,
between the Company and Timothy M. Aitken.
10.81 Second Amendment to Credit Agreement, dated as of
January 13, 1997, between the Company and Bankers
Trust Company (incorporated herein by reference to
Exhibit 2 to the Company's Current Report on Form
8-K dated January 22, 1997).
10.82 Letter Agreement amending Merger Agreement, dated
January 13, 1997, between the Company and HMI
(incorporated herein by reference to Exhibit 1 to the
Company's Current Report on Form 8-K dated January
22, 1997).
11 Statement re: computation of earnings per share
(computation can be determined clearly from the
material contained in this Annual Report on Form
10-K).
21.1* Subsidiaries of the Company.
23.1* Consent of Coopers & Lybrand L.L.P., independent
accountants of the Company.
27* Financial Data Schedule
- ---------------------------
*Filed herewith.
-66-
70
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TRANSWORLD HOME HEALTHCARE, INC.
By: /s/ Timothy M. Aitken
------------------------------
Timothy M. Aitken
Chairman of the Board and
Chief Executive Officer
Date: January 27, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Timothy M. Aitken Chairman of the Board and Chief Executive January 27, 1997
- --------------------------------------- Officer (Principal Executive Officer)
Timothy M. Aitken
President, Chief Operating Officer and January 27, 1997
/s/ Robert W. Fine Director
- ---------------------------------------
Robert W. Fine
Senior Vice President and Chief Financial January 27, 1997
/s/ Wayne A. Palladino Officer (Principal Financial and Accounting
- --------------------------------------- Officer)
Wayne A. Palladino
/s/ Richard A. Yoken Director January 27, 1997
- ---------------------------------------
Richard A. Yoken
/s/ Elliott H. Vernon Director January 27, 1997
- ---------------------------------------
Elliott H. Vernon
/s/ Scott A. Shay Director January 27, 1997
- ---------------------------------------
Scott A. Shay
/s/ David M. Golush Director January 27, 1997
- ---------------------------------------
David M. Golush
/s/ Robert Zalaznick Director January 27, 1997
- ---------------------------------------
Robert Zalaznick
-67-
71
TRANSWORLD HOME HEALTHCARE, INC.
Financial Statements Index Page
Report of Independent Accountants F-1
Consolidated Balance Sheets - October 31, 1996
and October 31, 1995 F-2
Consolidated Statements of Operations - For the
Years Ended October 31, 1996, 1995 and
1994 F-3
Consolidated Statements of Changes in
Stockholders' Equity - For the Years Ended
October 31, 1996, 1995 and 1994 F-4
Consolidated Statements of Cash Flows - For the
Years Ended October 31, 1996, 1995 and 1994 F-5
Notes to Consolidated Financial Statements F-7
Quarterly Financial Information (Unaudited) F-32
Financial Statements Schedule Index
Schedule VIII - Valuation and Qualifying Accounts S-1
F-i
72
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of Transworld Home HealthCare, Inc.:
We have audited the consolidated financial statements and the financial
statements schedule of Transworld Home HealthCare, Inc. (the "Company") as
listed in the index on page F-(i) of this Form 10-K. These financial statements
and financial statements schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statements schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits, the financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Company as of October 31, 1996 and 1995 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
October 31, 1996 in conformity with generally accepted accounting principles. In
addition, in our opinion, the financial statements schedule referred to above,
when considered in relation to the basic financial statement taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
As discussed in Note 2 to the consolidated financial statements, in fiscal 1994
the Company changed its method of accounting for income taxes.
Coopers & Lybrand L.L.P.
New York, New York
December 20, 1996, except as to the
information presented in the last
five paragraphs in Footnote 12 for
which the date is January 14, 1997.
F-1
73
TRANSWORLD HOME HEALTHCARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
October 31, October 31,
1996 1995
----------- -----------
ASSETS
Current assets:
Cash and temporary investments $ 4,598 $ 915
Accounts receivable, less allowance
for doubtful accounts of $5,471
and $5,137 24,414 18,906
Inventories 1,829 1,556
Deferred income taxes 2,902 2,469
Prepaid expenses and other 600
current assets 2,204 1,647
-------- -------
Total current assets 36,547 25,493
Property & equipment, net 3,934 4,062
Notes receivable, related parties 964 964
Intangible assets, net 44,496 42,037
Other assets 4,786 2,356
-------- -------
Total assets $90,727 $74,912
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ $ 1,000
Current portion of long-term debt,
including obligations under
capital leases 21 3,908
Accounts payable 2,975 3,969
Accrued expenses 5,548 5,564
Acquisitions payable 1,802 15,062
Income taxes payable 696
--------- -------
Total current liabilities 10,346 30,199
Long-term debt, including obligations
under capital leases 12,505 20,264
Deferred income taxes and other 651 363
--------- -------
Total liabilities 23,502 50,826
--------- -------
Commitments and contingencies (Note 11)
Stockholders' equity
Preferred stock, $.01 par value;
authorized 2,000 shares, issued
and outstanding - none
Common stock, $.01 par value;
authorized 30,000 shares, issued and
outstanding 9,940 and 5,060 shares 99 51
Additional paid-in capital 62,221 19,713
Retained earnings 4,905 4,322
--------- -------
Total stockholders' equity 67,225 24,086
---------- -------
Total liabilities and
stockholders' equity $ 90,727 $74,912
========== =======
See notes to consolidated financial statements.
F-2
74
TRANSWORLD HOME HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED OCTOBER 31,
---------------------------------------
1996 1995 1994
-------- -------- --------
Revenues:
Net patient services $ 19,164 $ 18,870 $ 12,150
Net infusion services 9,970 9,935 10,551
Net respiratory, medical equipment and supplies sales 47,170 42,782 17,022
-------- -------- --------
Total revenues 76,304 71,587 39,723
-------- -------- --------
Cost of revenues:
Patient services 10,174 9,830 7,311
Infusion services 6,025 6,102 4,830
Respiratory, medical equipment and supplies sales 18,481 16,798 6,668
-------- -------- --------
Total cost of revenues 34,680 32,730 18,809
-------- -------- --------
Gross profit 41,624 38,857 20,914
Selling, general and administrative expenses 33,552 29,774 15,968
Non-recurring charges 3,898
-------- -------- --------
Operating income 8,072 5,185 4,946
Interest expense, net 4,352 3,699 809
-------- -------- --------
Income before income taxes, extraordinary loss
and cumulative effect of an accounting change 3,720 1,486 4,137
Provision for income taxes 1,702 627 1,656
-------- -------- --------
Income before extraordinary loss and
cumulative effect of an accounting change 2,018 859 2,481
Extraordinary loss on early extinguishment of debt
(net of income tax benefit of $879) (1,435)
Cumulative effect of change in method of accounting for income taxes 300
-------- -------- --------
Net income $ 583 $ 859 $ 2,781
======== ======== ========
Primary income per share of common stock from:
Income before extraordinary loss and
cumulative effect of an accounting change $ .26 $ .13 $ .50
Extraordinary loss on early extinguishment of debt (.18)
Cumulative effect of change in method of accounting for income taxes .06
-------- -------- --------
Net income per share $ .08 $ .13 $ .56
======== ======== ========
Fully diluted income per share of common stock from:
Income before extraordinary loss and
cumulative effect of an accounting change $ .26 $ .13 $ .47
Extraordinary loss on early extinguishment of debt (.19)
Cumulative effect of change in method of accounting for income taxes .06
-------- -------- --------
Net income per share $ .07 $ .13 $ .53
======== ======== ========
Weighted average number of common shares outstanding:
Primary 7,741 6,776 5,006
======== ======== ========
Fully diluted 7,833 6,832 5,205
======== ======== ========
See notes to consolidated financial statements.
