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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED
SEPTEMBER 30, 1999
COMMISSION FILE NO. 1-11570
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TRANSWORLD 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.)
555 MADISON AVENUE
NEW YORK, NEW YORK (212) 750-0064 10022
(Address of principal (Registrant's telephone number, (Zip Code)
executive offices) including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.01 par value
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(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 3, 2000 was approximately
$11,559,655 based on the closing sale price of $1.75 on such date, as reported
by the American Stock Exchange.
The number of shares outstanding of the registrant's Common Stock, as
of January 3, 2000, was 17,551,076.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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TRANSWORLD HEALTHCARE, INC.
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended September 30, 1999
TABLE OF CONTENTS
PART I
Item 1. Business..............................................................1
General...............................................................1
Strategy .............................................................2
U.K. Operations.......................................................2
U.K. Services and Products............................................2
Patient Services......................................................3
Specialty Pharmaceutical and Medical Supplies Operations
and Respiratory Therapy.............................................3
U.K. Quality Assurance; Department of Health Licenses.................3
U.K. Sales and Marketing Activities...................................3
U.K. Recruiting and Training of Personnel.............................4
U.K. Third-Party Reimbursement........................................4
U.K. Suppliers........................................................5
U.K. Competition......................................................5
U.K. Patents and Trademarks...........................................5
U.K. Employees........................................................5
U.S. Operations.......................................................5
U.S. Services and Products............................................6
Mail-Order Operations.................................................6
Hi-Tech Operations....................................................6
U.S. Quality Assurance; JCAHO Accreditations..........................7
U.S. Sales and Marketing Activities...................................7
U.S. Third-Party Reimbursement........................................7
U.S. Suppliers........................................................8
U.S. Competition......................................................8
U.S. Patents and Trademarks...........................................8
U.S. Employees........................................................9
Government Regulation.................................................9
U.K. Government Regulation............................................9
U.S. Government Regulation...........................................10
Insurance............................................................13
Item 2. Properties...........................................................13
Item 3. Legal Proceedings....................................................14
The Company..........................................................14
HMI..................................................................14
Item 4. Submission of Matters to a Vote of Security Holders..................16
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PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters...............................................18
Item 6. Selected Financial Data.............................................19
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................21
General ............................................................21
Results of Operations...............................................23
Year Ended September 30, 1999 vs. Year Ended September 30, 1998.....23
Year Ended September 30, 1998 vs. Eleven Months Ended
September 30, 1997................................................25
Liquidity and Capital Resources.....................................28
General.............................................................28
Accounts Receivable.................................................28
Credit Facility.....................................................29
Refinancing ........................................................29
TNI Sale............................................................33
Acquisition of HMI/Sale to Counsel..................................34
Year 2000...........................................................34
Litigation..........................................................36
Impact of Recent Accounting Standards...............................36
Inflation...........................................................36
Item 7A. Quantitative and Qualitative Disclosures about Market Risk..........36
Foreign Currency Exchange...........................................36
Interest Rate Risk..................................................36
Item 8. Financial Statements and Supplementary Data.........................37
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure..........................................37
PART III
Item 10. Directors and Executive Officers of the Registrant..................38
Board Committees....................................................40
Audit Committee.....................................................40
Compensation Committee..............................................40
Compliance With Section 16(a) of the Securities
Exchange Act of 1934..............................................40
Item 11. Executive Compensation..............................................41
Summary Compensation Table..........................................41
Aggregate Option Exercises in Fiscal 1999 and 1999
Fiscal Year-End Option Values.....................................42
Compensation of Directors...........................................42
Employment Agreements; Termination of Employment and
Change-in-Control Arrangements....................................42
Compensation Committee Interlocks and Insider Participation.........42
Stock Option Plans..................................................42
1992 Stock Option Plan..............................................42
1997 Non-Employee Director Plan.....................................43
Indemnification.....................................................44
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Item 12. Security Ownership of Certain Beneficial Owners and Management......45
Item 13. Certain Relationships and Related Transactions......................46
Transactions with Principal Shareholders............................46
Transactions with Directors and Executive Officers..................47
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....49
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. This Annual Report contains certain
forward-looking 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 forward-looking 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.
iii
PART I
ITEM 1. BUSINESS.
GENERAL
Transworld Healthcare, Inc. (the "Company") is a provider of a broad range
of health care services and products with operations in the United Kingdom
("U.K.") and the United States ("U.S."). The Company provides the following
services and products: (i) patient services, including nursing and
para-professional services; (ii) specialty mail-order pharmaceuticals, medical
supplies, respiratory therapy and home medical equipment; and (iii) infusion
therapy. The Company provides these services and products from the following
reportable business segments: (i) U.K. operations ("U.K. Operations"); (ii) U.S.
specialty mail-order pharmaceuticals and medical supplies operations
("Mail-Order Operations"); and (iii) U.S. hi-tech operations ("Hi-Tech
Operations"). The Company's U.K. Operations include the U.K.'s second largest
commercial provider of nursing and para-professional care to the community and
U.K. healthcare institutions, the U.K.'s second largest home respiratory
supplier as well as a leading value-added medical supplies distributor, all with
operations located throughout the U.K. The Company's Mail-Order Operations
provide products to patients in their home nationwide and in Puerto Rico while
its Hi-Tech Operations are concentrated in New Jersey and New York.
The Company changed its fiscal year end from October 31 to September 30
effective for fiscal 1997. This resulted in an eleven month reporting period
ended September 30, 1997 (sometimes referred to herein as the "Eleven Month
Period") included in this Annual Report on Form 10-K.
The Company took a number of significant steps during the fiscal year ended
September 30, 1998 and the Eleven Month Period to realign its business as a
focused regional home health care provider and specialty pharmacy and medical
supply distributor in the U.S. and as an integrated national provider of health
care products and services in the U.K. These steps included: (i) selling
non-core assets such as the Company's Radamerica, Inc. ("Radamerica") business,
which provided radiation therapy in the Baltimore, Maryland area and the sale of
the assets of the Company's Transworld Home HealthCare - Nursing Division, Inc.
("TNI") operations (the "TNI Sale"), which provided nursing and
para-professional services in New Jersey and Florida; (ii) exiting businesses
that were deemed not to have the potential to earn an adequate return on capital
over the long term (such as wound care and orthotic product lines in the
continental U.S., as well as the Company's pulmonary rehabilitation center in
Cherry Hill, New Jersey); (iii) completing the sale of substantially all of the
assets of Health Management, Inc. ("HMI") to Counsel Corporation (the "HMI Asset
Sale"); and (iv) terminating the agreements to purchase Kwik Care, Ltd. and VIP
Health Services, Inc. (the "VIP Companies"), nursing service companies serving
New York City and the surrounding areas. The Company also completed the
acquisitions of Omnicare plc ("Omnicare") and Allied Medicare Ltd ("Allied") in
July 1997 for an aggregate purchase price of approximately $91,000,000. Omnicare
provides respiratory equipment and services and supplies a range of medical and
surgical products to patients at home throughout the U.K. through its network of
seven regional facilities. Allied is a national provider of nursing and other
care-giving services to the community and U.K. healthcare institutions with
seventy-five locations throughout the U.K.
The Company's principal executive offices are located at 555 Madison
Avenue, New York, New York 10022, and the Company's telephone number at that
location is (212) 750-0064.
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STRATEGY
The Company's strategic focus is to become the leading health care staffing
and services company in the U.K. The Company's growth strategy is to take
advantage of recent major policy moves by the government funded National Health
Service ("NHS") and by private payors seeking to treat a much larger number of
patients than in the past and to shorten waiting lists for access to care, as
well as the general trend of local government toward outsourcing its home care
requirements to private industry.
It is the Company's intention to focus on internal growth, as well as to
acquire additional nursing and other care giving operations to expand and
complement its Allied operations. The Company believes that the health care
staffing and services industry in the U.K. is highly fragmented and that
additional acquisition opportunities will continue to arise in a general trend
toward industry consolidation. Consistent with this strategy, the Company
acquired a total of 17 nursing and carer operations during fiscal 1997, 1998 and
1999 in the U.K.
The Company believes that valuations for health care staffing and services
companies in the U.K. market are significantly more attractive than in the U.S.
Therefore, the Company has executed a program to establish its U.K. Operations
as a stand-alone entity with its own financing in order to enable it to execute
an aggressive expansion program. To that end, on December 20, 1999, the
Company's U.K. subsidiaries completed a $124,500,000 refinancing which repaid
the Company's existing senior indebtedness of $55,755,000 and provided
approximately $46,000,000 for additional acquisitions in the U.K. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
The Company believes that by structuring its U.K. Operations in such a
manner, it enables the U.K. subsidiaries to raise capital on more favorable
terms than may be available currently in the U.S., as well as positions the
Company to maximize the value of its ownership interest in the U.K. Operations
in the future, whether it be by way of a public offering of the U.K. Operation's
shares, through a strategic business combination, or other alternative means.
In addition, the Company's strategy for its U.S. operations is to expand
its Mail-Order Operations through increasing the number of patients serviced,
with a primary focus on its respiratory medication and diabetic supply product
lines. The Company also seeks to expand its Hi-Tech Operations through marketing
its services to physicians, managed care organizations, hospitals, and other
referral sources in its market area.
U.K. OPERATIONS
U.K. SERVICES AND PRODUCTS
The Company provides the following services and products in the U.K.: (i)
patient services, principally nursing and para-professional services, and (ii)
specialty pharmaceutical and medical supplies and respiratory therapy. The
Company's U.K. Operations' products and services are provided to patients
throughout the U.K.
During fiscal 1999, the Company derived 67.6% of its revenues from U.K.
Operations, with the following contributions by product line: 76.7% of its U.K.
revenues from patient services, 19.1% from specialty pharmaceutical and medical
supplies and 4.2% from respiratory therapy.
-2-
PATIENT SERVICES.
The Company offers its U.K. patient services through Allied, a commercially
oriented provider of nursing and care staff services to a broad range of
clients, particularly NHS trusts, nursing homes, private clients and local
authority social services departments. Allied was founded in 1972 as a home
nursing service and has expanded through the establishment and acquisition of
branch offices throughout the U.K. The branch network has expanded substantially
in recent years, through both organic growth and an on-going nursing and care
agency acquisition program. Allied is now represented by 75 branches spread
across the U.K.
The Company believes that the demand for most forms of nursing and other
health care services is expected to increase during the next twenty years as the
U.K. population grows older in line with demographic trends. Consequently, it is
anticipated that requirements for temporary nursing services will increase in
the future, benefiting Allied.
SPECIALTY PHARMACEUTICAL AND MEDICAL SUPPLIES OPERATIONS AND RESPIRATORY
THERAPY.
The Company offers its U.K. specialty pharmaceutical and medical supplies
and respiratory therapy through the following Omnicare subsidiaries: (i) Amcare
Ltd ("Amcare"); (ii) Allied Oxycare Ltd ("Oxycare"); and (iii) Medigas Ltd
("Medigas").
Specialty Pharmaceutical and Medical Supplies Operations. Amcare supplies
ostomy, continence care and wound care products directly to patients at home
under a prescription written by the patients' family doctor. Amcare also
receives reimbursement and remuneration fees from the U.K. Department of Health
for providing dispensing services as defined by the terms of service for
contractors to the NHS and the "Drug Tariff" (a booklet listing all current
prescribable goods) for prescribable goods. These services are offered
throughout the mainland of the U.K.
Respiratory Therapy. Medigas and its parent Oxycare service patients with
chronic respiratory diseases either directly at home or via the community
pharmacist. Medigas supplies filled oxygen cylinders to pharmacies for patients
at home who require lower volumes of oxygen per day or who may have temporary
respiratory conditions. These services are offered throughout the U.K. Oxycare
provides oxygen concentrators, which filter room air to provide a 95% oxygen
gas, to patients in their homes.
U.K. QUALITY ASSURANCE; DEPARTMENT OF HEALTH LICENSES
The Company's U.K. Operations maintain quality assurance policies and
procedures and closely monitor operations to provide quality care and services
to patients and health care professionals in the U.K. Where appropriate, the
Company's U.K. Operations operate under license of the U.K. Department of Health
and Medicines Control Agency ("MCA"), adhering to the terms and conditions of
service demanded by such licensing authority.
The European Quality Standards BS EN ISO 9002 have been awarded to both
Amcare and Oxycare. The awarding authority checks the continued adherence to
these standards on a six month basis with procedure manuals being available for
review at any time.
U.K. SALES AND MARKETING ACTIVITIES
The Company's U.K. Operations primarily market their products and services
to health care professionals who act as referral sources to patients. These
health care professionals include medics, nurses, pharmacists, administrators,
the NHS and private health care providers. Other important targets for
promotional activity include
-3-
patient associations and community social services organizations. Fundamental to
Allied's ability to obtain and retain referral sources is the ability to
establish and maintain a reputation for quality service and responsiveness to
the needs of referral sources and their patients and clients.
Allied markets its nursing agency service via superintendents and their
staff within each of its seventy-five independent locations. These branch
locations are supported by small teams of sales and marketing professionals
based centrally to coordinate and support the sales activity.
Amcare employs representatives to promote the dispensing and delivery
services of the Company in the U.K. and supports this with marketing and
managerial staff centrally based for coordination and customer support
activities.
Medigas and Oxycare are marketed directly to the pharmacist for oxygen
cylinders and the NHS Supplies for oxygen concentrator services, by a senior
manager. In addition to primary sales activity, delivery drivers play a key role
as secondary sales staff.
In general, the sales representatives and managers of the Company's U.K.
Operations market the Company's U.K. products and services through direct
contact with referral sources in the form of meetings, telephone calls and
solicitations. Contact is maintained with these sources to strengthen their
relationships. While representatives strive to develop the strongest provider
relationship possible, referral sources often choose to use several service and
product providers.
As in many European and U.S. markets, the escalating pressures to reduce
the cost of health care has, for some lines of business (prescribed products and
services, including cylinder oxygen, concentrators and medical supplies) in the
Company's U.K. Operations, resulted in reductions in reimbursement rates.
However, the focus towards offering integrated home health care can result in an
overall cost saving leading to, the Company believes, substantial sales
opportunities for the Company's U.K. Operations.
U.K. RECRUITING AND TRAINING OF PERSONNEL
The Company's U.K. Operations recruit, train, provide on-going education,
offer benefits and other programs to its staff appropriate to their needs and
the requirements of the business. Recruiting of staff is conducted primarily
through advertising, direct contact with employment and governmental
organizations and through the use of competitive salary and benefit packages.
The U.K. health care industry continues to face shortages of certain
qualified personnel. In particular, Allied's nursing business experiences
significant competition in recruiting qualified health care personnel for its
operations. Most of the registered and licensed health care professionals
employed by Allied are also registered with and accept placements from
competitors.
U.K. THIRD-PARTY REIMBURSEMENT
For the years ended September 30, 1999 and 1998, the Company's U.K.
Operations received approximately 54.0% and 53.8%, respectively of revenues from
U.K. governmental payors (primarily the NHS). The remaining 46.0% and 46.2%,
respectively of revenues were derived from products and services provided to the
private health care sector and other commercial organizations, such as privately
owned nursing homes.
In general, reimbursement is received regularly and reliably from all
governmental department payors and
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this is also the case for most of the remaining customer base. The Company's
U.K. Operations generally collects payments from all third-party payors within
two months after products are supplied or services are rendered but pays its
accounts payable and employees currently.
The billing and reimbursement process includes the rendering of invoices
for products and services rendered, as well as prescriptions and other support
documentation for reimbursement of drugs and medical supplies.
U.K. SUPPLIERS
The Company's U.K. Operations purchase their equipment and supplies
required in connection with the provision of its services from various approved
suppliers. The Company believes that there are a number of alternative sources
for these items at prices comparable to its current sources.
U.K. COMPETITION
The Company believes that there are no major integrated service providers
and few multi-regional or national providers of any individual product or
service in the U.K. The Company also believes that home health care providers
who possess the infrastructure to provide an integrated network of products and
service will have significant growth opportunities.
The Company believes that the principal competitive factors in the U.K.
are: quality of care; breadth of services; reputation and professional
presentation; innovation; and value for services. The Company believes that the
success of its U.K. Operations is related to all of the above factors.
The Company's U.K. Operations' nursing, medical supplies and respiratory
therapy services compete with local, national and international companies. The
nursing agency business of Allied is the second largest in the U.K.; however,
the leading competitor is approximately four times larger in sales revenue.
U.K. PATENTS AND TRADEMARKS
The Company's U.K. Operations own no patents. The Company's U.K. Operations
operate under the following trade names: "Allied Medicare Ltd," "Medicare,"
"Medigas Ltd," "Allied Oxycare Ltd," "Omnicare Ltd," "Transworld Healthcare (UK)
Ltd," "Amcare Ltd," "Allied Medicare Services Ltd" and "Allied Medical Nursing
Services." The Company does not believe that its business in the U.K. is
dependent upon the use of any patent or trademark or similar property.
U.K. EMPLOYEES
As of December 31, 1999, the Company's U.K. Operations employed
approximately 179 full-time employees and 42 part-time employees.
In addition, the Company's U.K. Operations maintain registers of
approximately 4,020 registered nurses, carers and aides available to staff home
and health service nursing arrangements on a temporary basis. The Company
considers its relationships with its U.K. employees to be satisfactory.
U.S. OPERATIONS
During fiscal 1999, the Company derived 32.4% of its revenues from U.S.
operations, with the following
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contributions by reportable business segments: 73.8% of its U.S. revenues from
Mail-Order Operations and 26.2% from Hi-Tech Operations.
U.S. SERVICES AND PRODUCTS
MAIL-ORDER OPERATIONS.
The Company's Mail-Order Operations provide specialty mail-order
pharmaceuticals and medical supplies to patients in their home nationwide and in
Puerto Rico. The Company operates its Mail-Order Operations in Jacksonville,
Florida and Puerto Rico, which specialize in supplying diabetic patients with
glucose monitors and test strips, as well as respiratory, diabetic, maintenance
and other commonly prescribed medications. The Company also provides ostomy
products nationwide. As part of its service to patients, the Company provides
direct billing to Medicare, Medicaid and private insurance companies, thereby
reducing or eliminating up-front cash outlays for the patient. In addition, the
Company provides free routine home delivery, eliminating trips to the pharmacy.
The Company believes that its patients elect to receive their prescription drugs
and supplies via mail-order primarily because of convenience and the cash
savings. During 1997, the Company exited its wound care and orthotic product
lines in the continental U.S. As a result of this action, the Company recorded
special charges of $12,079,000 for the write-off of goodwill and intangible
assets and additional bad debt reserves of $6,060,000 related to the wound care
and orthotic product lines. In addition, during fiscal 1999, the remaining
accounts receivable associated with the wound care and orthotic product lines
were reserved for, as the Company became aware of deterioration in their
collectibility. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
HI-TECH OPERATIONS.
The Company's Hi-Tech Operations provide the following services and
products in the U.S.: (i) infusion therapy; (ii) respiratory therapy; and (iii)
home medical equipment. The Company's Hi-Tech Operations are concentrated in New
Jersey and New York. During fiscal 1999, the Company's Hi-Tech Operations
derived 70.6% of its revenues from infusion therapy, 22.0% from respiratory
therapy and 7.4% from home medical equipment.
Infusion Therapy. Infusion therapy involves the intravenous administration
of antibiotics, nutrients or other medications to patients in their homes
usually as a continuation of treatment initiated in the hospital. 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. The Company offers these
therapies and services to patients in the New York metropolitan area and in New
Jersey from its facility located in Clark, New Jersey.
Respiratory Therapy. The Company provides home respiratory services to
patients with a variety of conditions, primarily chronic obstructive pulmonary
disease (e.g., emphysema, chronic bronchitis and asthma). The Company employs a
clinical staff of 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 U.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. Accordingly, the Company generally
promotes its home medical equipment and services business as a
-6-
complementary product line in each of the markets where it also provides
respiratory therapy and infusion therapy.
U.S. QUALITY ASSURANCE; JCAHO 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 all of the Company's Hi-Tech Operations. JCAHO does not accredit
mail-order pharmacy operations and as such, the Company's U.S. Mail-Order
Operations are not eligible for such accreditation. The Company believes that
accreditations of its eligible facilities by JCAHO is a prerequisite for
entering into contracts with managed care providers and other intermediaries and
for obtaining and maintaining required licensure or certification.
U.S. 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
Hi-Tech Operations. The Company uses primarily the same sales force to
cross-market its products and services. The Company uses full-time and part-time
sales employees for its Mail-Order 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 sales presentations. The representatives maintain 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 home health care companies. The sales
representatives are trained by the Company to provide information to referral
sources concerning the quality and convenience of the Company's home health care
services and the potential 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.
During the latter part of 1996 and thereafter, there continued to be a
changing regulatory environment with respect to certain of the Company's product
lines, including, for example, developments affecting the respiratory
medications and the diabetic supplies segments 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 address these developments.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- General."
U.S. THIRD-PARTY REIMBURSEMENT
Substantially all of the Company's U.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
-7-
a result of third-party payment procedures. The Company generally collects
payments from third-party payors within three months after products are supplied
or services are rendered, but pays its accounts payable and employees currently.
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 managed care plans require very specific procedures and
documentation prior to approving any request for reimbursement. 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. The Company accepts assignment of insurance
benefits from the patient, and in most instances the third-party payors pay the
Company directly.
For the year ended September 30, 1999, 64.5% and 6.9%, respectively, of the
Company's U.S. revenues were directly attributable to the Medicare and Medicaid
programs. For the year ended September 30, 1998, 60.6% and 12.9%, respectively,
of the Company's U.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 September 30, 1999 versus 1998
was primarily the result of a decrease in revenues attributable to the sale of
the Company's nursing operations which did not derive any revenue from Medicare.
U.S. 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 specialty mail-order pharmacy and medical
supplies operations, from various suppliers. The Company believes that there are
a number of available sources of supply for the Company's products. The Company
has, from time to time, experienced difficulties in obtaining generic equivalent
diabetic testing strips due to shipping suspensions or product shortages from
its supplier. Historically, in these instances the Company has been able to
obtain equivalent product from alternate suppliers at similar cost. In the
future, any lengthy shortages or suspensions of their shipments, coupled with
the inability to secure product from alternate suppliers at similar cost, could
have a material adverse effect on the Company's results of operations and cash
flows.
U.S. COMPETITION
The home 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 the U.S. 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 for certain payors, price.
The Company's Mail-Order and Hi-Tech Operations, compete with numerous
local, regional and national companies. 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.
U.S. PATENTS AND TRADEMARKS
The Company owns no patents in the U.S. The Company owns the following
service marks in the U.S.: "Steri-Pharm," "Transworld Nurses, Inc.," "Advocate
Home Care" and "Respiflow." The Company does not believe that its business is
dependent upon the use of any patent or trademark or similar property.
-8-
U.S. EMPLOYEES
As of December 31, 1999, the Company had approximately 279 full-time
employees and approximately 44 part-time employees in the U.S. The Company
considers its relationship with its U.S. employees to be satisfactory.
GOVERNMENT REGULATION
U.K. GOVERNMENT REGULATION.
General. The Company's U.K. Operations are subject to regulations by the
government of the U.K. via acts of Parliament related to health care provision.
These acts generally fall under the Department of Health and relate to services
provided to the general public under the NHS.
Approximately 85% of health care in the U.K. is provided under the NHS with
the remaining 15% being provided by private health care organizations. However,
all care provision is regulated under the general health regulations of the
Department of Health.
Health Care Reform. The NHS has released a green paper "Towards a Healthier
Future" and two white papers, one concerned with community care and the second
with primary care reforms.
The current Labour government has continued to develop the previous Tory
government's plans of devolving decisions on patient care down to the family
doctor. Primary Care Groups, based on local communities are now in operation,
which will increasingly mean that decisions related to patient care and the
funding required, will be decided by a group representing general practitioners,
nurses, pharmacists and community care workers operating in conjunction with the
District Health Authorities and Local Authorities.
In addition to this top-level development change, the NHS continues to seek
ways in which it can reduce costs. The Company believes that contractors to the
NHS will continue to come under pressure over the next 5 years, until the next
election, with the current government's determination to fund changes in the NHS
without increasing direct taxation.
Licenses for Contractors and Suppliers. The Company's U.K. Operations are
subject to licensing and approval regulations from both governmental and
non-governmental bodies according to terms of service and operating procedures
decided by the U.K. government.
Allied operates under the Nurses Act (England and Wales) 1957 and 1961
Amendment and the Nurses Agency Act (Scotland) 1957. In addition, Allied is
accredited by various U.K. social services agencies for the supply of carers to
the Community Services, within that specific area. The MCA has granted licenses
to Oxycare and Medigas for the production and distribution of medical grade
oxygen to the network of 12,000 pharmacies throughout the U.K. Amcare operates
as a dispensing appliance contractor and as such holds nine licenses for
premises which provide dispensing services to patients on the mainland of the
U.K. The Company operates under terms of service for pharmacy contractors
outlined in the National Service Act 1977(a) and the NHS (Pharmaceutical
Services) Regulations 1992. Levels of reimbursement and remuneration are
published monthly in the NHS's Drug Tariff.
Fraud and Abuse. In late 1997, the Prescription Pricing Authority released
a report on "Prescription Fraud in the NHS" and certain recommendations have
been introduced to reduce the level of fraud by patients and contractors to the
NHS since April 1998. New prescription forms have been issued which are more
"secure" for the prescriber
-9-
while patients have to make signed undertakings that they are entitled to
receive the prescribed drugs. Regarding contractor fraud with prescriptions, a
number of practices were identified and challenged as to their legality.
The Company believes that its practices regarding claim for reimbursement
and remuneration are in substantial compliance with applicable law and it has
recently amended, while continuing to review its practices in light of recent
recommendations to ensure they are in line with governmental regulations.
The Company believes that it is in substantial compliance in all material
respects with U.K. health care laws and regulations applicable to its U.K.
Operations.
