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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED
SEPTEMBER 30, 2000
COMMISSION FILE NO. 1-11570
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 executive offices) (Registrant's telephone number, (Zip Code)
including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.01 par value
(Title of Class)
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 November 27, 2000 was approximately
$5,364,993 based on the closing sale price of $0.813 on such date, as reported
by the American Stock Exchange.
The number of shares outstanding of the registrant's Common Stock, as
of November 27, 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, 2000
TABLE OF CONTENTS
PART I
Item 1. Business..........................................................1
General...........................................................1
Strategy .........................................................2
U.K. Operations...................................................3
U.K. Services and Products........................................3
Patient Services..................................................3
Respiratory Therapy...............................................3
U.K. Quality Assurance; Department of Health Licenses.............4
U.K. Sales and Marketing Activities...............................4
U.K. Recruiting and Training of Personnel.........................5
U.K. Third-Party Reimbursement....................................5
U.K. Suppliers....................................................5
U.K. Competition..................................................5
U.K. Patents and Trademarks.......................................6
U.K. Employees....................................................6
U.S. Operations...................................................6
U.S. Services and Products........................................6
Mail-Order Operations.............................................6
Hi-Tech Operations................................................7
U.S. Quality Assurance; JCAHO Accreditations......................7
U.S. Sales and Marketing Activities...............................7
U.S. Third-Party Reimbursement....................................8
U.S. Suppliers....................................................8
U.S. Competition..................................................8
U.S. Patents and Trademarks.......................................9
U.S. Employees....................................................9
Government Regulation.............................................9
U.K. Government Regulation........................................9
U.S. Government Regulation.......................................10
Insurance........................................................14
Item 2. Properties.......................................................14
Item 3. Legal Proceedings................................................14
The Company......................................................14
HMI..............................................................15
Item 4. Submission of Matters to a Vote of Security Holders..............16
-i-
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.............................................17
Item 6. Selected Financial Data..........................................18
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................20
General ........................................................20
Results of Operations............................................22
Year Ended September 30, 2000 vs. Year Ended September 30, 1999..22
Year Ended September 30, 1999 vs. Year Ended September 30, 1998..24
Pro Form Year Ended September 30, 2000 vs. Historical
Year Ended September 30, 1999...................................26
Liquidity and Capital Resources..................................28
General..........................................................28
Assets Limited to Use............................................29
Accounts Receivable..............................................29
Refinancing .....................................................30
Acquisition of Nightingale.......................................33
U.S. Mail-Order Operations Sale..................................33
Amcare Sale......................................................33
TNI Sale.........................................................34
Acquisition of HMI/Sale to Counsel...............................34
Year 2000........................................................34
Contingencies....................................................35
Litigation.......................................................35
Impact of Recent Accounting Standards............................35
Inflation........................................................35
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 2000 and 2000 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...............................................43
1992 Stock Option Plan...........................................43
1997 Non-Employee Director Plan..................................43
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Stock Incentive Plan.............................................44
Indemnification..................................................44
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...............46
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K......................................................47
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.
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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) 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"); and (ii) 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 Hi-Tech Operations are concentrated in New
Jersey and New York.
The Company was a provider of specialty mail-order pharmaceuticals and
medical supplies ("Mail-Order Operations"). The Company provided these services
from the reportable business segment of its U.S. Mail-Order Operations, through
the year ended September 30, 2000, to patients in their home nationwide and in
Puerto Rico. In September 2000, the Company entered into an agreement, which was
completed on October 3, 2000, to sell a substantial portion of the assets of its
U.S. Mail-Order Operations (See Note 3 of the Notes to Consolidated Financial
Statements).
On December 20, 1999, the Company's U.K. subsidiaries obtained new
financing (the "Refinancing"). As a result of the provisions of the Voting Trust
(as defined and described in Liquidity and Capital Resources) the Company did
not hold a majority interest of the board of directors. The Investors (as
defined and described in Liquidity and Capital Resources) held substantive
rights, principally in the form of their ability to approve the annual budget
and financial forecast of results of operations and sources and uses of cash.
Therefore, the Company was no longer able to consolidate the U.K. subsidiaries
into its financial statements although it owned 100% of the outstanding shares
of the stock of the parent company, Transworld Holdings (UK) Limited ("UK
Parent"), as of December 31, 1999. Therefore, effective with the Refinancing,
the Company began accounting for the investment in UK Parent and its
subsidiaries under the equity method, retroactive to October 1, 1999. During the
second quarter of fiscal 2000, UK Parent and Transworld Healthcare (UK) Limited
("TW UK") amended their Articles of Association to give the Chairman (a Company
designee) the right to resolve any tie votes of the board of directors and
certain documents covering the Notes (as defined and described in Liquidity and
Capital Resources) were amended to eliminate the requirement that the Investors
approve the operating budget. These amendments have enabled the Company to
consolidate the U.K. subsidiaries as of January 1, 2000.
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'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.
1
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 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 existing 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 12, 10 and 7 nursing and care giving operations in the U.K. during
fiscal 2000, 1999 and 1998, respectively.
On April 6, 2000 TW UK acquired all of the issued and outstanding
shares of Nightingale Nursing Bureau Limited ("Nightingale"), a London based
provider of registered nursing and care staff to NHS Trust Hospitals and the
independent sector, with an additional branch in Sydney, Australia, for
approximately $15,362,000, plus an additional sum of up to approximately
$5,600,000 in deferred consideration dependent upon Pre-Tax Profits (as defined
in the agreement for sale and purchase) for certain periods ending in 2000 and
2001.
Approximately $13,691,000 of the purchase price for the acquisition was
paid using cash on hand and funds borrowed under TW UK's senior credit
facilities with the approximate remaining $1,671,000 of consideration being paid
in 1,050,000 shares of 5 pence par value class A1 common shares of TW UK.
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 execute an
aggressive expansion program. To that end, on December 20, 1999, the Company's
U.K. subsidiaries completed a $125,700,000 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 "Liquidity and Capital
Resources - Refinancing").
The Company believes that by structuring its U.K. Operations as a stand
alone entity, it enables the U.K. subsidiaries to raise capital on more
favorable terms than may be available currently in the U.S. In addition it
positions the Company to maximize the value of its ownership interest in the
U.K. Operations in the future, whether by way of a public offering of the U.K.
Operation's shares, through a strategic business combination, or other
alternative means.
2
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) respiratory therapy. The Company's U.K. Operations' products and services
are provided to patients throughout the U.K.
During fiscal 2000, the Company derived 72.0% of its revenues from U.K.
Operations, with the following contributions by product line: 82.3% of its U.K.
revenues from patient services, 14.3% from specialty pharmaceutical and medical
supplies and 3.4% from respiratory therapy.
PATIENT SERVICES.
The Company offers its U.K. patient services through Allied Medicare
Ltd ("Allied") and Nightingale. Allied and Nightingale are commercially oriented
providers 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 preferred model for branches in the Allied
network is for a Superintendent Model, where the manager of the branch is self
employed and paid 33% of the gross profit generated by the branch. Under these
arrangements the superintendent is responsible for costs associated with
operating the branch and Allied is responsible for various support services,
including payroll administration and collection of accounts receivable. In a
managed branch all operating costs are the responsibility of Allied. The branch
network has expanded substantially in recent years, through both organic growth
and an on-going nursing and care agency acquisition program. As of September 30,
2000, Allied is represented by 57 superintendent branches and 23 managed
branches in the network, with managed branches being operated where the business
will not easily support superintendent status or where the branch is newly
acquired and has not been fully integrated into the network.
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 both Allied and Nightingale.
RESPIRATORY THERAPY.
The Company offers its U.K. respiratory therapy through the following
Omnicare subsidiaries: (i) Allied Oxycare Ltd ("Oxycare"); and (ii) Medigas Ltd
("Medigas").
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.
The Company offered its U.K. specialty pharmaceutical and medical
supplies through its Omnicare subsidiary, Amcare Ltd ("Amcare"). On November 22,
2000, the Company sold Amcare, for approximately $14,200,000 in cash. The
Company has recorded a charge for impairment of long-lived assets of $2,727,000
in the accompanying Consolidated Statement of Operations, for the year ended
September 30, 2000, to reflect the write-down of the carrying value of goodwill,
originally acquired with the purchase of Amcare, to its fair value. In addition,
the Company has recorded a tax charge of approximately $1,654,000 to reflect the
tax effect of the transaction.
3
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
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 patient associations and community
social services organizations. Fundamental to Allied and Nightingale's ability
to obtain and retain referral sources is establishing and maintaining 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 independent locations. These branch locations are
supported by small teams of sales and marketing professionals based centrally to
coordinate and support the sales activity.
Nightingale markets its nursing agency service directly to NHS Trust
Hospitals and the independent sector.
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.
4
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. Nightingale employs qualified staff from both overseas and the U.K.
Typically between 30 and 50% of Nightingale's staff are sourced from the U.K.
while the majority of overseas staff come from Australia, where the Company has
a branch. The most successful method for recruiting staff is referral, but the
Company regularly advertises in appropriate papers and journals. Recruitment is
managed overseas by a branch manager in Sydney, Australia and by agents in New
Zealand and South Africa. Most of Nightingale's nursing professionals do not
work for other agencies and look to Nightingale as their sole provider of work.
U.K. THIRD-PARTY REIMBURSEMENT
For the years ended September 30, 2000 and 1999, the Company's U.K.
Operations received approximately 60.5% and 54.0%, respectively of revenues from
U.K. governmental payors (primarily the NHS). The remaining 39.5% and 46.0%,
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 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
services will have significant growth opportunities.
5
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 dependent on the above factors.
The Company's U.K. Operations' nursing, medical supplies and
respiratory therapy services compete with local, national and international
companies. The Company's nursing agency business is the second largest in the
U.K.; however, the largest competitor is approximately three times larger in
revenues.
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: "Transworld Holding (UK)
Ltd," "Allied Medicare Ltd," "Medicare," "Medigas Ltd," "Allied Oxycare Ltd,"
"Omnicare Ltd," "Transworld Healthcare (UK) 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 October 31, 2000, the Company's U.K. Operations employed
approximately 199 full-time employees and 39 part-time employees.
In addition, the Company's U.K. Operations maintain registers of
approximately 5,000 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 2000, the Company derived 28.0% of its revenues from U.S.
operations, with the following contributions by reportable business segments:
59.2% of its U.S. revenues from Mail-Order Operations and 40.8% from Hi-Tech
Operations.
U.S. SERVICES AND PRODUCTS
MAIL-ORDER OPERATIONS.
In September 2000, the Company entered into an agreement, which was
completed on October 3, 2000, to sell a substantial portion of the assets of its
Mail-Order Operations and has decided to exit the business (See Note 3 of the
Notes to Consolidated Financial Statements).
During fiscal 1999, the remaining accounts receivable associated with
the wound care and orthotic product lines, which the Company previously exited
in fiscal 1997, 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 and Liquidity and Capital Resources."
6
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 2000, the Company's Hi-Tech Operations
derived 74.8% of its revenues from infusion therapy, 19.8% from respiratory
therapy and 5.4% 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 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. 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.
7
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.
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 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, 2000, 52.6% and 12.1%, respectively,
of the Company's U.S. revenues were directly attributable to the Medicare and
Medicaid programs. 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. The decrease in the percentage of revenues
directly attributable to Medicare during the year ended September 30, 2000
versus 1999 was primarily the result of a decrease in revenues in the Company's
Mail-Order Operations, which derives most of its revenues 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.
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, including numerous local,
regional and national 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.
8
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," "PLANETWELLNESS" and "Respiflow." The Company does not believe that
its business is dependent upon the use of any patent or trademark or similar
property.
U.S. EMPLOYEES
As of October 31, 2000, the Company had approximately 162 full-time
employees and approximately 23 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 and Nightingale operate 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.
9
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 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, whilst continuing to review its practices in light
of recent recommendations to ensure they are in accordance with governmental
regulations. The Company's U.K. Operations were audited by the licensing health
authorities in June and July of 2000 and confirmation of compliance has been
received.
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.
10
The Company anticipates that Congress and state legislatures will
continue to review and assess alternative health care delivery and payment
systems and may in the future propose and adopt legislation effecting
fundamental changes in the health care delivery system. 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.
11
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 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. 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, as further
described below - see letter received from the HHS' Office of Audit Services.
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.
12
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 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 relator is a private party
who has brought action on behalf of the Federal government. The Company entered
into settlement discussions with the Department of Justice ("DOJ") and OIG in an
effort to bring closure to this matter and to avoid the expense, disruption and
uncertainty of litigation. Counsel for the relator was involved in these
settlement discussions as well. On August 4, 2000, a final settlement was
reached with the DOJ, the OIG and the relator in the amount of $10,000,000. In
addition, pursuant to the settlement agreement, the Company paid the relator
$82,000 covering reasonable expenses and attorney's fees and costs. In return,
the United States has agreed to release the Company, certain subsidiaries, as
well as its present and former owners, officers, directors, employees, and
certain others, from any civil or administrative monetary claim for the various
allegations being settled in this matter. In addition, the OIG has agreed not to
exclude the Company or any of its subsidiaries from future participation in any
federal health care program as a result of this matter.
In addition to its settlement with the federal government, the Company
also has reached a final settlement with the prior owners of Respiflow, MK and
related subsidiaries (the "Prior Owners") in connection with an ongoing dispute
with such persons. The Prior Owners paid the Company $5,000,000 to settle all
outstanding issues between the relevant parties. In a related agreement the
Company has guaranteed the Prior Owners a price of $5.00 per share for all
shares of Company common stock they currently own (190,000) and still own on
August 4, 2002. The Prior Owners are obligated to liquidate these shares on the
open market for $5.00 per share or greater. To the extent the shares remain
unliquidated on August 4, 2002, the difference between the closing price of the
Company's common stock on August 4, 2002 and $5.00 per share will be paid to the
Prior Owners by the Company in cash.