F-3
75
TRANSWORLD HOME HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
COMMON STOCK ADDITIONAL
---------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------- ------- ------- ------- -------
Balance, October 31, 1993 3,993 $ 40 $10,304 $ 682 $11,026
Net income 2,781 2,781
Issuance of common stock for:
Acquisition of Radamerica, Inc. 250 3 4,997 5,000
Deposit on acquisition of VIP 146 1 749 750
Debt financing fees 225 2 1,242 1,244
Exercise of stock options 27 66 66
Repurchase of warrants (656) (656)
Issuance of stock options for debt
financing 160 160
------- ------- ------- ------- -------
Balance, October 31, 1994 4,641 46 16,862 3,463 20,371
Net income 859 859
Issuance of common stock for:
Exercise of warrants 200 2 1,684 1,686
Exercise of stock options, including
tax benefit 219 3 1,167 1,170
------- ------- ------- ------- -------
Balance, October 31, 1995 5,060 51 19,713 4,322 24,086
Net income 583 583
Issuance of common stock for:
Private offering 4,400 44 38,307 38,351
Payment on acquisition payable 370 4 3,828 3,832
Exercise of stock options and
warrants, including tax benefit 110 373 373
------- ------- ------- ------- -------
Balance, October 31, 1996 9,940 $ 99 $62,221 $ 4,905 $67,225
======= ======= ======= ======= =======
See notes to consolidated financial statements.
F-4
76
TRANSWORLD HOME HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED OCTOBER 31,
-----------------------------------------------
1996 1995 1994
--------- ----------- ----------
Cash flows from operating activities:
Net income $ 583 $ 859 $ 2,781
Adjustments to reconcile net income to net
cash (used in) provided by operating
activities:
Depreciation and amortization 1,191 1,267 684
Amortization of goodwill 1,074 834 186
Amortization of other intangible assets 494 677 284
Amortization of debt discount and
issuance costs 912 902 158
Provision for doubtful accounts 6,394 5,732 2,981
Deferred income taxes (200) (1,866) (286)
Extraordinary loss on early extinguishment of debt 2,314
Cumulative effect of change in
accounting for income taxes (300)
Changes in assets and liabilities, excluding
the effect of businesses acquired:
Increase in accounts receivable (11,426) (11,990) (1,097)
(Increase) decrease in inventories (92) 17 (272)
Increase in prepaid expenses and other assets (1,511) (83) (1,124)
(Decrease) increase in accounts payable (1,123) 2,029 (654)
(Decrease) increase in accrued
expenses and other liabilities (1,873) 287 407
--------- ---------- ----------
Net cash (used in) provided by
operating activities (3,263) (1,335) 3,748
--------- ---------- ----------
Cash flows (used in) provided by investing activities:
Capital expenditures (1,040) (1,066) (456)
Notes receivable - related parties 161 (1,125)
Contract deposit on acquisition (750)
Acquisitions - net of cash acquired (1,785) (3,529) (12,832)
Payment on acquisition payable (11,078) (5,957)
--------- ----------- ----------
Net cash used in investing activities (13,903) (10,391) (15,163)
--------- ----------- ----------
(Continued)
See notes to consolidated financial statements.
F-5
77
TRANSWORLD HOME HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED OCTOBER 31,
-------------------------------------
1996 1995 1994
---------- --------- -----------
Cash flows provided by (used in) financing activities:
Proceeds from issuance of common stock $ 39,600
Payment of costs associated with
issuance of common stock (1,249)
Payments on notes payable (10,013)
Proceeds from notes payable 10,000
Payments on short-term debt (2,000) $ (5,000) $ (4,749)
Proceeds from short-term debt 1,000 1,000 6,596
Payments on revolving loan (10,990) (3,850) (2,010)
Borrowing under revolving loan 18,482 8,850 2,010
Payments on long-term debt (21,091) (4,391) (2,720)
Proceeds from long-term debt 18 7,400 18,033
Payments for financing fees and issuance costs (3,331) (534) (1,588)
Payments on notes payable - related parties (2,504)
Stock options and warrants exercised,
including tax benefit 423 2,856 66
Repurchase of warrants (656)
---------- --------- -----------
Net cash provided by
financing activities 20,849 6,331 12,478
---------- --------- -----------
Increase (decrease) in cash 3,683 (5,395) 1,063
Cash and temporary investments,
beginning of period 915 6,310 5,247
---------- --------- -----------
Cash and temporary investments,
end of period $ 4,598 $ 915 $ 6,310
========== ========= ===========
Supplemental cash flow information:
Cash paid for interest $ 3,763 $ 2,639 $ 721
========== ========= ===========
Cash paid for income taxes $ 2,086 $ 2,179 $ 1,266
========== ========= ===========
Supplemental disclosure of non-cash investing and financing activities:
Details of business acquired in purchase transactions:
Fair value of assets acquired $ 4,058 $ 14,906 $ 37,901
========== ========= ===========
Liabilities assumed or incurred $ 2,171 $ 11,240 $ 19,396
========== ========= ===========
Cash paid for acquisitions (including
related expenses) $ 1,887 $ 3,666 $ 13,505
Cash acquired 102 137 673
---------- --------- -----------
Net cash paid for acquisition $ 1,785 $ 3,529 $ 12,832
========== ========= ===========
Issuance of common stock $ 5,000
===========
Additional non-cash activities are disclosed in the notes to the
consolidated financial statements.
See notes to consolidated financial statements.
F-6
78
TRANSWORLD HOME HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1. THE COMPANY:
Transworld Home HealthCare, Inc. (the "Company") is a regional provider of
a broad range of alternate site health care services and products. The
Company provides the following services and products to patients in their
homes or in an outpatient setting: (i) respiratory therapy, home medical
equipment and specialized mail-order pharmaceuticals and medical supplies,
including respiratory and diabetic medications and supplies, wound care
dressings and ostomy and orthotic products; (ii) patient services,
including nursing and para-professional services and radiation therapy; and
(iii) infusion therapy.
During the years ended October 31, 1994, 1995 and 1996, the Company
completed the following acquisitions:
Company Date of Acquisition Nature of Business
------- ------------------- ------------------
RespiFlow, Inc. ("RespiFlow") April 1994 Specialized mail-order pharmacy
MK Diabetic Support Services, Inc. April 1994 Mail-order diabetic supplies
("MK Diabetic")
Radamerica, Inc. ("Radamerica") August 1994 Radiation therapy
DermaQuest Surgical Supply, Inc. November 1994 Mail-order medical supplies
("DermaQuest")
Delaware Valley Lung Center, P.A. January 1995 Pulmonary therapy
("DVLC")
Precision Health Care, Inc. March 1995 Mail-order orthotic products
("Precision")
Health Meds, Inc. ("Health Meds") October 1996 Respiratory mail-order pharmacy
U.S. HomeCare Infusion Therapy October 1996 Infusion therapy
Services Corporation of New Jersey
("U.S. HomeCare"), a subsidiary of
U.S. HomeCare Corporation
The consolidated financial statements presented herein are those of the
Company and include the results of the aforementioned acquired companies
from their respective dates of acquisition (Note 3).
F-7
79
TRANSWORLD HOME HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. Intercompany transactions and balances
are eliminated in consolidation.
CASH AND TEMPORARY INVESTMENTS:
Cash and temporary investments include highly liquid short-term investments
purchased with initial maturities of 90 days or less.
CONCENTRATIONS OF CREDIT RISK:
Financial instruments which potentially subject the Company to
concentrations of credit risk are temporary cash investments. The Company
places its temporary cash investments with high credit quality financial
institutions and invests in investment grade commercial paper and time
deposits with several commercial lending institutions with original
maturities of three months or less. The Company believes no significant
concentration of credit risk exists with respect to these temporary cash
investments.