U.S. 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, supplier standards,
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 are in substantial
compliance with applicable Federal and state laws and regulations in all
material respects. However, changes in the law or new interpretations of
existing laws could 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 U.S. to fundamental change. Although
Congress has failed to pass comprehensive health care reform legislation, the
Balanced Budget Act of 1997 (the "Balanced Budget Act") made several changes to
the Medicare reimbursement system that affect payment for the products provided
by the Company. Some of these provisions include an expansion of coverage of
diabetic testing supplies to non-insulin-treated Medicare diabetics, a 10%
reduction of Medicare payment rates for diabetic testing strips, as of January
1, 1998, a 5% reduction of Medicare payment rates for respiratory drugs, as of
January 1, 1998, a requirement that skilled nursing facilities provide directly
and bundle into their payment certain items, including medical supplies, which
may have been previously provided by outside suppliers, a freeze on the update
factor for durable medical equipment and supplies, and parenteral and enteral
equipment and supplies, a provision regarding billing for upgraded medical
equipment, and authorization for a competitive pricing demonstration program.
Under the Social Security Act's authority to the Health Care Financing
Administration ("HCFA") to alter certain reimbursement rates that are not
inherently reasonable, Medicare is proposing additional inherent reasonableness
cuts to Medicare payment rates as follows: (i) up to a 3.38% (depending on the
state) reduction for diabetic testing strips; (ii) a 15% reduction in Medicare
payment rates for diabetic lancets, and an additional 15% and 2.32% in
subsequent years; and (iii) a 10.5% reduction for albuterol sulfate (a
respiratory drug). On November 29, 1999, President Clinton signed into law the
Medicare, Medicaid and S-CHIP Balanced Budget Refinement Act of 1999, better
known as the Provider Relief Act. The Provider Relief Act provides that HCFA may
not use or permit its contractors to use the inherent reasonableness process
until after (i) the Comptroller General of the United States issues a report
regarding the impact of HCFA's and/or its contractor's use of such authority;
and (ii) HCFA has published final regulations implementing the agency's inherent
reasonableness authority. Consequently, it is unclear if or when HCFA will be
able to implement any of its previously proposed inherent reasonableness
reductions for diabetic testing strips, diabetic lancets or albuterol sulfate or
any other items and services supplied by the Company to Medicare beneficiaries.
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
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changes in the health care delivery system. 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. 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
consolidated business, financial position, cash flows or results of operations.
Permits and Licensure. Certain of the Company's facilities are subject to
state licensure laws, including licensing from state boards of pharmacy. 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
and nurses also are subject to state licensing requirements. The Company
believes that it is in substantial compliance with all applicable licensure
requirements.
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 Company also is subject to Federal and state
laws governing certain financial relationships with physicians and other fraud
and abuse laws prohibiting the submission of false claims.
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 provision of health care services. Violations of the statute may
result in criminal penalties, including fines of up to $25,000 and imprisonment
for up to five years for each violation, exclusion from participation in the
Medicare and Medicaid programs, and civil penalties of up to $50,000 and treble
the amount of remuneration for each violation. The Balanced Budget Act increases
accountability and strengthens program integrity through additional fraud and
abuse penalties.
The U.S. Department of Health and Human Services' ("HHS") Office of
Inspector General ("OIG") 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 OIG 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 self-referral or "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, outpatient prescription drugs and home medical equipment, which are
products and services provided by the Company), the physician is prohibited from
referring a Medicare patient to the health care provider, and that
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provider is prohibited from billing Medicare, for the designated health service.
The Stark Law has certain statutory exceptions. In August 1995, regulations were
issued pursuant to the Stark Law as it existed prior to significant amendments
enacted in 1993. The preamble to these regulations states that 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, the Company believes that its investments will qualify
for the publicly-traded securities exception because it has shareholder equity
of at least $75,000,000. Submission of a claim that a provider knows or should
know is for services for which payment is prohibited under the Amended Stark
Law, and which does not meet an exception 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 program. In addition a state
cannot receive Federal financial participation payments under the Medicaid
program for designated health services furnished to an individual on the basis
of a physician referral that would result in a denial of payment under Medicare
if Medicare covered the services to the same extent as under a state Medicaid
plan.
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. Recent
government 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 in substantial compliance with the
Anti-kickback Statute or the Amended Stark Law.
The 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. The OIG also has issued "Fraud Alerts" relating to
improper business practices in the provision of medical supplies to nursing
homes, and is expected to issue additional Fraud Alerts in the future as a means
of advising the public of suspect business arrangements and practices in the
health care industry. In addition, providers of 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 and/or other providers 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 is in substantial compliance with all material respects with applicable
provisions of the Anti-kickback Statute, the Amended Stark Law, False Claims and
applicable state laws, although because of the broad and sometimes vague nature
of these laws, there can be no assurance that an enforcement action will not be
brought against the Company or that the Company will not be
-12-
found to be in violation of one or more of these provisions. The Company intends
to monitor developments under these Federal and state fraud and abuse laws. At
this time, the Company cannot anticipate what impact, if any, subsequent
administrative or judicial interpretation of the applicable Federal and state
fraud and abuse laws may have on the Company's consolidated business, financial
position, cash flows or results of operations.
On July 11 and July 22, 1997, the Company's RespiFlow, Inc. ("RespiFlow")
and MK Diabetic Support Services, Inc. ("MK") subsidiaries, respectively, each
received a letter (the "Audit Letters") from the HHS' Office of Audit Services,
a division of the OIG. The Company was subsequently informed that the Audit
Letters cover its DermaQuest, Inc. ("DermaQuest") subsidiary. The Company has
produced certain documents and provided related information to the OIG and to
the U.S. Attorney for the Eastern District of Texas regarding these
subsidiaries' financial relationships with suppliers of durable medical
equipment and various other practices including the subsidiaries' practices
regarding the collection of coinsurance and deductible amounts due from Medicare
beneficiaries. Additionally, on November 19, 1997, the Company was notified by
the U.S. Attorney for the Eastern District of Texas that the Company, RespiFlow,
MK, and various other non-affiliated entities had been named defendants in a qui
tam action under the Federal False Claims Act. The qui tam action was recently
unsealed and a copy the complaint was provided to the Company. The relator is a
private party who has brought action on behalf of the Federal government. At
present, the Company has entered into settlement discussions with the Department
of Justice ("DOJ") and the OIG in an effort to bring closure to this matter and
to avoid the expense, disruption and uncertainty of litigation. The counsel for
the relator has been involved in these settlement discussions as well. At
present, the Company is not able to determine when a final settlement will be
reached with the DOJ, the OIG and the relator or whether any proposed settlement
can be concluded on terms acceptable to the Company. Accordingly, the Company is
unable to estimate what the appropriate loss might be at this time. In the event
that these settlement discussions are unsuccessful the Company will defend
vigorously its interest in these matters. As such, the Company cannot predict
whether the outcome of these actions will have a material adverse effect on the
Company's consolidated financial position, cash flows or results of
operations.
INSURANCE
Participants in both the U.K. and U.S. health care markets 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, as appropriate. 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 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 consolidated business, financial position, 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.
ITEM 2. PROPERTIES.
The Company owns three and leases forty-nine facilities in the U.K. (of
which sixteen are for a period of three months or less) and leases a total of
six facilities in three states and Puerto Rico. In addition, there are
thirty-nine facilities in the U.K. which are owned or leased by branch
representatives. Management 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
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operations. See Note 12 of the Notes to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS.
THE COMPANY
On February 4, 1997, Patient Care Systems, Inc. ("PCS") filed a lawsuit
against DermaQuest and the Company in the Court of Common Pleas of Chester
County, Pennsylvania, for breach of contract, conversion, unjust enrichment and
misrepresentation. Subsequently, PCS withdrew all claims except for its breach
of contract claim. On April 22, 1997, DermaQuest filed a counterclaim against
PCS for breach of contract. The action related to a contract initially entered
into between DermaQuest and PCS to market alternating pressure mattresses. A
jury trial in this matter began on June 28, 1999. On July 2, 1999, the jury
reached their verdict finding in favor of PCS on its breach of contract claim
and finding in favor of DermaQuest on its breach of contract counterclaim. Post
verdict, the parties settled the litigation whereby DermaQuest and the Company
agreed to pay a total of $180,000, as a full, final and complete resolution of
the dispute.
On August 20, 1999, TNI was named a defendant in a suit brought by Teresa
Crutcher, in New Jersey state court, as administrator of the estate of Aaron
Pernell, who was an infant and Teresa Crutcher's son. The claim is for wrongful
death of Aaron Pernell alleged to have been caused by the negligent manner in
which a TNI home care nurse placed him in an infant car seat. TNI has answered
the complaint. The claim is insured. As the case is in a preliminary stage, the
Company is not able to estimate any potential exposure and has not recorded any
amounts in its financial statements. It is possible that irrespective of
insurance coverage, the ultimate outcome of this action could be materially
unfavorable to the Company's consolidated financial condition, cash flows, or
results of operations. However, the Company intends to defend the proceedings
vigorously and 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, cash flows, or results of
operations.
On April 13, 1998, a shareholder of the Company, purporting to sue
derivatively on behalf of the Company, commenced a derivative suit in the
Supreme Court of the State of New York, County of New York, entitled Kevin Mak,
derivatively and on behalf of Transworld Healthcare, Inc., Plaintiff, vs.
Timothy Aitken, Scott A. Shay, Lewis S. Ranieri, Wayne Palladino and Hyperion
Partners II L.P., Defendants, and Transworld Healthcare, Inc., Nominal
Defendant, Index No. 98-106401. The suit alleges that certain officers and
directors of the Company, and Hyperion Partners II L.P. ("HPII"), breached
fiduciary duties to the Company and its shareholders, in connection with a
transaction, approved by a vote of the Company's shareholders on March 17, 1998,
in which the Company was to issue certain shares of stock to HPII in exchange
for the HMI Receivables (as defined and described in "Certain Relationships and
Related Transactions - Transactions with Principal Shareholders"). The action
seeks injunctive relief against this transaction, damages and costs and
attorneys' fees in unspecified amounts. The transaction subsequently closed and
the plaintiff has, on numerous occasions, stipulated to extend the defendants'
time to respond to this suit. The most recent stipulation provides for an
extension to March 3, 2000.
HMI
Effective October 1, 1997, the Company owned 100% of the stock of HMI.
HMI and certain of its current and former officers have been named as
defendants in a class action lawsuit filed on April 3, 1997 in the United States
District Court for the Eastern District of New York formerly entitled Nicholas
Volonnino et al. v. Health Management, Inc., W. James Nicol, Paul S. Jurewicz
and James Mieszala, 97 Civ.
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1646. The action was amended on September 12, 1997, and is now entitled Dennis
Baker et al. v. Health Management, Inc., BDO Seidman, LLP, Transworld
HealthCare, Inc., W. James Nicol, Paul S. Jurewicz and James Mieszala. The
plaintiffs asserted claims under Sections 10(b) and 20 (a) of the Securities
Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, arising out of
alleged misrepresentations and omissions by HMI in connection with certain of
its previous securities filings and press releases. The Company was sued as an
alleged control entity of HMI, based upon its acquisition of 49% of HMI's
outstanding common stock on January 13, 1997. The plaintiffs purport to be a
class of persons who purchased shares of HMI common stock between April 26, 1996
and March 17, 1997, the date that HMI announced that it would have to restate
certain of its financial statements and that it was renegotiating its deal with
the Company. Plaintiffs sought unspecified compensatory damages from the harm
that allegedly resulted from the alleged wrongdoing. Following the filing of
several motions by the parties and the filings of an amended complaint by the
plaintiffs, to which defendants responded, a memorandum of understanding, dated
March 16, 1999, setting forth the terms of a settlement of this litigation, was
executed by the plaintiffs, the Company, W. James Nicol, Paul S. Jurewicz, James
Mieszala, and HMI (the "HMI Defendants") and National Union Fire Insurance
Company of Pittsburgh, Pennsylvania ("National"). The total settlement to be
paid by the HMI Defendants is $2,375,000. The Company is directly responsible to
pay $325,000 of the settlement amount and National (as a separate party to the
settlement) is directly responsible to pay the remaining $2,050,000. Of the
$325,000 to be paid by the Company, $50,000 will be reimbursed by the Company's
directors' and officers' insurance policy carrier. On July 26, 1999, the
plaintiffs and BDO Seidman LLP entered into a preliminary agreement to settle
the claims against BDO Seidman LLP for $100,000. The Court subsequently
certified the class of plaintiffs to include all persons or entities who
purchased or otherwise acquired the common stock of HMI between April 26, 1996
and March 17, 1997 inclusive, except the defendants and related parties. In
November 1999, the Court gave final approval to the settlement.
On July 2, 1998, a former shareholder of HMI purporting to sue on behalf of
a class of shareholders of HMI as of June 6, 1997, commenced a suit in the
Delaware Chancery Court, New Castle County, entitled Kathleen S. O'Reilly v.
Transworld HealthCare, Inc., W. James Nicol, Andre C. Dimitriadis, Dr. Timothy
J. Triche and D. Mark Weinberg, Civil Action No. 16507-NC. Plaintiff alleged
that the Company, as majority shareholder of HMI, and the then directors of HMI,
breached fiduciary duties to the minority shareholders of HMI by approving a
merger between HMI and a subsidiary of the Company for inadequate consideration.
Plaintiff demands an accounting, damages, attorney's fees and other payment for
other expenses for unspecified amounts. The defendants filed a motion to dismiss
this action on September 18, 1998. The Court denied defendants' motion in part
and granted the motion in part, leaving intact certain claims. Plaintiff has
propounded discovery requests. The claims are insured.
HMI was named as a defendant in a lawsuit filed on November 25, 1997, in
the Chancery Court for the State of Delaware for New Castle County, entitled
Clifford E. Hotte v. Health Management, Inc., CA No. 1606-NC. The plaintiff
sought reimbursement and advancement of legal fees and expenses in the amount of
$1,000,000 incurred or anticipated in connection with his defense of certain
claims against him, a director and officer of HMI, in various litigation. The
Court granted plaintiff a preliminary injunction requiring HMI to pay $824,000
for plaintiff's legal expenses. As part of the settlement of a class action
litigation in which Clifford Hotte was still a defendant, but to which the
Company was not a party (although it had been previously), HMI's insurer,
National agreed to pay $1,000,000 to settle all of the class action plaintiffs'
claims against Clifford Hotte and his wife, who was a co-defendant, in exchange
for mutual releases of the parties and a release from Clifford Hotte of his
judgement and any further claims against HMI, including the $824,000 legal
expenses.
By letter dated December 20, 1999, the Company received formal written
notification of the intent of two plaintiffs to file a civil action in the Court
of Common Pleas of Allegheny County, Pennsylvania against Transworld Healthcare,
Inc., Transworld Home Healthcare, Inc., Health Management, Inc. and HMI
Pennsylvania, Inc. The two plaintiffs, Irwin Hirsch and Lloyd Myers, formerly
were employees of HMI Pennsylvania, Inc.
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a subsidiary of the Company, and had written employment agreements. Myers also
served as an officer of HMI. In their capacities as employees and as officers,
both had some contractual indemnification rights against HMI and HMI
Pennsylvania, Inc. for defense and indemnification. In 1994, Hirsch and Myers
also sold two retail pharmacies they owned to HMI.
Hirsch and Myers were named as defendants in an action 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),
which was a class action by shareholders of HMI alleging, among other claims
against the defendants, fraud in connection with the valuation of certain
securities. Hirsch and Myers incurred non-reimbursed legal expenses of $100,000
in defending that litigation and, ultimately, settled their liability jointly
for $1,325,000, which was non-reimbursed. They demand that defendants reimburse
to them their non-reimbursed legal fees and the settlement amount pursuant to
the indemnification provisions of their employee contracts.
In addition to their indemnification claims, Hirsch and Myers also claim
damages in the amount of $7,000,000 for losses in connection with the pharmacies
sale transaction they entered into with HMI under which they sold their retail
pharmacies to HMI. Hirsch and Myers claim that the pharmacies sale transaction
was based upon fraudulent misrepresentations by HMI.
The Company and HMI entities will vigorously defend against these claims.
The Company believes that Hirsch and Myers' indemnification claims should not
have any real merit because of testimony given by Hirsch and Myers under oath in
connection with a criminal trial against Clifford Hotte, a director and former
officer of HMI. In their testimony, Hirsch and Myers acknowledged malfeasance
and nonfeasance, which should render their contractual entitlement to
indemnification void. Even if they are entitled to indemnification despite their
acknowledgements, they are liable to defendants for the economic losses and
damages suffered by defendants as a result of the malfeasance and nonfeasance.
Therefore if the civil actions are filed, the Company and HMI entities will
aggressively pursue counterclaims against Hirsch and Myers for damages which,
conservatively, are far in excess of their claims, including the claims
associated with the pharmacies sale transaction.
The enforcement division of the Securities and Exchange Commission (the
"Commission") has issued 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 fully cooperating with this
investigation and has responded to the requests of the Commission for
documentary evidence.
The outcomes of certain of the foregoing lawsuits and the investigation
with respect to HMI are uncertain and the ultimate outcomes could have a
material adverse affect on the Company.
The Company is 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 believes these
matters should not have a material adverse impact on the consolidated financial
position, cash flows, or results of operations of the Company.
See also "Business Government Regulation."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its annual meeting of shareholders on September 14, 1999
(the "Annual Meeting"). The proposals voted upon at the Annual Meeting were (1)
to elect five directors to serve for a term of one year and
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until their respective successors are duly elected and qualified and (2) to
ratify the appointment by the Company's Board of Directors of
PricewaterhouseCoopers LLP, as independent accountants of the Company for the
fiscal year ending September 30, 1999.
The voting results with respect to each proposal are set forth below:
ABSTAIN/
PROPOSAL FOR AGAINST NON-VOTING
-------- --- ------- ----------
No. 1 (election of Directors) -
Messrs. Timothy M. Aitken 16,121,603 85,014 -
Lewis S. Ranieri 16,121,603 85,014 -
Scott A. Shay 16,121,603 85,014 -
Jeffery S. Peris 16,121,603 85,014 -
G. Richard Green 16,121,603 85,014 -
No. 2 16,136,000 63,067 7,550
-17-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock is quoted on the American Stock Exchange ("Amex") and is
traded under the symbol "TWH." Prior to April 30, 1999, the Common Stock was
quoted on the Nasdaq National Market (the "NASDAQ/NM") under the symbol "TWHH."
The following table sets forth, for the periods indicated, the high and low
sales price of the Common Stock on the NASDAQ/NM through April 29, 1999, and
thereafter on Amex.
PERIOD HIGH LOW
------ ---- ---
Year Ended September 30, 1998:
First Quarter................................ $ 9-7/8 $ 6-13/16
Second Quarter............................... 7-13/16 5-1/2
Third Quarter................................ 7-1/8 5-7/16
Fourth Quarter............................... 6 2-1/8
Year Ended September 30, 1999:
First Quarter................................ 5-13/32 2-1/8
Second Quarter............................... 5 2-5/8
Third Quarter................................ 4-7/8 2-5/16
Fourth Quarter............................... 3-15/16 1-1/2
Year Ended September 30, 2000:
First Quarter................................ 3-1/8 1-1/2
Second Quarter (through January 7, 2000)..... 2-5/8 1-5/8
As of January 3, 2000, there were approximately 168 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 position, 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 former senior secured revolving credit facility (the
"Credit Facility), the Company was prohibited from paying dividends or making
other cash distributions. Under the terms of the Refinancing (as defined and
described in "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources"), the Company's U.K.
subsidiaries are 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." See also
"Executive Compensation -- Stock option Plans."
-18-
ITEM 6. SELECTED FINANCIAL DATA.
The financial data for the years ended September 30, 1999 and 1998 and
the eleven months ended September 30, 1997 and balance sheet data as of
September 30, 1999 and 1998 as set forth below have been derived from the
consolidated financial statements of the Company for the periods indicated and
should be read in conjunction with those consolidated 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 "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
ELEVEN MONTHS
ENDED
YEAR ENDED SEPTEMBER 30, SEPTEMBER 30,(1) YEAR ENDED OCTOBER 31,
------------------------- ------------- --------------------------
1999 1998 1997(2) 1996(3) 1995(4)
------------------------- ------------- --------------------------
FINANCIAL DATA:
Net patient services....................... $ 80,169 $ 68,887 $ 29,844 $ 19,164 $ 18,870
Net respiratory, medical equipment
and supplies sales ...................... 65,277 76,185 52,562 47,170 42,782
Net infusion services...................... 9,282 10,237 11,038 9,970 9,935
-------- -------- --------- ----------- --------
Total revenues............................. 154,728 155,309 93,444 76,304 71,587
Cost of revenues........................... 99,410 97,192 51,387 34,680 32,730
-------- -------- --------- ----------- --------
Gross profit............................... 55,318 58,117 42,057 41,624 38,857
Selling, general and administrative
expenses ................................ 57,946(5) 51,980(6) 42,931 33,552 29,774
Gain on sale of assets..................... (2,511)(7) (606)(8)
Special charges, primarily goodwill
impairment.............................. 16,677(9) 3,898(10)
Equity in loss of HMI, net................. 18,076
-------- -------- --------- ----------- --------
Operating (loss) income.................... (2,628) 8,648 (35,021) 8,072 5,185
Interest income............................ (227) (635) (2,271) (75) (68)
Interest expense........................... 5,445 6,286 5,063 4,427 3,767
(Benefit) provision for income taxes ...... (500) 1,844 (5,078) 1,702 627
-------- -------- --------- ----------- --------
(Loss) income before extraordinary item ... (7,346) 1,153 (32,735) 2,018 859
Extraordinary item......................... (1,435)(11)
-------- -------- --------- ----------- --------
Net (loss) income.......................... $ (7,346) $ 1,153 $(32,735) $ 583 $ 859
======== ======== ========= =========== ========
(Loss) income per share of common
stock before extraordinary item(12):
Basic...................................... $ (0.42) $ 0.07 $ (2.56) $ 0.29 $ 0.15
======== ======== ========= =========== ========
Diluted.................................... $ (0.42) $ 0.07 $ (2.56) $ 0.26 $ 0.13
======== ======== ========= =========== ========
Net (loss) income per share of
common stock(12):
Basic...................................... $ (0.42) $ 0.07 $ (2.56) $ 0.08 $ 0.15
======== ======== ========= =========== ========
Diluted.................................... $ (0.42) $ 0.07 $ (2.56) $ 0.07 $ 0.13
======== ======== ========= =========== ========
Weighted average number of
common shares outstanding(12):
Basic...................................... 17,547 17,327 12,794 7,035 5,637
======== ======== ========= =========== ========
Diluted.................................... 17,547 17,488 12,794 7,833 6,868
======== ======== ========= =========== ========
-19-
SEPTEMBER 30, OCTOBER 31,
------------------------------------------- ----------------------
1999 1998 1997 1996 1995
-------- --------- --------- ------- -------
BALANCE SHEET DATA:
Working capital............ $ 26,005 $ 39,148 $ 26,411 $26,201 $ (4,706)(13)
Accounts receivable, net... 30,814 32,223 31,475 24,414 18,906
Total assets............... 172,121 179,708 201,281 90,727 74,912
Long-term debt............. 54,407 57,307 61,400 12,505 20,264
Total shareholders' equity. 91,274 101,905 81,905 67,225 24,086
- ---------
(1) The Company changed its fiscal year from October 31 to September 30
effective for fiscal 1997. This resulted in an eleven month reporting
period for the period ended September 30, 1997.
(2) The financial data for the eleven months ended September 30, 1997 includes
the results of operations of Omnicare and Allied from their dates of
acquisition (effective July 1, 1997 and June 23, 1997, respectively).
(3) The financial data for the year ended October 31, 1996 includes the results
of operations of Health Meds, Inc. ("Health Meds") and U.S. Home Care
Infusion Therapy Services Corporation of New Jersey ("USNJ") from their
dates of acquisition (effective October 1, 1996).
(4) The financial data for the year ended October 31, 1995 includes the results
of operations of DermaQuest (effective November 1, 1994), The Pulmonary
Division of Delaware Valley Lung Center, P.C. (effective January 1, 1995)
and Precision Health Care, Inc. (effective March 1, 1995) from their
respective dates of acquisition.
(5) Includes charges totaling $1,392,000 in the fiscal year ended September 30,
1999, primarily as a result of the attempted acquisitions of Sinclair
Montrose Healthcare PLC ("Sinclair") and Gateway HomeCare, Inc. ("Gateway")
and additional legal reserves.
(6) Includes charges totaling $554,000 in the fiscal year ended September 30,
1998 resulting from a write-off of expenses related to its attempted
acquisitions of Healthcall Group plc ("Healthcall") and Apria Healthcare
Group, Inc. ("Apria").
(7) The Company recorded a gain of $2,511,000 on the TNI Sale in the fiscal
year ended September 30, 1998.
(8) The Company recorded a gain of $606,000 on the sale of Radamerica in the
eleven months ended September 30, 1997.
(9) The Company reported special charges totaling $16,677,000 in the eleven
months ended September 30, 1997 resulting from a $1,841,000 non-cash charge
related to impairment of the investment in HMI, as well as to record
estimated costs, fees and other expenses related to completion of the HMI
Asset Sale, a $12,079,000 non-cash charge for the write-off of goodwill and
other intangible assets related to exiting the wound care and orthotic
product lines of DermaQuest, a $1,622,000 non-cash charge for the
termination of the agreements to purchase the VIP Companies, a $437,000
charge for closure of the Company's pulmonary rehabilitation center in
Cherry Hill, New Jersey, and $698,000 of other charges.
(10) The Company reported special charges totaling $3,898,000 in the fiscal year
ended October 31, 1995 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).
(11) 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 Company's former
credit agreement.
(12) Weighted average shares have been restated for the eleven months ended
September 30, 1997 and the fiscal years ended October 31, 1996 and 1995 to
reflect the provisions of Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share"("EPS"). SFAS No. 128 replaced
primary EPS with basic EPS and fully diluted EPS with diluted EPS. The
effects of this restatement were to increase basic from primary income per
share before extraordinary item by $0.03 and diluted from fully diluted
income per share before extraordinary item by $0.01 for the year ended
October 31, 1996, to increase basic from primary income per share before
extraordinary item and net income by $0.02 and diluted from fully diluted
income per share before extraordinary item and net income by $0.01 for the
year ended October 31, 1995.
(13) Includes a $5,973,000 acquisition payable in connection with the
acquisition of RespiFlow and MK and an $8,832,000 acquisition payable in
connection with the acquisition of DermaQuest.
-20-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
The Company changed its fiscal year to end on September 30 from October 31
effective for fiscal 1997. This resulted in an eleven month reporting period for
the period ended September 30, 1997.