13
The Company recorded a one-time charge of $5,082,000 related to the
settlement of all of these matters in its third quarter of fiscal 2000.
Contemporaneously with the government settlement, the Company entered
into a Corporate Integrity Agreement ("CIA") with the OIG to ensure compliance
with existing federal health programs. The CIA requires the Company to, among
other things, appoint a compliance officer and compliance committee, develop and
implement a written code of conduct and policies and procedures, perform
prospective and retrospective reviews of claims submitted to the Medicare
program. In addition, the CIA requires periodic written reporting to the OIG
summarizing the status and findings of the Company's compliance activities. The
CIA, which does not apply to the Company's U.S. Hi-Tech Operations, has a term
of five years.
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 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 fifty-nine facilities in the U.K. (of
which twenty-one are for a period of three months or less) and leases a total of
six facilities in the U.S. In addition, there are thirty-four 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 operations. See Note 13 of the Notes to Consolidated Financial
Statements.
ITEM 3. LEGAL PROCEEDINGS.
THE COMPANY
On August 20, 1999, Transworld Home Healthcare - Nursing Division, Inc.
("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. The case was settled on December
27, 1999 for $325,000 and was paid on December 29, 1999 by the Company's
insurance carrier. Since this settlement was within the policy limits of the
Company's insurance policies, it did not have any effect on the Company's
consolidated financial position, cash flows, or results of operations.
14
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 certain trade receivables due from Health Management, Inc. ("HMI") purchased
by HPII from unrelated third parties. 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 January 12, 2001.
HMI
Effective October 1, 1997, the Company owned 100% of the stock of HMI.
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 Company's insurer disclaims coverage as to
the Company, however, the insurer for the Company's HMI subsidiary has accepted
coverage for the individual defendant former HMI directors. The Company believes
that it does not have liability and will vigorously defend this action. 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.
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. Based
upon their former status as employees and as officers, both claim entitlement to
contractual indemnification from HMI and HMI Pennsylvania, Inc. for defense
costs and settlement of certain claims made against them. 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.
15
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.
None.
16
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, 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.............................. 3-5/8 1-5/8
Third Quarter............................... 2-7/8 1-7/16
Fourth Quarter.............................. 2-3/8 1-3/8
Year Ended September 30, 2001:
First Quarter (through November 27, 2000)... 1-7/16 11/16
As of November 27, 2000, there were approximately 161 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."
17
ITEM 6. SELECTED FINANCIAL DATA.
The financial data for the year ended September 30, 2000 and balance
sheet data as of September 30, 2000 as set forth below have been derived from
the consolidated financial statements of the Company, audited by Ernst & Young,
LLP, 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. The financial data for the years ended September 30,
1999 and 1998 and the balance sheet data as of September 30, 1999 as set forth
below have been derived from the consolidated financial statements of the
Company, audited by PricewaterhouseCoopers LLP, 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
Year Ended September 30, Ended Year Ended
----------------------------------------------- September 30, (2) October 31,
2000(1) 1999 1998 1997 1996
------------- --------------- ------------ ------------------- -----------------
Financial Data:
Total revenues.......................... $135,408 $154,728 $155,309 $93,444 $76,304
Gross profit............................ 45,627 55,318 58,117 42,057 41,624
Selling, general and administrative
expenses............................. 49,041 57,946 51,980 42,931 33,552
(Gain) on sale of assets(3)............. (2,511) (606)
Legal settlements, net.................. 5,082 (4)
Restructuring charge.................... 1,288 (5)
Impairment of long-lived assets......... 15,073 (6) 16,677 (7)
Equity in loss of HMI, net.............. 18,076
-------- -------- -------- ------- -------
Operating (loss) income................. (24,857) (2,628) 8,648 (35,021) 8,072
Interest expense, net................... 7,939 5,218 5,651 2,792 4,352
(Benefit) provision for income taxes.... (7,348) (500) 1,844 (5,078) 1,702
Equity in income of and interest
Income earned from U.K. subsidiaries. 1,193 (1)
Minority interest....................... (70)
-------- -------- -------- ------- -------
(Loss) income before extraordinary loss. (24,185) (7,346) 1,153 (32,735) 2,018
Extraordinary item(8)................... 759 (1,435)
-------- -------- -------- ------- -------
Net (loss) income....................... $(24,944) $ (7,346) $ 1,153 $(32,735) $ 583
======== ======== ======== ======= =======
(Loss) income per share of
common stock before extraordinary
item(9):
Basic.................................... $ (1.38) $ (0.42) $ 0.07 $ (2.56) $ 0.29
======== ======== ======== ======= =======
Diluted.................................. $ (1.38) $ (0.42) $ 0.07 $ (2.56) $ 0.26
======== ======== ======== ======= =======
Net (loss) income per share of
common stock(9):
Basic.................................... $ (1.42) $ (0.42) $ 0.07 $ (2.56) $ 0.08
======== ======== ======== ======= =======
Diluted.................................. $ (1.42) $ (0.42) $ 0.07 $ (2.56) $ 0.07
======== ======== ======== ======= =======
Weighted average number of
common shares outstanding(9):
Basic.................................... 17,551 17,547 17,327 12,794 7,035
======== ======== ======== ======= =======
Diluted.................................. 17,551 17,547 17,488 12,794 7,833
======== ======== ======== ======= =======
18
SEPTEMBER 30, October 31,
----------------------------------------- ---------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Balance Sheet Data:
Working capital .......... 25,640 $ 26,005 $ 39,148 $ 26,411 $ 26,201
Accounts receivable, net . 23,029 30,814 32,223 31,475 24,414
Total assets ............. 183,746 172,121 179,708 201,281 90,727
Long-term debt ........... 89,677 54,407 57,307 61,400 12,505
Total shareholders' equity 63,031 91,274 101,905 81,905 67,225
- -------
(1) Effective with the Refinancing, the Company began accounting for the
investment in the UK Parent and its subsidiaries under the equity method,
retroactive to October 1, 1999. During the second quarter of fiscal 2000,
UK Parent and TW UK amended their Articles of Association. The amendments
enabled the Company to consolidate the UK Parent and its subsidiaries as of
January 1, 2000.
(2) 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.
(3) The Company recorded a gain of $2,511,000 on the TNI sale in the year ended
September 30, 1998. The Company recorded a gain of $606,000 on the sale of
Radamerica in the eleven months ended September 30, 1997.
(4) The Company recorded a net charge of $5,082,000 related to legal
settlements with the DOJ, OIG and Prior Owners in the year ended September
30, 2000.
(5) The Company recorded a $1,288,000 restructuring charge related to exiting
its U.S. Mail-Order Operations in the year ended September 30, 2000.
(6) The Company recorded a charge for impairment of long-lived assets of
$15,073,000 in the year ended September 30, 2000. The charge related to the
write-down of assets, mainly goodwill, to their fair value, $12,346,000 for
the U.S. Mail-Order Operations and $2,727,000 for Amcare.
(7) 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.
(8) The Company recorded a non-cash, after tax, extraordinary charge of
$759,000 (net of tax benefit of $408,000) in the fiscal year ended
September 30, 2000 as a result of the write-off of deferred financing costs
associated with the early extinguishment of borrowings under the Company's
Credit Facility. The Company recorded a non-cash, after-tax, extraordinary
charge of $1,435,000 (net of tax benefit of $879,000) in the year ended
October 31, 1996 in connection with the repayment of the Company's former
credit agreement.
(9) Weighted average shares have been restated for the eleven months ended
September 30, 1997 and the fiscal year ended October 31, 1996 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.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
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) 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; and (ii)
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
Hi-Tech Operations are concentrated in New Jersey and New York.
The Company was a provider of specialty mail-order pharmaceuticals and
medical supplies. The Company provided these services from the reportable
business segment of its U.S. Mail-Order Operations, through the year ended
September 30, 2000, to patients in their home nationwide and in Puerto Rico. In
September 2000, the Company entered into an agreement, which was completed on
October 3, 2000, to sell a substantial portion of the assets of its U.S.
Mail-Order Operations (See Note 3 of the Notes to Consolidated Financial
Statements).
On December 20, 1999, the Company's U.K. subsidiaries obtained new
financing. As a result of the provisions of the Voting Trust (as defined and
described in Liquidity and Capital Resources) the Company did not hold a
majority interest of the board of directors. The Investors (as defined and
described in Liquidity and Capital Resources) held substantive rights,
principally in the form of their ability to approve the annual budget and
financial forecast of results of operations and sources and uses of cash.
Therefore, the Company was no longer able to consolidate the U.K. subsidiaries
into its financial statements although it owned 100% of the outstanding shares
of the stock of the parent company, UK Parent, as of December 31, 1999.
Therefore, effective with the Refinancing, the Company began accounting for the
investment in UK Parent and its subsidiaries under the equity method,
retroactive to October 1, 1999. During the second quarter of fiscal 2000, UK
Parent and TW UK amended their Articles of Association to give the Chairman (a
Company designee) the right to resolve any tie votes of the board of directors
and certain documents covering the Notes (as defined and described in Liquidity
and Capital Resources) were amended to eliminate the requirement that the
Investors approve the operating budget. These amendments have enabled the
Company to consolidate the U.K. subsidiaries as of January 1, 2000.
The Company's revenue mix and payor mix is influenced to a significant
degree by the relative 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:
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
2000 1999 1998
---- ---- ----
Product Line
- ------------
Net patient services................... 59.2% 51.8% 44.4%
Net respiratory, medical
equipment and supplies sales......... 32.2 42.2 49.0
Net infusion services.................. 8.6 6.0 6.6
----- ----- -----
Total revenues................. 100.0% 100.0% 100.0%
===== ===== =====
20
The increase in net patient services as a percentage of total revenues
for the year ended September 30, 2000 as compared to 1999 is primarily due to
the acquisition of Nightingale and 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, 2000 as compared to
1999 is due primarily to a decrease in revenues in the Company's U.S. Mail-Order
Operations due principally to a reduction in the number of patients serviced. On
a pro forma basis, assuming the U.K. Subsidiaries had been consolidated for the
entire year ended September 30, 2000, the percentage of total revenues would
have been as follows: net patient services 62.3%, net respiratory, medical
equipment and supplies sales 30.7% and net infusion services 7.0%.
The following table shows the historical payor mix for the Company's
total revenues for the periods presented:
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
Payor 2000 1999 1998
- ----- ---- ---- ----
U.K. NHS and other U.K.
Governmental payors............ 43.6% 36.5% 29.7%
Medicare......................... 14.7 20.9 27.2
Medicaid......................... 3.3 2.2 5.8
Private payors................... 38.4 40.4 37.3
----- ----- -----
Total revenues.......... 100.0% 100.0% 100.0%
===== ===== =====
The increase in U.K. NHS and other U.K. governmental payors as a
percentage of total revenues for the year ended September 30, 2000 as compared
to 1999 is primarily due to the acquisition of Nightingale, which derives the
majority of its revenues from the NHS, and to the growth in Allied's branch
network, as described above. The decrease in Medicare as a percentage of total
revenues for the year ended September 30, 2000 as compared to 1999 is primarily
due to the decrease in revenue in the Company's U.S. Mail-Order Operations. The
Company believes that its payor mix in the future will be determined primarily
by the payor profile of completed acquisitions and to a lessor extent, from
shifts in existing business among payors.
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 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. Subsequent acquisitions, when
completed, will continue to impact the relative mix of revenues and overall
gross margin.
21
At September 30, 2000 and 1999, the Company had $90,786,000 and
$103,248,000, respectively of intangible assets (primarily goodwill) on its
balance sheet. This represented 49.4% of total assets and 144.0% of total
stockholders' equity at September 30, 2000 and 60.0% of total assets and 113.1%
of total stockholders' equity at September 30, 1999. Amortization of intangibles
for the years ended September 30, 2000, 1999 and 1998 was $3,301,000, $3,459,000
and $3,147,000, respectively. Subsequent acquisitions, when completed, will
continue to increase the amount of intangible assets on the balance sheet and
future amortization expense. On a pro forma basis, assuming the U.K.
subsidiaries had been consolidated for the entire year ended September 30, 2000,
amortization of intangibles would have been $4,065,000.
The Company amortizes goodwill over periods ranging from ten to forty
years 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 a 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, 2000 VS. YEAR ENDED SEPTEMBER 30, 1999
Revenues. Total reported revenues for the years ended September 30,
2000 and 1999 were $135,408,000 and $154,728,000, respectively. This represents
a decrease of $19,320,000 or 12.5%. This decrease relates primarily to the
change in accounting for the U.K. subsidiaries from consolidation to the equity
method during the first quarter of fiscal 2000 ($24,489,000) and declines in
revenue experienced by the Mail-Order Operations ($14,554,000) due to a
reduction in the number of patients serviced. Partly offsetting these decreases
were increased revenues in the Company's U.K. nursing operations, subsequent to
January 1, 2000, ($17,945,000) as a result of acquisitions (including
$10,325,000 from Nightingale) and an increase in the billable hours. The Hi-Tech
Operations also experienced an increase in revenues ($2,336,000) primarily due
to an increase in the number of patients being serviced.