The Company grants credit without collateral to its patients, who are
primarily insured under third-party agreements. Accounts receivable at
October 31, 1996 and 1995 are comprised of amounts due from
Medicaid/Medicare (61% and 51%, respectively) and various other third-party
payors and self-pay patients (none of which comprise greater than 10% of
the balance).
INVENTORIES:
Inventories are valued at the lower of cost (first-in, first-out method) or
market. Inventories, which are primarily finished goods, include
pharmaceuticals, ancillary medical supplies and certain medical equipment.
PROPERTY AND EQUIPMENT:
Property and equipment, including revenue producing equipment, are carried
at cost and are being depreciated over their estimated useful lives of
three to seven years, using primarily the straight-line method. Revenue
producing equipment consists of home medical equipment (e.g., respiratory
equipment, beds, wheelchairs). Maintenance and repairs are charged against
results of operations as incurred. Leasehold improvements are amortized
over the related lease terms or estimated useful lives, whichever is
shorter. When assets are retired or otherwise disposed of, the cost and
related accumulated depreciation are removed from the accounts, and any
resulting gain or loss is reflected in results of operations.
F-8
80
TRANSWORLD HOME HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
REVENUE RECOGNITION:
Patient and infusion revenues are recognized when services are performed
and are recorded net of estimated contractual adjustments based on
agreements with third-party payors, where applicable. Revenues from home
medical equipment are recognized over the period the equipment is rented
(typically on a month-to-month basis) and approximated $5,072, $4,191 and
$3,896 in 1996, 1995 and 1994, respectively. Revenues from the sale of
pharmaceuticals and supplies are recognized when products are delivered and
are recorded at amounts expected to be paid by third-party payors. The
Company receives a majority of its revenue from third-party insurance
companies and Medicare and Medicaid. The amount paid by third-party payors
is dependent upon the benefits included in the patient's policy or as
allowable amounts set by third-party payors. Certain revenues are subject
to review by third-party payors, and adjustments, if any, are recorded when
determined. For the years ended October 31, 1996, 1995 and 1994, the
Company's net revenues attributable to the Medicare and Medicaid programs
were approximately 62%, 59% and 52%, respectively, of the Company's total
revenues.
INCOME TAXES:
During fiscal 1994, the Company implemented Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). Under SFAS No. 109, deferred taxes are determined upon the
cumulative differences between financial statement and income tax assets
and liabilities, based on currently enacted tax rates. Deferred tax assets
are recorded if future realization is more likely than not. The cumulative
effect of this accounting change increased the results of operations by
$300 for the year ended October 31, 1994.
Deferred taxes are provided primarily for bad debts, depreciation,
amortization of intangibles and acquisition liabilities, which are reported
for Federal income tax purposes in different periods than for financial
reporting purposes.
INTANGIBLE ASSETS:
Intangible assets primarily includes goodwill, which amounted to $43,950
and $41,198 at October 31, 1996 and 1995, respectively, and is being
amortized on a straight-line basis over forty years. Accumulated
amortization of goodwill at October 31, 1996 and 1995 was $2,109 and
$1,035, respectively. Also included in intangible assets at October 31,
1996 and 1995 are covenants not to compete of $546 and $839, respectively,
which are being amortized over periods ranging from two to three years.
Accumulated amortization of such covenants at October 31, 1996 and 1995 was
$1,276 and $782, respectively.
The Company selected the forty-year amortization period based on the likely
period of time over which the related economical benefit will be realized.
The Company believes the estimated goodwill life is reasonable given the
continuing movement of patient care to noninstitutional settings, expanding
demand due to demographic trends, the emphasis of the Company in
establishing significant coverage in its local and regional markets, the
consistent practice with other alternate site health care companies and
other factors.
F-9
81
TRANSWORLD HOME HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
At each balance sheet date, management assesses whether there has been a
permanent impairment in the amount of goodwill and the amount of any
impairment by comparing anticipated undiscounted future cash flows from
operating activities with the carrying value of goodwill. Factors
considered by management in estimating future cash flows include current
operating results, trends and prospects of acquired businesses, as well
as the effect of demand, competition, market and other economic factors.
DEFERRED FINANCING COSTS:
Costs incurred in obtaining long-term financing are amortized over the
terms of the long-term financing agreements using the interest method. At
October 31, 1996, other assets include $2,824 of deferred financing costs
associated with the Credit Facility described in Note 5, net of accumulated
amortization of $176.
On July 31, 1996, $740 of unamortized costs associated with the Credit
Agreement was written-off as an extraordinary charge for the early
extinguishment of the Credit Agreement (Note 5). Amortization of deferred
financing costs is included in interest expense in the Statements of
Operations.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS:
The presentation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these
estimates.
EARNINGS PER SHARE:
Primary and fully diluted earnings per share are computed using the
weighted average number of shares of common stock outstanding, after giving
effect to contingently issuable shares under the acquisition agreements and
dilutive stock options and warrants using the treasury stock method. Fully
diluted earnings per share also reflect the incremental dilution related to
stock options due to the use of the market price at the end of the period
when it is higher than the average price for the period.
The weighted average number of shares of common stock outstanding have been
restated for the years ended October 31, 1995 and 1994 to give effect to
market price guarantees under acquisition agreements. The only effect of
this restatement was to increase previously reported primary earnings per
share from income before cumulative effect of an accounting change and net
income by $0.01 for the year ended October 31, 1994.
F-10
82
TRANSWORLD HOME HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
The weighted average number of shares used in the primary and fully diluted
earnings per share computation for the years ended October 31, 1996, 1995
and 1994 are as follows:
YEAR ENDED OCTOBER 31,
-----------------------------------
1996 1995 1994
--------- ------ -------
Weighted average number of shares used in primary calculation:
Weighted average number of shares outstanding 6,622 4,937 4,159
Weighted average number of shares contingently issuable
per acquisition agreements 321 607 463
Incremental shares, after application of treasury stock
method, of stock options and warrants 798 1,232 384
----- ----- -----
Shares used in calculation of primary
income per common share 7,741 6,776 5,006
===== ===== ======
Weighted average number of shares used in fully diluted calculation:
Weighted average number of shares outstanding 6,622 4,937 4,159
Weighted average number of shares contingently issuable
per acquisition agreements 321 607 463
Incremental shares, after application of treasury stock
method, of stock options and warrants 890 1,288 583
----- ----- -----
Shares used in calculation of fully diluted
income per common share 7,833 6,832 5,205
===== ===== =====
F-11
83
TRANSWORLD HOME HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
IMPACT OF RECENT ACCOUNTING STANDARDS:
In December 1991, the FASB issued SFAS No. 107, "Disclosures About Fair
Value of Financial Instruments," which requires that the fair value of such
instruments, except those investments accounted for by the equity method,
be disclosed in the financial statements. The Company adopted SFAS No. 107
in fiscal year 1996. The carrying amounts of such assets and liabilities
approximate fair value.
In March 1995, the FASB issued SFAS No. 121 "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which
requires that long-lived assets and certain identifiable intangible assets'
carrying values be evaluated based on the future (undiscounted and without
interest charges) cash flows expected to be realized from the use of the
asset and its eventual disposition. If the sum of the expected future cash
flows from an asset is less than the carrying value an impairment loss must
be recognized. SFAS No. 121 is effective for fiscal years commencing after
December 15, 1995. The impact of adopting SFAS No. 121 in fiscal 1997,
is not expected to have any impact on the Company's financial position
or results of operations.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which prescribes a new method of accounting for stock-based
compensation that determines compensation expense based on fair value
measured at the grant date. SFAS No. 123 gives companies that grant stock
options or other equity instruments to employees, the option of either
adopting the new rules or continuing current accounting under the
Accounting Principles Board's Opinion No. 25, "Accounting for Stock Issued
to Employees," however disclosure would be required of the pro forma
amounts as if the new rules had been adopted. SFAS No. 123 is effective for
transactions entered into in fiscal years beginning after December 15,
1995. The Company intends to continue current accounting and provide the
disclosures only, as permitted under SFAS No. 123, beginning with its
annual financial statements for the year ending October 31, 1997.