The Company is a provider of a broad range of health care services and
products with operations in the U.K. and the U.S. The Company provides the
following services and products: (i) patient services, including nursing and
para-professional services; (ii) specialty mail-order pharmaceuticals, medical
supplies, respiratory therapy and home medical equipment; and (iii) infusion
therapy. The Company provides these services and products from the following
reportable business segments: (i) U.K. Operations; (ii) U.S. Mail-Order
Operations; and (iii) U.S. Hi-Tech Operations. The Company's U.K. Operations
include the U.K.'s second largest commercial provider of nursing and
para-professional care to the community and U.K. healthcare institutions, the
U.K.'s second largest home respiratory supplier as well as a leading value-added
medical supplies distributor, all with operations located throughout the U.K.
The Company's Mail-Order Operations provide specialty mail-order pharmaceutical
and medical supplies (including respiratory and diabetic medications and
supplies, as well as ostomy and orthotic products) to patients in their home
nationwide and in Puerto Rico while its U.S. Hi-Tech Operations provide infusion
and respiratory therapy services and home medical equipment and are concentrated
in New Jersey and New York.
The Company took a number of significant steps during the fiscal year ended
September 30, 1998 and the Eleven Month Period to realign its business as a
focused regional home health care provider and specialty pharmacy and medical
supply distributor in the U.S. and as an integrated national provider of home
and alternate site health care products and services in the U.K. These steps
included (i) selling non-core assets such as the Company's Radamerica business
which provided radiation therapy in the Baltimore, Maryland area and the
Company's TNI operations, which provided nursing and para-professional services
in New Jersey and Florida; (ii) exiting businesses that were deemed not to have
the potential to earn an adequate return on capital over the long term (such as
wound care and orthotic product lines in the continental U.S., as well as the
Company's pulmonary rehabilitation center in Cherry Hill, New Jersey); (iii)
completing the HMI Asset Sale; and (iv) terminating the agreements to purchase
the VIP Companies. The Company also completed the acquisitions of Omnicare and
Allied in July 1997 for an aggregate purchase price of approximately
$91,000,000. Omnicare provides respiratory equipment and services and supplies a
range of medical and surgical products to patients at home throughout the U.K.
through its network of seven regional facilities. Allied is a national provider
of nursing and other care-giving services to the community and U.K. healthcare
institutions with seventy-five locations throughout the U.K.
The Company's revenue mix and payor mix will be influenced to a significant
degree by the relative
-21-
contribution of acquired businesses and their respective payor profiles. The
following table shows the percentage of historical net revenues represented by
each of the Company's product lines:
Eleven Months
Year Ended Year Ended Ended
September 30, September 30, September 30,
1999 1998 1997
------ ----- -----
Product Line
- ------------
Net patient services................... 51.8% 44.4% 31.9%
Net respiratory, medical
equipment and supplies sales ......... 42.2 49.0 56.3
Net infusion services.................. 6.0 6.6 11.8
------ ----- -----
Total revenues....... 100.0% 100.0% 100.0%
====== ===== =====
The increase in net patient services as a percentage of total revenues for
the year ended September 30, 1999 as compared to 1998 is primarily due to growth
in Allied's branch network (both organically and through the on-going nursing
and care agency acquisition program). The decrease in net respiratory medical
equipment and supplies sales as a percentage of revenues for the year ended
September 30, 1999 as compared to 1998 is due primarily to a decrease in
revenues in the Company's U.S. Mail-Order and Hi-Tech Operations due principally
to a reduction in the number of patients serviced. Acquisitions, when completed,
will continue to impact the relative mix of revenues. On a pro forma basis,
assuming the Company owned 100% of Omnicare and Allied on November 1, 1996, the
percentage of total revenues for the eleven months ended September 30, 1997
would have been as follows: net respiratory, medical equipment and supplies
sales 47.3%; net patient services 44.9%; and net infusion services 7.8%.
The following table shows the historical payor mix for the Company's total
revenues for the periods presented:
Eleven Months
Year Ended Year Ended Ended
September 30, September 30, September 30,
1999 1998 1997
------ ----- -----
Payor
- -----
U.K. NHS and other U.K.
governmental payors............. 36.5% 29.7% 12.9%
Medicare......................... 20.9 27.2 42.0
Medicaid......................... 2.2 5.8 11.2
Private payors................... 40.4 37.3 33.9
------ ----- -----
Total revenues.......... 100.0% 100.0% 100.0%
====== ===== =====
The increase in U.K. NHS and other U.K. governmental payors and private
payors as a percentage of total revenues for the year ended September 30, 1999
as compared to 1998 is primarily due to the growth in Allied's branch network,
as described above. The decrease in Medicare and Medicaid as a percentage of
total revenues for the year ended September 30, 1999 as compared to 1998 is
primarily due to the decrease in revenues in the Company's U.S. Mail-Order and
Hi-Tech Operations, as described above. The decrease in Medicare as a percentage
of total revenues for the year ended September 30, 1998 as compared to the
Eleven Month Period is primarily a result of the Omnicare and Allied
acquisitions. 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
-22-
Omnicare and Allied on November 1, 1996, the payor mix for the Eleven Month
Period would have been as follows: U.K. NHS and other U.K. governmental payors
30.4%; Medicare 27.8%; Medicaid 7.4%; and private payors (including managed care
payors) 34.4%.
The Company believes that a substantial portion of its revenues derived
from private payors in the U.S. was subject to case management and managed care
and that this relationship will continue in the future. The Company maintains a
diversified offering of home services and products in an attempt to mitigate the
impact of potential reimbursement reductions for any individual product or
service.
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 and respiratory therapy operations than from its nursing and
infusion therapy operations. On a pro forma basis, assuming the Company owned
100% of Omnicare and Allied on November 1, 1996, the gross profit margin for the
Eleven Month Period would have been 38.8% versus the actual 45.1% for the same
period. Subsequent acquisitions, when completed, will continue to impact the
relative mix of revenues and overall gross margin.
At September 30, 1999 and 1998, the Company had $103,248,000 and
$105,784,000, respectively of intangible assets (primarily goodwill) on its
balance sheet. This represented 60.0% of total assets and 113.1% of total
stockholders' equity at September 30, 1999 and 58.9% of total assets and 103.8%
of total stockholders' equity at September 30, 1998. Amortization of intangibles
for the years ended September 30, 1999 and 1998 and the eleven months ended
September 30, 1997 was $3,459,000, $3,147,000 and $1,866,000, respectively.
Subsequent acquisitions, when completed, will continue to increase the amount of
intangible assets on the balance sheet and amortization of intangibles on the
statement of operations.
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 home health care companies. At each balance sheet date, or if a
significant adverse change occurs in the Company's business, management assesses
the carrying amount of enterprise goodwill. The Company measures impairment of
goodwill by comparing the future undiscounted cash flows (without interest) to
the carrying amount of goodwill. This evaluation is done at the reportable
business segment level (primarily by subsidiary). If the carrying amount of
goodwill exceeds the future cash flows, the excess carrying amount of goodwill
is written off. The factors considered by management in estimating future cash
flows include current operating results, the effects of any current or proposed
changes in third-party reimbursement or other governmental regulations, trends
and prospects of acquired businesses, as well as the effect of demand,
competition, market and other economic factors. If permanent impairment of
goodwill were to be recognized in future period it could have a material adverse
effect on the Company's consolidated financial position or results of
operations.
RESULTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1999 VS. YEAR ENDED SEPTEMBER 30, 1998.
Revenues. Total revenues decreased by $581,000 or .4% to $154,728,000 for
the year ended September 30, 1999 from $155,309,000 for the year ended September
30, 1998. This decrease was primarily attributable to a reduction in the number
of patients serviced by the Company's U.S. Mail-Order Operations ($9,514,000)
and
-23-
Hi-Tech Operations ($1,666,000) and the incremental impact of the Balanced
Budget Act, which reduced revenue in the Company's U.S. Mail-Order Operations by
$611,000. In addition, the sale of TNI accounted for a decrease of $7,661,000.
These decreases were substantially offset by increases in the Company's U.K.
Operations, specifically, patient services ($18,934,000). The U.K. Operations
increased principally due to continued expansion, increased billing rates and an
increase in the number of patients serviced.
Pursuant to the Balanced Budget Act, a 10% reduction in Medicare
reimbursement of diabetic testing strips and a 5% reduction in Medicare
reimbursement of respiratory drugs became effective January 1, 1998. These
reductions reduced revenue, increased cost of revenues as a percentage of
revenues and decreased gross profit for respiratory, medical equipment and
supplies sales effective with the reimbursement reduction (as discussed herein).
In addition, pursuant to the Social Security Act, which gives HCFA
authority to alter certain reimbursement rates that are not inherently
reasonable, Medicare is proposing further inherent reasonableness reductions in
Medicare reimbursement rates. See "Business -- Government Regulation." These
reductions, if implemented, are expected to increase cost of revenues as a
percentage of revenues, decrease gross profit and decrease operating income for
respiratory, medical equipment and supplies sales effective with the
reimbursement reduction. The amount of the impact will be dependent upon product
mix, the amount of product cost concessions that the Company is able to obtain
from its suppliers and the number of patients serviced whose primary insurance
coverage is Medicare.
Cost of Revenues. Cost of revenues increased by $2,218,000 to $99,410,000
for the year ended September 30, 1999 from $97,192,000 for the year ended
September 30, 1998. As a percentage of total revenues, cost of revenues for the
year ended September 30, 1999 increased to 64.2% in comparison to 62.6% for the
year ended September 30, 1998. Cost of revenues as a percentage of revenues
declined for patient services (68.1% for the year ended September 30, 1999
versus 69.4% for the year ended September 30, 1998), increased for respiratory,
medical equipment and supplies sales (57.7% for the year ended September 30,
1999 versus 55.0% for the year ended September 30, 1998) and increased for
infusion services (76.9% for the year ended September 30, 1999 versus 73.4% for
the year ended September 30, 1998). The decrease in patient services is
primarily due to increased billing rates. The increase in respiratory, medical
equipment and supplies sales is due to an increase in respiratory, medical
equipment and supplies sales in the U.S. Mail-Order Operations with higher
product costs. The increase in infusion services is due to an increase in
infusion therapies in the Hi-Tech Operations with higher product costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $5,966,000 or 11.5% to $57,946,000 for the
year ended September 30, 1999 from $51,980,000 for the year ended September 30,
1998. This increase was due to additional bad debt expense ($3,605,000)
principally as a result of fully reserving for DermaQuest's accounts receivables
(see Liquidity and Capital Resources - Accounts Receivable). In addition, there
were higher levels of overhead in the U.K. Operations ($3,585,000) due to its
continued expansion and the U.S. Mail-Order Operations incurred additional costs
for overhead related to sales and collection efforts in the U.S. operations
during the first half of fiscal 1999 ($1,942,000). Year ended September 30, 1999
included $1,392,000 of charges primarily related to the attempted acquisitions
of Sinclair and Gateway and additional legal reserves versus $554,000 of charges
included in fiscal 1998 primarily relating to costs incurred from its attempted
acquisitions of Healthcall and Apria. These increases were offset by an overhead
reduction program in the Mail-Order Operations ($2,642,000). The sale of TNI
accounted for an additional decreases of $1,871,000.
Gain on Sale of Assets. For the year ended September 30, 1998, the Company
recorded a $2,511,000
-24-
gain on the TNI Sale.
Operating (Loss) Income. The Company incurred an operating loss of
$2,628,000 for the year ended September 30, 1999 compared to operating income of
$8,648,000 for the year ended September 30, 1998. Excluding the $1,392,000 of
charges related to attempted acquisitions and additional legal reserves and
$3,605,000 of additional bad debt expenses in the year ended September 30, 1999,
the Company would have recorded operating income of $2,369,000.
Interest Income. Interest income decreased by $408,000 to $227,000 for the
year ended September 30, 1999 from $635,000 for the year ended September 30,
1998. This decrease was attributable to lower interest income earned on a lower
level of funds invested.
Interest Expense. Interest expense decreased by $841,000 to $5,445,000 for
the year ended September 30, 1999 from $6,286,000 for the year ended September
30, 1998. This favorable variance was primarily attributable to a lower level of
borrowings under the Company's Credit Facility combined with a reduced borrowing
rate.
(Benefit) Provision for Income Taxes. (Benefit) provision for income taxes
as a percentage of income before income taxes was a benefit of 6.4% for the year
ended September 30, 1999 and a provision of 61.5% for the year ended September
30, 1998. The difference between the 6.4% effective tax rate for fiscal 1999 and
the statutory tax rate resulted from non-deductible expenses, primarily
amortization of intangible assets.
Management believes that it is more likely than not that the Company will
generate sufficient levels of taxable income in the future to realize the
$11,369,000 net deferred tax assets comprised of the tax benefit associated with
future deductible temporary differences and net operating loss carryforwards,
prior to their expiration (primarily 13 years or more). This belief is based
upon, among other factors, changes in operations over the last few years,
management's focus on its business realignment activities and current business
strategies primarily with respect to its U.K. Operations. Failure to achieve
sufficient levels of taxable income might affect the ultimate realization of the
net deferred tax assets. If this were to occur, management is committed to
implementing tax planning strategies, such as the sale of net appreciated assets
of the Company to the extent required (if any) to generate sufficient taxable
income prior to the expiration of these benefits. Should such strategies be
required, they could potentially result in the sale of a portion of the
Company's interest in the U.K. Operations and repatriation of such proceeds to
the U.S.
Net Loss (Income). As a result of the foregoing, the Company incurred a net
loss of $7,346,000 for the year ended September 30, 1999 compared to net income
of $1,153,000 for the year ended September 30, 1998.
YEAR ENDED SEPTEMBER 30, 1998 VS. ELEVEN MONTHS ENDED SEPTEMBER 30, 1997.
Revenues. Total revenues increased by $61,865,000 or 66.2% to $155,309,000
for the year ended September 30, 1998 from $93,444,000 for the eleven months
ended September 30, 1997 with $13,153,000 accounting for the one additional
month's revenue in fiscal 1998. The remaining increase was primarily
attributable to the inclusion of eleven months of results for the year ended
September 30, 1998 versus three months in the comparable prior period for Allied
($42,322,000 in patient services) and Omnicare ($16,735,000 in respiratory,
medical equipment and supplies sales), as well as an increase in respiratory,
medical equipment and supplies sales due primarily to an increase in the number
of patients serviced in the Company's Mail-Order Operations ($5,395,000). These
increases were partly offset by a decrease in patient services revenue
attributable to the sale of Radamerica and the TNI Sale ($8,830,000), decreases
in respiratory, medical
-25-
equipment and supplies sales due to exiting certain product lines of DermaQuest
beginning in the fourth quarter of fiscal 1997 ($2,719,000) as well as a
reduction in revenue in the Mail-Order Operations due to the Balanced Budget Act
($1,846,000) and lower infusion services revenue ($1,836,000) due to a decline
in number of patients serviced in the Hi-Tech Operations.
Pursuant to the Balanced Budget Act, a 10% reduction in Medicare
reimbursement of diabetic testing strips and a 5% reduction in Medicare
reimbursement of respiratory drugs became effective January 1, 1998. These
reductions reduced revenue, increased cost of revenues as a percentage of
revenues and decreased gross profit for respiratory, medical equipment and
supplies sales effective with the reimbursement reduction (as discussed herein).
Cost of Revenues. Cost of revenues increased by $45,805,000 to $97,192,000
for the year ended September 30, 1998 from $51,387,000 for the eleven months
ended September 30, 1997 with $7,920,000 accounting for the one additional
month's cost of revenues in fiscal 1999. As a percentage of total revenues, cost
of revenues increased to 62.6% from 55.0% for the year ended September 30, 1998
and eleven months ended September 30, 1997, respectively. Cost of revenues as a
percentage of sales increased for respiratory, medical equipment and supplies
sales (55.0% for the year ended September 30, 1998 versus 48.9% for the eleven
months ended September 30, 1997) increased for patient services (69.4% for the
year ended September 30, 1998 versus 60.8% for the eleven months ended September
30, 1997) and increased for infusion services (73.4% for the year ended
September 30, 1998 versus 68.6% for the eleven months ended September 30, 1997).
The increase in cost of revenues of respiratory, medical equipment and supplies
sales as a percentage of revenues for fiscal 1998 are primarily attributable to
the impact of the Balanced Budget Act, which reduced revenues for diabetic
testing strips by 10% and respiratory drugs by 5% effective January 1, 1998 for
Medicare patients and the inclusion of a full year of Omnicare's results (versus
three months in the comparable period) which carry a higher cost of revenues
(70.7%) than the U.S. respiratory, medical equipment and supplies sales
operations (47.6%). The increase in patient services costs as a percentage of
revenues for fiscal 1998 are due to the inclusion of Allied's results for a full
year (versus three months in the comparable prior period) which carry a cost of
revenues of 69.4% and the sale of Radamerica in July 1997 which carried a lower
cost of service (26.4%). The increase in infusion services is a result of an
increase in therapies with higher product costs, as well as the effects of
reduced reimbursement rates for certain payors.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $9,049,000 or 21.1% to $51,980,000 for the
year ended September 30, 1998 from $42,931,000 for the eleven months ended
September 30, 1997 with $4,217,000 accounting for the one additional month's
expenses in fiscal 1998. The remaining increase was primarily attributable to
the inclusion of eleven months of results for fiscal 1998 versus three months in
the comparable prior period for the U.K. Operations ($12,952,000) and additional
costs incurred for overhead related to sales efforts, collections and additional
bad debt expense based upon a higher level of revenue. The increases were offset
by the sale of Radamerica in July 1997 ($2,922,000). In addition, the Company
recorded $554,000 of charges in fiscal 1998, primarily relating to costs
incurred from its attempted acquisitions of Healthcall and Apria and $7,023,000
of additional bad debt expense in the eleven months ended September 30, 1997
primarily related to the Company's DermaQuest product lines ($6,060,000) and
pulmonary rehabilitation center ($663,000).
Gain on Sale of Assets. For the year ended September 30, 1998, the Company
recorded a $2,511,000 gain on the TNI Sale. For the eleven months ended
September 30, 1997, the Company recorded a $606,000 gain on the sale of
Radamerica.
Special Charges. The Company recorded special charges of $16,677,000 during
the eleven months
-26-
ended September 30, 1997 related to the following items: (i) $1,841,000 non-cash
charge related to impairment of the investment in HMI as well as to record
estimated costs, fees and other expenses related to completion of the HMI Asset
Sale (see Note 3 of the Notes to Consolidated Financial Statements); (ii)
$12,079,000 non-cash charge for the write-off of goodwill and other intangible
assets related to exiting the wound care and orthotic product lines of the
Company's DermaQuest subsidiary; (iii) $1,622,000 non-cash charge for the
termination of the agreements to purchase the VIP Companies; (iv) $437,000
charge for closure of the Company's pulmonary rehabilitation center in Cherry
Hill, New Jersey; and (v) $698,000 of other charges.
Equity in Loss of HMI, Net. Equity in loss of HMI was $18,076,000 for the
eleven months ended September 30, 1997. This represented 49% of HMI's loss for
the six months ended July 31, 1997 after adjustments to book the Company's
adjustment to historical goodwill amortization based on its fair value
adjustments ($132,000) and to eliminate intercompany interest ($720,000). The
49% interest in HMI was acquired in mid January 1997 and was included in the
results of operations effective February 1, 1997. Due to the Company's decision,
during the third quarter of fiscal 1997, to sell HMI and the recording of HMI's
obligations that the Company was required to fund, in connection with the sale
to Counsel Corporation ("Counsel"), no equity in loss of HMI has been recorded
subsequent to July 31, 1997.
Interest Income. Interest income decreased by $1,636,000 to $635,000 for
the year ended September 30, 1998 from $2,271,000 for the eleven months ended
September 30, 1997 with $65,000 attributable to the one additional month's
interest income in fiscal 1998. The gross decrease was primarily attributable to
interest income earned (after elimination of intercompany interest) under a
credit agreement with HMI ($1,417,000) for the eleven months of 1997 and lower
interest income earned on a lower level of funds invested in fiscal 1998 as
compared to fiscal 1997.
Interest Expense. Interest expense, increased by $1,223,000 to $6,286,000
for the year ended September 30, 1998 from $5,063,000 for the eleven months
ended September 30, 1997 with $585,000 accounting for the one additional month's
interest expense in fiscal 1998. The remaining increase was primarily
attributable to an increased level of borrowings under the Credit Facility in
the early part of fiscal 1998.
Provision (Benefit) for Income Taxes. Provision (benefit) for income taxes
as a percentage of income before income taxes was a provision of 61.5% for the
year ended September 30, 1998 and a benefit of 13.4% for the eleven months ended
September 30, 1997. The difference between the 61.5% effective tax rate for
fiscal 1998 and the statutory tax rate resulted from non-deductible expenses,
primarily amortization of intangible assets.
Net deferred tax assets, net of valuation allowance, were $8,674,000 at
September 30, 1998, an increase of $970,000 from net deferred tax assets of
$7,704,000 at September 30, 1997, primarily as a result of an increase in the
provision for doubtful accounts and federal net operating loss carryforwards. A
valuation allowance, 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 1998, the Company decreased the
valuation allowance by $114,000 primarily due to utilization of state net
operating loss carryforwards.
Net Income (Loss). As a result of the foregoing, the Company produced net
income of $1,153,000 for the year ended September 30, 1998 compared to net loss
of $32,735,000 for the eleven months ended September 30, 1997.
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LIQUIDITY AND CAPITAL RESOURCES
GENERAL.
During the year ended September 30, 1999, the Company generated $3,258,000
from its operating activities. Cash flow from operating activities, combined
with the use of existing cash, funded a $1,500,000 payment to further reduce the
Company's Credit Facility and the following investing activities: $3,824,000 for
further expansion of the Company's U.K. Operations and $2,642,000 for capital
expenditures.
During the year ended September 30, 1998, the Company received $22,241,000
from investing activities as follows: $32,328,000 received from the HMI Asset
Sale partly offset by $11,122,000 paid to complete the merger with HMI as well
as for fees and expenses incurred in connection with the merger and to satisfy
existing HMI obligations which were retained by the Company; $6,029,000 received
from asset sales net of utilization of $3,346,000 for capital expenditures and
$1,648,000 for acquisitions and purchases of other intangibles. Funds generated
by investing activities along with net proceeds of $6,492,000 from the exercise
of the Company's warrants were used to reduce the Company's borrowings under the
Credit Facility by $29,100,000 and to fund operating activities.
During the eleven months ended September 30, 1997, the Company utilized
$130,302,000 ($117,138,000 net of proceeds from asset sales and other
miscellaneous transactions) in investing activities as follows: $93,586,000 for
the acquisition of the U.K. Operations (Omnicare and Allied); $32,189,000 for
the purchase of 49% of HMI and HMI's senior debt and related advances;
$2,694,000 for capital expenditures and $1,833,000 for acquisitions payable. In
addition, the Company utilized $1,089,000 for operating activities.
Substantially all of the financing for the operating and investing activities
was provided by net borrowings under the Company's Credit Facility of
$73,864,000, the equity investment by HPII and Hyperion TW Fund L.P. (the
"Fund") aggregating $50,650,000 and proceeds of $12,100,000 from the sale of
Radamerica.
The Company believes it has adequate capital resources to conduct its
operations for the next twelve months. On December 20, 1999, the Company's U.K.
subsidiaries completed a $124,500,000 refinancing which repaid the Company's
existing senior indebtedness of $55,755,000 and provided funds for additional
acquisitions in the U.K., subject to the terms of the refinancing agreements.
See "-Refinancing."
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 September 30, 1999 and 1998, $30,814,000
(17.9%) and $32,223,000 (17.9%), 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.
Accounts receivable decreased by $1,409,000 from September 30, 1998 to
September 30, 1999 primarily due to the decision to fully reserve for the
remaining DermaQuest accounts receivable ($2,205,000) (see below).
During fiscal 1996 and the eleven months ended September 30, 1997, 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 conducted an extensive review of the DermaQuest
receivables in connection with the decision to discontinue these product lines
in the continental U.S.
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and, as a result, established additional reserves of $6,060,000 based on the
potential inability to secure required documentation in a timely manner for
reimbursement as a result of no longer being in these business lines. In
establishing the net realizable value of its accounts receivable for DermaQuest,
the Company had relied on its historical and anticipated payment experience.
During fiscal 1999, the decision to fully reserve for the remaining DermaQuest
accounts receivable was made in light of the Company's payment history over the
first three quarters of fiscal 1999. During fiscal 1998 it appeared that
collections of $1,013,000 on the remaining receivables during the fiscal year
justified the carrying value at September 30, 1998 ($2,253,467). However,
payments slowed dramatically during fiscal 1999. It only became apparent that
this slow down was permanent in nature (and not a temporary issue) during the
third quarter of fiscal 1999, as the total collected on the receivables year to
date was $168,000, with only $37,000 collected during the third quarter. The
decision was made to reserve the remaining receivables based on this evidence.
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 the years ended September 30, 1999 and 1998 and the
Eleven Month Period, the Company's average DSOs were 73, 72 and 73,
respectively.
CREDIT FACILITY.
The Credit Facility contained 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. As
of September 30, 1999, the Company was in technical default of the Credit
Facility due to non-compliance with certain financial covenants (debt to EBITDA,
interest coverage and minimum EBITDA). On December 20, 1999, the Company
refinanced and repaid the Credit Facility with funds obtained in the
Refinancing.
During the year ended September 30, 1999, the Company amended the Credit
Facility to allow for further expansion of its U.K. Operations.
REFINANCING.
General. As described more fully below, on December 20, 1999, the Company's
UK subsidiaries, Transworld Holdings (UK) Limited ("UK Parent") and its
subsidiary Transworld Healthcare (UK) Limited ("TW UK") obtained an aggregate of
$124,500,000 in new financing consisting of a $73,000,000 senior secured term
and revolving credit facility (the "Senior Credit Facility"), $16,000,000 in
mezzanine indebtedness (the "Mezzanine Loan") and $36,000,000 principal amount
of senior subordinated notes (the "Notes") (each of the foregoing are sometimes
referred to collectively herein as the "Refinancing"). $55,755,000 of the net
proceeds of the Refinancing were used to repay the Company's existing Credit
Facility, $11,000,000 was provided to the Company for general corporate
purposes, with the balance to be used for acquisitions and working capital in
the U.K., subject to the terms of the documents governing the Refinancing. In
connection with the repayment of the Company's existing Credit Facility, the
Company will record a non-cash, pre-tax, extraordinary charge of approximately
$1,200,000 in its first quarter of fiscal 2000 relating to the write-off of the
deferred financing costs associated with the Credit Facility.