Cost of Revenues. Total reported cost of revenues for the years ended
September 30, 2000 and 1999 was $89,781,000 and $99,410,000, respectively. As a
percentage of total revenue, cost of revenues for the year ended September 30,
2000 increased to 66.3% in comparison to 64.2% for the year ended September 30,
1999. Cost of revenues as a percentage of revenues increased slightly for
patient services (69.0% for the year ended September 30, 2000 versus 68.1% for
the year ended September 30, 1999) and for respiratory, medical equipment and
supplies sales (59.7% for the year ended September 30, 2000 versus 57.7% for the
year ended September 30, 1999) and decreased for infusion services (72.4% for
the year ended September 30, 2000 versus 76.9% for the year ended September 30,
1999). The increase in patient services costs is primarily due to the
acquisition of Nightingale, which has a higher cost of revenue (82.0%) than the
historical U.K. nursing operations (67.1%). The increase in respiratory, medical
equipment and supplies sales costs is principally attributable to higher
delivery costs in the U.K. Operations. The decrease in infusion services costs
is due to an increase in volume of higher gross margin infusion therapies in the
Hi-Tech Operations.
22
Selling, General and Administrative Expenses. Reported selling, general
and administrative expenses for the years ended September 30, 2000 and 1999 were
$49,041,000 and $57,946,000, respectively. This represents a decrease in the
current year of $8,905,000 or 15.4%. The change in accounting for the U.K.
subsidiaries from consolidation to the equity method during the first quarter of
fiscal 2000 accounted for $5,070,000 of the decrease. The recording of
additional bad debt expense of $3,655,000 (principally as a result of fully
reserving for DermaQuest's accounts receivable) and $2,030,000 of charges
primarily related to the attempted acquisitions of Sinclair Montrose Healthcare
("Sinclair") and Gateway Homecare, Inc. ("Gateway") and additional legal costs
during the fiscal year ended September 30, 1999 added to the decrease. In
addition, selling, general and administrative expenses decreased in the
Company's U.S. Mail-Order Operations due to an overhead reduction program
($2,165,000). Overhead costs in the Company's U.S. Corporate offices also
decreased ($537,000) principally due to headcount reductions. These decreases
were offset by higher levels of overhead in the U.K. operations, subsequent to
January 1, 2000, principally due to its acquisitions ($3,170,000). These
decreases were also offset by the net increase in bad debt expense in the
Company's U.S. Mail-Order Operations as a result of valuing accounts receivable
to net realizable value ($3,180,000) which was offset by declines in revenue
resulting in reduced bad debt charges ($1,697,000).
Impairment of Long-Lived Assets. For the year ended September 30, 2000,
the Company recorded a $15,073,000 charge related to the write-down of assets to
their fair value for the U.S. Mail-Order Operations and Amcare (see Notes 3 and
16 of the Notes to Consolidated Financial Statements).
Legal Settlements, Net. For the year ended September 30, 2000, the
Company recorded a one-time charge of $10,082,000 related to a settlement with
the federal government which was offset by a $5,000,000 settlement with the
Prior Owners (see "Business - Government Regulation").
Restructuring Charge. For the year ended September 30, 2000, the
Company recorded a $1,288,000 restructuring charge related to exiting and
closing its U.S. Mail-Order Operations (See Note 3 of the Notes to Consolidated
Financial Statements).
Interest Income. Reported interest income for the years ended September
30, 2000 and 1999 was $1,443,000 and $227,000, respectively. The increase was
attributable to higher interest income earned ($1,276,000) on a higher level of
funds invested partially offset by the change in accounting for the U.K.
subsidiaries from consolidation to the equity method during the first quarter of
fiscal 2000 ($60,000).
Interest Expense. Reported interest expense for the years ended
September 30, 2000 and 1999 was $9,382,000 and $5,445,000, respectively. The
increase was primarily attributable to a higher level of borrowings combined
with higher borrowing rates under the Refinancing than the Credit Facility
($4,153,000). This increase was partially offset by the change in accounting for
the U.K. subsidiaries from consolidation to the equity method during the first
quarter of fiscal 2000 ($215,000).
23
Benefit for Income Taxes. The Company recorded a benefit for income
taxes amounting to $7,348,000 or 22.4% of loss before income taxes, equity
income, minority interest and extraordinary loss for the year ended September
30, 2000 versus $500,000 or 6.4% of loss for the year ended September 30, 1999.
The difference between the 22.4% effective tax rate for fiscal 2000 and the
statutory tax rate resulted from non-deductible expenses, primarily amortization
of intangible assets, the legal settlements and foreign capital gains tax on the
sale of Amcare.
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
$20,961,000 of reported 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 12 years or more). This
belief is based upon, among other factors, 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.
Management expects that it is more likely than not that future levels
of income will be sufficient to realize the deferred tax assets, as recorded.
The amount of the deferred tax asset considered realizable, however, could be
reduced in the near term if estimates of future taxable income during the
carryforward period are reduced.
Equity in Income of and Interest Income Earned from U.K. Subsidiaries.
Equity in income of U.K. subsidiaries for the year ended September 30, 2000 was
$411,000, which represents 100% of the net income of the Company's U.K.
subsidiaries for the first quarter of fiscal 2000 (See Note 2 of the Notes to
Consolidated Financial Statements). Interest income earned from U.K.
subsidiaries for the year ended September 30, 2000 was $782,000 (net of tax
provision of $421,000), which represents interest income on an intercompany
loan, which was repaid on December 20, 2000, concurrent with the Refinancing.
There was no equity in income of and interest income earned from U.K.
subsidiaries for the entire year ended September 30, 1999 as the Company
consolidated its U.K. subsidiaries in fiscal 1999.
Minority Interest. The Company reported a benefit from minority
interest of $70,000 in the year ended September 30, 2000. The minority interest
represents the 1,050,000 shares of class A1 common stock of TW UK issued as part
of the Nightingale consideration (See Note 3 of the Notes to Consolidated
Financial Statements).
Extraordinary Loss on Early Extinguishment of Debt. An extraordinary
loss (net of tax benefit of $408,000) of $759,000 was recorded in the year ended
September 30, 2000, as a result of the write-off of deferred financing costs
associated with the early extinguishment of borrowings under the Company's
Credit Facility.
Net Loss. As a result of the foregoing, the Company recorded a net loss
of $24,944,000 for the year ended September 30, 2000 compared to $7,346,000 for
the year ended September 30, 1999.
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 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.
24
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 $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. 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 decrease of $1,871,000.
Gain on Sale of Assets. For the year ended September 30, 1998, the
Company recorded a $2,511,000 gain on the TNI Sale.
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.
25
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.
PRO FORMA YEAR ENDED SEPTEMBER 30, 2000 VS. HISTORICAL YEAR ENDED
SEPTEMBER 30, 1999
The following comparisons of pro forma year ended September 30, 2000 as
compared to September 30, 1999 present the pro forma statement of operations
data as if the U.K. subsidiaries had been consolidated for the entire year ended
September 30, 2000.
Revenues. Total pro forma revenues for the year ended September 30,
2000 were $164,255,000 as compared to $154,728,000 for the year ended September
30, 1999, which represents an increase of $9,527,000 or 6.2%. This increase was
primarily attributable to increased revenues in the Company's U.K. nursing
operations ($22,132,000) as a result of acquisitions (including $10,325,000 from
Nightingale) and an increase in the number of billable hours. Also contributing
to the increase was increased revenues in the Hi-Tech Operations ($2,336,000).
Partly offsetting the increases from the U.K. and Hi-Tech Operations were
declines in revenue experienced by the Mail-Order Operations ($14,554,000) due
to a reduction in the number of patients serviced.
Cost of Revenues. Pro forma cost of goods sold for the year ended
September 30, 2000 was $109,635,000 as compared to $99,410,000 for the year
ended September 30, 1999. On a pro forma basis total cost of revenues as a
percentage of revenues increased to 66.7% from 64.2% in the year ended September
30, 2000. On a pro forma basis cost of revenues as a percentage of revenues
increased for respiratory, medical equipment and supplies sales (61.5% for the
year ended September 30, 2000 versus 57.7% for the year ended September 30,
1999), decreased for infusion services (72.4% for the year ended September 30,
2000 versus 76.9% for the year ended September 30, 1999) and increased slightly
for patient services (68.7% for the year ended September 30, 2000 versus 68.1%
for the year ended September 30, 1999). The increase in respiratory, medical
equipment and supplies sales operations costs is attributable to higher delivery
costs in the U.K. Operations. The decrease in infusion services costs is due to
an increase in volume of higher gross margin infusion therapies in the Hi-Tech
Operations. Patient services costs increased slightly due to the acquisition of
Nightingale, which has a higher cost of revenue (82.0%) than the historical U.K.
nursing operations (67.2%).
26
Selling, General and Administrative Expenses. Pro forma selling,
general and administrative expenses for the year ended September 30, 2000 were
$55,592,000 as compared to $57,946,000 for the year ended September 30, 1999,
which represents a decrease of $2,354,000 or 4.1%. This decrease was primarily
due to the recording of additional bad debt expense of $3,655,000 (principally
as a result of fully reserving for DermaQuest's accounts receivable) and
$2,030,000 of charges primarily related to the attempted acquisitions of
Sinclair and Gateway and additional legal costs during the year ended September
30, 1999. In addition, selling, general and administrative expensed decreased in
the Company's Mail-Order Operations due to an overhead reduction program
($2,165,000). Overhead costs in the Company's U.S. Corporate offices also
decreased ($333,000) principally due to headcount reductions. These decreases
were offset by higher levels of overhead in the U.K. Operations principally due
to its acquisitions and internal growth ($4,447,000). These decrease were also
offset by the net increase in bad debt expense in the Company's U.S. Mail-Order
Operations as a result of valuing accounts receivable to net realizable value
($3,180,000) which was offset by declines in revenue resulting in reduced bad
debt charges ($1,697,000).
Impairment of Long-Lived Assets. For the year ended September 30, 2000,
the Company recorded a $15,073,000 charge related to the write-down of assets to
their fair value for the U.S. Mail-Order Operations and Amcare (see Notes 3 and
16 of the Notes to Consolidated Financial Statements).
Legal Settlements, Net. For the year ended September 30, 2000, the
Company recorded a one-time charge of $10,082,000 related to a settlement with
the federal government which was offset by a $5,000,000 settlement with the
Prior Owners (see "Business - Government Regulation").
Restructuring Charge. For the year ended September 30, 2000, the
Company recorded a $1,288,000 restructuring charge related to exiting and
closing its U.S. Mail-Order Operations (See Note 3 of the Notes to Consolidated
Financial Statements).
Interest Income. Pro forma interest income for the year ended September
30, 2000 was $1,503,000 as compared to $227,000 for the year ended September 30,
1999, which represents an increase of $1,276,000. This increase was attributable
to higher interest income earned on a higher level of funds invested.
Interest Expense. Pro forma interest expense for the year ended
September 30, 2000 was $9,598,000 as compared to $5,445,000 for the year ended
September 30, 1999, which represents an increase of $4,153,000. This variance
was primarily attributable to a higher level of borrowings combined with higher
borrowing rates under the Refinancing than the Credit Facility.
Benefit for Income Taxes. Pro forma benefit for income taxes for the
year ended September 30, 2000 was $6,254,000 or 20.5% of loss before income
taxes, equity income, minority interest and extraordinary loss for the year
ended September 30, 2000 versus $500,000 or 6.4% of loss before income taxes for
the year ended September 30, 1999. The difference between the effective tax rate
for the year ended September 30, 2000 and the statutory tax rate resulted from
non-deductible expenses, primarily amortization of intangible assets, the legal
settlements and foreign capital gains tax on the sale of Amcare.
27
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
$20,961,000 of reported 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 12 years or more). This
belief is based upon, among other factors, 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.
Management expects that it is more likely than not that future levels
of income will be sufficient to realize the deferred tax assets, as recorded.
The amount of the deferred tax asset considered realizable, however, could be
reduced in the near term if estimates of future taxable income during the
carryforward period are reduced.
Minority Interest. On a pro forma basis, the Company still would have
reported a benefit from minority interest of $70,000 in the year ended September
30, 2000. The minority interest represents the 1,050,000 shares of class A1
common stock of TW UK issued as part of the Nightingale consideration (See Note
3 of the Notes to Consolidated Financial Statements).
Extraordinary Loss on Early Extinguishment of Debt. On a pro forma
basis, the Company still would have reported an extraordinary loss (net of tax
benefit of $408,000) of $759,000 in the year ended September 30, 2000, as a
result of the write-off of deferred financing costs associated with the early
extinguishment of borrowings under the Credit Facility.
Net Loss. As a result of the foregoing, on a pro forma basis, the
Company still would have reported a net loss of $24,944,000 for the year ended
September 30, 2000 compared to $7,346,000 for the year ended September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL.
Cash requirements for the fiscal year ended September 30, 2000 for
capital expenditures ($1,207,000), payments for acquisitions ($13,687,000),
financing fees and issuance costs ($2,849,000), payments on revolving loan
($5,121,000), payments on long-term debt ($2,187,000), as well as the
$55,755,000 repayment of the Credit Facility were met through funds generated
from net payments received from the U.K. subsidiaries ($67,069,000) (as
discussed further in "Refinancing"), borrowings under the acquisition loan
($5,632,000) and proceeds from notes payable ($2,012,000).
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
sale of substantially all of the assets of HMI to Counsel Corporation (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.
28
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 $125,700,000 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 " Business - Strategy" "- and Refinancing."
ASSETS LIMITED TO USE.
Represents cash and cash equivalents, advanced under the Refinancing,
available for payment of up to fifty percent of the total consideration payable
in connection with Permitted Acquisitions (as defined in the Senior Credit
Agreement).