F-12
84
TRANSWORLD HOME HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
3. BUSINESS COMBINATIONS:
During the years ended October 31, 1994, 1995 and 1996, the Company
acquired the entities described below, which were accounted for by the
purchase method of accounting. The results of operations of the acquired
companies are included in the Company's statement of operations from their
respective dates of acquisition.
RESPIFLOW/MK DIABETIC
Effective April 1, 1994, the Company acquired all of the issued and
outstanding capital stock of RespiFlow and MK Diabetic (collectively,
"RespiFlow/MK Diabetic") for $1,000 in cash, $4,000 in notes (which were
paid in full in August 1994) and an additional payment of $11,850. During
fiscal 1995, the Company paid $5,877 of the additional payment and on
January 10, 1996 paid the balance of $5,973. RespiFlow/MK Diabetic provides
home care patients with respiratory, diabetic, ophthalmic and other
commonly prescribed medications and supplies.
The total cost of the acquisition of $16,951 was allocated on the basis of
the fair value of the assets acquired and liabilities assumed and incurred.
Accordingly, assets were assigned a value of $7,042, current liabilities
were $5,652 with the excess allocated to covenants not to compete of $550
and goodwill of $15,011. The covenants and goodwill are being amortized on
a straight-line basis over three and forty years, respectively.
RADAMERICA
On August 5, 1994, the Company acquired all of the issued and outstanding
capital stock of Radamerica, which operates five radiation therapy centers
adjacent to hospitals in and around Baltimore, Maryland, for $8,000 in cash
and 250 shares of the Company's common stock valued at $5,000 based on a
$20 per share market price guarantee. The measurement date for such
guarantee will be August 5, 1997, at which point any deficiency between the
market value of the Company's common stock, as defined in the purchase
agreement, and the $20 per share guarantee may be paid to the selling
shareholders either in common stock of the Company, in cash or a
combination of stock and cash. Such payment, if any, is due within 30 days
following a selling shareholder's demand, which must be exercised by
February 5, 1998. To the extent amounts owed are not paid when due,
interest will accrue on the unpaid portion at a rate of 12% per annum.
The $13,262 cost of the acquisition was allocated on the basis of the fair
value of the assets acquired and liabilities assumed and incurred with
$1,837, $2,445 and $2,994 allocated to current assets, property, plant and
equipment and liabilities, respectively. The excess was allocated to
covenants not to compete for $700 and goodwill for $11,274, which are being
amortized on a straight-line basis over three and forty years,
respectively.
F-13
85
TRANSWORLD HOME HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
3. BUSINESS COMBINATIONS (CONTINUED):
The total cost of the acquisition recorded in the financial statements will
not change as a result of any payments which may be required as a result of
the market price guarantee, however, an adjustment will be made to the
amount previously recorded for the issuance of the 250 shares. For purposes
of earnings per share calculations, contingently issuable shares of the
Company's common stock which arise as a result of the difference between
the market price at each balance sheet date and the $20 guaranteed price
are included in both primary and fully diluted earnings per share
calculations.
The Company loaned an aggregate of $1,100 to certain of the selling
shareholders, which is collateralized by 83 shares of the Company's common
stock. Principal and interest, at an annual rate of prime (8.25% and 8.75%
at October 31, 1996 and 1995) plus 0.75%, are due to the Company
concurrently with the due date of any payments to the selling shareholders
resulting from the market price guarantee or if no amounts are required to
be made under the market price guarantee, the date will be February 1,
1998. However, the outstanding amounts may be prepaid in whole or in part
prior to maturity. As of October 31, 1996, $136 of the loans have been
repaid (Note 8).
DERMAQUEST
Effective November 1, 1994, the Company acquired all of the issued and
outstanding capital stock of DermaQuest, a mail-order wound care products
company serving nursing home and home care patients, for $3,000 in
promissory notes which were repaid during fiscal 1995. Additional
contingent consideration is provided for in the purchase agreement, as
amended effective November 1, 1995, whereby the Company may have been
required to make additional payments based on the 1995 and 1996 earnings
levels of DermaQuest as described below. The Company issued a $4,000 letter
of credit under its Credit Agreement, as collateral for any contingent
payments. An additional payment due of $8,832 was recorded as of October
31, 1995 based on the purchase agreement and was satisfied through the
payment of $5,000 in cash and issuance of 370 shares of common stock valued
at $10.35 during the 1996 fiscal year. No additional payment will be made
for the year ending October 31, 1996. The total cost of the DermaQuest
acquisition was $11,832 and was allocated on the basis of the fair value of
the assets acquired and liabilities assumed and incurred, resulting in the
allocation of $1,539 and $1,993 to assets and current liabilities,
respectively. The excess amounts were allocated to covenants not to compete
of $100 and goodwill of $12,186 ($8,832 recorded on October 31, 1995 as a
result of the additional payment) which are being amortized on a
straight-line basis over three and forty years, respectively.
F-14
86
TRANSWORLD HOME HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
3. BUSINESS COMBINATIONS (CONTINUED):
COMBINED PRO FORMAS
The following represents the unaudited pro forma results of operations and
related per share information assuming the Company acquired the
aforementioned entities at the beginning of the periods presented. The pro
forma results for the year ended October 31, 1994 are based on the
historical financial statements of the Company for the year ended October
31, 1994 (including RespiFlow/MK Diabetic and Radamerica from the dates of
acquisition), RespiFlow/MK Diabetic for the five months ended March 31,
1994, Radamerica for the nine months ended July 31, 1994 and DermaQuest for
the ten months ended October 31, 1994.
The unaudited pro forma information is not necessarily indicative either of
the results of operations that would have occurred had the acquisitions
been made on the dates indicated or that may occur in the future.
YEAR ENDED
OCTOBER 31,
1994
---------------------------
(UNAUDITED)
---------------------------
Net revenues $60,059
Income before cumulative effect of an accounting change: 2,533
Net income 2,833
Income per share before cumulative effect an accounting change:
Primary 0.46
Fully diluted 0.44
Net income per share:
Primary 0.51
Fully diluted 0.49
F-15
87
TRANSWORLD HOME HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
3. BUSINESS COMBINATIONS (CONTINUED):
DVLC
Effective January 31, 1995, the Company acquired certain assets and assumed
certain liabilities of DVLC for approximately $500. DVLC is a provider of
pulmonary rehabilitation and diagnostics which operates in Cherry Hill, New
Jersey.
The cost of the acquisition was allocated on the basis of the fair value of
the assets acquired and liabilities assumed and incurred, resulting in
goodwill and covenants not to compete of $312 and $200, respectively, which
are being amortized on a straight-line basis over forty and three years,
respectively.
PRECISION
Effective March 1, 1995, the Company acquired certain of the assets and
assumed certain liabilities of Precision, an orthotics distribution company
serving nursing home and home care patients. Pursuant to the Precision
purchase agreement, as amended, the purchase price of the assets acquired
from Precision was $360. On June 6, 1995, $30 was paid with the balance
payable in 33 equal monthly installments. The cost of the acquisition was
allocated on the basis of the fair value of the assets acquired and
liabilities assumed and incurred, resulting in goodwill of $388 which is
being amortized on a straight-line basis over forty years.
HEALTH MEDS
Effective October 1, 1996, the Company acquired certain assets and assumed
certain liabilities of Health Meds, a respiratory mail-order pharmacy for
$1,400 subject to adjustment per the acquisition agreement.
The cost of the acquisition was allocated on the basis of the fair value of
the assets acquired and the liabilities assumed and incurred, resulting in
goodwill of $1,621 which is being amortized on a straight-line basis over
forty years.