Senior Credit Facility. The Senior Credit Facility consists of a (i)
$44,800,000 term loan A, maturing December 17, 2005, (ii) $20,000,000
acquisition term loan B, maturing December 17, 2006 which may be drawn upon
during the first three years following closing, and (iii) $8,000,000 revolving
facility, maturing
-29-
December 17, 2005. Repayment of the loans commences on July 30, 2000 and
continues until final maturity. The loans bear interest at rates equal to LIBOR
plus 2% to 2.75% per annum. As of January 3, 2000, TW UK had outstanding
borrowings of $50,700,000 under the Senior Credit Facility. As of January 3,
2000, borrowings under the Senior Credit Facility bore interest at a rate of
7.7241% to 8.4741%.
Subject to certain exceptions, the Senior Credit Facility prohibits or
restricts, among other things, the incurrence of liens, the incurrence of
indebtedness, certain fundamental corporate changes, dividends (including
distributions to the Company), the making of specified investments and certain
transactions with affiliates. In addition, the Senior Credit Facility contains
affirmative and negative financial covenants customarily found in agreements of
this kind, including the maintenance of certain financial ratios, such as senior
interest coverage, debt to EBITDA, fixed charge coverage and minimum net worth.
The loans under the Senior Credit Facility are collateralized by, among
other things, a lien on substantially all of TW UK's and its subsidiaries'
assets, a pledge of TW UK's ownership interest in its subsidiaries and
guaranties by TW UK's subsidiaries.
Mezzanine Loan. The Mezzanine Loan is a term loan maturing December 17,
2007 and bears interest at the rate of LIBOR plus 7% per annum, where LIBOR plus
3.5% will be payable in cash, with the remaining interest being added to the
principal amount of the loan. The Mezzanine Loan contains other terms and
conditions substantially similar to those contained in the Senior Credit
Facility. The lenders of the Mezzanine Loan also received warrants to purchase
2% of the fully diluted ordinary shares of TW UK. As of January 3, 2000,
borrowings under the Mezzanine Loan bore interest at a rate of 12.7204%.
Senior Subordinated Notes and Warrants. Notes. The Notes consist of
$36,000,000 principal amount of senior subordinated notes of UK Parent purchased
by several institutional investors and certain members of management
(collectively, the "Investors"), plus equity warrants issued by TW UK
concurrently with the sale of the Notes (the "Warrants") exercisable for
ordinary shares of TW UK ("Warrant Shares") representing in the aggregate 27% of
the fully diluted ordinary shares of TW UK. See "Certain Relationships and
Related Transactions--Transactions with Directors and Executive Officers."
The Notes bear interest at the rate of 9.375% per annum payable quarterly
in cash subject to restrictions contained in the Senior Credit Facility
requiring UK Parent to pay interest in-kind through the issuance of additional
notes ("PIK Notes") for the first 18 months, with payment of interest in cash
thereafter subject to a fixed charge coverage test (provided that whenever
interest cannot be paid in cash, additional PIK Notes shall be issued as payment
in-kind of such interest). The Notes mature nine years from issuance.
UK Parent will not have the right to redeem the Notes and the PIK Notes
except as provided in, and in accordance with the documents governing the
issuance of the Notes and Warrants (herein the "Securities Purchase Documents").
-30-
The redemption price of the Notes and the PIK Notes will equal the principal
amount of the Notes and the PIK Notes plus all accrued and unpaid interest on
each.
The Investors have the right, at their option, to require UK Parent to
redeem all or any portion of the Notes and the PIK Notes under certain
circumstances and in accordance with the terms of the Securities Purchase
Documents. The redemption price of the Notes and the PIK Notes shall be equal to
the principal amount of the Notes and the PIK Notes, plus all accrued and unpaid
interest on each.
UK Parent's redemption obligation of the Notes and the PIK Notes is
guaranteed by TW UK, which guarantee is subordinated to the existing senior
indebtedness of TW UK to the same extent as the Notes and the PIK Notes are
subordinated to senior indebtedness of UK Parent. If UK Parent fails to perform
in full its obligations following exercise of the Investors put of Notes and TW
UK fails to perform its obligations as a guarantor of such obligations, the
Investors shall have the right to among other things exercise directly (through
the voting trust described below) the drag-along rights described without the
requirement that the Board of Directors of TW UK first take any action.
Warrants. The Warrants may be exercised, in whole or in part, at any time,
unless previously purchased or cancelled upon a redemption of the Notes, at the
option of the holders prior to the time of maturity of the Notes for Warrant
Shares representing approximately 27% of TW UK's fully diluted ordinary share
capital, subject to antidilution adjustment as contained in the Securities
Purchase Documents.
The exercise price of the Warrants shall equal the entire principal amount
of the Notes (other than PIK Notes and excluding any accrued unpaid interest)
for all Warrants in the aggregate and must be paid through the tender of Notes
(other than PIK Notes) to TW UK, whereby TW UK shall issue to the Investors the
appropriate number of Warrant Shares and pay to the Investors in cash an amount
equal to the principal amount of the PIK Notes and all accrued unpaid interest
on the Notes and the PIK Notes.
The Warrants will automatically be exercised for Warrant Shares in the
event that TW UK consummates
-31-
a public offering of shares valuing the Investors ordinary shares of TW UK
issuable upon a voluntary exercise of the Warrants at or above 2.5x the initial
investment.
The Investors will have the right, at their option, to require UK Parent to
purchase all or any portion of the Warrants or the Warrant Shares under certain
circumstances and in accordance with the terms of the Securities Purchase
Documents. The purchase price of the Warrants shall be equal to the difference,
if a positive number, between (i) the fair market value of the Warrant Shares
which the Investors have the right to acquire upon exercise of such Warrants and
(ii) the exercise price of such Warrants. The purchase price of the Warrant
Shares shall be equal to the fair market value of such Warrant Shares.
UK Parent's purchase obligation of the Warrants is guaranteed by TW UK,
which guarantee is subordinated to existing senior indebtedness of TW UK. If UK
Parent fails to perform in full its obligations following exercise of the
Investors put of Warrants and TW UK fails to perform its obligations as a
guarantor of such obligations, the Investors shall have the right to among other
things exercise directly through the voting trust the drag-along rights without
the requirement that the Board of Directors of TW UK first take any action.
If UK Parent fails to perform in full its obligations following exercise of
the Investors put of Warrant Shares, the Investors shall have the right to among
other things exercise directly through the voting trust the drag-along rights
without the requirement that the Board of Directors of TW UK first take any
action.
Following an initial public offering and upon exchange of the Warrants the
Investors shall be entitled to two demand and unlimited piggyback registrations
with respect to the Warrant Shares. The Warrant Shares shall be listed for
trading on any securities exchange on which the ordinary shares of TW UK are
listed for trading.
-32-
All ordinary shares of UK Parent owned by the Company and all
ordinary shares of TW UK owned by UK Parent are held in a voting trust for
the benefit of the holders of ordinary shares of TW UK and the holders of the
Warrants, with the trustee of the trust being obligated to vote the shares held
in trust as follows: (i) to elect to the Board of Directors of TW UK individuals
designated in accordance with the Securities Purchase Documents and on any other
matter, pursuant to instructions approved by the required majority of the Board
of Directors of TW UK as contemplated by the Securities Purchase Documents; and
(ii) following the breach by UK Parent and TW UK of their obligations to honor
an Investor put of Notes, an Investor put of Warrants or an Investor put of
Warrant Shares, the Investors have the right to exercise drag-along rights
directly without any action of the Board of Directors of TW UK on a transaction
to which such drag-along rights apply pursuant to instructions from the
Investors. G. Richard Green, a Director of the Company, is the trustee of the
voting trust. The voting trust includes provisions to the effect that under
certain circumstances the shares held in trust shall thereafter be voted on all
matters, including the election of directors, pursuant to instructions from a
majority of those members of the Board of Directors of TW UK who are not
affiliated or associated with the Company, HPII, or any of their successors.
The Company is currently in the process of evaluating the effect of the
provisions of the voting trust and other aspects of the Refinancing on its
ability to continue to consolidate the operations of TW UK in its fiscal 2000
financial statements.
The Articles of Association of TW UK and the Securities Purchase Documents
provide that neither UK Parent nor TW UK will enter into any transaction with or
make contributions to the Company or UK Parent (except as required by the terms
of the Notes, the Warrants or the Warrant Shares) in the form of dividends,
fees, re-charges, loans, guarantees or any other benefit, in any form, unless
they have been previously agreed upon by all shareholders.
The Securities Purchase Documents also provide that the Investors will have
the benefit of customary shareholder rights for a transaction of this type
including, without limitation: (i) pre-emptive rights with respect to new
securities; (ii) rights of first refusal with respect to proposed transfers of
ordinary shares of TW UK; (iii) drag-along rights; (iv) tag-along rights; and
(v) the exercise of voting rights by the holders of the Warrants as therein
described including the right to elect one director to the TW UK Board of
Directors. The Securities Purchase Documents also include limitations on TW UK's
ability to do the following, among others, without the consent of the Investors:
(i) issue additional equity securities of TW UK; (ii) pay dividends or make
other restricted payments, except as required by the terms of the Notes, the
Warrants or the Warrant Shares; (iii) sell, lease or otherwise dispose of assets
exceeding specified values; (iv) enter into any transactions with affiliates;
(v) amend the Memorandum or Articles of Association; or (vi) merge or
consolidate with another entity.
TNI SALE.
On July 15, 1998, the Company sold substantially all of the assets of its
domestic home nursing
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subsidiary for $5,300,000 which was paid in cash at closing. Subject to the
terms of the agreement, $300,000 of such amount was placed into escrow for a
period of one year following the closing to secure TNI's obligations under the
agreement. Proceeds from the sale were used to reduce borrowings under the
Credit Facility ($4,100,000) and to satisfy transaction costs and liabilities
that were retained by the Company.
ACQUISITION OF HMI/SALE TO COUNSEL.
On October 1, 1997, the Company, through a wholly-owned subsidiary,
completed the merger with HMI. Under the terms of a merger agreement, HMI
stockholders received $.30 in cash for each outstanding share of HMI common
stock not already owned by the Company. Concurrently with the closing of the
merger, the Company completed the HMI Asset Sale to Counsel for $40,000,000 at
which time substantially all of the businesses and operations of HMI were sold
to Counsel. Of the $40,000,000 proceeds, $30,000,000 was received in cash with
$7,500,000 to be paid to the Company as HMI's accounts receivable, existing at
date of sale, were collected, with the remaining $2,500,000 held in escrow for
post-closing adjustments. As of September 30, 1999 an aggregate (including
interest earned on such escrow funds) of $37,648,000 was received (including the
$7,500,000 escrow that was held for accounts receivable collection) of which,
$25,000,000 was used to reduce the senior secured debt owed by the Company under
the Credit Facility, $2,800,000 was used to complete the merger and the
remainder was used for costs, fees and other expenses to complete the HMI Asset
Sale as well as to satisfy liabilities not assumed by Counsel. The remaining
$2,500,000 escrow was fully utilized for post-closing adjustments.
Pursuant to the HMI Asset Sale, Counsel did not assume any liabilities of
HMI other than certain liabilities arising after the closing under assumed
contracts and certain employee-related liabilities. Liabilities not assumed by
Counsel, as well as certain wind-down and contingent obligations of HMI
(including litigation - see "Legal Proceedings" with respect to certain legal
proceedings concerning HMI), were recorded in the Company's consolidated
financial statements in accordance with purchase accounting.
YEAR 2000.
General. The Year 2000 computer issue refers to potential conditions in
computer programs whereby a two-digit field rather than a four-digit field is
used to define the applicable year. Unless corrected, some computer programs may
not appropriately function as of January 1, 2000 because these programs will
read the "00" in the year 2000 as January 1, 1900. If uncorrected, the problem
could have resulted in computer system failures or equipment and medical device
malfunctions (affecting patient diagnosis and treatment) thereby disrupting the
Company's business operations and subjecting the Company to potentially
significant legal liabilities.
During the early part of 1998, the Company formed a task force consisting
of members of senior management, in-house legal counsel, representatives from
each of the Company's operating subsidiaries (in both the U.K. and the U.S.),
and other Company personnel. The task force also consulted with the Company's
insurance carrier and risk management advisors. The task force developed an
action plan to address the potential problems of the Year 2000, which considered
the following critical phases: (i) the Company's state of readiness; (ii) risks
of the Company's Year 2000 issues; (iii) costs to address Year 2000 compliance;
and (iv) the Company's contingency plans.
Company's State of Readiness. The information technology ("IT") and IT
infrastructure portions of the Company's Year 2000 project, addressed the
inventory, assessment, necessary corrective actions, testing and implementation
of external vendor products, mission critical third-party software and
internally developed
-34-
software. In that regard, the Company believes it has identified (in both the
U.K. and the U.S.), the various software applications that may have been
potentially impacted. The Company's assessment of all IT related components has
been completed and any remediation of external vendor products, mission critical
third-party software and internally developed software has been completed. The
Company has also implemented and tested all remediation.
With respect to the non-IT portion of the Company's Year 2000 project, the
Company had undertaken a program to inventory, assess and correct or replace
(where necessary) impacted mission critical as well as non-mission critical
vendor and supplier products (including but not limited to drugs, medical
supplies and specialty mail-order pharmaceutical products), medical equipment,
telephone systems, postage machines and other related equipment with Year 2000
risk. These types of supplies and equipment play a vital role in the day to day
operations of the Company. The Company had implemented (in both the U.K. and the
U.S.), a program of contacting vendors and suppliers, analyzing and acting upon
information provided to replace or otherwise amend any devices or equipment that
pose a Year 2000 impact. The Company had prioritized its non-IT efforts by
allocating resources to equipment and medical devices that would have a direct
impact on patient safety and health with a goal of minimizing and/or eliminating
the associated risks. The Company recognizes, to a certain degree, that it has
relied upon information that was being provided by equipment and medical device
manufacturers regarding the Year 2000 status of their respective products. While
the Company has attempted to evaluate information provided by its present
vendors and suppliers, there can be no assurance that in all instances accurate
information was provided. The Company's assessment of potentially non-IT
affected components has been completed and any required corrective actions have
been completed. The Company has also implemented and tested all remediation.
Lastly, the Company relies heavily upon third party payors, including to a
large extent governmental payors such as the NHS in the U.K. and Medicare and
Medicaid in the U.S. for accurate and timely reimbursement of claims, often
through the use of electronic data interfaces. Although much has been published
publicly stating that the government was working to solve its own Year 2000
issues in a timely manner, the Company has received no assurance that their
systems and interfaces were converted timely. Failure of any of the Company's
third party payors, especially governmental payors, to solve their Year 2000
issues could have a material adverse effect on the Company's consolidated
financial condition, cash flows, or results of operations.
Risks of the Company's Year 2000 Issues. Failure from any of the
aforementioned IT and/or non-IT equipment and components, including the support
from third parties, could have a material adverse impact on the Company's
operations (in both the U.K. and the U.S.) resulting in the potential inability
to provide health care services to its patients. This inability could result in
the loss of revenue (which at the present time is unable to be quantified) and
give rise to litigation. Failure of the third party payor's systems also could
have a material adverse affect on the Company's consolidated financial
position, cash flows or results of operations.
Costs to Address Year 2000 Compliance. As of January 3, 2000, costs
incurred for all efforts of the Company's Year 2000 action plan amounted to
$245,000 and have not been material to the Company. These costs have been
expensed as incurred and have been funded by operating cash flows. Based upon
the best estimate by the Company's management and the Year 2000 task force, the
Company does not expect any additional costs associated with the Company's Year
2000 action plan. If additional costs are incurred they will also be expensed as
incurred and be funded by operating cash flow.
The Company's Contingency Plans. Each operating subsidiary (both in the
U.K. and the U.S.) has been asked to develop a contingency plan to restore the
material functions of each of its systems or activities in the case of a Year
2000 failure. To date, there have been no material malfunctions of the Company's
systems or
-35-
activities due to Year 2000 issues.
However, there can be no assurance that unanticipated events still will not
occur or that the Company was able to identify all Year 2000 issues before
problems arise. In addition, the Company has no assurance that third party
payors and vendors have or had the ability to identify and solve all or
substantially all their Year 2000 issues. Therefore, there can be no assurance
that the Year 2000 issue still will not have a material adverse effect on the
Company's consolidated financial position, cash flows or results of operations.
LITIGATION.
See "Legal Proceedings" with respect to certain legal proceedings
concerning the Company and HMI.
IMPACT OF RECENT ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 addresses the accounting for derivative instruments including
certain derivative instruments embedded in other contracts and for hedging
activities. As the Company currently does not enter into transactions involving
derivative instruments, the Company does not believe that the adoption of SFAS
No. 133 will have a material effect on the Company's financial statements. As
issued, SFAS No. 133 is effective for all fiscal quarters of all fiscal years
beginning after June 15, 1999, with earlier application encouraged. In June
1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of SFAS No. 133," which
amended the effective date of SFAS No. 133 for all fiscal quarters of all fiscal
years beginning after June 15, 2000.
INFLATION
Inflation has not had a significant impact on the Company's operations to
date.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
FOREIGN CURRENCY EXCHANGE
The Company faces exposure to adverse movements in foreign currency
exchange rates. These exposures may change over time as business practices
evolve and could have a material adverse impact on the Company's consolidated
financial results. The Company's primary exposure relates to non-U.S. dollar
denominated sales in the U.K. where the principal currency is Pounds Sterling.
Currently, the Company does not hedge foreign currency exchange rate exposures.
INTEREST RATE RISK
The Company's exposure to market risk for changes in interest rates relate
primarily to the Company's cash equivalents, Senior Credit Facility and
Mezzanine Loan. The Company's cash equivalents include highly liquid short-term
investments purchased with initial maturities of 90 days or less. The Company is
subject to fluctuating interest rates that may impact, adversely or otherwise,
its consolidated results of operations or cash flows for its variable rate
Senior Credit Facility, Mezzanine Loan and cash equivalents. The Company has
agreed as part of the Refinancing to hedge 66 2/3% of its floating rate debt
within 90 days of the completion of the Refinancing.
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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.
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE 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.... 55 Chairman of the Board and Chief Executive Officer
Sarah L. Eames....... 41 President
Wayne A. Palladino... 41 Senior Vice President and Chief Financial Officer
Leslie J. Levinson... 44 Secretary
Lewis S. Ranieri..... 52 Director
Scott A. Shay........ 42 Director
Jeffrey S. Peris..... 53 Director
G. Richard Green..... 60 Director
- ---------------
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 1995 until January 1997. From June 1995 until November 1995, Mr. Aitken
served as the vice chairman and president of Apria Healthcare Group, Inc., a
California based home health care company. He has also served as chairman of the
board of Omnicare plc from September 1995 until its acquisition by the Company.
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.
Sarah L. Eames has served as President since May 1998 and Executive Vice
President, Business Development and Marketing of the Company from June 1997 to
May 1998. Prior to joining the Company, Ms. Eames was employed by Johnson &
Johnson Professional, Inc. as a business development consultant from 1996 to
1997. From June 1995 until November 1995, Ms. Eames served as Vice President,
Marketing for Apria Healthcare Group, Inc. From 1980 until June 1995 Ms. Eames
held various marketing and business development positions at Abbey Healthcare
Group Inc., a predecessor company of Apria Healthcare Group, Inc.
Wayne A. Palladino has been a Vice President and Chief Financial Officer of
the Company since February 1991 and Senior Vice President of the Company 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 December 1985, Mr. Palladino was a senior associate in the
business development unit of W.R. Grace & Co., Inc.
Leslie J. Levinson has served as Secretary of the Company since September
1999 and had previously served in such capacity from October 1990 to July 1997.
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
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partner in the law firm of Dow, Lohnes & Albertson, which firm served as counsel
to the Company.
Lewis S. Ranieri has been a Director of the Company since May 1997. Since
1988 he has been the chairman of Bank United Corp. He was also the president and
chief executive of the predecessors of Bank United Corp. and the chairman of
Bank United, the subsidiary of Bank United Corp., from 1988 until July 15, 1996.
Mr. Ranieri is also the chairman and president of Ranieri & Co., Inc., positions
he has held since founding Ranieri & Co., Inc., in 1988. Mr. Ranieri is a
founder of Hyperion Partners L.P. and of Hyperion Partners II L.P. He is also
vice chairman of Hyperion Capital Management, Inc., a registered investment
advisor. Mr. Ranieri is a director of The Hyperion Total Return Fund, Inc.; The
Hyperion 1999 Term Trust, Inc.; The Hyperion 2002 Term Trust, Inc. and Hyperion
2005 Investment Grade Opportunity Trust, Inc. Mr. Ranieri is also chairman and
president of various other indirect subsidiaries of Hyperion Partners L.P. and
Hyperion Partners II L.P. He is also a director of American Marine Holdings,
Inc. and Delphi Financial Group, Inc. Mr. Ranieri is a former vice chairman of
Salomon Brothers Inc. where he was employed from 1968 to 1987, and was one of
the principal developers of the secondary mortgage market. He is a member of the
National Association of Home Builders Mortgage Roundtable.
Scott A. Shay has been a Director of the Company since January 1996 and
served as Acting Chairman of the Board of the Company from September 1996 until
January 1997. Mr. Shay has been a managing director of Ranieri & Co., Inc. since
its formation in 1988. Mr. Shay is currently a director of Bank United Corp.,
and Bank United, the subsidiary of Bank United Corp. Bank Hapoalim B.M., in Tel
Aviv, Israel, iOwn Holding, Inc. and Hyperion Capital Management, Inc., as well
as an officer or director of other direct and indirect subsidiaries of Hyperion
Partners L.P. and Hyperion Partners II L.P. Mr. Shay is also a director of the
general partner of Cardholder Management Services, L.P. Prior to joining Ranieri
& Co., Inc., Mr. Shay was a director of Salomon Brothers Inc. where he was
employed from 1980 to 1988.
Jeffrey S. Peris has been a Director of the Company since May 1998. Mr.
Peris has been the vice president of business operation of Knoll Pharmaceutical
(BASF Pharma) where he is responsible for human resources and corporate
communications since April 1998. Mr. Peris had been a management consultant to
various Fortune 100 companies from May 1997 until April 1998. From 1972 until
May 1997, Mr. Peris was employed by Merck & Co., Inc., where he served as the
executive director of human resources from 1985 until May 1997, the executive
director of marketing from 1976 until 1985, and the director of clinical
biostatistics and research data systems from 1972 until 1976.
G. Richard Green has been a Director of the Company since August 1998. Mr.
Green has been the chairman since 1987 and a director since 1960 of J.H. & F.W.
Green Ltd a U.K. based conglomerate. From 1960 Mr. Green has held various
positions at J.H. & F.W. Green Ltd. and several of its subsidiaries. Mr. Green
was also a director of Abbey Healthcare Group, Inc. from 1991 to 1995. He also
held directorships of Omnicare plc and Medigas Ltd from 1993 to 1996.
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. See "Certain Relationships and Related
Transactions - Transactions with Principal Shareholders."
Other than Timothy M. Aitken and Sarah L. Eames, none of the Company's
executive officers have employment agreements or letters with the Company. See
"Executive Compensation -- Employment Agreements;
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Termination of Employment and Change-in-Control Arrangements."
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 consolidated
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 performance on the
auditors' independence. Messrs. Shay, Green and Peris constitute 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 consists of Messrs. Ranieri and Shay.
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 G. Richard
Green, a director of the Company, who filed one Form 4 late with respect to one
transaction which occurred in December 1998 and Jeffery S. Peris, a director of
the Company, who did not timely file his Form 3 and one Form 4 with respect to
one transaction which occurred in December 1998.
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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 fiscal years ended September 30, 1999 and
1998 and the Eleven Month Period.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION AWARDS
-------------------------
ANNUAL
COMPENSATION RESTRICTED SECURITIES
NAME AND FISCAL --------------- STOCK UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS AWARDS OPTIONS COMPENSATION
- ------------------ ---- ------ ----- ------ ------- ------------
Timothy M. Aitken(1) ...... 1999 $250,000 $100,000 $ -- -- $39,228(4)
Chairman of the Board 1998 243,423 -- -- 150,000 52,742(4)
and Chief Executive Eleven Month
Officer Period 138,461 -- -- 500,000 53,428(4)
Sarah L. Eames(2) ......... 1999 $240,000 $100,000 $ -- -- $ 5,200(4)
President 1998 187,404 -- -- 100,000 --
Eleven Month
Period 47,115 -- -- 60,000 --
Wayne A. Palladino ........ 1999 $225,000 $100,000 $ -- -- $91,866(5)
Senior Vice President and 1998 181,731 -- -- 100,000 --
Chief Financial Officer Eleven Month
Period 154,807 -- -- 45,000 --
Gregory E. Marsella(3) .... 1999 $120,192 $ -- $ -- -- $ 4,500(4)
Vice President, General 1998 121,154 -- -- -- --
Counsel and Secretary Eleven Month
Period 26,923 -- -- 48,000 --
- ----------
(1) Mr. Aitken became Chief Executive Officer and Chairman of the Company
effective January 1997.
(2) Ms. Eames became Executive Vice President, Business Development and
Marketing of the Company in June 1997 and President of the Company in May
1998.
(3) Mr. Marsella became Vice President, General Counsel and Secretary of the
Company in July 1997 and resigned September 3, 1999.
(4) Reflects reimbursement for certain travel expenses.
(5) Reflects forgiveness of a loan and reimbursement of certain travel
expenses.
In fiscal 1999, there were no options granted to any of the Named Officers
pursuant to the Company's 1992 Stock Option Plan.
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AGGREGATE OPTION EXERCISES IN FISCAL 1999
AND 1999 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
- ---- ----------- -------- ------------------------- -------------------------
Timothy M. Aitken......... -- -- 516,666 / 133,334 $0 / $0
Sarah L. Eames............ -- -- 146,667 / 13,333 0 / 0
Wayne A. Palladino........ -- -- 135,000 / 15,000 0 / 0
- ----------
(1) Calculated on the basis of $2.00 per share, the closing sale price of the
Common Stock as reported on Amex on September 30, 1999, minus the exercise
price.