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, 2000 and 1999, $23,029,000
(12.5%) and $30,814,000 (17.9%), respectively, of the Company's total assets
consisted of accounts receivable substantially from third-party payors. Such
payors generally require 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 $7,785,000 from September 30, 1999 to
September 30, 2000 primarily due to additional reserves in the U.S. Mail-Order
Operation, the effect the weakening dollar has had on the translation of the
U.K. subsidiaries accounts receivable ($2,114,000), improved collections in the
Company's U.K. nursing operations and Hi-Tech Operations, and a decline in the
Mail-Order Operations revenue base. These decreases were partially offset by the
acquisition of Nightingale.
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, 2000, 1999 and 1998,
the Company's average DSOs were 51, 73 and 72, respectively.
Amcare and Novacare (UK) Limited (subsidiaries of TW UK), had claims
against Health Authorities to recover outstanding sums which they alleged were
due in respect of services performed as National Health Service dispensing
appliance contractors from their respective licensed premises across England and
Wales.
It is believed that the dispute arose out of a wider national dispute
between Health Authorities and many dispensing appliance contractors over the
correct interpretation of the statutory-based contractual reimbursement
provisions in the context of modern distribution and dispensing practices.
Amcare and Novacare (UK) Limited have reached commercial settlements of the
various disputes with the Health Authorities. As a result of the settlement
discussions with the Health Authorities the Company has recorded a sales credit
of $859,000 in the year ended September 30, 2000.
29
REFINANCING.
General. As described more fully below, on December 20, 1999, the
Company's U.K. subsidiaries, UK Parent and its subsidiary TW UK obtained new
financing denominated in pounds sterling, which aggregates approximately
$114,178,000 at September 30, 2000. The new financing consists of a $66,562,000
senior collateralized term and revolving credit facility (the "Senior Credit
Facility"), $15,012,000 in mezzanine indebtedness (the "Mezzanine Loan") and
$32,604,000 principal amount of senior subordinated notes (the "Notes") (each of
the foregoing are sometimes referred to collectively herein as the
"Refinancing"). Of the $114,178,000 of the net proceeds of the Refinancing,
$55,755,000 was used to repay the Company's existing Credit Facility,
$11,617,000 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 recorded a
non-cash, after-tax, extraordinary charge of approximately $759,000 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)
$40,961,000 term loan A, maturing December 17, 2005, (ii) $18,286,000
acquisition term loan B, maturing December 17, 2006 which may be drawn upon
during the first nine years following closing, and (iii) $7,315,000 revolving
facility, maturing December 17, 2005. Repayment of the loans commenced 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 November 1, 2000, TW UK had
outstanding borrowings of $45,120,000 under the Senior Credit Facility. As of
November 1, 2000, borrowings under the Senior Credit Facility bore interest at a
rate of 8.10% to 8.85%.
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 earnings before interest, taxes, depreciation and
amortization, 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 and Mezzanine Warrants. 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 November 1, 2000, borrowings under the Mezzanine Loan bore interest at
a rate of 13.1038%.
Mezzanine Warrants. The warrants issued to the mezzanine lenders (the
"Mezzanine Warrants") are detachable and can be exercised at any time without
condition for an aggregate exercise price of approximately $120,000. The fair
value of the Mezzanine Warrants ($2,319,000) issued to the mezzanine lenders has
been recorded as a discount to the mezzanine loan and is being amortized over
the term of the loan using the interest method.
30
Senior Subordinated Notes and Warrants. Notes. The Notes consist of
$32,604,000 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). As of September 30, 2000, $2,403,000 of
PIK Notes have been recorded in the Company's Consolidated Balance Sheet. 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").
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 can be exercised for cash or
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. In the event that
any warrants are exercised by tendering cash, the UK Parent shall have the
right, at its option (which it intends to exercise), to redeem the aggregate
principal amount of Notes equal to the number of warrants so exercised
multiplied by the warrant exercise price.
31
The Warrants will automatically be exercised for Warrant Shares in the
event that TW UK consummates 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 Investor 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 rights 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.
All ordinary shares of UK Parent owned by the Company and all ordinary
shares of TW UK owned by UK Parent will be 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 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.
32
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.
ACQUISITION OF NIGHTINGALE.
On April 6, 2000 TW UK acquired all of the issued and outstanding
shares of Nightingale, a London based provider of registered nursing and care
staff to NHS Trust Hospitals and the independent sector, with an additional
branch in Sydney, Australia, for approximately $15,362,000, plus an additional
sum of up to approximately $5,600,000 in deferred consideration dependent upon
Pre-Tax Profits (as defined in the agreement for sale and purchase) for certain
periods ending in 2000 and 2001.
Approximately $13,691,000 of the purchase price for the acquisition was
paid using cash on hand and funds borrowed under the senior credit facilities
with the approximate remaining $1,671,000 of consideration being paid in
1,050,000 shares of 5 pence par value class A1 common shares of TW UK.
U.S. MAIL-ORDER OPERATIONS SALE
In September 2000, the Company approved a plan to exit its U.S.
Mail-Order Operations and on September 18, 2000, entered into an agreement to
sell certain assets of this division located in Jacksonville, Florida. Under the
terms of the transaction, the Company will receive $2,000,000 plus $556,000
representing the book value of saleable on-hand inventory at September 29, 2000.
The Company has recognized a pre-tax charge for impairment of long-lived assets
of $12,346,000, principally reflecting the write-down of intangible assets to
their fair value. Based on the estimated net proceeds from the sale, which
closed on October 3, 2000, the fair values of the assets to be sold are recorded
as assets held for sale in the Company's Consolidated Balance Sheet at September
30, 2000.
In addition to the sale of certain assets, the Company has entered into
a Receivables Management Agreement ("Agreement") with the buyer. Under the terms
of the Agreement, the buyer will manage the collection of the pre-closing trade
receivables through March 31, 2001.
The Company recorded a $1,288,000 restructuring charge in the fourth
quarter of fiscal 2000 representing the estimated costs related to exiting the
business and closing its U.S. Mail-Order Operations. The restructuring charge
includes $128 for the write-off of unrecoverable leasehold improvements,
$680,000 to satisfy existing lease obligations and $480,000 for severance and
employee related costs. The employee costs represent termination benefits for
all 97 employees of the U.S. Mail Order Operations. As of September 30, 2000, no
amounts related to the lease obligations or employee related costs have been
paid.
AMCARE SALE.
On November 22, 2000, the Company sold Amcare, for approximately
$14,200,000 in cash. The Company has recorded a charge for impairment of
long-lived assets of $2,727,000 in the accompanying Consolidated Statement of
Operations, for the year ended September 30, 2000, to reflect the write-down of
the carrying value of goodwill, originally acquired with the purchase of Amcare,
to its fair value. In addition, the Company has recorded a tax charge of
approximately $1,654,000 to reflect the tax effect of the transaction.
33
TNI SALE.
On July 15, 1998, the Company sold substantially all of the assets of
its domestic home nursing 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 former 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 former 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.
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. To date, there have been no material malfunctions
of the Company's systems or 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.
As of November 1, 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,
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.
34
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.
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.
CONTINGENCIES.
Some of the Company's subsidiaries are Medicare Part B suppliers who
submit claims to the designated carrier who is the government's claims
processing administrator. From time to time, the carrier may request an audit of
Medicare Part B claims on a prepayment or postpayment basis. Some of the
Company's subsidiaries currently have pending such audits. If the outcome of any
audit results in a denial or a finding of an overpayment, then the affected
subsidiary has appeal rights. Some of the subsidiaries currently are responding
to these audits and pursuing appeal rights in certain circumstances.
LITIGATION.
See "Legal Proceedings" with respect to certain legal proceedings
concerning the Company and HMI.
IMPACT OF RECENT ACCOUNTING STANDARDS
The Company is currently evaluating the future impact that Staff
Accounting Bulletin ("SAB") 101, "Revenue Recognition," issued in December 1999
by the Securities and Exchange Commission may have on the Company's consolidated
financial statements in the future. SAB 101 is effective no later than the
fourth quarter of fiscal years beginning after December 15, 1999. The Company
will adopt SAB 101 in fiscal year ended September 30, 2001.
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. The Company hedged the interest rate in connection with a
component of its Refinancing (see Interest Rate Risk below). 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. The Company will adopt SFAS No. 133 in 2001 and
is in the process of evaluating its impact on the consolidated financial
statements.
INFLATION
Inflation has not had a significant impact on the Company's operations
to date.
35
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 and the U.K. subsidiaries'
December 20, 1999 Refinancing which includes the 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 its consolidated results
of operations or cash flows for its variable rate Senior Credit Facility,
Mezzanine Loan and cash equivalents. In accordance with provisions of the
Refinancing, on January 25, 2000, the Company hedged the interest rate (LIBOR
cap of 9%) on approximately $41,935,000 of its floating rate debt in a contract
which expires June 30, 2003. The approximate notional amount of the contract
adjusts down (consistent with debt maturity) as follows:
December 31, 2000 $38,633,000
June 30, 2001 $36,982,000
December 31, 2001 $35,331,000
June 30, 2002 $32,855,000
December 31, 2002 $30,378,000
As of September 30, 2000, the Company's Notes ($32,604,000) and PIK
Notes ($2,403,000) mature on December 31, 2008 and bear interest at a fixed rate
of 9.375%. The table below represents the expected maturity of the Company's
variable rate debt and their weighted average interest rates at September 30,
2000.
EXPECTED WEIGHTED AVERAGE
FISCAL MATURITY RATE
- ------ ------------- ----------------
2001 $ 3,806,000 LIBOR +1.62%
2002 5,120,000 LIBOR +2%
2003 6,144,000 LIBOR +2%
2004 8,192,000 LIBOR +2%
2005 10,240,000 LIBOR +2%
Thereafter 24,974,000 LIBOR +4.75%
--------------
$58,476,000 LIBOR +3.15%
==============
The aggregate fair value of the Company's debt was estimated based on
quoted market prices for the same or similar issues and approximated $94,392,000
at September 30, 2000.
36
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.
Effective May 12, 2000, the Company dismissed PricewaterhouseCoopers
LLP as the Company's independent accountant. The reports of
PricewaterhouseCoopers LLP on the consolidated financial statements for the
fiscal years ended September 30, 1999 and 1998 contained no adverse opinion or
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles. In connection with its audits for the two
most recent fiscal years and through May 12, 2000, there have been no
disagreements with PricewaterhouseCoopers LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements if not resolved to the satisfaction of
PricewaterhouseCoopers LLP would have caused them to make reference thereto in
their reports on the consolidated financial statements for such years.
The decision to change accountants was approved by both the Company's
Audit Committee and its Board of Directors.
On May 12, 2000, the Company engaged Ernst & Young LLP as its new
independent accountant. During the fiscal years ended September 30, 1999, 1998
and during the subsequent period ended May 12, 2000, neither the Company nor
anyone on its behalf consulted Ernst & Young LLP regarding (i) the application
of accounting principles to any transaction, either completed or proposed, or
(ii) the type of audit opinion that might be rendered by Ernst & Young LLP on
the Company's financial statements.
37
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.............................. 56 Chairman of the Board and Chief
Executive Officer
Sarah L. Eames................................. 42 President
John B. Wynne.................................. 39 Vice President and Chief Financial
Officer
Leslie J. Levinson............................. 45 Secretary
Lewis S. Ranieri............................... 53 Director
Scott A. Shay.................................. 43 Director
Jeffrey S. Peris............................... 54 Director
G. Richard Green............................... 61 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.
John B. Wynne joined the Company in June 2000 as Vice President of
Finance and has served as Vice President and Chief Financial Officer since
August 2000. Prior to joining the Company, Mr. Wynne was Chief Financial Officer
of Wassall, USA, Inc., a private equity concern where he was employed from
August 1996. From 1983 until 1996, Mr. Wynne was employed by Coopers & Lybrand
LLP.
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 partner in the law firm of Dow, Lohnes & Albertson,
which firm served as counsel to the Company.
38
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 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; Termination of Employment and
Change-in-Control Arrangements."
39
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 and integrity of
the Company's financial statements; (iii) considerin the adequacy of the
internal accounting and control procedures of the Company and compliance with
legal and regulatory requirements; 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 other than John B. Wynne, who
inadvertently did not file his Form 3.
40
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, 2000,
1999 and 1998.
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............. 2000 $250,000 $140,000 $ -- -- $72,090(5)
Chairman of the Board 1999 250,000 100,000 -- 39,228(5)
and Chief Executive 1998 234,423 -- 150,000 52,742(5)
Officer
Sarah L. Eames(1).............. 2000 $256,154 $160,000 $ -- -- $ 7,150(5)
President 1999 240,000 100,000 -- -- 5,200(5)
1998 187,404 -- -- 100,000 --
Wayne A. Palladino(2).......... 2000 $275,191(4) $150,000 $ -- -- $ 6,825(5)
Senior Vice President and 1999 225,000 100,000 -- 91,866(6)
Chief Financial Officer 1998 181,731 -- -- 100,000 --
Gregory E. Marsella(3)......... 2000 $ -- $ -- $ -- -- $ --
Vice President, General 1999 120,192 -- -- -- 4,500(5)
Counsel and Secretary........ 1998 121,154 -- -- -- --
- -------------------
(1) Ms. Eames became Executive Vice President, Business Development and
Marketing of the Company in June 1997 and President of the Company in May
1998.
(2) Mr. Palladino resigned August 11, 2000 as Senior Vice President and Chief
Financial Officer.
(3) Mr. Marsella became Vice President, General Counsel and Secretary of the
Company in July 1997 and resigned September 3, 1999.
(4) Includes $71,827 payout of vacation time accrued. Reflects reimbursement
for certain travel expenses.
(5) Reflects forgiveness of a loan and reimbursement of certain travel
expenses.