U.S. HOMECARE
Effective October 1, 1996, the Company acquired certain assets and assumed
certain liabilities of U.S. HomeCare, a provider of infusion therapy to
patients in their homes for $2,000. As of October 31, 1996, $350 was paid
and $1,650 was recorded in acquisitions payable. The remaining $1,650 plus
accrued interest was paid on November 1, 1996.
The cost of the acquisition was allocated on the basis of the fair value of
the assets acquired and the liabilities assumed and incurred, resulting in
goodwill and covenants not to compete of $2,206 and $50, respectively,
which are being amortized on a straight-line basis over forty and five
years, respectively.
F-16
88
TRANSWORLD HOME HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
3. BUSINESS COMBINATIONS (CONTINUED):
The pro forma results of operations and related per share information for
DVLC, Precision, Health Meds and U.S. HomeCare have not been presented as
the impact is not material.
PENDING ACQUISITION
VIP COMPANIES
On June 30, 1994, the Company entered into stock purchase agreements, as
amended, to acquire all of the issued and outstanding capital stock of VIP
Health Services, Inc. and Kwik Care, Ltd. (collectively, the "VIP
Companies") for $11,000, consisting of $10,250 in cash and 146 shares of
the Company's common stock, (valued at $750 after taking into account
restrictions on transfer). The Company placed in escrow $1,500 ($750 in
cash and 146 shares of Company common stock) during July 1994 as a down
payment on the acquisition of the VIP Companies (the "VIP Acquisition"),
which amounts are included in "Other Assets." The cash portion of the
contract deposit has, with the Company's consent, been loaned to the VIP
Companies to be used for working capital purposes.
The VIP Companies provide temporary nursing and related home health care
services in the City of New York and surrounding areas through both a
licensed and a Medicare certified agency. The consummation of the VIP
Acquisition is subject to, among other things, various closing conditions,
including receipt of necessary governmental approvals (including the
submission and approval of a plan of financing), the approval of the
lenders under the Credit Facility, the accuracy at closing of various
representations and warranties and the compliance by the sellers with
certain covenants and agreements contained in the stock purchase
agreements. In July 1996, the Company announced that the consummation of
the VIP Acquisition would not occur concurrently with the Second Closing
(as defined in Note 6) under the unit purchase agreement (as described in
Note 6), in that, among other things, the approvals and consents necessary
to consummate the transactions had not been and could not be obtained at
that time. The Company believes that the sellers are not in compliance with
certain provisions contained in the stock purchase agreements concerning
the VIP Companies and has notified the sellers of the VIP Companies
regarding the same. The Company cannot predict when or whether all of the
requisite consents and approvals will be obtained and the other closing
conditions will be satisfied, and, regardless, when or whether the
transaction will ultimately be consummated. For the years ended December
31, 1994 and 1995 and the nine months ended September 30, 1996 (unaudited),
the VIP Companies generated approximately $33,000, $35,000 and $21,930,
respectively, in revenues and pro forma net income (loss) (after
consideration of pro forma provision for income taxes) of $850, $(978) and
$334, respectively. The 1995 net loss includes a special one-time bonus of
$3,000 (pretax) to one of the VIP Companies' officers.
F-17
89
TRANSWORLD HOME HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
4. PROPERTY AND EQUIPMENT:
Major classes of property and equipment consist of the following:
OCTOBER 31
----------------------------
1996 1995
------ -------
Revenue producing equipment $2,826 $2,416
Furniture, Fixtures and equipment 4,708 4,264
Leasehold improvements 1,023 915
------ -------
8,557 7,595
Less, accumulated depreciation
and amortization 4,623 3,533
------ ------
$3,934 $4,062
====== ======
The net book value of revenue producing equipment was $1,232 and $1,080 at
October 31, 1996 and 1995, respectively.
5. DEBT:
On August 5, 1994, the Company entered into a credit agreement with an
institutional lender, as Agent, and various banks (the "Credit Agreement"),
which provided for a term loan of $18,000 and revolving loans of up to
$10,000. On March 2, 1995, such agreement was amended and provided for a
total term loan of $23,000 and revolving loans of up to $12,000.
On January 10, 1996, the Company's Credit Agreement was amended to permit
the issuance of equity units under the unit purchase agreement (Note 6), to
permit the issuance of the 20% Subordinated Notes described below, to allow
the payment in cash of the remaining $5,973 RespiFlow / MK Diabetic
acquisition payable (plus interest from its due date of August 15, 1995),
which was paid on January 10, 1996 (Note 3), and to amend and modify
certain definitions and covenants in the Credit Agreement.
F-18
90
TRANSWORLD HOME HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
5. DEBT (CONTINUED):
On January 10, 1996, an institutional investor purchased from the Company
$10,000 of 20% subordinated notes (the "Subordinated Notes") due October
10, 1996. On May 30, 1996 the interest rate on the Subordinated Notes was
reduced to 12%. On July 31, 1996, the Subordinated Notes were repaid with
proceeds from the Second Closing (as defined in Note 6).
On May 28, 1996, the required lenders under the Credit Agreement consented
to the use of the $5,400 proceeds from the Initial Closing (as defined in
Note 6) to: (i) pay $1,000 plus accrued interest for the remainder of the
DermaQuest acquisition payable (Note 3); (ii) pay interest accrued through
the Initial Closing on the Subordinated Notes; and (iii) to use the
remainder for general corporate and working capital purposes.
On July 31, 1996, the Company completed a new $100,000 senior secured
revolving credit facility, underwritten by a commercial bank who is also
acting as Agent Bank (the "Credit Facility"). This new facility replaced
the Company's existing $35,000 Credit Agreement. On July 31, 1996, the
Credit Agreement was repaid out of proceeds from the Second Closing (Note
6) and borrowings under the Credit Facility. In connection with the
repayment of the Credit Agreement, the Company recorded a non-cash,
after-tax, extraordinary charge of $1,435 (net of tax benefit of $879) in
fiscal 1996, relating to the write-off of the deferred financing costs and
discount associated with the Credit Agreement.
Pursuant to the Credit Facility and subject to the terms thereof, up to
$85,000 of the total facility may be used by the Company for the
acquisition of other alternate site health care providers with the balance
of the Credit Facility not used for acquisitions to be used for working
capital. The loans under the Credit Facility are collateralized by, among
other things, a lien on substantially all of the Company's and its
subsidiaries' assets, a pledge of the Company's ownership interest in its
subsidiaries and guaranties by the Company's subsidiaries. The loans mature
on July 31, 2001 with reductions in availability commencing July 31, 1998
through final maturity.
The Credit Facility provides that subject to the terms thereof, the Company
may make borrowings either at the Base Rate (as defined in the Credit
Facility), plus 1% or the Eurodollar Rate (5.375% at October 31, 1996),
plus 2%. As of October 31, 1996, the Company had $12,492 outstanding under
the Credit Facility and availability under the Credit Facility was $87,508.
F-19
91
TRANSWORLD HOME HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
5. DEBT (CONTINUED):
Subject to certain exceptions, the Credit Facility prohibits or restricts,
among other things, the incurrence of liens, the incurrence of
indebtedness, certain fundamental corporate changes, dividends, the making
of specified investments and certain transactions with affiliates. In
addition, the Credit Facility contains affirmative and negative financial
covenants customarily found in agreements of this kind including the
maintenance of certain financial ratios, such as interest coverage, debt to
earnings before interest, taxes, depreciation and amortization ("EBITDA")
and minimum EBITDA. On October 31, 1996, the Company was in compliance with
all financial covenants contained in the Credit Facility.
As of October 31, 1995, $1,000 of the amounts outstanding under the
revolving loans were classified as short-term debt. Such amount was repaid
in November 1995.