COMPENSATION OF DIRECTORS
See "Directors and Executive Officers of the Registrant" with respect to
compensation of non-employee directors.
EMPLOYMENT AGREEMENTS; TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
In January 1997, the Company entered into an employment agreement with Mr.
Aitken, which expired in January 1998. The agreement renewed for a one-year term
in January 1998 and will renew for one-year terms absent notice of non-renewal
from either party. This agreement provided for a base salary of $250,000,
increasing to $300,000 when the agreement was renewed in January 1998. 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.
In connection with Ms. Eames' employment with the Company, the Company has
agreed that if Ms. Eames' employment is terminated (other than for cause) she
will be entitled to one year's salary (currently $240,000 per year) plus
relocation expenses to California.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors consists of Messrs.
Ranieri and Shay. Messrs. Ranieri and Shay among others, control the general
partner of HPII and the Fund, each of which are principal shareholders of the
Company, which principal shareholders engaged in certain transactions with the
Company described under Item 13 of this Report under the heading "Certain
Relationships and Related Transactions -- Transactions with Principal
Shareholders." See also "Directors and Officers of the Registrant -- Board
Committees."
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
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Plan (the "Option Plan"). The Option Plan provides for the grant of options to
key employees, officers, directors and non-employee independent contractors of
the Company. The 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 3,175,361 shares as of September 30, 1999. Beginning in
fiscal 1999 and ending in July 2002, the number of shares available for issuance
under the Option Plan, as amended, increases by one percent of the number of
shares of Common Stock outstanding as of the first day of each fiscal year. As
of January 3, 2000, the number of shares of Common Stock available for issuance
thereunder is 3,350,872 shares.
Options granted under the 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 ("Non-Qualified Options"). Under the 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 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 Options are
granted). The 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 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 Option Plan will be
nontransferable, except by will or by the laws of descent and distribution, and
generally 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 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 Option
Plan which have terminated or expired unexercised will return to the pool of
shares available for issuance under the Option Plan.
On December 15, 1998, the Company granted options to purchase shares of
Common Stock at $4.31 per share under the Option Plan as follows: (i) 5,000 to
Mr. Peris and (ii) 5,000 to Mr. Green.
1997 NON-EMPLOYEE DIRECTOR PLAN.
In May 1997, the Company adopted the Company's 1997 Option Plan for
Non-Employee Directors (the "Director Plan") pursuant to which 100,000 shares of
Common Stock of the Company were reserved for issuance upon the exercise of
options granted to non-employee directors of the Company. The purpose of the
Director Plan is to encourage ownership of Common Stock by non-employee
directors of the Company whose continued services are considered essential to
the Company's future progress and to provide them with a further incentive to
remain as directors of the Company. The Director Plan is administered by the
Board of Directors. Directors of the Company who are not employees of the
Company or any subsidiary or affiliate of the Company are eligible to
participate in the Director Plan. The term of the Director Plan is ten years
from the date of approval by the
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stockholders; however, options outstanding on the expiration of the term shall
continue to have full force and effect in accordance with the provisions of the
instruments evidencing such options. The Board of Directors may suspend,
terminate, revise or amend the Director Plan, subject to certain limitations.
Under the Director Plan, the Board of Directors may from time to time at
its discretion determine which of the eligible directors should receive options,
the number of shares subject to such options and the dates on which such options
are to be granted. Each such option is immediately exercisable for a period of
ten years from the date of grant generally, but may not be exercised more than
90 days after the date an optionee ceases to serve as a director of the Company.
Options granted under the Director Plan are not transferable by the optionee
other than by will, laws of descent and distribution, or as required by law.
Common Stock may be purchased from the Company upon the exercise of an
option by payment in cash or cash equivalent, through the delivery of shares of
Common Stock having a fair market value equal to the cash exercise price of the
option or any combination of the above, subject to the discretion of the Board
of Directors.
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 state 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 3, 2000, 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; and (iv) all executive officers and directors of the
Company as a group (7 persons).
NUMBER OF SHARES PERCENTAGE
NAME BENEFICIALLY OWNED BENEFICIALLY OWNED
- ---- ------------------ ------------------
Timothy M. Aitken(1)........................ 670,000 3.7%
Sarah L. Eames(2)........................... 150,667 *
Wayne A. Palladino(3)....................... 224,190 1.3%
Gregory E. Marsella(4)...................... -- --
Lewis S. Ranieri(5)......................... 13,818,021 67.2%
Scott A. Shay(5)............................ 13,818,021 67.2%
Jeffrey S. Peris(6)......................... 3,667 *
G. Richard Green(6)......................... 4,667 *
Hyperion Partners II L.P.(7)................ 13,818,021 67.2%
Hyperion TW Fund L.P.(8).................... 13,818,021 67.2%
All executive officers and directors
as a group (7 persons)(9) ................ 14,871,212 69.2%
- ----------
* Less than one percent.
(1) Includes 650,000 shares subject to options exercisable within 60 days from
January 3, 2000.
(2) Includes 146,667 shares subject to options exercisable within 60 days from
January 3, 2000.
(3) Includes 135,000 shares subject to options exercisable within 60 days from
January 3, 2000.
(4) Mr. Marsella resigned as Vice President, General Counsel and Secretary
effective September 3, 1999.
(5) Includes 6,669,565 shares of Common Stock and 3,000,000 shares of Common
Stock underlying the warrants exercisable within 60 days from January 3,
2000 (the "Warrants") acquired pursuant to the HPII Purchase Agreement (as
defined herein) which HPII has purchased and 4,148,456 shares of Common
Stock which the Fund (each of which are affiliates of Messrs. Ranieri and
Shay) has purchased and as to which Messrs. Ranieri and Shay disclaim
beneficial ownership. See "Certain Relationships and Related Transactions
-- Transactions with Principal Shareholders."
(6) Includes 1,667 shares subject to options exercisable within 60 days from
January 3, 2000.
(7) Includes 4,148,456 shares of Common Stock which the Fund (an affiliate of
HPII) has purchased and as to which HPII disclaims beneficial ownership and
3,000,000 shares of Common Stock subject to the Warrants exercisable within
60 days from January 3, 2000. The address of HPII is 50 Charles Lindbergh
Parkway, Uniondale, New York 11553. See "Certain Relationships and Related
Transactions -- Transactions with Principal Shareholders."
(8) Includes 6,669,565 shares of Common Stock and 3,000,000 shares subject to
the Warrants exercisable within 60 days from January 3, 2000 which HPII (an
affiliate of the Fund) has purchased and as to which the Fund disclaims
beneficial ownership. The address of the Fund is 50 Charles Lindbergh
Parkway, Uniondale, New York 11553.
(9) Includes all shares held by Messrs. Aitken, Palladino, Ranieri, Shay,
Peris, Green and Ms. Eames, and those shares subject to options and
Warrants held by such individuals exercisable within 60 days from January
3, 2000.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
TRANSACTIONS WITH PRINCIPAL SHAREHOLDERS
Under a unit purchase agreement dated November 20, 1995, as amended (the
"HPII Purchase Agreement") pursuant to which HPII acquired its initial equity
interest in the Company, until July 31, 2001, HPII has the right to designate to
the Board of Directors of the Company the greater of three directors or 40% of
the number of directors constituting the entire Board of Directors. Messrs.
Ranieri and Shay are the HPII designees presently serving on the Board of
Directors.
The HPII Purchase Agreement also provides that for a period of five (5)
years commencing on May 30, 1996, 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 HPII 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 Mr. Palladino and certain former
officers of the Company 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.
Mr. Palladino in his individual capacity, has agreed to take all steps
necessary, including voting his shares for the election of HPII's designees to
the Board of Directors, and to utilize his 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 HPII Purchase Agreement further provides that commencing July 31, 1996,
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.
In November and December, 1996, HPII purchased from various unrelated third
parties certain trade receivables due from HMI (the "HMI Receivables") at
various discounts. The aggregate face amount of these receivables was
approximately $18,300,000. On March 26, 1997, HPII and the Company entered into
the a stock purchase agreement (the "AP Stock Purchase Agreement"), as amended,
pursuant to which HPII and the Company agreed, subject to the conditions stated
in the AP Stock Purchase Agreement, that the Company would issue shares of its
Common Stock (the "HPII Shares") equal to the Agreed Value (as defined herein)
divided by the Agreed Price (as defined herein) in consideration of the
assignment by HPII to the Company of the HMI Receivables. For the purposes of
the AP Stock Purchase Agreement, (A) "Agreed Value" means the sum of the
following amounts: (i) $4,000,000, plus (ii) 10% of the first $20,000,000 of Net
Recovery (as defined herein), plus (iii) 30% of the next $10,000,000 of Net
Recovery, plus (iv) 50% of any amount of Net Recovery in excess of $30,000,000;
(B) "Net Recovery" means the amount realized or recovered by the Company on or
after September 1, 1997 on or in respect of (i) any indebtedness owed by HMI
and/or its subsidiaries to the Company;
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(ii) any investment made by the Company in HMI and/or its subsidiaries; and
(iii) the HMI Receivables (including, without limitation, by reason of any
claims against third parties relating to the purchase of any of the foregoing),
net of (x) the merger consideration paid by the Company to acquire HMI and (y)
all reasonable out-of-pocket costs and expenses incurred by the Company in
connection with such realization or recovery. Net Recovery does not include any
tax benefit to the Company from the net loss on its equity and debt investments
in HMI; and (C) "Agreed Price" means the lesser of $7-5/8 and the closing price
of the Common Stock of the Company on the last trading day prior to the closing
of the AP Stock Purchase Agreement. This transaction was approved at a special
meeting of the shareholders held on March 17, 1998 and subsequently during April
1998, HPII contributed the HMI Receivables to the Company in exchange for
1,159,288 shares of the Company's Common Stock with a value per share of $6.00.
The aggregate value of the HPII Shares was $6,956,000. The shares of Common
Stock issued pursuant to this agreement are also covered by a registration
agreement entered into with HPII in connection with the HPII Purchase Agreement.
The Company will bear all expenses, other than underwriting discounts and
commissions, in connection with any such registration.
On April 13, 1998, a shareholder derivative action was filed against
certain officers and directors of the Company, alleging that consummation of the
AP Stock Purchase Agreement was against the best interests of the Company's
shareholders (see "Legal Proceedings").
During the summer of 1999 the Company's U.K. Operations were in the process
of acquiring three nursing and carer agencies when the Company was informed by
its senior lenders that they would not consent to these pending acquisitions.
The Company then requested that HPII complete these acquisitions on the
Company's behalf. Affiliates of HPII (the "HP Affiliates") completed these
acquisitions in August and September, 1999. Effective December 17, 1999, the
Company acquired all three businesses from the HPII Affiliates for the aggregate
amount of $2,992,000 representing HPII's acquisition cost plus, interest at a
rate of 12% per annum and reimbursement of transaction costs. Messrs. Ranieri
and Shay did not participate in any action by the Board of Directors with
respect to these acquisitions.
TRANSACTIONS WITH DIRECTORS AND EXECUTIVE OFFICERS
On December 14, 1992, a former principal shareholder and a former director
and officer of the Company, each sold 6,666 shares of Common Stock at a price of
$5.00 per share to Mr. Palladino. On such date, the Company loaned Mr. Palladino
the funds necessary to consummate such purchases. On April 8, 1998, the Company
forgave the $66,666 loan provided that Mr. Palladino remain employed by the
Company as follows: one-third as of April 9, 1998, one-third on January 1, 1999
and one-third on September 30, 1999.
Mr. Palladino among others, (collectively, the "Restricted Transferees")
has entered into a stock restriction agreement (the "Restriction Agreement"),
pursuant to which he agreed to limit the transferability of his 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
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 HPII
Purchase Agreement, and the numerator of which is the numerical amount of the
denominator less the number of Common Equivalents transferred by such Restricted
-47-
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 HPII 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.
In connection with the Refinancing, Mr. Aitken (the Company's Chairman and
Chief Executive Officer), Ms. Eames (the Company's President), Mr. Palladino
(the Company's Chief Financial Officer), Mr. Green (a director of the Company)
and certain other directors and officers of TW UK and its subsidiaries
co-invested, alongside the other Investors, $800,000, $100,000, $25,000 and
$1,100,000, respectively, in senior subordinated notes and also received
warrants exercisable into approximately 2% in the aggregate of the fully diluted
ordinary shares of TW UK. The terms of the senior subordinated notes and
warrants acquired by the foregoing persons are identical to the senior
subordinated notes and warrants acquired by the other Investors. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Certain directors 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."
-48-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Index to Consolidated Financial Statements Page
Report of Independent Accountants F-1
Consolidated Balance Sheets - September 30, 1999 and 1998 F-2
Consolidated Statement of Operations - For the Years Ended
September 30, 1999 and 1998 and the Eleven Months Ended
September 30, 1997 F-3
Consolidated Statement of Changes in Stockholders' Equity-
For the Years Ended September 30, 1999 and 1998 and the
Eleven Months Ended September 30, 1997 F-4
Consolidated Statement of Cash Flows - For the Years Ended
September 30, 1999 and 1998 and the Eleven Months Ended
September 30, 1997 F-5
Notes to Consolidated Financial Statements F-7
Quarterly Financial Information (Unaudited) F-37
(a)(2) Index to Consolidated Financial Statements Schedule
Schedule II 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 consolidated financial
statements or related notes.
(b) Reports on Form 8-K
None
(c) Exhibits
The exhibits listed in the Exhibit Index below are filed as
part of this Annual Report on Form 10-K.
-49-
EXHIBIT INDEX
Exhibit
Number Title
- ------ -----
3.1 Restated Certificate of Incorporation of the Company filed on December
12, 1990, as amended on August 7, 1992 (incorporated herein by
reference to Exhibit 3.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended April 30, 1997).
3.2 Certificate of Amendment to the Restated Certificate of Incorporation
of the Company filed on June 28, 1995 (incorporated herein by
reference to Exhibit 3.2 to the Company's Quarterly Report on Form
10-Q for the quarter ended April 30, 1997).
3.3 Certificate of Amendment to the Restated Certificate of Incorporation
of the Company filed on October 9, 1996 (incorporated herein by
reference to Exhibit 3.3 to the Company's Quarterly Report on Form
10-Q for the quarter ended April 30, 1997).
3.4 Certificate of Amendment to the Restated Certificate of Incorporation
of the Company filed on May 6, 1997 (incorporated herein by reference
to Exhibit 3.4 to the Company's Quarterly Report on Form 10-Q for the
quarter ended April 30, 1997).
3.5 Certificate of Amendment to the Restated Certificate of Incorporation
of the Company filed on April 16, 1998.
3.6 Restated By-laws of the Company, as amended (incorporated herein by
reference to Exhibit 3.4 to the Company's Annual Report on Form 10-K
for the year ended October 31, 1996).
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).
10.1 Transworld Home HealthCare, Inc. 1992 Stock Option Plan, as amended
(incorporated herein by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998).
10.2 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).
10.3 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).
-50-
Exhibit
Number Title
- ------ -----
10.4 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).
10.5 Amended and Restated Asset Purchase Agreement, dated as of March 1,
1995, among DermaQuest, Precision Health Care, Inc., 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).
10.6 Asset Purchase Agreement between The PromptCare Companies, Inc. and
The Pulmonary Division of Delaware Valley Lung Center, P.C. 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).
10.7 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).
10.8 Asset Purchase Agreement, dated as of May 28, 1993, among TNI,
Complete Health Care Services, Inc. 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).
10.9 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).
10.10 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).
10.11 Amendment, dated July 29, 1994, to the Stock Purchase Agreement among
the Company, Edward Mashek, Walter Kraemer and Lorraine Andrews
(incorporated herein by reference to Exhibit 2 to the Company's
Current Report on Form 8-K dated August 5, 1994).
10.12 Amendment among the Company, Edward Mashek, Walter Kraemer and
Lorraine Andrews, 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).
-51-
Exhibit
Number Title
- ------ -----
10.13 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).
10.14 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).
10.15 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).
10.16 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).
10.17 Amendment dated February 16, 1996 to Subordinated Note Purchase
Agreement 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).
10.18 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).
10.19 Credit Agreement among the Company, Various Lending Institutions and
Bankers Trust Company, as Agent dated as of July 31, 1996
(incorporated herein by reference to Exhibit 1 to the Company's
Current Report on Form 8-K dated July 31, 1996).
10.20 Pledge Agreement dated as of July 31, 1996 in favor of Bankers Trust
Company, as Collateral Agent (incorporated herein by reference to
Exhibit 10.59 to the Company's Annual Report on Form 10-K for the year
ended October 31, 1996).
10.21 Security Agreement among the Company, Various Subsidiaries and Bankers
Trust Company, as Collateral Agent dated as of July 31, 1996
(incorporated herein by reference to Exhibit 10.60 to the Company's
Annual Report on Form 10-K for the year ended October 31, 1996).
-52-
Exhibit
Number Title
- ------ -----
10.22 Subsidiaries Guaranty dated as of July 31, 1996 (incorporated herein
by reference to Exhibit 10.61 to the Company's Annual Report on Form
10-K for the year ended October 31, 1996).
10.23 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).
10.24 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).
10.25 Third Amendment to Credit Agreement, dated as of April 17, 1997,
between the Company and Bankers Trust Company (incorporated herein by
reference to Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended April 30, 1997).
10.26 Fourth Amendment to Credit Agreement, dated as of May 30, 1997 between
the Company and Bankers Trust Company (incorporated herein by
reference to Exhibit 19.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended July 31, 1997).
10.27 Fifth Amendment to Credit Agreement, dated as of June 30, 1997 between
the Company and Bankers Trust Company (incorporated herein by
reference to Exhibit 19.2 to the Company's Quarterly Report on Form
10-Q for the quarter ended July 31, 1997).
10.28 Sixth Amendment to Credit Agreement, dated as of September 15, 1997
between the Company and Bankers Trust Company (incorporated herein by
reference to Exhibit 10.32 to the Company's Transition Report on Form
10-K for transition period from November 1, 1996 to September 30,
1997).
10.29 Seventh Amendment to Credit Agreement, dated as of October 1, 1997
between the Company and Bankers Trust Company (incorporated herein by
reference to Exhibit 1 to the Company's Current Report on Form 8-K
dated October 10, 1997).
10.30 Eighth Amendment to Credit Agreement, dated as of November 12, 1997
between the Company and Bankers Trust Company (incorporated herein by
reference to Exhibit 10.34 to the Company's Transition Report on Form
10-K for transition period from November 1, 1996 to September 30,
1997).
-53-
Exhibit
Number Title
- ------ -----
10.31 Ninth Amendment to Credit Agreement, dated as of February 5, 1998
between the Company and Bankers Trust Company (incorporated herein by
reference to Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended December 31, 1997.
10.32 Tenth Amendment to Credit Agreement, dated as of April 7, 1998 between
the Company and Bankers Trust Company (incorporated herein by
reference to Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998).
10.33 Eleventh Amendment to Credit Agreement, dated as of July 15, 1998
between the Company and Bankers Trust Company (incorporated herein by
reference to Exhibit 10.2 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998).
10.34 Twelfth Amendment to Credit Agreement, dated as of August 12, 1998
between the Company and Bankers Trust Company (incorporated herein by
reference to Exhibit 10.35 to the Company's Annual Report on Form 10-K
for the year ended September 30, 1998).
10.35 Thirteenth Amendment to Credit Agreement, dated as of October 1, 1998
between the Company and Bankers Trust Company (incorporated herein by
reference to Exhibit 10.36 to the Company's Annual Report on Form 10-K
for the year ended September 30, 1998).
10.36 Fourteenth Amendment to Credit Agreement, dated as of January 8, 1999
between the Company and Bankers Trust Company (incorporated herein by
reference to Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1999).
10.37 Fifteenth Amendment to Credit Agreement, dated as of March 1, 1999
between the Company and Bankers Trust Company (incorporated herein by
reference to Exhibit 10.2 to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1999).
10.38 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).
10.39 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).
-54-
Exhibit
Number Title
- ------ -----
10.40 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).
10.41 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).
10.42 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).
10.43 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 (incorporated herein by
reference to Exhibit 10.71 to the Company's Annual Report on Form 10-K
for the year ended October 31, 1996).
10.44 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).
10.45 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).
10.46 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).
10.47 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).
-55-
Exhibit
Number Title
- ------ -----
10.48 DermaQuest Amendment Agreement, dated as of February 1, 1996, among
the Company, DermaQuest, Edward Mashek, Walter Kraemer and Lorraine
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).
10.49 Stock Purchase Agreement, dated January 8, 1997, by and between the
Company and HPII (incorporated herein by reference to Exhibit 10.79 to
the Company's Annual Report on Form 10-K for the year ended October
31, 1996).
10.50 Employment Agreement, dated as of January 13, 1997, between the
Company and Timothy M. Aitken (incorporated herein by reference to
Exhibit 10.80 to the Company's Annual Report on Form 10-K for the year
ended October 31, 1996).
10.51 Letter Agreement amending Agreement and Plan of Merger, 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).
10.52 Letter Agreement dated March 26, 1997, amending Agreement and Plan of
Merger between the Company and HMI (incorporated herein by reference
to Exhibit 1 to the Company's Current Report on Form 8-K dated March
27, 1997).
10.53 Stock Purchase Agreement between the Company and HPII dated as of
March 26, 1997 (incorporated herein by reference to Exhibit 1 to the
Company's Current Report on Form 8-K dated as of April 16, 1997).
10.54 Stock Purchase Agreement between the Company and the Fund dated as of
March 26, 1997 (incorporated herein by reference to Exhibit 2 to the
Company's Current Report on Form 8-K dated as of April 16, 1997).
10.55 Recommended Cash Offer by Henry Cooke Corporate Finance Ltd. on behalf
of Transworld Healthcare (UK) Limited, a subsidiary of the Company for
Omnicare (incorporated herein by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K/A Amendment No. 1 dated as of
July 2, 1997).
10.56 Letter Agreement dated July 7, 1997 amending Agreement and Plan of
Merger between the Company and HMI (incorporated herein by reference
to Exhibit 10.53 to the Company's Transition Report on Form 10-K for
transition period from November 1, 1996 to September 30, 1997).
-56-
Exhibit
Number Title
- ------ -----
10.57 Asset Purchase Agreement dated as of October 1, 1997 among HMI, Health
Reimbursement Corporation, HMI Illinois, Inc., HMI Maryland, Inc., HMI
Pennsylvania, Inc., HMI PMA, Inc., HMI Retail Corp., Inc., Home Care
Management, Inc., the Company, Stadtlander Drug Distribution Co., Inc.
and Counsel (incorporated herein by reference to Exhibit 2 to the
Company's Current Report on Form 8-K dated October 10, 1997).
10.58 Amendment dated as of August 14, 1997 to Stock Purchase Agreement
dated March 26, 1997 between HPII and the Company (incorporated herein
by reference to Exhibit 3 to the Company's Current Report on Form 8-K
dated October 10, 1997).
10.59 Stock Purchase Agreement between the Company, Parkway Ventures, Inc.
and Radamerica dated as of July 31, 1997 (incorporated herein by
reference to Exhibit (c) to the Company's Current Report on Form 8-K
dated July 31, 1997).
10.60 Agreement for Sale and Purchase of Allied between Transworld
Healthcare (UK) Limited and Vanessa Rosamunde Wynn Griffiths and David
Wynn Griffiths dated July 1, 1997 (incorporated herein by reference to
Exhibit 2.1 to the Company's Current Report on Form 8-K dated July 3,
1997).
10.61 Transworld Home HealthCare, Inc. 1997 Option Plan for Non-Employee
Directors (incorporated herein by reference to Exhibit A to the
Company's Proxy Statement for its Annual Meeting held on May 28,
1997).
10.62 Transition Agreement dated October 1, 1997, by and among HMI, Health
Reimbursement Corporation, HMI Illinois, Inc., HMI Maryland, Inc., HMI
Pennsylvania, Inc., HMI PMA, Inc., HMI Retail Corp., Inc., Home Care
Management, Inc. and Stadlander Drug Distribution Co., Inc.
(incorporated herein by reference to Exhibit 10.59 to the Company's
Transition Report on Form 10-K for transition period from November 1,
1996 to September 30, 1997).
10.63 Letter Agreement dated June 12, 1997 amending Agreement and Plan of
Merger between the Company and HMI (incorporated herein by reference
to Exhibit 10.60 to the Company's Transition Report on Form 10-K for
transition period from November 1, 1996 to September 30, 1997).
10.64 Asset Purchase Agreement dated as of June 5, 1998 between the Company,
TNI and Pediatric Services of America, Inc. (incorporated herein by
reference to Exhibit 99.1 to the Company's Current Report on Form 8-K
dated July 15, 1998).
10.65* Voting Trust Agreement dated December 17, 1999 by and among UK Parent,
TW UK, the Company, Triumph and the Trustee.
10.66* Securities Purchase Agreement of UK Parent and TW UK , dated December
17, 1999.
-57-
Exhibit
Number Title
- ------ -----
10.67* Senior Credit Agreement among UK Parent, TW UK, Paribas as Arranger,
Paribas and Barclays Bank PLC as Underwriters, Barclays Bank PLC as
Agent and Security Agent and Others, dated as of December 17, 1999.
10.68* Mezzanine Agreement among UK Parent, TW UK, Paribas as Arranger,
Underwriter and Agent, Barclays Bank PLC as Security Agent and
Others, dated as of December 17, 1999.
10.69* Warrant Instrument to subscribe for Shares in TW UK in favor of the
mezzanine lenders, dated as of December 17, 1999.
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 PricewaterhouseCoopers LLP, independent accountants of the
Company.
27* Financial Data Schedule.
- ----------
*Filed herewith.
-58-
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 HEALTHCARE, INC.
By: /s/ Timothy M. Aitken
--------------------------
Timothy M. Aitken
Chairman of the Board and
Chief Executive Officer
Date: January 13, 2000
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 January 13, 2000
- ---------------------- Executive Officer (Principal Executive
Timothy M. Aitken Officer)
/s/ Wayne A. Palladino Senior Vice President and Chief January 13, 2000
- ---------------------- Financial Officer (Principal Financial
Wayne A. Palladino and Accounting Officer)
/s/ Lewis S. Ranieri Director January 13, 2000
- ----------------------
Lewis S. Ranieri
/s/ Scott A. Shay Director January 13, 2000
- ----------------------
Scott A. Shay
/s/ Jeffrey S. Peris Director January 13, 2000
- ----------------------
Jeffrey S. Peris
/s/ G. Richard Green Director January 13, 2000
- ----------------------
G. Richard Green
-59-
TRANSWORLD HEALTHCARE, INC.