41
AGGREGATE OPTION EXERCISES IN FISCAL 2000
AND 2000 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.......... - - 650,000 / 0 $0 / $0
Sarah L. Eames............. - - 160,000 / 0 0 / 0
John B. Wynne.............. - - - / 50,000 0 / 0
- ---------------------
(1) Calculated on the basis of $1.38 per share, the closing sale price of the
Common Stock as reported on Amex on September 30, 2000, 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 renews for one-year
terms every January absent notice of non-renewal from either party. Effective
October 1, 2000, this agreement provides for a base salary of $350,000. 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 plus relocation expenses to
California. Effective October 1, 2000, Ms. Eames' agreement provides for a base
salary of $325,000.
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 Hyperion TW Fund L.P. (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."
42
STOCK OPTION PLANS
1992 STOCK OPTION PLAN.
In July 1992, the Company's Board of Directors and shareholders
approved the Company's 1992 Stock Option Plan (the "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. 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 November 1, 2000, the number of shares of Common Stock available for
issuance thereunder is 3,526,383 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 June 22, 2000, the Company granted options to purchase 50,000 shares
of Common Stock at $1.81 per share under the Option Plan to Mr. Wynne.
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 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.
43
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.
STOCK INCENTIVE PLAN
In January, 2000, TW UK adopted a management incentive plan (the "UK
Plan"). Under the UK Plan, a new class of redeemable shares (having a nominal
value of 0.01p) in the capital of TW UK was created (the "Redeemable Shares"),
which are redeemable in the manner described below. Pursuant to the UK Plan
9,800,000 Redeemable Shares are reserved for issuance. Under the UK Plan the
Redeemable shares may be issued at their nominal value and with an option price
set by the board of directors of TW UK (the "Initial Value"). On March 7, 2000,
TW UK issued 3,500,000, 1,800,000 and 4,200,000 Redeemable Shares, with an
Initial Value of 105p per share, to Mr. Aitken, Ms. Eames and various employees
and members of management of TW UK and its subsidiaries, respectively. On July
10, 2000, 120,000 additional Redeemable Shares were issued to a member of
management of TW UK and its subsidiaries with an Initial Value of 125p per
share. The redemption rights attached to the Redeemable Shares are exercisable
at any time during the period commencing on the date of a qualified public
offering in the UK and ending 10 years from the date of issuance. The net effect
of the exercise of redemption rights is that the holder acquires ordinary shares
of TW UK at a price per ordinary share equal to the Initial Value. The
Redeemable Shares do not carry any dividend or income rights and do not carry
any right to vote at general meetings of TW UK. All terms associated with the
shares are fixed and the market value of an ordinary share of TW UK was less
than the Initial Values of 105p and 125p therefore no compensation expense has
been recognized.
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.
44
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 November 27, 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)......................................... 164,000 *
Wayne A. Palladino(3)..................................... -- --
John B. Wynne(4).......................................... -- --
Lewis S. Ranieri(5)....................................... 13,913,721 67.7%
Scott A. Shay(5).......................................... 13,913,721 67.7%
Jeffrey S. Peris(6)....................................... 5,334 *
G. Richard Green(6)...................................... 6,334 *
Hyperion Partners II L.P.(7).............................. 13,913,721 67.7%
Hyperion TW Fund L.P.(8).................................. 13,913,721 67.7%
All executive officers and directors as
a group (7 persons)(9)................................. 14,759,389 69.1%
- ------------------------------------
* Less than one percent.
(1) Includes 650,000 shares subject to options exercisable within 60 days from
November 27, 2000.
(2) Includes 160,000 shares subject to options exercisable within 60 days from
November 27, 2000.
(3) Mr. Palladino resigned as Senior Vice President and Chief Financial Officer
effective August 11, 2000.
(4) Mr. Wynne joined the Company effective June 22, 2000 as Vice President of
Finance and effective August 11, 2000 became Vice President and Chief
Financial Officer.
(5) Includes 6,765,265 shares of Common Stock and 3,000,000 shares of Common
Stock underlying the warrants exercisable within 60 days from November 1,
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 3,334 shares subject to options exercisable within 60 days from
November 27, 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 November 1, 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 6,765,265 shares of Common Stock and 3,000,000 shares subject to
the Warrants exercisable within 60 days from November 1, 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, Wynne, Ranieri, Shay, Peris,
Green and Ms. Eames, and those shares subject to options and Warrants held
by such individuals exercisable within 60 days from November 27, 2000.
45
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 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.
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.
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
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 former 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 officers of the Company have been granted options to purchase
shares of Common Stock under the Company's stock option plans. See "Executive
Compensation - Stock Option Plans."
46
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Index to Consolidated Financial StatementsPage
Report of Independent Auditors F-1
Report of Independent Accountants F-2
Consolidated Balance Sheets - September 30, 2000 and 1999 F-3
Consolidated Statements of Operations - For the Years Ended September 30, 2000, 1999 and 1998 F-4
Consolidated Statements of Changes in Stockholders' Equity -
For the Years Ended September 30, 2000, 1999 and 1998 F-5
Consolidated Statements of Cash Flows - For the Years Ended September 30, 2000, 1999 and 1998 F-6
Notes to Consolidated Financial Statements F-8
Selected Quarterly Financial Data (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
The Company filed on August 11, 2000 a current report on Form 8-K dated
August 11, 2000 concerning an Item 5 event.
The Company filed on September 22, 2000 a current report on Form 8-K
dated September 18, 2000 concerning an item 5 event.
(c) Exhibits
The exhibits listed in the Exhibit Index below are filed as part of
this Annual Report on Form 10-K.
47
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).
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).
48
Exhibit
Number Title
- ------ -----
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).
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).
49
Exhibit
Number Title
- ------ -----
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).
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).
50
Exhibit
Number Title
- ------ -----
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).
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).
51
Exhibit
Number Title
- ------ -----
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).
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).
52
Exhibit
Number Title
- ------ -----
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).
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).
53
Exhibit
Number Title
- ------ -----
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).
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).
54
Exhibit
Number Title
- ------ -----
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.
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.
10.70 Share Sale and Purchase Agreement of Nightingale Nursing Bureau
Limited dated as of April 6, 2000 between Transworld Healthcare (UK)
Limited and W-A Thompson, D.T. Thompon and others (incorporated herein
by reference to Exhibit 99.1 to the Company's Current Report on Form
8-K dated April 20, 2000).
10.71 Letter from PricewaterhouseCoopers LLP to the Securities and Exchange
Commission (incorporated herein by reference to Exhibit 16.1 to the
Company's Current Report on Form 8-K dated May 18, 2000).
10.72 Asset Purchase Agreement dated as of September 18, 2000 between MK
Diabetic Support Services, Inc., Respiflow, Inc. and Transworld
Ostomy, Inc. and Express-Med, Inc. (incorporated herein by reference
to Exhibit 10.1 to the Company's Current Report on Form 8-K dated
October 11, 2000).
10.73* Sale and Purchase Agreement of entire share capital of Amcare Limited
together with its subsidiary Novacare UK Limited dated November 22,
2000 between Omnicare Limited and Bristol-Myers Squibb Holdings
Limited.
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.
27* Financial Data Schedule.
- ---------------------
*Filed herewith.
55
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: December 12, 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 December 12, 2000
- ------------------------------- Executive Office (Principal Executive
Timothy M. Aitken Chief Executive Officer
/s/ John B. Wynne Vice President and Chief Financial December 12, 2000
- ------------------------------- Officer (Principal and Accounting
John B. Wynne Officer)
/s/ Lewis S. Ranieri Director December 12, 2000
- -------------------------------
Lewis S. Ranieri
/s/ Scott A. Shay Director December 12, 2000
- -------------------------------
Scott A. Shay
/s/ Jeffrey S. Peris Director December 12, 2000
- -------------------------------
Jeffrey S. Peris
/s/ G. Richard Green Director December 12, 2000
- -------------------------------
G. Richard Green
56
TRANSWORLD HEALTHCARE, INC.
Index to Consolidated Financial Statements Page
- ------------------------------------------ ----
Report of Independent Auditors F-1
Report of Independent Accountants F-2
Consolidated Balance Sheets - September 30, 2000
and 1999 F-3
Consolidated Statements of Operations - for the
years ended September 30, 2000, 1999 and 1998 F-4
Consolidated Statements of Changes in
Stockholders' Equity - for the years ended
September 30, 2000, 1999 and 1998 F-5
Consolidated Statements of Cash Flows - for the
years ended September 30, 2000, 1999 and 1998 F-6
Notes to Consolidated Financial Statements F-8
Selected Quarterly Financial Data (Unaudited) F-37
Index to Consolidated Financial Statements Schedule
- ---------------------------------------------------
Schedule II - Valuation and Qualifying Accounts S-1
F-i
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Transworld Healthcare, Inc.
We have audited the accompanying consolidated balance sheet of Transworld
Healthcare, Inc. as of September 30, 2000, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year then
ended. Our audit also included the financial statement schedule listed in the
Index at Item 14(a) for the year ended September 30, 2000. These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Transworld
Healthcare, Inc. at September 30, 2000, and the consolidated results of its
operations and its cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule for the year ended September
30, 2000, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
Ernst & Young LLP
New York, New York
November 27, 2000
F-1
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 the results of their operations and their cash flows for
the years ended September 30, 1999 and 1998 in conformity with accounting
principles generally accepted in the United States. In addition, in our opinion,
the financial statement schedule for the years ended September 30, 1999 and
1998, 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-2
TRANSWORLD HEALTHCARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------------- -------------------
ASSETS
Current assets:
Cash and cash equivalents $ 7,867 $ 5,158
Accounts receivable, less allowance for doubtful
accounts of $21,219 and $19,870, respectively 23,029 30,814
Inventories 1,871 2,929
Deferred income taxes 12,287 6,930
Assets held for sale 2,317
Prepaid expenses and other assets 5,952 4,735
-------- --------
Total current assets 53,323 50,566
Property and equipment, net 7,674 9,929
Assets limited to use 17,230
Intangible assets, net 90,786 103,248
Deferred income taxes 10,256 6,173
Other assets 4,477 2,205
-------- --------
Total assets $183,746 $172,121
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 3,806 $ 1,364
Accounts payable 4,101 5,058
Accrued expenses 15,789 14,899
Taxes payable 3,987 3,240
-------- --------
Total current liabilities 27,683 24,561
Long-term debt 54,670 54,391
Notes payable 35,007
Deferred income taxes and other 1,763 1,895
Minority interest 1,592
-------- --------
Total liabilities 120,715 80,847
-------- --------
Commitments and contingencies (Note 13)
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 17,551 shares, respectively 176 176
Additional paid-in capital 128,070 125,526
Accumulated other comprehensive loss (6,248) (405)
Retained deficit (58,967) (34,023)
-------- --------
Total stockholders' equity 63,031 91,274
-------- --------
Total liabilities and stockholders' equity $183,746 $172,121
======== ========
See notes to consolidated financial statements.
F-3
TRANSWORLD HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 1998
--------------- --------------- --------------
Revenues:
Net patient services $ 80,210 $ 80,169 $ 68,887
Net respiratory, medical equipment and supplies sales 43,619 65,277 76,185
Net infusion services 11,579 9,282 10,237
--------- --------- ---------
Total revenues 135,408 154,728 155,309
--------- --------- ---------
Cost of revenues:
Patient services 55,370 54,620 47,779
Respiratory, medical equipment and supplies sales 26,024 37,650 41,898
Infusion services 8,387 7,140 7,515
--------- --------- ---------
Total cost of revenues 89,781 99,410 97,192
--------- --------- ---------
Gross profit 45,627 55,318 58,117
Selling, general and administrative expenses 49,041 57,946 51,980
Gain on sale of assets (Note 3) (2,511)
Impairment of long-lived assets (Notes 3 and 16) 15,073
Restructuring charge (Note 3) 1,288
Legal Settlements, net (Note 13) 5,082
--------- --------- ---------
Operating (loss) income (24,857) (2,628) 8,648
Interest income (1,443) (227) (635)
Interest expense 9,382 5,445 6,286
--------- --------- ---------
(Loss) income before income taxes, equity income,
minority interest and extraordinary loss (32,796) (7,846) 2,997
(Benefit) provision for income taxes (7,348) (500) 1,844
Equity in income of and interest income earned
from U.K. subsidiaries (Note 2) 1,193
--------- --------- ---------
(Loss) income before minority interest and extraordinary loss (24,255) (7,346) 1,153
Minority interest (70)
--------- --------- ---------
(Loss) income before extraordinary loss (24,185) (7,346) 1,153
Extraordinary loss on early extinguishment of debt
(net of income tax benefit of $408) 759
--------- --------- ---------
Net (loss) income $ (24,944) $ (7,346) $ 1,153
========= ========= =========
Basic and diluted loss per share of common
stock before extraordinary loss $ (1.38) $ (0.42) $ 0.07
========= ========= =========
Basic and diluted net loss per share of
common stock $ (1.42) $ (0.42) $ 0.07
========= ========= =========
Weighted average number of common shares outstanding:
Basic 17,551 17,547 17,327
========= ========= =========
Diluted 17,551 17,547 17,488
========= ========= =========
See notes to consolidated financial statements.
F-4
TRANSWORLD HEALTHCARE, INC.
CONSOLIDATED STATEMENTS 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, 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
Net loss (24,944) (24,944)
Translation adjustment (5,843) (5,843)
Issuance of detachable warrants to
purchase common stock 2,544 2,544
------ ---- -------- ------- -------- --------
Balance, September 30, 2000 17,551 $176 $128,070 $(6,248) $(58,967) $ 63,031
====== ==== ======== ======= ======== ========
See notes to consolidated financial statements.