Long-term debt, net of unamortized discount, consists of the following:
OCTOBER 31,
---------------------
1996 1995
------- -------
Credit Facility, due July 31, 2001, with monthly interest at Eurodollar Rate
(5.375% at October 31, 1996), plus 2% collateralized by a lien on all
Company assets $12,492
Bank term and revolving loans, due October 31, 1999, with quarterly principal
payments ranging from $1,000 to $1,625 plus interest at LIBOR (5.875% at October
31, 1995), plus 3.25% net of unamortized discount of $1,936, at October 31,
1995 collateralized by a lien on all Company assets $24,064
Equipment leases with monthly principal plus interest ranging from 7.25% to
12.5% through 1998, collateralized by related equipment 34 108
------- -------
12,526 24,172
Less, current maturities 21 3,908
------- -------
$12,505 $20,264
======= =======
F-20
92
TRANSWORLD HOME HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
5. DEBT (CONTINUED):
Annual maturities of long-term debt for each of the next five years are:
YEAR ENDING OCTOBER 31,
1997 $ 21
1998 13
2001 12,492
--------
$12,526
========
6. UNIT PURCHASE AGREEMENT:
On November 20, 1995, the Company entered into a unit purchase agreement,
as amended, with an institutional investor under which the Company sold an
aggregate of 4,400 units at a purchase price of $9.00 per unit (for an
aggregate purchase price of $39,600) to the institutional investor in two
separate closings, subsequent to receipt of necessary shareholder and
governmental approval. Each unit is comprised of one share of the Company's
restricted common stock and a 0.6818 non-callable, five year stock purchase
warrant with each whole warrant entitling the holder to purchase an
additional share of the Company's common stock at $12.45 per share (the
"Warrants").
The initial closing (the "Initial Closing") was completed on May 30, 1996
following the receipt of shareholder approval (which was obtained at the
Company's annual meeting of shareholders on April 16, 1996), at which time
the Company sold 600 units or 9.8% of the issued and outstanding shares of
the Company, after giving effect to the sale, at a purchase price of $9.00
per unit for an aggregate purchase price of $5,400. The second closing (the
"Second Closing"), which was subject to receipt of New York State
Department of Health approval of the transaction, (which was received in
June of 1996) was completed on July 31, 1996. At the Second Closing,
the Company sold an additional 3,800 units for an aggregate purchase price
of $34,200. Gross proceeds of $39,600 were reduced by $1,249 of offering
costs.
F-21
93
TRANSWORLD HOME HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
7. NON-RECURRING CHARGES:
During the fourth quarter of 1995, the Company recorded non-recurring
charges totaling $3,898 related to the write-off of expenses related to an
abandoned public offering ($2,808), write-off of expenses related to
abandoned acquisitions ($605) and expenses related to the consolidation of
certain of the Company's facilities ($485).
The decision to abandon the proposed public offering was made during the
fourth quarter following management's assessment of the ability to complete
the financing. Financing was subsequently arranged through an institutional
investor (Note 6). The non-recurring charge of $2,808 is primarily made up
of legal, accounting, underwriting, printing, and "roadshow" expenses.
Pursuant to the decision to abandon the public offering, management
assessed the recoverability of deferred expenses related to certain
potential acquisitions which had been capitalized based on the completion
of both the public offering and the acquisitions. Management made the
determination that, as of the balance sheet date, these expenses would not
be recoverable. The non-recurring charge of $605 is primarily made up of
legal and accounting expenses.
The decision to consolidate certain of the Company's facilities was made
during the fourth quarter and relates to the consolidation of redundant
facilities in the New York/New Jersey market into an existing Company
location in New Jersey. Included in the non-recurring charge of $485 are
costs associated with closing down the New York Facility, exclusive of
personnel costs. The Company is in the final phases of the consolidation of
these facilities which could require the remaining $126 to be paid out in
fiscal 1997.
F-22
94
TRANSWORLD HOME HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
8. RELATED PARTY TRANSACTIONS:
Notes receivable from related parties and stockholders consisted of the
following:
OCTOBER 31,
-------------------
1996 1995
------ ------
Notes due from officers and employees $ 200 $ 200
Notes due from related parties 964 964
------ ------
1,164 1,164
Less current maturities, (included in prepaid expenses
and other current assets on the balance sheet) 200 200
------ ------
$ 964 $ 964
====== ======
Interest on the notes due from officers and employees are at rates ranging
from prime (8.25% and 8.75% at October 31, 1996 and 1995) to prime plus 1%
and are due April 30, 1997.
The Company loaned an aggregate of $1,100 to two of the four sellers of
Radamerica. Interest on these notes is at prime (8.25% and 8.75% at October
31, 1996 and 1995) plus 0.75%. As of October 31, 1996, $136 of the loans
have been repaid (Note 3).
Interest expense-related parties, net was $3, $132 and $163 for the years
ended October 31, 1996, 1995 and 1994, respectively.
F-23
95
TRANSWORLD HOME HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
9. INCOME TAXES:
During fiscal 1994, the Company changed its method of accounting for income
taxes in accordance with SFAS No. 109 (Note 2). The provision (benefit) for
income taxes from continuing operations before the extraordinary loss is
summarized as follows:
YEAR ENDED OCTOBER 31,
-------------------------------------
1996 1995 1994
------- ------- -------
Current:
Federal $ 1,637 $ 1,944 $ 1,625
State 265 549 317
Deferred:
Federal (215) (1,465) (127)
State 15 (401) (159)
------- ------- -------
Provision for income taxes $ 1,702 $ 627 $ 1,656
======= ======= =======
F-24
96
TRANSWORLD HOME HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
9. INCOME TAXES (CONTINUED):
For 1996, 1995 and 1994, deferred income taxes reflect the net tax effects
of temporary differences between the carrying amounts of assets and
liabilities recorded for financial reporting purposes and the amounts used
for income tax purposes. Significant components of the Company's deferred
tax assets and liabilities as of October 31, 1996, 1995 and 1994 are as
follows:
OCTOBER 31,
-------------------------------------
1996 1995 1994
------- ------- -------
Deferred tax assets:
Current
Provision for doubtful accounts $ 2,172 $ 2,006 $ 419
Inventory capitalization 9 11 118
Accrued expenses 677 409 213
Other, net 44 43
Valuation allowance (53)
-------- ------- ------
Current deferred tax assets 2,902 2,469 697
------- ------- -------
Non-current:
State net operating losses 151 312
Other, net 57
Valuation allowance (130) (285)
------- ------- -------
Non-current deferred tax assets,
included in other assets 78 27
------- ------- -------
Deferred tax liabilities:
Non-current:
Depreciation and amortization 490 297 253
Other, net 65 (26) 85
------- ------- -------
Deferred tax liabilities 555 271 338
------- ------- -------
Net deferred tax assets $ 2,425 $ 2,225 $ 359
======= ======= =======
F-25
97
TRANSWORLD HOME HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
9. INCOME TAXES (CONTINUED):
The valuation allowance at October 31, 1996 relates to deferred tax assets
established for certain state net operating loss carryforwards which are
not expected to be realized based on historical or future earnings. The net
decrease in the valuation allowance of $155 is primarily due to the
realization of state deferred tax assets based on current levels of income.
Management expects that it is more likely than not that future levels of
income will be sufficient to realize the deferred tax assets, as recorded.
As of October 31, 1996, the Company has state net operating tax losses of
$1,626 which, if unused, will expire in the years 1998 through 2011.