Index to Consolidated Financial Statements Page
- ------------------------------------------ ----
Report of Independent Accountants F-1
Consolidated Balance Sheets - September 30, 1999
and 1998 F-2
Consolidated Statement of Operations - For the Years Ended September 30, 1999
and 1998 and the Eleven Months Ended September 30, 1997 F-3
Consolidated Statement of Changes in Stockholders' Equity - For the Years Ended
September 30, 1999 and 1998 and the Eleven Months Ended September 30, 1997 F-4
Consolidated Statement of Cash Flows - For the
Years Ended September 30, 1999 and 1998 and
the Eleven Months Ended September 30, 1997 F-5
Notes to Consolidated Financial Statements F-7
Quarterly Financial Information (Unaudited) F-37
Index to Consolidated Financial Statements Schedule
Schedule II - Valuation and Qualifying Accounts S-1
F-i
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Transworld Healthcare, Inc.:
In our opinion, the consolidated financial statements listed in the accompanying
index on page F-i present fairly, in all material respects, the financial
position of Transworld Healthcare, Inc. and its subsidiaries (the "Company") at
September 30, 1999 and 1998, and the results of their operations and their cash
flows for the years ended September 30, 1999 and 1998, and the eleven months
ended September 30, 1997 in conformity with accounting principles generally
accepted in the United States. In addition, in our opinion, the financial
statement schedule listed in the accompanying index on page F-i present fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
New York, New York
January 5, 2000
F-1
TRANSWORLD HEALTHCARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 5,158 $ 10,413
Accounts receivable, less allowance for doubtful
accounts of $19,870 and $15,367, respectively 30,814 32,223
Inventories 2,929 4,188
Deferred income taxes 6,930 6,732
Prepaid expenses and other assets 4,735 4,382
--------- ---------
Total current assets 50,566 57,938
Property & equipment, net 9,929 9,888
Intangible assets, net 103,248 105,784
Deferred income taxes 6,173 3,483
Other assets 2,205 2,615
--------- ---------
Total assets $ 172,121 $ 179,708
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt, including
obligations under capital leases $ 1,364 $ 40
Accounts payable 5,058 2,728
Accrued expenses 14,899 12,901
Income taxes payable 3,240 3,022
Acquisitions payable 99
--------- ---------
Total current liabilities 24,561 18,790
Long-term debt, including obligations under
capital leases, less current portion 54,407 57,307
Deferred income taxes and other 1,879 1,706
--------- ---------
Total liabilities 80,847 77,803
--------- ---------
Commitments and contingencies (Note 12)
Stockholders' equity:
Preferred stock, $.01 par value; authorized
2,000 shares, issued and outstanding - none
Common stock, $.01 par value; authorized
40,000 shares, issued and outstanding
17,551 and 17,536 shares, repectively 176 175
Additional paid-in capital 125,526 125,461
Accumulated other comprehensive (loss) income (405) 2,946
Retained deficit (34,023) (26,677)
--------- ---------
Total stockholders' equity 91,274 101,905
--------- ---------
Total liabilities and stockholders' equity $ 172,121 $ 179,708
========= =========
See notes to consolidated financial statements.
F-2
TRANSWORLD HEALTHCARE, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ELEVEN
YEAR ENDED YEAR ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1997
--------- --------- ---------
Revenues:
Net patient services $ 80,169 $ 68,887 $ 29,844
Net respiratory, medical equipment and supplies sales 65,277 76,185 52,562
Net infusion services 9,282 10,237 11,038
--------- --------- ---------
Total revenues 154,728 155,309 93,444
--------- --------- ---------
Cost of revenues:
Patient services 54,620 47,779 18,132
Respiratory, medical equipment and supplies sales 37,650 41,898 25,687
Infusion services 7,140 7,515 7,568
--------- --------- ---------
Total cost of revenues 99,410 97,192 51,387
--------- --------- ---------
Gross profit 55,318 58,117 42,057
Selling, general and administrative expenses 57,946 51,980 42,931
Gain on sale of assets (2,511) (606)
Special charges, primarily goodwill impairment (Note 8) 16,677
Equity in loss of HMI, net (Note 3) 18,076
--------- --------- ---------
Operating (loss) income (2,628) 8,648 (35,021)
Interest income (227) (635) (2,271)
Interest expense 5,445 6,286 5,063
--------- --------- ---------
(Loss) income before income taxes (7,846) 2,997 (37,813)
(Benefit) provision for income taxes (500) 1,844 (5,078)
--------- --------- ---------
Net (loss) income $ (7,346) $ 1,153 $ (32,735)
========= ========= =========
Net (loss) income per share of common stock:
Basic and diluted $ (0.42) $ 0.07 $ (2.56)
========= ========= =========
Weighted average number of common shares outstanding:
Basic 17,547 17,327 12,794
========= ========= =========
Diluted 17,547 17,488 12,794
========= ========= =========
See notes to consolidated financial statements.
F-3
TRANSWORLD HEALTHCARE, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER RETAINED
------------------------- PAID-IN COMPREHENSIVE (DEFICIT)
SHARES AMOUNT CAPITAL (LOSS) INCOME EARNINGS TOTAL
----------- ----------- ---------- ------------- ----------- -------------
Balance, October 31, 1996 9,940 $ 99 $ 62,221 $ 4,905 $ 67,225
Net loss (32,735) (32,735)
Translation adjustment $ (2,192) (2,192)
Issuance of common stock for:
Private offering 5,015 50 50,465 50,515
Radamerica per share price
guarantee (Note 3) 321 3 (3)
Exercise of stock options and
warrants, including tax benefit 210 2 703 705
Cancellation of common stock from:
Termination of VIP agreement
(Note 3) (40) (354) (354)
Repayment of Radamerica notes
receivable (146) (1) (1,258) (1,259)
--------- --------- --------- --------- --------- ---------
Balance, September 30, 1997 15,300 153 111,774 (2,192) (27,830) 81,905
Net income 1,153 1,153
Translation adjustment 5,138 5,138
Issuance of common stock for:
HMI Receivables transaction (Note 7) 1,159 12 6,944 6,956
Exercise of stock options and
warrants 1,090 11 6,483 6,494
Cancellation of common stock from:
Repayment of related party
notes receivable (13) (1) (80) (81)
Issuance of options for services rendered 340 340
--------- --------- --------- --------- --------- ---------
Balance, September 30, 1998 17,536 175 125,461 2,946 (26,677) 101,905
Net loss (7,346) (7,346)
Translation adjustment (3,351) (3,351)
Issuance of common stock for:
Exercise of stock options 15 1 65 66
--------- --------- --------- --------- --------- ---------
Balance, September 30, 1999 17,551 $ 176 $ 125,526 $ (405) $ (34,023) $ 91,274
========= ========= ========= ========= ========= =========
See notes to consolidated financial statements.
F-4
TRANSWORLD HEALTHCARE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
ELEVEN
YEAR ENDED YEAR ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1997
------------ ------------- -------------
Cash flows from operating activities:
Net (loss) income $ (7,346) $ 1,153 $ (32,735)
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities:
Depreciation and amortization 2,312 1,981 1,324
Amortization of goodwill 3,168 2,841 1,458
Amortization of other intangible assets 291 306 408
Amortization of debt issuance costs 1,086 1,151 830
Provision for doubtful accounts 12,272 8,318 12,973
Gain on sale of assets (2,511) (606)
Special charges, primarily goodwill impairment 16,677
Equity in loss of HMI 18,796
Deferred income taxes (2,684) (988) (5,574)
Changes in assets and liabilities, excluding
the effect of businesses acquired and sold:
Increase in accounts receivable (11,173) (7,372) (11,351)
Decrease (increase) in inventories 1,208 (897) (102)
Increase in prepaid expenses and other assets (491) (246) (4,457)
Increase (decrease) in accounts payable 2,359 (5,270) 1,910
Increase (decrease) in accrued expenses
and other liabilities 2,256 1,396 (640)
--------- --------- ---------
Net cash provided by (used in) operating activities 3,258 (138) (1,089)
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures (2,642) (3,346) (2,694)
Notes receivable - payments received 58 4,683
Proceeds from termination of VIP agreement 500
Proceeds from sale of property and equipment 90 60 550
Proceeds from sale of Radamerica, net of cash
overdraft when sold 1,204 12,114
Proceeds from sale of TNI's assets 4,765
Proceeds from sale of HMI's assets 32,328
Advances to and investment in HMI (11,122) (36,872)
Acquisitions - net of cash acquired (3,694) (846) (93,586)
Payments on acquisitions payable (130) (406) (1,833)
Purchases of other intangible assets (16) (396)
--------- --------- ---------
Net cash (used in) provided by investing activities (6,334) 22,241 (117,138)
--------- --------- ---------
(Continued)
See notes to consolidated financial statements.
F-5
TRANSWORLD HEALTHCARE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(In thousands)
ELEVEN
YEAR ENDED YEAR ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1997
------------ ------------- -------------
Cash flows from operating activities:
Proceeds from issuance of common stock $ 50,650
Payment of costs associated with
issuance of common stock (175)
Payments on notes payable (11)
Borrowing under revolving loan 96,847
Payments on revolving loan $ (1,500) $ (29,100) (22,983)
Proceeds from long-term debt 55 47
Principal payments on long-term debt (73) (58) (340)
Payments for debt issuance costs (346) (17) (1,564)
Stock options and warrants exercised, net,
including tax benefit 66 6,492 939
--------- --------- ---------
Net cash (used in) provided by financing activities (1,853) (22,628) 123,410
--------- --------- ---------
Effect of exchange rate on cash (326) 312 845
--------- --------- ---------
(Decrease) increase in cash (5,255) (213) 6,028
Cash and cash equivalents,
beginning of period 10,413 10,626 4,598
--------- --------- ---------
Cash and cash equivalents,
end of period $ 5,158 $ 10,413 $ 10,626
========= ========= =========
Supplemental cash flow information:
Cash paid for interest $ 4,192 $ 5,330 $ 3,993
========= ========= =========
Cash paid (refunded) for income taxes, net $ 1,948 $ (506) $ 2,312
========= ========= =========
Supplemental disclosure of non-cash
investing and financing activities:
Details of business acquired in
purchase transactions:
Fair value of assets acquired $ 3,730 $ 1,151 $ 106,402
========= ========= =========
Liabilities assumed or incurred $ 36 $ 305 $ 11,951
========= ========= =========
Cash paid for acquisitions (including
related expenses) $ 3,694 $ 846 $ 94,451
Cash acquired 865
--------- --------- ---------
Net cash paid for acquisitions $ 3,694 $ 846 $ 93,586
========= ========= =========
Additional non-cash activities are disclosed in the
notes to the consolidated financial statements.
See notes to consolidated financial statements.
F-6
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1. BASIS OF PRESENTATION:
Transworld Healthcare, Inc. (the "Company") is a provider of a broad range
of health care services and products with operations in the United Kingdom
("U.K.") and the United States ("U.S."). The Company provides the following
services and products: (i) patient services, including nursing and
para-professional services; (ii) specialty mail-order pharmaceuticals,
medical supplies, respiratory therapy and home medical equipment; and (iii)
infusion therapy.
During July 1997, the Company completed the following significant
acquisitions:
COMPANY NATURE OF BUSINESS
------- ------------------
Omnicare plc ("Omnicare") Respiratory equipment and services
and medical and surgical products
Allied Medicare Limited ("Allied") Nursing and para-professional
services
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).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF ACCOUNTING:
The accompanying consolidated financial statements are prepared on the
accrual basis of accounting in accordance with U.S. generally accepted
accounting standards.
FISCAL YEAR CHANGE:
The Company changed its fiscal year end from October 31 to September 30
effective for fiscal 1997.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
Investments in entities that are 20% to 50% owned are accounted for under
the equity method of accounting.
REVENUE RECOGNITION:
Patient services and infusion and respiratory therapy 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 (including respiratory
equipment) are recognized over the period the equipment is rented
(typically on a month-to-month basis) and approximated $5,884, $6,711 and
$5,402 in fiscal 1999, 1998 and 1997, respectively.
F-7
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Revenues from the sale of pharmaceuticals and supplies are recognized when
products are shipped 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, the National Health Services (the "NHS") and other U.K.
governmental payors, 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 September 30, 1999 and 1998
and the eleven months ended September 30, 1997, 36%, 30% and 13%,
respectively of the Companies net revenues were attributable to the NHS and
other U.K. governmental payors programs. For the years ended September 30,
1999 and 1998 and the eleven months ended September 30, 1997, the Company's
net revenues attributable to the Medicare and Medicaid programs were
approximately 23%, 33% and 53%, respectively, of the Company's total
revenues.
INCOME TAXES:
The Company accounts for income taxes using the liability method in
accordance with Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes." Under this method, deferred income tax
assets and liabilities reflect tax carryforwards and the net effects of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting and income tax purposes, as determined
under currently enacted tax rates. Deferred tax assets are recorded if
future realization is more likely than not.
Deferred taxes are provided primarily for bad debts, Federal and state net
operating losses, acquisition liabilities, depreciation and amortization of
intangibles, which are reported for Federal income tax purposes in
different periods than for financial reporting purposes. Valuation
allowances are established, when necessary, to reduce deferred taxes to the
amounts expected to be realized.
EARNINGS PER SHARE:
Effective October 1, 1997, the Company adopted the provisions SFAS No. 128,
"Earnings per Share" ("EPS"). SFAS No. 128 replaced primary EPS with basic
EPS and fully diluted EPS with diluted EPS. Basic EPS is computed using the
weighted average number of common shares outstanding, after giving effect
to issuable shares per agreements. Diluted EPS is computed using the
weighted average number of common shares outstanding, after giving effect
to contingently issuable shares per agreements and dilutive stock options
and warrants using the treasury stock method. At September 30, 1999, 1998
and 1997, the Company had outstanding stock options and warrants to
purchase 3,683, 3,965 and 3,809 shares, respectively of common stock
ranging in price from $4.31 to $12.45, $4.38 to $12.45 and $7.88 to $12.45
per share, respectively, that were not included in the computation of
diluted EPS because the exercise price was greater than the average market
price of the common shares. In addition, for the year ended September 30,
1999 and for the eleven months ended September 30, 1997, the Company had an
incremental weighted average of 128 and 699 shares, respectively, of stock
options and warrants which were not included in the diluted computation as
the effect of such inclusion would have been anti-dilutive due to a net
loss position.
F-8
TRANSWORLD 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 common shares outstanding have been restated
for the eleven months ended September 30, 1997 to reflect the provisions of
SFAS No. 128. This restatement had no effect on EPS.
The weighted average number of shares used in the basic and diluted
earnings per share computations for the years ended September 30, 1999 and
1998 and eleven months ended September 30, 1997 are as follows:
ELEVEN MONTHS
YEAR ENDED YEAR ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1997
--------------- --------------- ----------------
Weighted average number of common
shares outstanding 17,547 16,663 12,517
Weighted average number of contingently
issuable shares per agreements 664 277
------ ------ ------
Shares used in computation of basic net
(loss) income per share of common stock 17,547 17,327 12,794
Incremental shares after application
of treasury stock method, of stock
options and warrants 161
------ ------ ------
Shares used in computation of diluted net
(loss) income per share of common stock 17,547 17,488 12,794
====== ====== ======
IMPAIRMENT OF LONG-LIVED ASSETS:
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If
the sum of the undiscounted future cash flows is less than the carrying
amount of the asset, a loss is recognized for the difference between the
fair value (discounted future cash flows) and carrying value of the asset.
Impairment loss on assets to be sold, if any, is based on the estimated
proceeds to be received, less estimated costs to sell.
STOCK-BASED COMPENSATION:
The accompanying Consolidated Balance Sheets and Statement of Operations of
the Company have been prepared in accordance with the Accounting Principles
Board's Opinion No. 25, Accounting for Stock Issued to Employees ("APB No.
25"). Under APB No. 25, generally, no compensation expense is recognized in
the accompanying consolidated financial statements in connection with the
awarding of stock option grants to employees provided that, as of the
grant date, all terms associated with the award are fixed and the quoted
market price of the Company's stock is equal to or less than the amount an
employee must pay to acquire the stock as defined. The Company only issues
fixed term stock option grants at the quoted market price on the date of
the grant.
F-9
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Effective November 1, 1996, the Company adopted the disclosures required by
SFAS No. 123, "Accounting for Stock-Based Compensation," including pro
forma operating results had the Company prepared it consolidated financial
statements in accordance with the fair value based method of accounting for
stock-based compensation, and they have been included in Note 11.
COMPREHENSIVE INCOME:
Effective October 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." This statement established standards
for the reporting and display of comprehensive income and its components in
a full set of general purpose financial statements. Components of
comprehensive income include net income and all other non-owner changes in
equity, such as the change in the cumulative translation adjustment,
unrealized gains and losses on investments available for sale and minimum
pension liability. Currency translation is the only item of other
comprehensive income impacting the Company. The following table displays
comprehensive (loss) income for the years ended September 30, 1999 and 1998
and the eleven months ended September 30, 1997:
ELEVEN MONTHS
YEAR ENDED YEAR ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1997
-------------- -------------- ----------------
Net (loss) income $ (7,346) $ 1,153 $ (32,735)
Change in cumulative
translation adjustment (3,351) 5,138 (2,192)
----------- --------- -----------
Comprehensive (loss) income $ (10,697) $ 6,291 $ (34,927)
=========== ========= ===========
SEGMENT INFORMATION:
Effective October 1, 1998, the Company adopted the provisions of SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information."
SFAS No. 131 supercedes SFAS No. 14, "Financial Reporting for Segments of a
Business Enterprise," replacing the "industry segment" approach with the
"management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments.
SFAS No. 131 also requires disclosures about products and services,
geographic areas and major customers. The adoption of SFAS No. 131 had no
impact on the Company's consolidated financial statements for the periods
presented.
CONTINGENCIES:
Contingent liabilities, including any material claims, disputes, or
unsettled matters with third-party
F-10
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
payors, are disclosed where management believes they are material to the
Company's financial position.
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents include highly liquid short-term investments
purchased with initial maturities of 90 days or less.
INVENTORIES:
Inventories are valued at the lower of cost (determined using a first-in,
first-out method) or market. Inventories, which consists primarily of
finished goods, include pharmaceuticals, ancillary medical supplies and
certain medical equipment.
PROPERTY AND EQUIPMENT:
Property and equipment, including revenue producing equipment, is carried
at cost, net of accumulated depreciation and amortization. Revenue
producing equipment in the U.K. consists of oxygen cylinders and oxygen
concentrators. Depreciation for these oxygen cylinders and oxygen
concentrators is provided on the straight-line method over their estimated
useful lives of twenty and seven years, respectively. Revenue producing
equipment in the U.S. consists of home medical equipment (e.g., respiratory
equipment, beds and wheelchairs). Depreciation for this home medical
equipment is provided primarily on the straight-line method over their
estimated useful lives of three to seven years. Buildings are being
depreciated over their useful lives of twenty-five to fifty years and
leasehold improvements are amortized over the related lease terms or
estimated useful lives, whichever is shorter. Routine maintenance and
repairs that do not extend the useful life of property and equipment are
charged against results of operations as incurred. When assets are retired
or otherwise disposed of, the cost and related accumulated depreciation are
reversed from the accounts, and any resulting gain or loss is reflected in
the accompanying Consolidated Statement of Operations.
INTANGIBLE ASSETS:
Intangible assets, consisting principally of goodwill and covenants
not-to-compete, are carried at cost, net of accumulated amortization. All
goodwill is enterprise goodwill and is amortized on a straight-line basis
primarily over forty years. Amortization of other intangible assets
(primarily covenants not-to-compete) is provided on a straight-line basis
over three to fifteen years.
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 that the estimated goodwill life is reasonable given
the continuing movement of patient care to non-institutional settings,
expanding demand due to demographic trends, the emphasis of the Company on
establishing significant coverage in its local and regional markets, the
consistent practice with other alternate site health care
F-11
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
companies and other factors.
At each balance sheet date, or if a significant adverse change occurs in
the Company's business, management assesses the carrying amount of
enterprise goodwill. The Company measures impairment of goodwill by
comparing the future undiscounted cash flows (without interest) to the
carrying amount of goodwill. This evaluation is done at the reportable
business segment level (primarily by subsidiary). If the carrying amount of
goodwill exceeds the future cash flows, the excess carrying amount of
goodwill is written off. Factors considered by management in estimating
future cash flows include current operating results, the effects of any
current or proposed changes in third-party reimbursement or other
governmental regulations, 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
September 30, 1999 and September 30, 1998, other assets included $1,357 and
$2,425, respectively of deferred financing costs associated with the Credit
Facility (as defined and described in Note 6), net of accumulated
amortization of $3,242 and $2,156, respectively. In addition, at September
30, 1999, other assets included $655 of deferred financing costs associated
with the Refinancing (as defined and described in Note 15). Amortization of
deferred financing costs is included in interest expense in the
accompanying Consolidated Statement of Operations.
FOREIGN CURRENCY TRANSLATION:
Assets and liabilities of foreign subsidiaries whose functional currency is
other than the U.S. dollar are translated to U.S. dollars using the
exchange rates in effect at the balance sheet date. Results of operations
are translated using weighted average exchange rates during the period.
Adjustments resulting from the translation process are included as a
separate component of stockholders' equity.
CONCENTRATIONS OF CREDIT RISK:
Financial instruments which potentially subject the Company to
concentrations of credit risk are cash equivalents and accounts receivable.
The Company places its cash equivalents with high credit quality financial
institutions. The Company believes no significant concentration of credit
risk exists with respect to these cash equivalents.
The Company grants credit without collateral to its patients, who are
primarily insured under third-party agreements. The Company maintains an
allowance for doubtful accounts based on the expected collectibility of
accounts receivable. Accounts receivable at September 30, 1999 is comprised
of amounts due from the NHS and other U.K. governmental payors, Medicare
and Medicaid (40.3%, 10.9% and 3.8%, respectively) and various other
third-party payors and self-pay patients (none of which comprise greater
than 10% of the balance). At September 30, 1998, 22.8%, 27.8% and 4.1% of
F-12
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
accounts receivable was due from the NHS and other U.K. governmental
payors, Medicare and Medicaid, respectively with the balance due from
various other third-party payors and self-pay patients (none of which
comprise greater than 10% of the balance).
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Cash, accounts receivable, intangible assets, other assets, accounts
payable and accrued expenses and other liabilities approximate fair value
due to the short-term maturity of those instruments. The estimated fair
value of the Company's borrowing under the Credit Facility approximates the
carrying value at September 30, 1999 and 1998 due to interest rates which
fluctuate with market rates.
IMPACT OF RECENT ACCOUNTING STANDARDS:
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 addresses the accounting for derivative
instruments including certain derivative instruments embedded in other
contracts and for hedging activities. As the Company currently does not
enter into transactions involving derivative instruments, the Company does
not believe that the adoption of SFAS No. 133 will have a material effect
on the Company's financial statements. As issued, SFAS No. 133 is effective
for all fiscal quarters of all fiscal years beginning after June 15, 1999,
with earlier application encouraged. In June 1999, the FASB issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of SFAS No. 133," which amended the
effective date of SFAS No. 133 for all fiscal quarters of all fiscal years
beginning after June 15, 2000.
USE OF MANAGEMENT'S ESTIMATES:
The preparation of financial statements in conformity 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 those
estimates. Estimates are used for, but not limited to, the accounting for
allowance for doubtful accounts, valuation of inventories, accrued
expenses, depreciation and amortization.
RECLASSIFICATIONS:
Certain prior year balances have been reclassified to conform to the
current year presentation.
F-13
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
3. BUSINESS COMBINATIONS AND DISPOSALS:
COMBINATIONS:
During the eleven months ended September 30, 1997, 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 accompanying Consolidated Statement of Operations from
their respective dates of acquisition.
OMNICARE
At the end of June 1997, Transworld Healthcare (UK) Limited ("TW UK"), a
wholly-owned subsidiary of the Company, acquired Omnicare pursuant to a
recommended cash offer to acquire all the issued and to be issued shares of
Omnicare not already owned by TW UK for approximately $29,028, which was
paid during July 1997. In addition, 1,765 shares had previously been
purchased from Hyperion Partners II L.P. ("HPII"), a related party, on May
30, 1997 for $2,857. Accordingly, the Company has included the results of
operations, financial position and cash flows of Omnicare in its
consolidated results effective July 1, 1997.
Omnicare provides respiratory equipment and services to patients at home in
the U.K. under the terms of contracts and licenses with various NHS
agencies. The Company also dispenses and supplies a range of medical and
surgical products, principally ostomy products, to patients at home, as
well as providing those patients with advisory and other services through
its network of regional care centers.
The total cost of the acquisition was allocated on the basis of the fair
value of the assets acquired and liabilities assumed and incurred.
Accordingly, assets and liabilities were assigned values of approximately
$9,669 and $6,016, respectively, with the excess of $28,232 allocated to
goodwill which is being amortized on a straight-line basis over forty
years.
ALLIED
Effective June 23, 1997, TW UK acquired all of the issued and outstanding
capital stock of Allied, a privately held provider of nursing and other
care-giving services to home care patients throughout the U.K., for
approximately $60,042. Accordingly, the Company has included the results of
operations, financial position and cash flows of Allied in its consolidated
results effective June 23, 1997.
The total cost of the acquisition was allocated on the basis of the fair
value of the assets acquired and liabilities assumed and incurred.
Accordingly, assets and liabilities were assigned values of approximately
$10,062 and $7,667, respectively, with the excess allocated to covenants
not-to-compete of $734 and goodwill of $56,913. The covenants and goodwill
are being amortized on a straight-line basis over three and forty years,
respectively.
F-14
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
COMBINED PRO FORMAS
The following represents the unaudited pro forma results of operations and
related per share information assuming the Company acquired Omnicare and
Allied on November 1, 1996. The pro forma results for the eleven months
ended September 30, 1997 are based on the historical consolidated financial
statements of the Company for the eleven months ended September 30, 1997
(including Omnicare and Allied from the dates of acquisition), Omnicare for
the eight months ended June 30, 1997 and Allied for the thirty-six weeks
ended June 22, 1997.