F-5
TRANSWORLD HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 1998
------------- ------------- -------------
Cash flows from operating activities:
Net (loss) income $(24,944) $ (7,346) $ 1,153
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities:
Depreciation and amortization 2,119 2,312 1,981
Amortization of goodwill 3,145 3,168 2,841
Amortization of other intangible assets 156 291 306
Amortization of debt issuance costs 1,182 1,086 1,151
Provision for doubtful accounts 9,026 12,272 8,318
Gain on sale of assets (2,511)
Impairment of long-lived assets 15,073
Restructuring charge 1,288
Interest in kind 2,975
Minority interest (70)
Equity in income of U.K. subsidiaries (411)
Extraordinary loss on early extingusishment of debt 1,167
Deferred income taxes (9,529) (2,684) (988)
Changes in assets and liabilities, excluding
the effect of businesses acquired and sold:
Increase in accounts receivable (2,967) (11,173) (7,372)
Decrease (increase) in inventories 829 1,208 (897)
Increase in prepaid expenses and other assets (424) (491) (246)
Increase (decrease) in accounts payable (1,865) 2,359 (5,270)
Increase in accrued expenses and other liabilities 2,621 2,256 1,396
-------- -------- --------
Net cash (used in) provided by operating activities (629) 3,258 (138)
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (1,207) (2,642) (3,346)
Proceeds from sale of property and equipment 184 90 60
Notes receivable from U.K. subsidiaries - payments received 58,983
Advances to U.K. subsidiaries (304)
Repayment of advances to U.K. subsidiaries 8,390
Payments for acquisitions - net of cash acquired (13,687) (3,694) (846)
Notes receivable - payments received 58
Proceeds limited to future acquisitions (18,395)
Proceeds from sale of Radamerica, net of cash
overdraft when sold 1,204
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)
Payments on acquisitions payable (130) (406)
Purchases of other intangible assets (16) (396)
-------- -------- --------
Net cash provided by (used in) investing activities 33,964 (6,334) 22,241
-------- -------- --------
(Continued)
See notes to consolidated financial statements.
F-6
TRANSWORLD HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 1998
------------- ------------- -------------
Cash flows from financing activities:
Payments for financing fees and issuance costs (2,849) (346) (17)
Proceeds from notes payable 2,012
Payments on long-term debt (55,755)
Borrowing under revolving loan 781
Payments on revolving loan (5,121) (1,500) (29,100)
Borrowing under acquisition loan 5,632
Proceeds from long-term debt 55
Principal payments on long-term debt (2,187) (73) (58)
Stock options and warrants exercised, net,
including tax benefit 66 6,492
-------- -------- --------
Net cash used in financing activities (57,487) (1,853) (22,628)
-------- -------- --------
Effect of exchange rate on cash (1,135) (326) 312
Decrease in cash due to deconsolidation of U.K. subsidiaries (2,598)
Increase in cash due to reconsolidation of U.K. subsidiaries 30,594
-------- -------- --------
Increase (decrease) increase in cash 2,709 (5,255) (213)
Cash and cash equivalents,
beginning of period 5,158 10,413 10,626
-------- -------- --------
Cash and cash equivalents,
end of period $ 7,867 $ 5,158 $ 10,413
======== ======== ========
Supplemental cash flow information:
Cash paid for interest $ 5,612 $ 4,192 $ 5,330
======== ======== ========
Cash paid (refunded) for income taxes, net $ 2,031 $ 1,948 $ (506)
======== ======== ========
Supplemental disclosure of non-cash investing and financing activities:
Details of business acquired in purchase transactions:
Fair value of assets acquired $ 18,841 $ 3,730 $ 1,151
======== ======== ========
Liabilities assumed or incurred $ 1,470 $ 36 $ 305
======== ======== ========
Cash paid for acquisitions (including
related expenses) $ 15,731 $ 3,694 $ 846
Cash acquired 2,044
-------- -------- --------
Net cash paid for acquisitions $ 13,687 $ 3,694 $ 846
======== ======== ========
Issuance of class A1 common shares of TW UK (as defined in Note 3) $ 1,662
========
Additional non-cash activities are disclosed in the notes to the
consolidated financial statements
See notes to consolidated financial statements.
F-7
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) respiratory therapy and home medical
equipment; and (iii) infusion therapy.
The Company was a provider of specialty mail-order pharmaceuticals and
medical supplies. In September 2000, the Company entered into an agreement,
which was completed on October 3, 2000, to sell a substantial portion of
the assets of its U.S. Specialty Mail-Order Pharmaceuticals and Medical
Supplies Operations ("Mail-Order Operations"). See 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.
PRINCIPLES OF CONSOLIDATION:
On December 20, 1999, the Company's U.K. subsidiaries obtained new
financing (the "Refinancing") denominated in pounds sterling, which
aggregated approximately $125,700 at December 31, 1999. Concurrent with the
Refinancing, specifically relating to the senior subordinated notes (the
"Notes"), the Company placed 100% of its ownership interest in Transworld
Healthcare (UK) Limited ("TW UK") into a voting trust (the "Voting Trust").
As a result of the establishment of the Voting Trust, the Company would
initially own 100% of the outstanding voting certificates. The term of the
Voting Trust is 20 years. The Voting Trust agreement stipulates that the
composition of the board of directors of TW UK will consist of one person
designated by the Company, one person appointed by the purchasers of the
Notes, one representative of TW UK management (currently the Chairman and
Chief Executive Officer of the Company) and two independent directors. The
board of directors of TW UK will then vote on substantially all matters
regarding its operations. G. Richard Green, a director of the Company, is
the trustee of the Voting Trust.
As a result of the provisions of the Voting Trust discussed above, the
Company controlled only 50% of the board of directors and the holders of
the Notes (the "Investors") had the right to approve or veto the annual
budget and financial forecast of results of operations and sources and uses
of cash and any material deviation from such approved budget. Since the
Company did not control a majority of the board of directors and the
Investors held substantive rights, principally in the form of their ability
to approve the annual budget and financial forecast of results of
operations and sources and uses of cash, it was no longer able to
consolidate the U.K. subsidiaries into its financial statements although it
owned 100% of the outstanding shares of the stock of the parent company,
Transworld Holdings (UK) Limited ("UK Parent"). Therefore, effective with
the Refinancing, the Company began accounting for the investment in UK
Parent and its subsidiaries under the equity method, retroactive to October
1, 1999.
F-8
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
During the second quarter of fiscal 2000, UK Parent and TW UK amended their
Articles of Association to give the Chairman (a Company designee) the right
to resolve any tie votes of the board of directors and certain documents
covering the Notes were amended to eliminate the requirement that the
Investors approve the operating budget. These amendments enabled the
Company to consolidate the U.K. subsidiaries as of January 1, 2000.
The table below presents pro forma condensed consolidated statement of
operations data as if the U.K. subsidiaries had been consolidated for the
entire year ended September 30, 2000.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS DATA
Fiscal Year Ended September 30, 2000
Net revenues $ 164,255
Gross profit 54,620
Operating loss (22,415)
Interest income (1,503)
Interest expense 9,598
Benefit for income taxes (6,255)
Net loss (24,944)
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 $6,148, $5,844 and
$6,711 in fiscal 2000, 1999 and 1998, respectively. 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, 2000, 1999 and
1998, 44%, 36% and 30%, respectively of the Company's net revenues were
attributable to the NHS and other U.K. governmental payors programs. For
the years ended September 30, 2000, 1999 and 1998, the Company's net
revenues attributable to the Medicare and Medicaid programs were
approximately 18%, 23% and 33%, 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
F-9
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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 recorded primarily for bad debts, Federal and state net
operating loss carry forwards, depreciation and amortization of
intangibles, which are reported in different periods for Federal income tax
purposes than for financial reporting purposes. Valuation allowances are
established, when necessary, to reduce deferred tax assets 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, 2000, 1999
and 1998, the Company had outstanding stock options and warrants to
purchase 3,940, 3,683 and 3,965 shares, respectively of common stock
ranging in price from $2.63 to $12.45, $4.31 to $12.45 and $4.38 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 years ended September 30,
2000 and 1999, the Company had an incremental weighted average of 12 and
128 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-10
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 shares used in the basic and diluted
earnings per share computations for the years ended September 30, 2000,
1999 and 1998 are as follows:
YEAR ENDED Year Ended Year Ended
SEPTEMBER 30, September 30, September 30,
2000 1999 1998
------------- ------------- -------------
Weighted average number of common
shares outstanding 17,551 17,547 16,663
Weighted average number of contingently
issuable shares per agreements - - 664
------ ------ ------
Shares used in computation of basic net
(loss) income per share of common stock
17,551 17,547 17,327
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
17,551 17,547 17,488
====== ====== ======
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 (See Notes 3 and 16).
STOCK-BASED COMPENSATION:
The accompanying consolidated financial statements 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 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. As the Company only
issues fixed term stock option grants at the quoted market price on the
date of the grant, there is no compensation expense recognized in the
accompanying consolidated financial statements.
F-11
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 provisions of SFAS No.
123, "Accounting for Stock-Based Compensation," which requires disclosure
including pro forma operating results had the Company prepared its
consolidated financial statements in accordance with the fair value based
method of accounting for stock-based compensation (See 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 three years ended September 30:
YEAR ENDED SEPTEMBER 30,
2000 1999 1998
--------- --------- --------
Net (loss) income $(24,944) $ (7,346) $1,153
Change in cumulative
translation adjustment (5,843) (3,351) 5,138
-------- -------- ------
Comprehensive (loss) income $(30,787) $(10,697) $6,291
======== ======== ======
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.
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents include highly liquid short-term investments
purchased with initial maturities of 90 days or less.
F-12
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
ASSETS LIMITED TO USE:
Represents cash and cash equivalents, advanced under the Refinancing,
available for payment of up to fifty percent of the total consideration
payable in connection with Permitted Acquisition (as defined in the Senior
Credit Agreement).
INVENTORIES:
Inventories are valued at the lower of cost (determined using a first-in,
first-out method) or market. Inventories, which consist 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.
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
over its estimated useful life. Other intangible assets (primarily
covenants not-to- compete) are amortized on a straight-line basis over the
contractual period (three to fifteen years).
The Company's amortization periods for goodwill range from ten to forty
years based on the likely period of time over which the related economic
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, increasing 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 companies and other factors (See Notes 3 and 16).
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
F-13
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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 (See Notes 3 and 16).
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, 2000, other assets included $4,349 of deferred financing
costs associated with the Refinancing (see Note 6) net of accumulated
amortization of $746. Amortization of deferred financing costs is included
in interest expense in the accompanying Consolidated Statements of
Operations. At September 30, 1999, other assets included $1,357 of deferred
financing costs associated with the Credit Facility (see Note 6), net of
accumulated amortization of $3,242.
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, 2000 is comprised
of amounts due from the NHS and other U.K. governmental payors (46.0%),
Medicare (9.2%) and Medicaid (4.3%) and various other third-party payors
and self-pay patients (none of which comprise greater than 10% of the
balance). At September 30, 1999, 40.3%, 10.9% and 3.8% of 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, accounts payable and accrued expenses
approximate fair value due to the
F-14
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
short-term maturity of those instruments. The estimated fair value of the
Company's borrowing under the Refinancing was $94,392 compared to $93,483
total debt outstanding at September 30, 2000. At September 30, 1999, the
Credit Facility approximated the carrying value due to interest rates which
fluctuate with market rates.
IMPACT OF RECENT ACCOUNTING STANDARDS:
The Company is currently evaluating the future impact that Staff Accounting
Bulletin ("SAB") 101, "Revenue Recognition," issued in December 1999 by the
Securities and Exchange Commission may have on the Company's consolidated
financial statements in the future. SAB 101 is effective no later than the
fourth quarter of fiscal years beginning after December 15, 1999. The
Company will adopt SAB 101 in fiscal year ended September 30, 2001.
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 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. The Company will adopt SFAS No. 133 in 2001
and is in the process of evaluating its impact on the consolidated
financial statements.
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.
3. BUSINESS COMBINATIONS AND DISPOSALS:
COMBINATIONS:
Effective April 1, 2000 TW UK acquired all of the issued and outstanding
shares of Nightingale Nursing Bureau Limited ("Nightingale"), a
London-based provider of registered nursing and care staff to NHS Trust
Hospitals and the independent sector, with an additional branch in Sydney,
Australia, for approximately $15,362, plus an additional sum of up to
approximately $5,600 in deferred consideration dependent upon Pre-Tax
Profits (as defined in the agreement for sale and purchase) for certain
periods
F-15
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
3. BUSINESS COMBINATIONS AND DISPOSALS (CONTINUED):
ending in 2000 and 2001. Approximately $13,691 of the purchase price for
the acquisition was paid using cash on hand and funds borrowed under the
senior credit facilities with the approximate remaining $1,671 of
consideration being paid in 1,050 shares of 5 pence par value class A1
common shares of TW UK. Accordingly, the Company has included the results
of operations, financial position and cash flows of Nightingale in its
consolidated results effective April 1, 2000.
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
$3,435 and $2,029, respectively, with the remaining portion of $13,956
attributable to goodwill. The goodwill is being amortized on a
straight-line basis over twenty years.
The pro forma results of operations and related per share information for
Nightingale have not been presented as amounts are considered immaterial.
DISPOSITIONS:
SPECIALTY PHARMACY
Impairment of Long-Lived Assets
In September 2000, the Company approved a plan to exit its U.S. Mail-Order
Operations and on September 18, 2000, entered into an agreement to sell
certain assets of this segment located in Jacksonville, Florida. Under the
terms of the transaction, the Company will receive $2,000 plus an
additional $556 representing the book value of on-hand saleable inventory
at September 29, 2000. The Company has recognized a pre-tax charge for
impairment of long-lived assets of $12,346 principally reflecting the
write-down of intangible assets to their fair value. Based on the estimated
net proceeds from the sale, which closed on October 3, 2000, the fair
values of the assets to be sold are recorded as assets held for sale in the
accompanying Consolidated Balance Sheet at September 30, 2000.