Reconciliations of the differences between income taxes on income from
continuing operations computed at Federal statutory tax rates and
consolidated provisions for income taxes are as follows:
YEAR ENDED OCTOBER 31,
-------------------------------------
1996 1995 1994
------- ------- -------
Income taxes computed at Federal
statutory tax rate $ 1,265 $ 505 $ 1,406
State income taxes, net of
Federal benefits 350 (187) 105
Nondeductible expenses, primarily
amortization of intangible assets 266 41 271
Valuation allowance, state taxes (155) 232 (170)
Other, net (24) 36 44
------- ------- -------
Provision for income taxes $ 1,702 $ 627 $ 1,656
======= ======= =======
F-26
98
TRANSWORLD HOME HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
10. STOCK OPTION PLAN AND WARRANTS:
The Company has a nonqualified stock option plan ( "1987 Plan") and a
stock option plan which provides for either incentive stock options or
nonqualified stock options ("1992 Plan"). The 1992 Plan gives eligible
employees, officers, directors and non-employee independent contractors
options to purchase up to 1,500 shares of stock, of which options to
purchase 725 shares of stock were outstanding as of October 31, 1996.
Under the 1987 Plan, options covering 24 shares have been granted and are
outstanding and no additional options may be granted. Options under the
1992 Plan may be granted by the Compensation Committee of the Board of
Directors which determines the exercise price, vesting provisions and term
of such grants. The vesting provisions provide for vesting of options over
a period of between two and three years. Following is a summary of
transactions under both plans during the years ended October 31, 1994,
1995 and 1996:
STOCK
OPTIONS
-------
Outstanding - October 31, 1993 at $1.25 to $3.18 per share 465
Granted during 1994 ($4.38 to $8.88 per share) 380
Exercised during 1994 ($1.25 to $3.18 per share) (27)
Canceled during 1994 ($2.78 to $4.38 per share) (59)
----
Outstanding - October 31, 1994 at $1.25 to $8.88 per share 759
Granted during 1995 ($7.88 per share) 260
Exercised during 1995 ($1.25 to $5.50 per share) (148)
Canceled during 1995 ($3.18 to $8.88 per share) (19)
----
Outstanding - October 31, 1995 at $1.25 to $8.75 per share 852
Granted during 1996 ($8.88 to $10.00 per share) 70
Exercised during 1996 ($1.25 to $7.88 per share) (159)
Canceled during 1996 ($3.18 to $8.75 per share) (14)
----
Outstanding - October 31, 1996 $1.25 to $10.00 per share 749
====
Available for future grants 517
====
F-27
99
TRANSWORLD HOME HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
10. STOCK OPTION PLAN AND WARRANTS (CONTINUED):
Of the 759 options outstanding as of October 31, 1994, 499 were
exercisable as of that date.
Of the 852 options outstanding as of October 31, 1995, 471 were
exercisable as of that date.
As of October 31, 1996, 583 of the 749 options outstanding were
exercisable.
In connection with the initial public offering, the Company issued
warrants to purchase 1,600 common shares. The warrants are exercisable at
$6.50 per share and expire on December 6, 1997. During 1994, the Company
repurchased 500 of the public warrants, 250 for $1.25 per warrant and 250
at $1.3125 per warrant in open market purchases.
11. COMMITMENTS AND CONTINGENCIES:
The Company has employment agreements with certain of its executive
officers and management personnel which provide for minimum aggregate
annual compensation of $1,175 in fiscal 1997. The contracts expire between
August 1997 and January 1999 and contain customary termination and
non-compete provisions. Certain of the contracts, which amount to $770 of
1997 minimum aggregate compensation, contain change in control provisions
that would entitle each of the individuals up to 2.9 times of their salary
then in effect, except for one individual who is entitled to 2.0 times his
salary, plus any unpaid bonus and unreimbursed expense upon a change of
control of the Company (as defined) or significant change in the
responsibilities of such person.
In fiscal 1996, the Company paid $350 to its former Chairman of the Board
and Chief Executive Officer ("Chairman") in connection with his
resignation. The Company also entered into a consulting agreement with its
former Chairman which provides for annual compensation of $150 less the
amount by which certain amounts paid to or on his behalf exceed $60.
Beginning in fiscal 1995, the Company had adopted a performance based
bonus plan for the Company's executive officers and certain other
employees. Under this plan, amounts granted may be up to 50% of their base
salaries at the sole discretion of the Compensation Committee. Bonuses may
be paid in whole or in part, in cash or shares of common stock.
From November 1, 1994 to March 1, 1999, RespiFlow/MK Diabetic and
DermaQuest will be managed by E/L Associates, an affiliate of certain of
the selling shareholders of those entities. Pursuant to a management
agreement, E/L Associates will receive an annual management fee of $450
per year until March 1, 1999 and is eligible to receive an incentive fee
during each year of the term of the agreement with respect to RespiFlow/MK
Diabetic and DermaQuest as follows: (i) a fee equal to 25% of the annual
pretax earnings of RespiFlow/MK Diabetic in excess of $3,600 ($654 in
1995) and (ii) a fee equal to 25% of the annual pretax earnings of
DermaQuest in excess of $2,400 (in each case, as defined). The Company has
guaranteed the obligations of RespiFlow/MK Diabetic and DermaQuest under
this management agreement.
F-28
100
TRANSWORLD HOME HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED):
Effective November 1, 1995, the management agreement with E/L Associates
was amended to change the base compensation under the agreement to $240,
$390, $490 and $490 in fiscal 1996 through 1999, respectively, and to
change the incentive compensation formula to 7% of pretax income (as
defined), payable based on achieving minimum pretax earnings (as defined)
of $3,800 at RespiFlow/MK Diabetic and $3,000 at DermaQuest.
The Company has entered into various operating lease agreements for office
space and equipment. Certain of these leases provide for renewal options
extending to the year 2006.
Future minimum non-cancelable lease payments at October 31, 1996 are as
follows:
1997 $1,280
1998 1,214
1999 1,100
2000 588
2001 417
Thereafter 404
------
$5,003
======
Total rental expense for the year ended October 31, 1996, 1995 and 1994
amounted to $1,645, $1,563 and $753, respectively.
On November 2, 1994, an action was filed in the Supreme Court of the State
of New York, County of Westchester against the Company, alleging that one
of its drivers negligently caused the death of plaintiff's husband while
operating his motor vehicle during a delivery for the Company. The
plaintiffs are seeking $12,580 in damages for wrongful death, pain and
suffering, loss of consortium and related claims. The Company has tendered
defense of this action to its insurance carrier and management of the
Company and counsel to the insurance carrier intend to vigorously defend
this lawsuit. As the case is in a preliminary stage, the Company is not
able to estimate any potential exposure or range of exposure and has not
recorded any amounts in its financial statements. It is reasonably
possible that irrespective of insurance coverage, the ultimate outcome of
this action may be materially unfavorable to the Company's consolidated
results of operations, financial position or cash flows. However, the
Company believes that the ultimate liability, if any, will be within the
policy limits of its insurance policies, and will not have a material
adverse effect on the Company's consolidated financial position, results
of operations or cash flows.
The Company is also involved in various other legal proceedings and claims
incidental to its normal business activities. The Company is vigorously
defending its position in all such proceedings. Management and its legal
counsel believe these matters should not have a material adverse impact on
the financial condition, cash flows, or results of operations.
F-29
101
TRANSWORLD HOME HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
12. SUBSEQUENT EVENT:
On November 13, 1996, the Company entered into a number of agreements
including a stock purchase agreement (the "Stock Purchase Agreement") and
a merger agreement (the "Merger Agreement") to acquire 100% of the issued
and outstanding stock and senior secured indebtedness of Health
Management, Inc. ("HMI") in a series of transactions. HMI is a Buffalo
Grove, Illinois based provider of integrated pharmacy management services
to patients with chronic medical conditions and to health care
professionals, drug manufacturers and third-party payors involved in such
patients' care. For the year ended April 30, 1996 and the six months
ended October 31, 1996 (unaudited), HMI reported $158,860 and $40,523 of
net sales, respectively and net (loss) income of ($10,927) and $432,
respectively. Included in the amounts reported above in the year ended
April 30, 1996 net loss are charges of $16,840, related to (i) a
write-off of medical device inventory ($2,840); (ii) an additional
provision reflecting a change in the estimation of the allowance for
doubtful accounts ($8,400); (iii) costs associated with organizational
consolidation and other cost reduction programs ($3,600); and (iv)
professional fees related to HMI's litigation and restatement of fiscal
1995 financial statements ($2,000).