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.
PRO FORMA
ELEVEN MONTHS ENDED
SEPTEMBER 30,
1997
-------------------
(unaudited)
Net revenues $141,231
Net loss (32,695)
Net loss per share of common stock:
Basic and diluted (2.56)
DISPOSITIONS:
RADAMERICA
Effective July 31, 1997, the Company sold Radamerica, Inc. ("Radamerica")
for $13,304 and received $12,100 in fiscal 1997 with the remaining $1,204
subsequently received on November 10, 1997. As part of the consideration
for the acquisition of Radamerica, the Company had issued 250 shares of its
common stock valued at $5,000 based on a $20 per share market price
guarantee to the selling shareholders of Radamerica. Per the agreement, the
incremental per share amount due under the market price guarantee of $10.60
was paid to the selling shareholders through issuance of 321 shares of
common stock of the Company ($8.25 per share fair market value) during
August 1997, resulting in a reclassification of $3 from additional paid-in
capital to common stock.
Results for Radamerica through July 31, 1997 have been included in the
overall Company's results for the eleven months ended September 30, 1997.
Accordingly, for purposes of earnings per share computations, the weighted
average actual shares issued of the Company's common stock under the per
share market price guarantee have been included in both basic and diluted
earnings per share computations.
F-15
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
3. BUSINESS COMBINATIONS AND DISPOSALS (CONTINUED):
The Company recognized a pre-tax gain on the sale of Radamerica of
approximately $606.
TNI
Effective July 12, 1998, the Company sold substantially all of the assets
of Transworld Home HealthCare-Nursing Division, Inc. ("TNI") for $5,300,
which was paid in cash at closing with $300 of such amount placed into
escrow and released one year following the closing (the "TNI Sale").
Results for TNI through July 12, 1998 have been included in the overall
Company's results for the year ended September 30, 1998. The Company
recognized a pre-tax gain on the TNI Sale of approximately $2,511.
TERMINATION OF PENDING ACQUISITIONS:
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"). On July 23, 1997, the Company and the VIP Companies terminated
the stock purchase agreements principally due to delays in completing the
transaction.
As a result of the termination of the agreements, the Company has taken a
pre-tax non-cash charge of approximately $1,622 during its third quarter of
fiscal 1997 relating to the termination of the transaction, a contract
deposit and other acquisition-related expenses. This charge has been
recorded in special charges (Note 8).
HMI
During fiscal 1997, the Company acquired 100% of the issued and outstanding
stock of Health Management, Inc. ("HMI") and disposed of all of HMI's
assets and businesses 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.
On November 13, 1996, the Company acquired HMI's senior secured
indebtedness under the credit agreement between HMI and its senior lenders
for $21,263 directly from such lenders. In mid January 1997, the Company
acquired 8,964 newly issued shares of HMI common stock, representing
approximately 49% of HMI's outstanding common stock for $1 per share or
$8,964.
The $9,714 investment in HMI was recorded as of January 31, 1997 and
represents 49% of HMI's equity in net tangible assets and after fair value
adjustments, $15,835 was preliminarily allocated to goodwill, which was
being amortized on a straight-line basis over thirty years. The acquisition
of
F-16
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
3. BUSINESS COMBINATIONS AND DISPOSALS (CONTINUED):
49% of the outstanding shares of HMI common stock was accounted for by the
Company under the equity method of accounting (effective as of January 31,
1997). During the eleven months ended September 30, 1997, the Company
recorded $18,076 of equity in loss of HMI which represented 49% of HMI's
loss for the six months ended July 31, 1997, after adjustments to book the
Company's adjustment to historical goodwill amortization based on its fair
value adjustments ($132) and to eliminate intercompany interest ($720). Due
to the Company's decision, during the third quarter of fiscal 1997, to sell
HMI and the recording of HMI's obligations that the Company was required to
fund, in connection with the sale to Counsel Corporation ("Counsel"), no
equity in loss of HMI has been booked subsequent to July 31, 1997.
On August 14, 1997, the Company entered into an agreement (the "Asset Sale
Agreement") with Counsel, an unrelated party, relating to the sale of
substantially all of the businesses and operations of HMI (the "Asset
Sale") for approximately $40,000. The Asset Sale Agreement required the
Company to acquire the remaining 51% of HMI prior to the sale to Counsel.
As a result of the Asset Sale Agreement, the Company recorded an impairment
charge of $1,841 for its investment in HMI at July 31, 1997. The carrying
amount of the investment was adjusted for costs and obligations to sell HMI
(including contractually obligated costs to be incurred) compared with the
gross proceeds on the Asset Sale. Such adjustments included the cost to
purchase the remaining 51% of HMI ($2,800), transaction costs (principally
legal expenses) associated with the sale to Counsel ($1,000), purchase
price adjustments (primarily working capital adjustments) ($4,470), the
acquisition of the HMI Receivables (as defined and described in Note 7)
from HPII ($6,956) and the retained liabilities of HMI ($10,774). These
retained liabilities consisted principally of legal expenses and settlement
costs associated with the shareholder and class action litigation,
settlement of accounts payable, severance and employee related costs and
lease termination costs.
On October 1, 1997, the Company, through a wholly-owned subsidiary,
purchased the remaining 51% of the outstanding shares of HMI's common stock
for $.30 per common share. Concurrently, the Company completed the Asset
Sale to Counsel for $40,000. Of the $40,000 proceeds, $30,000 was received
in cash with $7,500 being paid to the Company as HMI's accounts receivable,
existing at date of sale, were collected, with the remaining $2,500 held in
escrow for post-closing adjustments. As of September 30, 1999 an aggregate
(including interest earned on such escrow funds) of $37,648 was received
(including the $7,500 that was held for accounts receivable collection) of
which, $25,000 was used to reduce the senior secured debt owed by the
Company under the Credit Facility, $2,800 was used to acquire the remaining
51% of HMI and the remainder was used for costs, fees and other expenses to
complete the HMI Asset Sale as well as to satisfy liabilities not assumed
by Counsel. The remaining $2,500 escrow was fully utilized for post-closing
adjustments.
The Company also amended its Credit Facility on October 1, 1997 to
accommodate the acquisition of the remaining 51% of HMI and the concurrent
Asset Sale to Counsel.
Pursuant to the Asset Sale, Counsel did not assume any liabilities of HMI
other than certain liabilities arising after the closing under assumed
contracts and certain employee-related liabilities.
F-17
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
4. PROPERTY AND EQUIPMENT:
Major classes of property and equipment, net consist of the following:
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------------- ------------
Revenue producing equipment $10,892 $10,076
Furniture, fixtures and equipment 7,971 7,257
Land, buildings and leasehold improvements 1,473 1,470
------- -------
20,336 18,803
Less, accumulated depreciation and amortization 10,407 8,915
------- -------
$ 9,929 $ 9,888
======= =======
Depreciation and amortization of property and equipment for the years ended
September 30, 1999 and 1998 and the eleven months ended September 30, 1997
was $2,312, $1,981 and $1,324, respectively. The net book value of revenue
producing equipment was $6,151 and $5,542 at September 30, 1999 and
September 30, 1998, respectively.
5. INTANGIBLE ASSETS:
Intangible assets, net consist of the following:
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------------- ------------
Goodwill $111,039 $110,165
Covenants not-to-compete 1,541 1,565
Other intangible assets 466 462
-------- --------
113,046 112,192
Less accumulated amortization 9,798 6,408
-------- --------
$103,248 $105,784
======== ========
Amortization of intangibles for the years ended September 30, 1999 and 1998
and the eleven months ended September 30, 1997 was $3,459, $3,147 and
$1,866, respectively.
6. DEBT:
On July 31, 1996, the Company completed a $100,000 senior secured revolving
credit facility, underwritten by a commercial bank who is also acting as
Agent Bank (the "Credit Facility"). During the year ended September 30,
1999, the Company amended the Credit Facility to allow for further
expansion of its U.K. operations. In addition, the Company reduced its
borrowings under the Credit Facility by $1,500.
The Company amended the Credit Facility during the year ended September 30,
1998 to accommodate
F-18
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
6. DEBT (CONTINUED):
the TNI Sale. On July 15, 1998, the Company reduced outstanding borrowings
under the Credit Facility by $4,100 with proceeds from the TNI Sale.
The Company amended the Credit Facility during the eleven months ended
September 30, 1997 to accommodate the sale of the Shares (as defined in
Note 7) and issuance of the HPII Shares (as defined in Note 7), the
purchase of HMI's senior debt and 100% of HMI's common stock, certain
working capital advances to HMI, the sale of substantially all of HMI's
assets, the purchases of Omnicare and Allied and to amend certain financial
covenants.
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 (ranging from 5.375% to 5.4375%
at September 30, 1999 and from 5.375% to 5.5625% at September 30, 1998),
plus 2%. In addition, 0.5% is charged on the unused portion of the Credit
Facility. As of September 30, 1999, the Company had $55,755 outstanding
under the Credit Facility and the unused portion under the Credit Facility
was $23,645. Additional borrowings require the approval of the required
banks under the Credit Facility.
The loans under the Credit Facility are collateralized by, among other
things, a lien on substantially all of the Company's and its domestic
subsidiaries' assets, a pledge of the Company's ownership interest in its
subsidiaries and guaranties by the Company's domestic subsidiaries. The
loans mature on July 31, 2001 with quarterly reductions in availability
which commenced July 31, 1998 and continue through maturity. The
availability at September 30, 1999 was $79,400.
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 September 30, 1999, the Company was in technical
default of the Credit Facility due to non-compliance with certain financial
covenants (i.e.: interest coverage, debt to EBITDA and minimum EBITDA). On
December 20, 1999, the Company refinanced and repaid the Credit Facility
with funds obtained in the Refinancing (Note 15).
F-19
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
6. DEBT (CONTINUED):
Long-term debt consists of the following:
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
--------- ----------
Credit Facility, due July 21, 2001, with monthly interest at Euro-
dollar Rate (ranging from 5.375% to 5.4375% at September 30,
1999 and from 5.375% to 5.5625% at September 30, 1998),
plus 2% collateralized by a lien on all the Company's and
it's domestic subsidiaries' assets $ 55,755 $ 57,255
Equipment leases with monthly principal plus interest ranging from
6.9% to 12.5% through 2002, collateralized by related equipment 16 92
--------- ----------
55,771 57,347
Less, current maturities 1,364 40
--------- ----------
$ 54,407 $ 57,307
========= ==========
Annual maturities of long-term debt for each of the next three years are:
YEAR ENDING SEPTEMBER 30,
-------------------------
2000 $ 1,364
2001 54,405
2002 2
---------
$ 55,771
=========
7. STOCKHOLDERS' EQUITY:
On April 21, 1997, HPII purchased 899 shares of the Company's common stock
at $11.125 per share and Hyperion TW Fund L.P. ( the "Fund") purchased
4,116 shares of the Company's common stock at $9.875 per share for an
aggregate purchase price of $50,650 (collectively, the "Shares").
Collectively, HPII and the Fund are the Company's principal shareholders.
In November and December, 1996, HPII purchased from various unrelated third
parties certain receivables (the "HMI Receivables") due from HMI at various
discounts. The aggregate face amount of these receivables was approximately
$18,300. On March 26, 1997, the Company entered into a stock purchase
agreement, with HPII, as amended, to purchase these receivables from HPII
for a number of shares of common stock (the "HPII Shares") as determined by
a formula geared to the net cash proceeds ultimately realized by the
Company upon sale of the HMI assets. The value per share of the HPII Shares
was determined by the market value of the Company's common stock on the
date of issuance. This transaction was approved at a special meeting of the
shareholders held on March 17, 1998 and subsequently during April 1998,
HPII was issued 1,159 shares of the Company's common stock with a value per
share of $6.00. The aggregate value of the HPII Shares was $6,956 (Note
12).
F-20
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
7. STOCKHOLDERS' EQUITY (CONTINUED):
No gain or loss was directly recorded as a result of this transaction, as
it was considered a cost of acquiring HMI (Note 3).
8. BUSINESS REALIGNMENT:
The Company took a number of significant steps during the year ended
September 30, 1998 and the eleven months ended September 30, 1997 to
realign its business as a focused regional home health care provider and
specialty pharmacy and medical supply distributor in the U.S. and an
integrated national provider of health care products and services in the
U.K. These steps included: (i) selling non-core assets (i.e.: Radamerica
and TNI); (ii) exiting businesses that were deemed not to have the
potential to earn an adequate return on capital over the long term (such as
wound care and orthotic product lines in the continental U.S., as well as
the Company's pulmonary rehabilitation center in Cherry Hill, New Jersey);
(iii) completing the Asset Sale; and (iv) terminating the agreements to
purchase the VIP Companies. In addition, during fiscal 1998, the Company
attempted the acquisitions of Healthcall Group plc ("Healthcall") and Apria
Healthcare Group, Inc. ("Apria"). During fiscal 1999, the Company attempted
the acquisitions of Sinclair Montrose Healthcare PLC ("Sinclair") and
Gateway HomeCare, Inc. ("Gateway").
For the eleven months ended September 30, 1997, the Company incurred
pre-tax special charges in relation to these actions of $16,677, comprised
of the following items: (i) $1,841 related to the impairment of the
investment in HMI upon the sale to Counsel (Note 3); (ii) $12,079 for the
write-off of goodwill and other intangible assets related to the decisions
to exit substantially all of DermaQuest, Inc.'s ("DermaQuest") product
lines in the continental U.S. (principally wound care and orthotics); (iii)
$1,622 for the termination of the agreements to purchase the VIP Companies
(Note 3); (iv) $437 principally for the write-off of goodwill and other
intangible assets and estimated costs associated with the closure of the
Company's pulmonary rehabilitation center in Cherry Hill, New Jersey (Note
3); and (v) $698 of other charges. In addition, the Company recorded
$18,076 of equity in loss of HMI and a gain of $606 on the sale of
Radamerica in the eleven months ended September 30, 1997 (Note 3).
In addition to these special charges, during the eleven months ended
September 30, 1997, the Company recognized additional bad debt expenses of
$7,023 principally related to its DermaQuest product lines ($6,060) and
pulmonary rehabilitation center ($663), which is reflected in selling,
general and administrative expenses. The Company established $3,986 of
these reserves as a result of the decision to discontinue these product
lines, and the associated impact on the ability to secure required
documentation in a timely manner for reimbursement. The additional $2,737
was reserved as the Company became aware of deterioration in the collection
of DermaQuest receivables.
For the year ended September 30, 1998, the Company recorded in selling,
general and administrative expenses $554 of charges primarily related to
costs incurred from its attempted acquisitions of Healthcall and Apria and
recorded a gain of $2,511 on the TNI Sale (Note 3).
F-21
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
8. BUSINESS REALIGNMENT (CONTINUED):
For the year ended September 30, 1999, the Company recorded in selling,
general and administrative expenses $1,392 of charges primarily related to
costs incurred from its attempted acquisitions of Sinclair and Gateway and
legal reserves and recognized additional bad debt expenses of $3,605
principally as a result of fully reserving for DermaQuest's accounts
receivable, as the Company became aware of additional deterioration in
their collectiblity, based upon the Company's payment history over the
first nine months of fiscal 1999.
9. RELATED PARTY TRANSACTION:
On April 8, 1998, the Company forgave a $67 note receivable due from an
officer of the Company. The debt was forgiven over a two year period
(one-third in fiscal 1998 and two-thirds in fiscal 1999). The compensation
expense recorded on the forgiveness of debt was $45 and $22 in fiscal 1999
and 1998, respectively.
10. INCOME TAXES:
The (benefit) provision for income taxes from continuing operations is
summarized as follows:
ELEVEN MONTHS
YEAR ENDED YEAR ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1997
------------- -------------- -------------
Current:
Federal $ 68 $ (200) $ (243)
State 52 150 213
Foreign 2,063 924 55
Deferred:
Federal (3,136) 769 (4,443)
State 328 85 (763)
Foreign 125 116 103
------ ------ -------
(Benefit) provision for
income taxes $ (500) $1,844 $(5,078)
====== ====== =======
F-22
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
10. INCOME TAXES (CONTINUED):
For 1999, 1998 and 1997, 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 September 30, 1999, 1998 and 1997 are as
follows:
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1997
---------- ------------ -----------
Deferred tax assets:
Current:
Provision for doubtful accounts $ 5,991 $ 4,930 $ 4,396
Inventory capitalization 22 20 33
Accrued expenses 917 1,557 1,882
Other, net 225 219
---------- -------- ---------
Current deferred tax assets 6,930 6,732 6,530
---------- -------- ---------
Non-current:
Federal net operating loss 5,128 1,810 1,695
State net operating losses 2,073 2,050 2,186
Capital losses 768 991
Other, net 82 507 464
Valuation allowance (1,878) (1,875) (1,989)
---------- -------- ---------
Non-current deferred tax assets 6,173 3,483 2,356
---------- -------- ---------
Deferred tax liabilities:
Non-current:
Depreciation and amortization 1,170 1,089 865
Other, net 564 452 317
---------- -------- ---------
Deferred tax liabilities 1,734 1,541 1,182
---------- -------- ---------
Net deferred tax assets $ 11,369 $ 8,674 $ 7,704
========== ======== =========
The valuation allowance at September 30, 1999 relates to deferred tax
assets established for certain state net operating loss carryforwards and
deferred tax assets which are not expected to be realized based on
historical or future earnings. The increase in the valuation allowance of
$3 is primarily due to the net increase in state net operating loss
carryforwards.
Management believes that it is more likely than not that the Company will
generate sufficient levels of taxable income in the future to realize the
$11,369 net deferred tax assets comprised of the tax benefit associated
with future deductible temporary differences and net operating loss
carryforwards, prior to their expiration (primarily 13 years or more). This
belief is based upon, among other factors,
F-23
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
10. INCOME TAXES (CONTINUED):
changes in operations over the last few years, management's focus on its
business realignment activities and current business strategies primarily
with respect to its U.K. operations. Failure to achieve sufficient levels
of taxable income might affect the ultimate realization of the net deferred
tax assets. If this were to occur, management is committed to implementing
tax planning strategies, such as the sale of net appreciated assets of the
Company to the extent required (if any) to generate sufficient taxable
income prior to the expiration of these benefits. Should such strategies be
required, they could potentially result in the sale of a portion of the
Company's interest in the U.K. operations and repatriation of such proceeds
to the U.S.
As of September 30, 1999, the Company has state net operating loss
carryforwards of $23,058 which, if unused, will expire in the years 2000
through 2014, and has a Federal net operating loss carryforward of $16,037
which if unused, will expire in the years 2013 through 2019. The Company
has a capital loss carryforward of $2,528 which if unused, will expire in
2002.
Reconciliations of the differences between income taxes computed at Federal
statutory tax rates and consolidated provisions for income taxes are as
follows:
ELEVEN MONTHS
YEAR ENDED YEAR ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1997
------------ -------------- ----------------
Income taxes computed at Federal
statutory tax rate $ (2,668) $ 1,019 $ (12,856)
State income taxes, net of
Federal benefits 560 268 (2,222)
Nondeductible expenses, primarily
amortization of intangible assets 1,076 711 4,291
Valuation allowance, state taxes 3 (114) 1,859
Tax contingency 416
Market write-down on investment in
subsidiary 3,200
Other, net 113 (40) 650
--------- --------- -----------
(Benefit) provision for income taxes $ (500) $ 1,844 $ (5,078)
========= ========= ===========
Income (loss) before income taxes generated from the U.K. operations for
the years ended September 30, 1999 and 1998 and the eleven months ended
September 30, 1997 was $3,416, $1,332, and ($868), respectively.
F-24
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
11. STOCK OPTION PLAN AND WARRANTS:
The Company has a stock option plan which provides for either incentive
stock options or nonqualified stock options (the "Option Plan"). The
Option Plan gives eligible employees, officers, directors and non-employee
independent contractors options to purchase up to 3,175 shares of common
stock of which options to purchase 1,130 shares of common stock were
outstanding as of September 30, 1999. Options under the Option Plan may be
granted by the Compensation Committee of the Board of Directors which
determines the exercise price, vesting provisions and term of such grants.
The vesting provisions provided for vesting of options over a period of
between two and three years.
Following is a summary of transactions under the Option Plan during the
years ended September 30, 1999 and 1998 and the eleven months ended
September 30, 1997:
WEIGHTED
NUMBER AVERAGE
OF STOCK EXERCISE
OPTIONS PRICE ($)
------- ---------
Outstanding - October 31, 1996 ($1.25 to $10.00 per share) 749 5.29
Granted during 1997 ($7.25 to $12.00 per share) 893 7.38
Exercised during 1997 ($2.78 to $10.00 per share) (282) 4.34
Cancelled during 1997 ($5.50 to $12.00 per share) (76) 9.63
-----
Outstanding - September 30, 1997 ($3.18 to $10.00 per share) 1,284 6.70
Granted during 1998 ($2.63 per share) 515 2.63
Exercised during 1998 ($3.18 to $7.88 per share) (126) 4.21
Cancelled during 1998 ($4.38 to $7.88 per share) (283) 6.32
-----
Outstanding - September 30, 1998 ($2.63 to $10.00 per share) 1,390 5.49
Granted during 1999 ($4.31 per share) 10 4.31
Exercised during 1999 ($4.38 per share) (15) 4.38
Cancelled during 1999 ($2.63 to $10.00 per share) (255) 6.04
-----
Outstanding - September 30, 1999 ($2.63 to $7.88 per share) 1,130 5.37
=====
Available for future grants 1,387
=====
On May 28, 1997, the Company adopted a stock option plan for non-employee
directors (the "Directors Plan") which gives non-employee directors options
to purchase up to 100 shares of common stock. As of September 30, 1999, no
options have been granted under the Directors Plan. Options under the
Directors Plan may be granted by the Board of Directors which determines
the exercise price, vesting provisions and term of such grants. All options
granted under the Directors Plan are immediately exercisable.
F-25
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
11. STOCK OPTION PLAN AND WARRANTS (CONTINUED):
A summary of the 1,130 options outstanding as of September 30, 1999 is as
follows:
WEIGHTED WEIGHTED WEIGHTED
RANGE AVERAGE AVERAGE AVERAGE
OF EXERCISE PRICE REMAINING EXERCISE PRICE
EXERCISE NUMBER OF OPTIONS CONTRACTUAL LIFE NUMBER OF OPTIONS
PRICE ($) OUTSTANDING OUTSTANDING ($) IN YEARS EXERCISABLE EXERCISABLE ($)
--------- ----------- --------------- -------- ----------- ---------------
2.63 457 2.63 4.0 386 2.63
4.31 10 4.31 9.2
7.25 633 7.25 2.4 462 7.25
7.88 30 7.88 1.0 29 7.88
----- ---
2.63 to 7.88 1,130 5.37 3.1 877 5.24
===== ===
Of the 1,390 options outstanding as of September 30, 1998, 645 were
exercisable (with a weighted average exercise price of $5.88) as of that
date. Of the 1,284 options outstanding as of September 30, 1997, 472 were
exercisable (with a weighted average exercise price of $5.61) as of that
date.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." In accordance with SFAS No. 123,
the Company continues to apply APB No. 25 and related Interpretations to
account for stock-based compensation using the intrinsic value method for
its stock option plans and, accordingly, does not recognize compensation
expense. If the Company had elected to recognize compensation expense based
on the fair value of the options at grant date as prescribed by SFAS No.
123, net (loss) income and net (loss) earnings per share would have been
adjusted to the pro forma amounts indicated in the table below:
ELEVEN MONTHS
YEAR ENDED YEAR ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1997
------------ -------------- ----------------
Net (loss) income - as reported $(7,346) $ 1,153 $ (32,735)
Net (loss) income - pro forma (8,155) 113 (33,731)
Basic and diluted (loss) earnings per
share - as reported (0.42) 0.07 (2.56)
Basic and diluted (loss) earnings per
share - pro forma (0.46) 0.01 (2.64)
F-26
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
11. STOCK OPTION PLAN AND WARRANTS (CONTINUED):
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions:
1999 1998 1997
-------- -------- --------
Expected life (years) 4 4 4
Risk-free interest rate 5.5% 5.5% 6.0%
Volatility 55.7% 55.9% 52.5%
Expected dividend yield 0% 0% 0%
The compensation cost as generated by the Black-Scholes option-pricing
model, may not be indicative of the future benefit, if any, that may be
received by the option holder.
Effective January 15, 1997, the Company granted Mr. Aitken (the Company's
Chairman of the Board and Chief Executive Officer) options under the
Option Plan to purchase 500 shares of common stock at an exercise price of
$11.375 per share. Such options were repriced on August 13, 1997 to an
exercise price of $7.25 per share which represented the fair value at that
date.
In connection with the initial public offering, the Company issued
warrants to purchase 1,600 common shares. The warrants were exercisable at
$6.294 (reduced from $6.50 in accordance with an anti-dilution clause in
the agreement) per share and expired on December 8, 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. During the eleven
months ended September 30, 1997, 7 warrants were exercised for $44 and
prior to their expiration an additional 960 warrants were exercised for an
aggregate of $6,041 in fiscal 1998.
12. COMMITMENTS AND CONTINGENCIES:
EMPLOYMENT AGREEMENTS:
The Company has two employment agreements with certain of its executive
officers which provide for minimum aggregate annual compensation of $325
in fiscal 2000. One expires January 2000 and amounts to $85 of the fiscal
2000 minimum aggregate compensation. The agreement contains customary
termination and non-compete provisions and a change in control provision
that would entitle the individual up to 2.9 times of his salary then in
effect, 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. The other agreement entitles the employee
to a severance payment equal to one year's salary (currently $240 per
year) plus relocation expenses.
In fiscal 1996, the Company entered into a consulting agreement with its
former Chairman, which expires on April 30, 2000, which provides for
annual compensation of $150 less the amount by which certain amounts paid
to or on his behalf exceed $60.
F-27
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED):
The Company has a performance based bonus plan for the Company's executive
officers and certain other employees. Under this plan, amounts may be
granted 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.
OPERATING LEASES:
The Company has entered into various operating lease agreements for office
space and equipment. Certain of these leases provide for renewal options
with extension dates in fiscal 2008 and 2013.