In addition to the sale of certain assets, the Company has entered into a
Receivables Management Agreement ("Agreement") with the buyer. Under the
terms of the Agreement, the buyer will manage the collection of the
pre-closing trade receivables through March 31, 2001.
Restructuring Charge
The Company recorded a $1,288 restructuring charge in the fourth quarter of
fiscal 2000 representing the estimated costs related to exiting and closing
its U.S. Mail-Order Operations. The restructuring charge includes
F-16
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
3. BUSINESS COMBINATIONS AND DISPOSALS (CONTINUED):
$128 for the write-off of unrecoverable leasehold improvements, $680 to
satisfy existing lease obligations and $480 for severance and employee
related costs. The employee costs represent termination benefits for all
97 employees of the U.S. Mail-Order Operations. As of September 30, 2000,
no amounts related to the lease obligations or employee related costs have
been paid.
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 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:
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 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.
F-17
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
3. BUSINESS COMBINATIONS AND DISPOSALS (CONTINUED):
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 Hyperion Partners II L.P. ("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, 2000 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-18
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,
2000 1999
------------- -------------
Revenue producing equipment $10,867 $10,892
Furniture, fixtures and equipment 6,499 7,971
Land, buildings and leasehold improvements 1,028 1,473
------- -------
18,394 20,336
Less, accumulated depreciation and amortization 10,720 10,407
------- -------
$ 7,674 $ 9,929
======= =======
Depreciation and amortization of property and equipment for the years ended
September 30, 2000, 1999 and 1998 was $2,119, $2,312 and $1,981,
respectively. The net book value of revenue producing equipment was $5,489
and $6,151 at September 30, 2000 and September 30, 1999, respectively.
5. INTANGIBLE ASSETS:
Intangible assets, net consist of the following:
SEPTEMBER 30, September 30,
2000 1999
------------- -------------
Goodwill $99,419 $111,039
Covenants not-to-compete 908 1,541
Other intangible assets 398 466
-------- ---------
100,725 113,046
Less accumulated amortization 9,939 9,798
-------- ---------
$90,786 $103,248
======== =========
The above intangible assets are net of the goodwill impairment charges
related to the sale of the Company's U.S. Mail-Order Operations and Amcare
Ltd ("Amcare"), a subsidiary of the TW UK (See Notes 3 and 16).
Amortization of intangibles for the years ended September 30, 2000, 1999
and 1998 was $3,301, $3,459 and $3,147, respectively. On a pro forma basis
assuming the U.K. subsidiaries had been consolidated for the entire year
ended September 30, 2000, the amortization of intangibles would have been
$4,065.
F-19
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
6. DEBT:
On December 20, 1999, the Company's U.K. subsidiaries obtained the
Refinancing denominated in pounds sterling, which aggregates approximately
$116,581 at September 30, 2000 as follows:
FINAL
FACILITY TOTAL OUTSTANDING INTEREST RATE MATURITY
-------- -------- ----------- ------------- -------------
Senior credit facilities:
Term loan $ 40,961 $38,913 LIBOR + 2% Dec. 17, 2005
Acquisition loan 18,286 6,643 LIBOR + 2.75% Dec. 17, 2006
Working capital facility 7,315 LIBOR + 2% Dec. 17, 2005
---------- ---------
Total senior credit facilities 66,562 45,556
MEZZANINE TERM LOAN 15,012 12,920(1) LIBOR + 7% Dec. 17, 2007
NOTES WITH WARRANTS 35,007 35,007 9.375% Dec. 17, 2008
---------- ---------
TOTAL REFINANCING $116,581 93,483
==========
LESS, CURRENT MATURITIES 3,806
--------
$89,677
=========
- ----------
1) Net of unamortized discount of $2,093.
The aggregate fair value of the Company's debt was estimated based on
quoted market prices for the same or similar issues and approximated
$94,392 at September 30, 2000.
The mezzanine lenders and the Investors were also issued warrants to
purchase approximately 2% and 27%, respectively, of the fully diluted
shares of TW UK. The exercise price of the warrants issued to the Investors
(the "Warrants") shall equal the entire principal amount of the Notes for
all Warrants in the aggregate and can be exercised for cash or through the
tender of Notes to TW UK. In the event that any warrants are exercised by
tendering cash, the UK parent shall have the right, at its option (which it
intends to exercise), to redeem the aggregate principal amount of Notes
equal to the number of warrants so exercised multiplied by the warrant
exercise price. The warrants issued to the mezzanine lenders (the
"Mezzanine Warrants") are detachable and can be exercised at any time
without condition for an aggregate exercise price of approximately $120.
The fair value of the Mezzanine Warrants ($2,319) issued to the mezzanine
lenders has been recorded as a discount to the mezzanine term loan and is
being amortized over the term of the loan using the interest method.
The Investors have the right, at their option, to require UK Parent to
redeem all or any portion of the Notes under certain circumstances and in
accordance with the terms of the documents covering the Notes. The
redemption price of the Notes shall be equal to the principal amount of the
Notes, plus all accrued and unpaid interest.
The Investors will have the right, at their option, to require UK Parent to
purchase all or any portion of the Warrants or the shares issued upon
exercise of the Warrants (the "Warrant Shares") under certain circumstances
and in accordance with the terms of the documents covering the Notes. 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.
F-20
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
6. DEBT (CONTINUED):
Of the $114,178 net proceeds of the Refinancing, $55,755 was used to repay
the Company's existing senior indebtedness (the "Credit Facility"), $11,617
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. At September 30, 1999, the Credit Facility had monthly interest at a
Euro-dollar Rate, which ranged from 5.38% to 5.44%, plus 2% collateralized
by a lien on all the Company's and its domestic subsidiaries assets.
Repayment of the loans under the senior credit facilities commenced on July
30, 2000 and will continue until final maturity. The acquisition loan may
be drawn upon through December 17, 2002. As of September 30, 2000,
borrowings under the senior credit facilities bore interest at a rate of
8.11% to 8.86%. The senior credit facilities contain restrictions,
prohibitions and affirmative and negative financial covenants customarily
found in agreements of these 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 facilities.
As of September 30, 2000, borrowings under the mezzanine term loan bore
interest at a rate of 13.11%.
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
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.
In connection with the repayment of the Credit Facility, the Company
recorded a non-cash, after-tax, extraordinary charge of $759 (net of income
tax benefit of $408) during the fiscal year ended September 30, 2000,
related to the write-off of deferred financing costs associated with the
Credit Facility.
F-21
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
6. DEBT (CONTINUED):
Annual maturities of long-term debt for each of the next five years are:
YEAR ENDING SEPTEMBER 30,
-------------------------
2001 $ 3,806
2002 5,120
2003 6,144
2004 8,192
2005 10,240
Thereafter 59,981
----------
$93,483
==========
The Company is subject to fluctuating interest rates that may impact its
consolidated results of operations or cash flows for its variable rate
Senior Credit Facility, Mezzanine Loan and cash equivalents. In accordance
with provisions of the Refinancing, on January 25, 2000, the Company hedged
the interest rate (LIBOR cap of 9%) on approximately $41,935 of its
floating rate debt in a contract which expires June 30, 2003. The
approximate notional amount of the contract adjusts down (consistent with
debt maturity) as follows:
December 31, 2000 $38,633
June 30, 2001 $36,982
December 31, 2001 $35,331
June 30, 2002 $32,855
December 31, 2002 $30,378
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
13).
F-22
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 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 selling non-core assets (i.e.:
TNI) and attempted 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 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).
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.
F-23
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
10. INCOME TAXES:
The (benefit) provision for income taxes from continuing operations is
summarized as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 1998
------------- ------------- -------------
Current:
Federal $ - $ 68 $ (200)
State - 52 150
Foreign 2,606 2,063 924
Deferred:
Federal (10,070) (3,136) 769
State 116 328 85
Foreign - 125 116
----------- -------- ---------
(Benefit) provision for
income taxes $ (7,348) $ (500) $1,844
=========== ======== =========
For 2000, 1999 and 1998, 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, 2000, 1999 and 1998 are as
follows:
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 1998
------------- ------------- -------------
Deferred tax assets:
Current:
Provision for doubtful accounts $ 6,415 $ 5,991 $ 4,930
Inventory capitalization 21 22 20
Accrued expenses 5,528 917 1,557
Other, net 323 - 225
------- ------- -------
Current deferred tax assets 12,287 6,930 6,732
------- ------- -------
Non-current:
Federal net operating loss 9,327 5,128 1,810
State net operating losses 1,546 2,073 2,050
Capital losses 768 768 991
Other, net 161 82 507
Valuation allowance (1,546) (1,878) (1,875)
------- ------- -------
Non-current deferred tax assets 10,256 6,173 3,483
------- ------- -------
Deferred tax liabilities:
Non-current:
Depreciation and amortization 1,081 1,170 1,089
Other, net 501 564 452
------- ------- -------
Deferred tax liabilities 1,582 1,734 1,541
------- ------- -------
Net deferred tax assets $20,961 $11,369 $ 8,674
======= ======= =======
F-24
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
10. INCOME TAXES (CONTINUED):
The valuation allowance at September 30, 2000 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.
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
$20,961 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 12 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.
As of September 30, 2000, the Company has state net operating loss
carryforwards of approximately $31,635 which, if unused, will expire in the
years 2001 through 2015, and has a Federal net operating loss carryforward
of approximately $30,660 which if unused, will expire in the years 2014
through 2020. The Company has a capital loss carryforward of approximately
$2,259 which, if unused, will expire in the years 2002 through 2005.
Reconciliations of the differences between income taxes computed at Federal
statutory tax rates and consolidated provisions for income taxes on income
(loss) before equity income of and interest income earned from U.K.
subsidiaries are as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 1998
------------- ------------- -------------
Income taxes at 34% $(11,151) $(2,668) $1,019
State income taxes, net of
Federal benefit - 560 268
Nondeductible expenses, primarily
amortization and write down of 1,648 1,076 711
intangible assets
Legal settlement 510 - -
Valuation allowance, state taxes (332) 3 (114)
Foreign tax on sale of subsidiary 1,654
Tax contingency - 416
Other, net 323 113 (40)
-------- ------- ------
(Benefit) provision for income taxes $ (7,348) $ (500) $1,844
======== ======= ======
F-25
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
10. INCOME TAXES (CONTINUED):
(Loss) income before income taxes generated from the U.K. operations for
the years ended September 30, 2000, 1999 and 1998 was $(2,046), $3,416, and
$1,332, respectively. On a pro forma basis, assuming the U.K. subsidiaries
had been consolidated for the entire fiscal year ended September 30, 2000,
the loss generated from the U.K. Operations would have been $(965).
11. STOCK OPTION PLAN AND WARRANTS:
Options under the Option Plan may be granted by the Compensation Committee
of the Board of Directors which determines the exercise price, vesting
provisions and term of such grants. The vesting provisions provided for
vesting of options over a period of between two and three years.
Following is a summary of transactions under the Option Plan during the
years ended September 30, 2000, 1999 and 1998:
2000 1999 1998
----------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF STOCK EXERCISE OF STOCK EXERCISE OF STOCK EXERCISE
OPTIONS PRICE ($) OPTIONS PRICE ($) OPTIONS PRICE ($)
---------------------------------------------------------------------------
Outstanding beginning of year 1,130 5.37 1,390 5.49 1,284 6.70
Granted 100 1.81 10 4.31 515 2.63
Exercised (15) 4.38 (126) 4.21
Forfeited (190) 4.34 (255) 6.04 (283) 6.32
----- ----- -----
Outstanding end of year 1,040 5.22 1,130 5.37 1,390 5.49
===== ===== =====
Weighted-average fair
value of options granted
during the year 0.93 2.08 1.27
==== ==== ====
Available for future grants 1,478
=====
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, 2000, 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-26
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 1,040 options outstanding as of September 30, 2000 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 ($)
--------------- ----------- --------------- ---------------- ----------- ---------------
2.63 335 2.63 3.0 307 2.63
1.81 100 1.81 4.7
4.31 10 4.31 8.2 3 4.31
7.25 581 7.25 1.4 581 7.25
7.88 14 7.88 14 7.88
------ ---
2.63 to 7.88 1,040 5.22 2.3 905 5.68
====== ===
Of the 1,130 options outstanding as of September 30, 1999, 877 were
exercisable (with a weighted average exercise price of $5.24) as of that
date. 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.
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:
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30,
2000 1999 1998
------------ ------------ -------------
Net (loss) income - as reported $(24,944) $(7,346) $1,153
Net (loss) income - pro forma (25,186) (8,155) 113
Basic and diluted (loss) earnings per
share - as reported (1.42) (0.42) 0.07
Basic and diluted (loss) earnings per
share - pro forma (1.44) (0.46) 0.01
F-27
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:
2000 1999 1998
---- ---- ----
Expected life (years) 4 4 4
Risk-free interest rate 5.5% 5.5% 5.5%
Volatility 61.0% 55.7% 55.9%
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.
12. STOCK INCENTIVE PLAN:
In January, 2000, TW UK adopted a management incentive plan (the "UK
Plan"). Under the UK Plan, a new class of redeemable shares (having a
nominal value of 0.01p) in the capital of TW UK was created (the
"Redeemable Shares"), which are redeemable in the manor described below.