The acquisition of 49% of the outstanding shares of HMI common stock
will be accounted for by the Company as a purchase and recorded under the
equity method of accounting until such time as the Company gains control
of HMI (greater than 50% ownership of the outstanding common stock of
HMI), at which point HMI will be consolidated with the Company.
Also on November 13, 1996, the Company acquired HMI's senior secured
indebtedness under the credit agreement between HMI and its senior lenders
(the "HMI Credit Agreement") for $21,263 directly from such lenders. The
Company also agreed to lend HMI up to $5,000 for working capital purposes
and to forbear from exercising any remedies under the HMI Credit Agreement
until January 31, 1997.
On January 13, 1997, The Company agreed to changes to its Credit Facility
with its senior lenders in order to accommodate the purchase of the senior
secured indebtedness of HMI and the 8,964 shares of HMI common stock
purchased by the Company pursuant to the Stock Purchase Agreement. The
principal changes include temporary adjustments to certain financial
covenants until April 30, 1997, by which time the Company believes it will
have either consummated the acquisition pursuant to the Merger Agreement
and/or have obtained additional capital, such that it will be in
compliance with the terms of the Credit Facility. The Company also agreed
that, until the acquisition of HMI has been consummated, any additional
acquisitions would be subject to the specific approval of its senior
lenders.
On January 14, 1997, the Stock Purchase Agreement was completed, pursuant
to which the Company acquired 8,964 newly issued shares of HMI's common
stock, representing approximately 49% of HMI's outstanding common stock
for $1 per share or $8,964. The Company also entered into a registration
rights agreement providing for the registration of the aforementioned
shares, which commences on the earlier of June 30, 1997 or the date on
which the Merger Agreement, described below, is terminated. The Company
also received an option to purchase newly issued shares up to an
additional 2% of HMI's then outstanding common stock for $1 per share,
which expires on January 14, 1998. Also as of January 14, 1997, the
Company had advanced $4,649 to HMI for working capital purposes.
The Merger Agreement, as amended on January 13, 1997, provides for the
acquisition by the Company of the remaining issued and outstanding common
shares of HMI, not previously owned by the Company for $1.50 per share.
Consummation of the Merger Agreement is subject to various closing
conditions, including receipt of the financing by the Company necessary to
complete the merger, approval of the lenders under the Credit Facility,
receipt of certain regulatory approvals and approval by HMI's
shareholders.
The aggregate cost of the acquisition is estimated to be $60,000 and the
aggregate amount of capital required to complete the remaining portion of
the acquisition is approximately $30,000, of which the Company expects a
substantial portion will be provided through borrowings under the Credit
Facility. On January 8, 1997, HPII agreed to purchase an additional
899 shares of the Company's Common Stock at a purchase price of $11.125
per share for an aggregate purchase price of $10,000 (subject to, among
other things, receipt of applicable regulatory approvals) and it is
anticipated that these funds may be used to complete the HMI transaction.
The Company anticipates completing this acquisition at the end of the
Company's second fiscal quarter of 1997.
F-30
102
TRANSWORLD HOME HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
12. SUBSEQUENT EVENT (CONTINUED):
HPII has purchased certain of HMI's trade payables aggregating
approximately $18,000 at various discounts. Provided that the HMI Merger
Agreement is consummated, HPII has agreed to extend a 10% discount of the
outstanding face amount of such payables to the Company.
F-31
103
TRANSWORLD HOME HEALTHCARE, INC.
QUARTERLY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
The following table presents the comparative quarterly results for the years
ended October 31, 1996 and 1995.
January 31, April 30, July 31, October 31, Total
---------- ---------- ---------- -------- ----------
1996 quarter ended
------------------
Total revenues $ 19,644 $ 17,522 $ 19,236 $ 19,902 $ 76,304
========== ========== ========== ======== ==========
Gross profit $ 10,700 $ 9,622 $ 10,421 $ 10,881 $ 41,624
========== ========== ========== ======== ==========
Income before extraordinary loss(1) $ 821 $ 119 $ 292 $ 786 $ 2,018
========== ========== ========== ======== ==========
Net income (loss) $ 821 $ 119 $ (1,050) $ 693 $ 583
========== ========== ========== ======== ==========
Primary income per share of
common stock(2)(3):
Income before extraordinary loss(1) $ 0.13 $ 0.02 $ 0.04 $ 0.07 $ 0.26
Extraordinary loss on early
extinguishment of debt(1) (0.19) (0.01) (0.18)
---------- ---------- ---------- -------- ----------
Net income (loss) per share of
common stock $ 0.13 $ 0.02 $ (0.15) $ 0.06 $ 0.08
========== ========== ========== ======== ==========
Fully diluted income per share of
common stock(2)(3):
Income before extraordinary loss(1) $ 0.13 $ 0.02 $ 0.04 $ 0.07 $ 0.26
Extraordinary loss on early
extinguishment of debt(1) (0.19) (0.01) (0.19)
---------- ---------- ---------- -------- ----------
Net income (loss) per share of
common stock $ 0.13 $ 0.02 $ (0.15) $ 0.06 $ 0.07
========== ========== ========== ======== ==========
1995 quarter ended January 31, April 30, July 31, October 31, Total
------------------ ----------- --------- -------- ----------- -----
Total revenues $17,705 $17,048 $18,854 $17,980 $71,587
======= ======= ======= ======= =======
Gross profit $ 9,744 $ 9,415 $10,281 $ 9,417 $38,857
======= ======= ======= ======= =======
Net income $ 1,282 $ 1,027 $ 1,084 $(2,534) $ 859
======= ======= ======= ======= =======
Primary net income (loss) per share
of common stock(2)(3): $ 0.20 $ 0.15 $ 0.16 $ (0.37) $ 0.13
======= ======= ======= ======= =======
Fully diluted net income (loss) per
share of common stock (2)(3): $ 0.19 $ 0.15 $ 0.16 $ (0.37) $ 0.13
======= ======== ======= ======= =======
(1) See Note 5 to the Consolidated Financial Statements regarding
extraordinary loss. Amounts booked to extraordinary loss in the fourth
quarter of fiscal 1996 relate to a change in estimate for the income tax
benefit.
(2) The sum of the per share amounts for the quarters does not necessarily
equal that of the year because of computations are made independently.
(3) Weighted average shares have been restated for the three months ended
January 31, 1995, April 30, 1995, July 31, 1995, October 31, 1995, January
31, 1996, April 30, 1996 and July 31, 1996 and for the year ended October
31, 1996 to give effect to a market price guarantee under an acquisition
agreement. The only effect of this restatement was to increase previously
reported primary loss per share by $0.01 for the quarter ended October 31,
1995.
F-32
104
TRANSWORLD HOME HEALTHCARE, INC.
(IN THOUSANDS)
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
- -------------------------- ---------------- --------------------------------------- ----------------- ----------------
Additions Charged to
---------------------------------------
Balance at Balance at
Beginning Cost and Other End of
Description of Period Expenses Accounts Deductions Period
- -------------------------- ---------------- ---------------- ----------------- ----------------- ----------------
Allowance for
doubtful accounts:
Year ended $5,137 $6,394 $ 70(B) $6,130(A) $5,471
October 31, 1996
Year ended 4,009 5,732 5(B) 4,609(A) 5,137
October 31, 1995
Year ended 1,472 2,977 3,118(B) 3,558(A) 4,009
October 31, 1994
(A) Doubtful accounts written, off, net of recoveries and amounts related
to acquisitions.
(B) Assumed in acquisitions.
S-1