Future minimum rental commitments required under operating leases that
have non-cancelable lease terms in excess of one year as of September 30,
1999 are as follows:
2000 $1,827
2001 1,468
2002 1,079
2003 701
2004 521
Thereafter 2,108
------
$7,704
======
Rent expense under non-capitalized, non-cancelable lease agreements for
the years ended September 30, 1999 and 1998 and the eleven months ended
September 30, 1997 amounted to $2,431, $2,320 and $1,848, respectively.
CONTINGENCIES:
On February 4, 1997, Patient Care Systems, Inc. ("PCS") filed a lawsuit
against DermaQuest and the Company in the Court of Common Pleas of Chester
County, Pennsylvania, for breach of contract, conversion, unjust
enrichment and misrepresentation. Subsequently, PCS withdrew all claims
except for its breach of contract claim. On April 22, 1997, DermaQuest
filed a counterclaim against PCS for breach of contract. The action
related to a contract initially entered into between DermaQuest and PCS to
market alternating pressure mattresses. A jury trial in this matter began
on June 28, 1999. On July 2, 1999, the jury reached their verdict finding
in favor of PCS on its breach of contract claim and finding in favor of
DermaQuest on its breach of contract counterclaim. Post verdict, the
parties settled the litigation whereby DermaQuest and the Company agreed
to pay a total of $180, as a full, final and complete resolution of the
dispute.
On August 20, 1999, TNI was named a defendant in a suit brought by Teresa
Crutcher, in New Jersey state court, as administrator of the estate of
Aaron Pernell, who was an infant and Teresa Crutcher's son. The claim is
for wrongful death of Aaron Pernell alleged to have been caused by the
negligent manner in which a TNI home care nurse placed him in an infant
car seat. TNI has answered the
F-28
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED):
complaint. The claim is insured. As the case is in a preliminary stage,
the Company is not able to estimate any potential exposure and has not
recorded any amounts in its financial statements. It is possible that
irrespective of insurance coverage, the ultimate outcome of this action
could be materially unfavorable to the Company's consolidated financial
condition, cash flows, or results of operations. However, the Company
intends to defend the proceedings vigorously and 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, cash flows, or results of operations.
On April 13, 1998, a shareholder of the Company, purporting to sue
derivatively on behalf of the Company, commenced a derivative suit in the
Supreme Court of the State of New York, County of New York, entitled Kevin
Mak, derivatively and on behalf of Transworld Healthcare, Inc., Plaintiff,
vs. Timothy Aitken, Scott A. Shay, Lewis S. Ranieri, Wayne Palladino and
Hyperion Partners II L.P., Defendants, and Transworld Healthcare, Inc.,
Nominal Defendant, Index No. 98-106401. The suit alleges that certain
officers and directors of the Company, and HPII, breached fiduciary duties
to the Company and its shareholders, in connection with a transaction,
approved by a vote of the Company's shareholders on March 17, 1998, in
which the Company was to issue certain shares of stock to HPII in exchange
for the HMI Receivables (Note 7). The action seeks injunctive relief
against this transaction, and damages, costs and attorneys' fees in
unspecified amounts. The transaction subsequently closed and the plaintiff
has, on numerous occasions, stipulated to extend the defendants' time to
respond to this suit. The most recent stipulation provides for an
extension to March 3, 2000.
On July 11 and July 22, 1997, the Company's RespiFlow, Inc. ("RespiFlow")
and MK Diabetic Support Services, Inc. ("MK") subsidiaries, respectively,
each received a letter (the "Audit Letters") from the U.S. Department of
Health and Human Services' Office of Audit Services, a division of the
Office of Inspector General ("OIG"). The Company was subsequently informed
that the Audit Letters cover its DermaQuest subsidiary. The Company has
produced certain documents and provided related information to the OIG and
to the U.S. Attorney for the Eastern District of Texas regarding these
subsidiaries' financial relationships with suppliers of durable medical
equipment and various other practices including the subsidiaries'
practices regarding the collection of coinsurance and deductible amounts
due from Medicare beneficiaries. Additionally, on November 19, 1997, the
Company was notified by the U.S. Attorney for the Eastern District of
Texas that the Company, RespiFlow, MK, and various other non-affiliated
entities had been named defendants in a qui tam action under the Federal
False Claims Act. The qui tam action was recently unsealed and a copy of
the complaint was provided to the Company. The relator is a private party
who has brought action on behalf of the Federal government. At present,
the Company has entered into settlement discussions with the Department of
Justice ("DOJ") and the OIG in an effort to bring closure to this matter
and to avoid the expense, disruption and uncertainty of litigation. The
counsel for the relator has been involved in these settlement discussions
as well. At present, we are not able to determine when a final settlement
will be reached with the DOJ, the OIG and the relator or whether any
proposed settlement can be concluded on terms acceptable to the Company.
Accordingly, the Company is unable to estimate what the appropriate loss
might be at this time. In the event that these settlement discussions are
unsuccessful
F-29
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED):
the Company will defend vigorously its interest in these matters. As such,
the Company cannot predict whether the outcome of these actions will have
a material adverse effect on the Company's consolidated financial
position, cash flows or results of operations.
In addition to the above allegations, during the normal course of
business, the Company continues to carefully monitor and review its
submission of Medicare, Medicaid and all other claims for reimbursement.
The Company believes that it is substantially in compliance, in all
material respects, with the applicable provisions of the Federal statutes,
regulations and laws and applicable state laws. Because of the broad and
sometimes vague nature of these laws, 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
provisions. At present, the Company cannot anticipate what impact, if any,
subsequent administrative or judicial interpretation of the applicable
Federal and state laws may have on the Company's consolidated financial
position, cash flows or results of operations.
Effective October 1, 1997, the Company owned 100% of the stock of HMI.
HMI and certain of its current and former officers have been named as
defendants in a class action lawsuit filed on April 3, 1997 in the United
States District Court for the Eastern District of New York formerly
entitled Nicholas Volonnino et al. v. Health Management, Inc., W. James
Nicol, Paul S. Jurewicz and James Mieszala, 97 Civ. 1646. The action was
amended on September 12, 1997, and is now entitled Dennis Baker et al. v.
Health Management, Inc., BDO Seidman, LLP, Transworld HealthCare, Inc.,
W. James Nicol, Paul S. Jurewicz and James Mieszala. The plaintiffs
asserted claims under Sections 10(b) and 20 (a) of the Securities
Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, arising out
of alleged misrepresentations and omissions by HMI in connection with
certain of its previous securities filings and press releases. The
Company was sued as an alleged control entity of HMI, based upon its
acquisition of 49% of HMI's outstanding common stock on January 13, 1997.
The plaintiffs purport to be a class of persons who purchased shares of
HMI common stock between April 26, 1996 and March 17, 1997, the date that
HMI announced that it would have to restate certain of its financial
statements and that it was renegotiating its deal with the Company.
Plaintiffs sought unspecified compensatory damages from the harm that
allegedly resulted from the alleged wrongdoing. Following the filing of
several motions by the parties and the filings of an amended complaint by
the plaintiffs, to which defendants responded, a memorandum of
understanding, dated March 16, 1999, setting forth the terms of a
settlement of this litigation, was executed by the plaintiffs, the
Company, W. James Nicol, Paul S. Jurewicz, James Mieszala, and HMI (the
"HMI Defendants") and National Union Fire Insurance Company of
Pittsburgh, Pennsylvania ("National"). The total settlement to be paid by
the HMI Defendants is $2,375. The Company is directly responsible to pay
$325 of the settlement amount and National (as a separate party to the
settlement) is directly responsible to pay the remaining $2,050. Of the
$325 to be paid by the Company, $50 will be reimbursed by the Company's
directors' and officers' insurance policy carrier. On July 26, 1999, the
plaintiffs and BDO Seidman LLP entered into a preliminary agreement to
settle the claims against BDO Seidman LLP for $100. The Court
subsequently certified the class of plaintiffs to include all persons or
entities who purchased or otherwise acquired the common stock of
F-30
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED):
HMI between April 26, 1996 and March 17, 1997 inclusive, except the
defendants and related parties. In November 1999, the Court gave final
approval to the settlement.
On July 2, 1998, a former shareholder of HMI purporting to sue on behalf
of a class of shareholders of HMI as of June 6, 1997, commenced a suit in
the Delaware Chancery Court, New Castle County, entitled Kathleen S.
O'Reilly v. Transworld HealthCare, Inc., W. James Nicol, Andre C.
Dimitriadis, Dr. Timothy J. Triche and D. Mark Weinberg, Civil Action No.
16507-NC. Plaintiff alleged that the Company, as majority shareholder of
HMI, and the then directors of HMI, breached fiduciary duties to the
minority shareholders of HMI by approving a merger between HMI and a
subsidiary of the Company for inadequate consideration. Plaintiff demands
an accounting, damages, attorney's fees and other payment for other
expenses for unspecified amounts. The defendants filed a motion to dismiss
this action on September 18, 1998. The Court denied defendants' motion in
part and granted the motion in part, leaving intact certain claims.
Plaintiff has propounded discovery requests. The claims are insured
HMI was named as a defendant in a lawsuit filed on November 25, 1997, in
the Chancery Court for the State of Delaware for New Castle County,
entitled Clifford E. Hotte v. Health Management, Inc., CA No. 1606-NC. The
plaintiff sought reimbursement and advancement of legal fees and expenses
in the amount of $1,000 incurred or anticipated in connection with his
defense of certain claims against him, a director and officer of HMI, in
various litigation. The Court granted plaintiff a preliminary injunction
requiring HMI to pay $824 for plaintiff's legal expenses. As part of the
settlement of a class action litigation in which Clifford Hotte was still
a defendant, but to which the Company was not a party (although it had
been previously), HMI's insurer, National agreed to pay $1,000 to settle
all of the class action plaintiffs' claims against Clifford Hotte and his
wife, who was a co-defendant, in exchange for mutual releases of the
parties and a release from Clifford Hotte of his judgement and any further
claims against HMI, including the $824 legal expenses.
By letter dated December 20, 1999, the Company received formal written
notification of the intent of two plaintiffs to file a civil action in the
Court of Common Pleas of Allegheny County, Pennsylvania against Transworld
Healthcare, Inc., Transworld Home Healthcare, Inc., Health Management,
Inc. and HMI Pennsylvania, Inc. The two plaintiffs, Irwin Hirsch and Lloyd
Myers, formerly were employees of HMI Pennsylvania, Inc. a subsidiary of
the Company, and had written employment agreements. Myers also served as
an officer of HMI. In their capacities as employees and as officers, both
had some contractual indemnification rights against HMI and HMI
Pennsylvania, Inc. for defense and indemnification. In 1994, Hirsch and
Myers also sold two retail pharmacies they owned to HMI.
Hirsch and Myers were named as defendants in an action 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), which was a class action by shareholders of HMI alleging,
among other claims against the defendants, fraud in connection with the
valuation of certain securities. Hirsch and Myers incurred non-reimbursed
legal expenses of $100 in defending that litigation and, ultimately,
F-31
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED):
settled their liability jointly for $1,325, which was non-reimbursed. They
demand that defendants reimburse to them their non-reimbursed legal fees
and the settlement amount pursuant to the indemnification provisions of
their employee contracts.
In addition to their indemnification claims, Hirsch and Myers also claim
damages in the amount of $7,000 for losses in connection with the
pharmacies sale transaction they entered into with HMI under which they
sold their retail pharmacies to HMI. Hirsch and Myers claim that the
pharmacies sale transaction was based upon fraudulent misrepresentations by
HMI.
The Company and HMI entities will vigorously defend against these claims.
The Company believes that Hirsch and Myers' indemnification claims should
not have any real merit because of testimony given by Hirsch and Myers
under oath in connection with a criminal trial against Clifford Hotte, a
director and former officer of HMI. In their testimony, Hirsch and Myers
acknowledged malfeasance and nonfeasance, which should render their
contractual entitlement to indemnification void. Even if they are entitled
to indemnification despite their acknowledgements, they are liable to
defendants for the economic losses and damages suffered by defendants as a
result of the malfeasance and nonfeasance. Therefore if the civil actions
are filed, the Company and HMI entities will aggressively pursue
counterclaims against Hirsch and Myers for damages which, conservatively,
are far in excess of their claims, including the claims associated with the
pharmacies sale transaction.
The enforcement division of the Securities and Exchange Commission (the
"Commission") has issued 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 fully cooperating with
this investigation and has responded to the requests of the Commission for
documentary evidence.
The outcomes of certain of the foregoing lawsuits and the investigation
with respect to HMI are uncertain and the ultimate outcomes could have a
material adverse affect on the Company.
The Company is 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 believes these
matters should not have a material adverse impact on the consolidated
financial position, cash flows or results of operations.
13. OPERATIONS BY BUSINESS SEGMENTS AND GEOGRAPHIC AREAS:
During the years ended September 30, 1999 and 1998 and the eleven months
ended September 30, 1997, the Company operated in the following reportable
business segments: (i) U.K. operations; (ii) U.S. specialty mail-order
pharmaceuticals and medical supplies operations ("Mail-Order"); and (iii)
U.S. hi-tech operations ("Hi-Tech"). The U.K. operations derives its
revenues from nursing and para-professional services, mail-order of ostomy,
continence and wound care products and oxygen concentrators and cylinders
throughout the U.K. The Mail-Order operations derives its revenues from
F-32
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
13. OPERATIONS BY BUSINESS SEGMENTS AND GEOGRAPHIC AREAS (CONTINUED):
mail-order of diabetic test strips and glucose monitors, respiratory,
diabetic, maintenance and other commonly prescribed medications, as well
as ostomy and orthotic products. The Mail-Order operations provides
products to patients in their home nationwide and Puerto Rico. The
Hi-Tech operations derives its revenues from infusion and respiratory
therapy services and home medical equipment operations concentrated in
New Jersey and New York.
During the year ended September 30, 1998 and the eleven months ended
September 30, 1997, the Company also operated a U.S. nursing operation,
TNI ("Nursing") which provided professional nursing and para-professional
services in New Jersey and Florida. This operation was sold in July 1998.
During the eleven months ended September 30, 1997, the Company also
operated a U.S. radiation therapy operation, Radamerica ("Radiation")
which provided radiation therapy services in the Baltimore, Maryland
metropolitan area. This operation was sold in July 1997.
The Company uses differences in geographic areas, as well as in products
and services to identify the reportable segments. The Company evaluates
performance and allocates resources based on profit and loss from
operations before corporate expenses, interest and income taxes. The
accounting policies of the business segments are the same as those
described in the summary of significant accounting policies. Inter segment
sales are not material. The following tables presents certain financial
information by reportable business segments and geographic areas of
operations for the years ended September 30, 1999 and 1998 and the eleven
months ended September 30, 1997.
YEAR ENDED SEPTEMBER 30, 1999
---------------------------------------------------------
U.K. U.S. U.S. U.S.
OPERATIONS MAIL-ORDER HI-TECH TOTAL TOTAL
---------- ---------- ------- ----- -----
Revenues to unaffiliated $ 104,550 $ 37,030 $ 13,148 $ 50,178 $ 154,728
========= ======== ======== ======== =========
Segment operating (loss) profit $ 9,809 $ (5,268) $ (1,232) $ (6,500) $ 3,309
========= ======== ======== ========
Corporate expenses (5,937)
Interest expense, net (5,218)
---------
Loss before income taxes $ (7,846)
=========
Depreciation and amortization $ 4,149 $ 815 $ 758 $ 1,573 $ 5,722
========= ======== ======== ========
Corporate depreciation and
amortization 49
---------
Total depreciation and
amortization $ 5,771
=========
Identifiable assets,
September 30, 1999 $ 118,845 $ 25,812 $ 10,972 $ 36,784 $ 155,629
========= ======== ======== ========
Corporate assets 16,492
---------
Total assets, September 30, 1999 $ 172,121
=========
Capital expenditures $ 1,889 $ 150 $ 596 $ 746 $ 2,635
========= ======== ======== ========
Corporate capital expenditures 7
---------
Total capital expenditures $ 2,642
=========
F-33
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
13. OPERATIONS BY BUSINESS SEGMENTS AND GEOGRAPHIC AREAS (CONTINUED):
YEAR ENDED SEPTEMBER 30, 1998
---------------------------------------------------------------------------
U.K. U.S. U.S. U.S. U.S.
OPERATIONS MAIL-ORDER HI-TECH NURSING TOTAL TOTAL
---------- ---------- ------- ------- ----- -----
Revenues to unaffiliated customers $ 85,679 $ 47,155 $ 14,814 $ 7,661 $ 69,630 $155,309
--------- --------- -------- -------- --------- --------
Segment operating profit $ 6,986 $ 2,777 $ 422 $ 3,038 $ 6,237 $ 13,223
========= ========= ======== ======== =========
Corporate expenses (4,575)
Interest expense, net (5,651)
--------
Income before income taxes $ 2,997
========
Depreciation and amortization $ 3,579 $ 772 $ 691 $ 42 $ 1,505 $ 5,084
========= ========= ======== ======== =========
Corporate depreciation and
amortization 44
--------
Total depreciation and
amortization $ 5,128
========
Identifiable assets,
September 30, 1998 $ 115,441 $ 35,916 $ 10,463 $ 291 $ 46,670 $162,111
========= ========= ======== ======== =========
Corporate assets 17,597
--------
Total assets, September 30, 1998 $179,708
========
Capital expenditures $ 2,061 $ 650 $ 588 $ 22 $ 1,260 $ 3,321
========= ========= ======== ======== =========
Corporate capital expenditures 25
--------
Total capital expenditures $ 3,346
========
ELEVEN MONTHS ENDED SEPTEMBER 30, 1997
---------------------------------------------------------------------------------------
U.K. U.S. U.S. U.S. U.S. U.S.
OPERATIONS MAIL-ORDER HI-TECH NURSING RADIATION TOTAL TOTAL
---------- ---------- ------- ------- --------- ----- -----
Revenues to unaffiliated customers $ 19,847 $ 42,348 $ 15,549 $ 10,065 $ 5,635 $ 73,597 $ 93,444
========= ========= ======== ======== ========= ======== ==========
Segment operating (loss) profit $ 1,775 $ (13,971) $ (754) $ 1,007 $ 1,223 $ (12,495) $ (10,720)
========= ========= ======== ======== ========= =========
Equity in loss of HMI (18,076)
Corporate expenses (6,605)
Interest income 2,651
Interest expense (5,063)
----------
Loss before income taxes $ (37,813)
==========
Depreciation and amortization $ 802 $ 949 $ 653 $ 53 $ 704 $ 2,359 $ 3,161
========= ========= ======== ======== ========= =========
Corporate depreciation and
amortization 29
----------
Total depreciation and amortization $ 3,190
==========
Identifiable assets,
September 30, 1997 $ 108,324 $ 35,748 $ 13,535 $ 2,376 $ $ 51,659 $ 159,983
========= ========= ======== ======== ========= =========
Corporate assets 41,298
----------
Total assets, September 30, 1997 $ 201,281
==========
Capital expenditures $ 1,118 $ 512 $ 670 $ 15 $ 323 $ 1,520 $ 2,638
========= ========= ======== ======== ========= =========
Corporate capital expenditures 56
----------
Total capital expenditures $ 2,694
==========
F-34
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
14. PROFIT SHARING PLAN:
The Company has a profit sharing plan pursuant to Section 401(k) of the
Internal Revenue Code, concerning all U.S. employees who meet certain
requirements. These requirements include, among other things, at least one
year of service and attainment of the age of 21.
The plan operates as a salary reduction plan whereby participants
contribute anywhere from 1% to 15% of their compensation, not to exceed
the maximum available under the Code.
The Company may make an additional matching contribution at its discretion
which had been and will be in the form of its common stock through
December 31, 1998 and will be in cash thereafter. The Company's
contributions to the plan were approximately $28, $28 and $27 for the
years ended September 30, 1999 and 1998 and the eleven months ended
September 30, 1997, respectively.
In addition to the U.S. plan described above, the Company also sponsors
personal pension plans at selected U.K. subsidiaries. The plans operate as
salary reduction plans, which also allows for lump sum contributions,
whereby participants contribute anywhere from 1% to 40% of their
compensation, not to exceed the maximum available under the U.K. tax laws.
The Company may make an additional contribution (which varies according to
employee contracts and contribution elections) which is in the form of
cash. The Company's contributions to the U.K. plans were $91 and $71 for
the years ended September 30, 1999 and 1998, respectively and $13 for the
eleven months ended September 30, 1997.
15. SUBSEQUENT EVENT (Unaudited):
On December 20, 1999 the Company's U.K. subsidiaries obtained an aggregate
of $124,500 in new financing (the "Refinancing") as follows:
TOTAL OUTSTANDING
FACILITY FACILITY JAN. 3, 2000 INTEREST RATE MATURITY
- -------- -------- ------------ ------------- --------
SENIOR CREDIT FACILITIES:
Term loan $44,800 $44,800 LIBOR + 2% Dec. 17, 2005
Acquisition loan 20,000 1,500 LIBOR + 2.75% Dec. 17, 2006
Working capital facility 8,000 4,400 LIBOR + 2% Dec. 17, 2005
-------- ----------
Total senior credit facilities 72,800 50,700
MEZZANINE TERM LOAN 16,000 16,000 LIBOR + 7% Dec. 17, 2007
SENIOR SUBORDINATED NOTES
WITH WARRANTS (THE "NOTES") 35,700 35,700 9.375% Dec. 17, 2008
======== ==========
TOTAL REFINANCING $124,500 $102,400
======== ==========
F-35
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
15. SUBSEQUENT EVENT (Unaudited) (CONTINUED):
The mezzanine lenders and the purchasers of the Notes were also issued
warrants to purchase approximately 2% and 27%, respectively, of the fully
diluted shares of TW UK. $55,755 of the net proceeds of the Refinancing
were used to repay the Company's existing Credit Facility, $11,000 was
provided to the Company for general corporate purposes in the U.S., with
the balance to be used for acquisitions and working capital in the U.K.
Repayment of the loans under the senior credit facility commences on July
30, 2000 and continues until final maturity. The acquisition loan may be
drawn upon through December 17, 2002. As of January 3, 2000, borrowings
under the senior credit facilities bore interest at a rates of 7.72% to
8.47%. Subject to certain exceptions, the senior credit facilities
contains restrictions, prohibitions and affirmative and negative financial
covenants customarily found in agreements of this kind.
The loans under the senior credit facilities are collateralized by, among
other things, a lien on substantially all of TW UK's assets, a pledge of
TW UK's ownership interest in its subsidiaries and guaranties by TW UK's
subsidiaries.
With respect to the mezzanine term loan interest, LIBOR + 3.5% will be
payable in cash, with the remaining interest being added to the principal
amount of the loan. The mezzanine term loan contains terms and conditions
substantially similar to those contained in the senior credit facility. As
of January 3, 2000, borrowings under the mezzanine term loan bore interest
at a rate of 12.72%.
Interest payments on the Notes are subject to restrictions contained in
the senior credit facilities which require interest on the Notes to be
paid in-kind through the issuance of additional notes for the first 18
months, with payment of interest in cash thereafter subject to meeting
certain financial tests. The documents covering the Notes provide for
customary shareholder rights for a transaction of this type, including:
(i) pre-emptive rights with respect to new securities; (ii) rights of
first refusal with respect to proposed transfers of shares of TW UK; (iii)
drag-along rights; (iv) tag-along rights; (v) put and call provisions; and
(vi) certain corporate actions which require the consent of the holder of
the Notes.
Concurrent with the Refinancing, the Company placed 100% of its ownership
interest in TW UK into a voting trust (the "Voting Trust"). The trustee of
the Voting Trust is generally obligated to vote the shares held in trust
pursuant to the instructions of the Board of Directors of TW UK, as well
as to elect to the board of directors of TW UK, individuals designated in
accordance with the documents governing the Notes. G. Richard Green, a
director of the Company, is the trustee of the Voting Trust.
In connection with the repayment of the Company's existing Credit
Facility, the Company will record a non-cash, pre-tax, extraordinary
charge of approximately $1,200 in its first quarter of fiscal 2000,
relating to the write-off of the deferred financing costs associated with
the Credit Facility.
F-36
TRANSWORLD HEALTHCARE, INC.
QUARTERLY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
The following table presents the comparative quarterly results for the
years ended September 30, 1999 and 1998:
1999 QUARTER ENDED DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, TOTAL
----------- ---------- ----------- ------------- -----------
Total revenues $ 40,054 $ 38,951 $ 37,534 $ 38,189 $ 154,728
========== ========== =========== ========== ===========
Gross profit $ 14,946 $ 13,731 $ 13,351 $ 13,290 $ 55,318
========== ========== =========== ========== ===========
Net income (loss) $ 4 $ (954) $ (4,467) $ (1,929) $ (7,346)
========== ========== =========== ========== ===========
Basic and diluted
income (loss) per share
of common stock (1) $ -- $ (0.05) $ (0.25) $ (0.11) $ (0.42)
========== ========== =========== ========== ===========
1998 QUARTER ENDED DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, TOTAL
----------- ---------- ----------- ------------- -----------
Total revenues $ 37,805 $ 37,323 $ 39,861 $ 40,320 $ 155,309
========== ========== =========== ========== ===========
Gross profit $ 14,279 $ 13,225 $ 15,078 $ 15,535 $ 58,117
========== ========== =========== ========== ===========
Net income (loss) $ 347 $ (595) $ 271 $ 1,130 $ 1,153
========== ========== =========== ========== ===========
Basic and diluted
income (loss) per share
of common stock (1) $ 0.02 $ (0.03) $ 0.02 $ 0.06 $ 0.07
========== ========== =========== ========== ===========
(1) The sum of the per share amounts for the quarters does not necessarily
equal that of the year because computations are made independently.
F-37
TRANSWORLD HEALTHCARE, INC.
(IN THOUSANDS)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions Charged to
---------------------
Balance at Balance at
Beginning of Cost and Other End of
Description Period Expenses Accounts Deductions Period
- ----------- ------ -------- -------- ---------- ------
Allowance for doubtful accounts:
Year ended September 30, 1999 $15,367 $12,272 $ (5)(B) $ 7,764(A) $ 19,870
Year ended September 30, 1998 11,909 8,318 23(B) 4,883(A) 15,367
Eleven months ended September 30, 1997 5,471 13,071 155(B) 6,788(A) 11,909
(A) Doubtful accounts written off, net of recoveries and sold.
(B) Assumed in acquisitions and adjustments arising from translation of
foreign financial statements to U.S. dollars.
S-1