Pursuant to the UK Plan 9,800 Redeemable Shares are reserved for issuance.
Under the UK Plan the Redeemable shares may be issued at their nominal
value and with an option price set by the board of directors of TW UK (the
" Initial Value"). On March 7, 2000 TW UK issued 3,500, 1,800 and 4,200
Redeemable Shares, with an Initial Value of 105p per share, to Mr. Aitken,
Ms. Eames and various employees and members of management of TW UK and its
subsidiaries, respectively. On July 10, 2000, 120 additional Redeemable
Shares were issued to a member of management of TW UK and its subsidiaries
with an Initial Value of 125p per share. The redemption rights attached to
the Redeemable Shares are exercisable at any time during the period
commencing on the date of a qualified public offering in the UK and ending
10 years from the date of issuance. The net effect of the exercise of
redemption rights is that the holder acquires ordinary shares of TW UK at a
price per ordinary share equal to the Initial Value. The Redeemable Shares
do not carry any dividend or income rights and do not carry any right to
vote at general meetings of TW UK. All terms associated with the shares are
fixed and the market value of an ordinary share of TW UK was less than the
Initial Values of 105p and 125p therefore no compensation expense has been
recognized.
13. 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 $425 in
fiscal 2001. One expires January 2001 and amounts to $100 of the fiscal
2001 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
F-28
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
13. COMMITMENTS AND CONTINGENCIES (CONTINUED):
in the responsibilities of such person. The other agreement entitles the
employee to a severance payment equal to one year's salary, $325 as of
October 1, 2000, plus relocation expenses.
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, 2000
are as follows:
2001 $1,471
2002 1,163
2003 774
2004 560
2005 519
Thereafter 1,828
-------
$6,315
======
Rent expense under non-capitalized, non-cancelable lease agreements for the
years ended September 30, 2000, 1999 and 1998 amounted to $2,871, $2,431
and $2,320, respectively.
CONTINGENCIES:
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. The case was settled on December 27, 1999 for $325 and was paid on
December 29, 1999 by the Company's insurance carrier. Since this settlement
was within the policy limits of the Company's insurance policies, it did
not have any 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
F-29
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
13. COMMITMENTS AND CONTINGENCIES (CONTINUED):
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 January 12,
2001.
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 relator is a private party who has brought action on behalf of the
Federal government. The Company entered into settlement discussions with
the Department of Justice ("DOJ") and 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 was involved in these settlement
discussions. On August 4, 2000, a final settlement was reached with the
DOJ, the OIG and the relator in the amount of $10,000. In addition,
pursuant to the settlement agreement, the Company has agreed to pay the
relator $82 covering reasonable expenses and attorney's fees and costs. In
return, the United States has agreed to release the Company, certain
subsidiaries, as well as its present and former owners, officers,
directors, employees, and certain others, from any civil or administrative
monetary claim for the various allegations being settled in this matter. In
addition, the OIG has agreed not to exclude the Company or any of its
subsidiaries from future participation in any federal health care program
as a result of this matter. The Company has also agreed to a corporate
integrity agreement with the OIG.
In addition to its settlement with the federal government, the Company also
has reached a final settlement with the prior owners of RespiFlow, MK and
related subsidiaries (the "Prior Owners") in connection with an ongoing
dispute with such persons. The Prior Owners paid the Company $5,000 to
settle all outstanding issues between the relevant parties. In a related
agreement the Company has guaranteed the Prior Owners a price of $5.00 per
share for all shares of Company common stock they currently own (190) and
still own on August 4, 2002. The Prior Owners are obligated to liquidate
these shares on the open market for $5.00 per share or greater. To the
extent that shares remain unliquidated on August 4, 2002, the difference
between the closing price of the Company's common stock on August 4, 2002
and $5.00 per share will be paid to the Prior Owners by the Company in
cash.
F-30
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
13. COMMITMENTS AND CONTINGENCIES (CONTINUED):
The Company has record a one-time charge of $5,082 related to the
settlement of all of these matters in its third quarter of fiscal 2000.
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.
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 Company's insurer disclaims coverage as
to the Company, however, the insurer for the Company's HMI subsidiary has
accepted coverage for the individual defendant former HMI directors. The
Company believes that it does not have liability and will vigorously defend
this action. 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.
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. Based upon their former status as employees and as
officers, both claim entitlement to contractual indemnification from HMI
and HMI Pennsylvania, Inc. for defense costs and settlement of certain
claims made against them. 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
F-31
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
13. COMMITMENTS AND CONTINGENCIES (CONTINUED):
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, 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.
Some of the Company's subsidiaries are Medicare Part B suppliers who submit
claims to the designated carrier who is the government's claims processing
administrator. From time to time, the carrier may request an audit of
Medicare Part B claims on a prepayment or postpayment basis. Some of the
Company's subsidiaries currently have pending such audits. If the outcome
of any audit results in a denial or a finding of an overpayment, then the
affected subsidiary has appeal rights. Some of the subsidiaries currently
are responding to these audits and pursuing appeal rights in certain
circumstances.
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.
F-32
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
14. OPERATIONS BY BUSINESS SEGMENTS AND GEOGRAPHIC AREAS:
During the years ended September 30, 2000, 1999 and 1998, 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 derive 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 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 provide products to patients in their home
nationwide and Puerto Rico. The Hi-Tech operations derive 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, 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.
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 table presents certain financial
information by reportable business segments and geographic areas of
operations for the years ended September 30, 2000, 1999 and 1998.
YEAR ENDED SEPTEMBER 30, 2000
------------------------------------------------------------------
U.K. U.S. U.S. U.S.
OPERATIONS Mail-Order Hi-Tech Total TOTAL
-------------- --------------------------- -----------------------------
Revenues to unaffiliated customers $ 97,449 $22,476 $15,483 $37,959 $135,408
======== ======= ======= ======= ========
Segment operating (loss) profit $ 7,860 $(8,015) $ 495 $(7,520) 340
======== ======= ======= =======
Corporate expenses (3,754)
Impairment of long-lived assets
(Note 3 and 16) (15,073)
Legal settlements, net (Note 13) (5,082)
Restructuring charge (Note 3) (1,288)
Interest expense, net (7,939)
--------
Loss before income taxes $(32,796)
========
Depreciation and amortization $ 3,815 $ 790 $ 767 $ 1,557 $ 5,372
======== ======= ======= =======
Corporate depreciation and
Amortization 48
--------
Total depreciation and amortization $ 5,420
========
Identifiable assets, September 30, 2000 $140,058 $ 6,555 $10,891 $17,446 $157,504
======== ======= ======= =======
Corporate assets 26,242
--------
Total assets, September 30, 2000 $183,746
========
Capital expenditures $ 831 $ 35 $ 336 $ 371 $ 1,202
========= ========== ========== ==========
Corporate capital expenditures 5
--------
Total capital expenditures $ 1,207
========
F-33
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
14. OPERATIONS BY BUSINESS SEGMENTS AND GEOGRAPHIC AREAS (CONTINUED):
YEAR ENDED SEPTEMBER 30, 2000
--------------------------------------------------------------------
U.K. U.S. U.S. U.S.
OPERATIONS MAIL-ORDER HI-TECH TOTAL TOTAL
-------------- --------------------------- -------------------------
Revenues to unaffiliated customers $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
========
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 (loss) profit $ 6,986 $ 2,777 $ 422 $3,038 $ 6,237 $ 13,223
======== ======= ======= ====== =======
Corporate expenses (4,575)
Interest income, 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
========
F-34
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
14. OPERATIONS BY BUSINESS SEGMENTS AND GEOGRAPHIC AREAS (CONTINUED):
The following table presents certain financial information by reportable
business segment and geographic area of operations pro forma for the fiscal
year ended September 30, 2000 as if the U.K. subsidiaries had been
consolidated for the entire year ended September 30, 2000.
PRO FORMA YEAR ENDED SEPTEMBER 30, 2000
--------------------------------------------------------------------
U.K. U.S. U.S. U.S.
OPERATIONS MAIL-ORDER HI-TECH TOTAL TOTAL
-------------- --------------------------- -------------------------
Revenues to unaffiliated customers $126,295 $22,476 $15,484 $37,960 $164,255
======== ======= ======= ======= ========
Segment operating profit (loss) $ 10,302 $(8,015) $ 495 $(7,520) $ 2,782
======== ======= ======= =======
Corporate expenses (3,754)
Impairment of long-lived assets
(Note 3 and 16) (15,073)
Legal settlements, net (Note 8) (5,082)
Restructuring charge (Note 3) (1,288)
Interest expense, net (8,095)
--------
Loss before income taxes (30,510)
Depreciation and amortization $ 4,914 $ 790 $ 767 $ 1,557 $ 6,471
======== ======= ======= =======
Corporate depreciation and
Amortization 48
--------
Total depreciation and amortization $ 6,519
========
Identifiable assets, September 30, 2000 $140,058 $ 6,555 $10,891 $ 17,446 $157,504
======== ======= ======= =======
Corporate assets 26,242
--------
Total assets, September 20, 2000 $183,746
========
Capital expenditures $ 1,418 $ 35 $ 336 $ 371 $ 1,789
======== ======= ======= =======
Corporate capital expenditures 5
--------
Total capital expenditures $ 1,794
========
15. 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 in the form of its common stock through December 31, 1998
and will be in cash thereafter. The Company's
F-35
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
15. PROFIT SHARING PLAN (CONTINUED):
contributions to the plan were approximately $22, $28 and $28 for the years
ended September 30, 2000, 1999 and 1998, respectively.
In addition to the U.S. plan described above, certain of the Company's U.K.
subsidiaries also sponsor personal pension plans. 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 $80, $91 and $71
for the years ended September 30, 2000, 1999 and 1998, respectively.
16. SUBSEQUENT EVENT:
On November 22, 2000, the Company sold Amcare for approximately $14,200 in
cash. The Company has recorded a charge for impairment of long-lived assets
of approximately $2,727 in the accompanying Consolidated Statement of
Operations, for the year ended September 30, 2000, to reflect the
write-down of the carrying value of goodwill, originally acquired with the
purchase of Amcare, to its fair value. In addition, the Company has
recorded a tax charge of approximately $1,654 to reflect the tax effect of
the transaction. The condensed results of operations for Amcare included in
the accompanying Consolidated Statement of Operations for the year ended
September 30, 2000 is as follows:
Net revenues $13,931
Gross profit 2,771
Operating income 142
Interest income (13)
Provision for taxes 1,710
Net loss (1,555)
F-36
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents the comparative unaudited quarterly results
for the years ended September 30, 2000 and 1999:
2000 QUARTER ENDED December 31, March 31, June 30, September 30, TOTAL
------------ --------- -------- ------------- -----
Total revenues $ 11,435 $ 40,708 $ 42,758 $ 40,507 $ 135,408
========= ========= ========= ========= ==========
Gross profit $ 5,268 $ 14,448 $ 13,945 $ 11,966 $ 45,627
========= ========= ========= ========= ==========
Net (loss) income before
extraordinary loss $ (153) $ 101 $ (7,030)(b) $ (17,103)(c)&(d) $ (24,185)
Extraordinary loss on early
extinguishment of debt (net
of income tax benefit of
$408) $ 759 $ 759
--------- --------- --------- --------- ----------
Net (loss) income as
previously reported $ (912) $ 101 $ (7,030) $ (17,103) $ (24,944)
Interest adjustment, net
of tax (a) 92 586 569 (1,247)
--------- --------- --------- --------- ----------
Net (loss) as adjusted $ (1,004) $ (485) $ (7,599) $ (15,856) $ (24,944)
========= ========= ========= ========= ==========
Basic and diluted net (loss)
income per share of
common stock before
extraordinary loss as
previously reported $ (0.01) $ 0.01 $ (0.40) $ (0.97) $ (1.38)
========= ========= ========= ========= ==========
Basic and diluted net (loss)
per share of common stock
before extraordinary loss as
adjusted $ (0.01) $ (0.03) $ (0.43) $ (0.90) $ (1.38)
========= ========= ========= ========= ==========
Basic and diluted net
(loss) income per share
of common stock as previously
reported $ (0.05) $ 0.01 $ (0.40) $ (0.97) $ (1.42)
========= ========= ========= ========= ==========
Basic and diluted net
(loss) per share of common
Stock as adjusted $ (0.06) $ (0.03) $ (0.43) $ (0.90) $ (1.42)
========= ========= ========= ========= ==========
(a) Net income (loss) as previously reported in the Company's quarterly reports
differ from amounts set forth above because of a correction of an error in
accounting for interest expense on the Notes.
(b) The Company recorded a net charge of $5,082 related to legal settlements
with the DOJ, OIG and Prior Owners.
(c) The Company recorded a $1,288 restructuring charge related to exiting its
U.S. Mail-Order Operations.
(d) The Company recorded a charge for impairment of long-lived assets of
$15,073. The charge related to the write-down of assets, mainly goodwill,
to their fair value, $12,346 for the U.S. Mail-Order Operations and $2,727
for Amcare.
F-37
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED):
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 net
income (loss) per share
of common stock (1) $ - $ (0.05) $ (0.25) $ (0.11) $ (0.42)
=========== ============ ============ =========== =============\
F-38
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 Cost and Other End of
Description of Period Expenses Accounts Deductions Period
- -------------------------------- ----------------- ------------ --------------- -------------- --------------
Allowance for doubtful accounts:
Year ended
September 30, 2000 $ 19,870 $ 9,026 $ (142)(B) $ 7,535(A) $ 21,219
Year ended
September 30, 1999 15,367 12,272 (5)(B) 7,764(A) 19,870
Eleven months ended
September 30, 1998 11,909 8,318 23 (B) 4,883(A) 15,367
(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