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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, 2001
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 (Registrant's telephone number, (Zip Code)
executive offices) including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 par value
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock ("Common Stock") held by
non-affiliates of the registrant as of December 10, 2001 was approximately
$14,556,795 based on the closing sale price of $2.50 on such date, as reported
by the American Stock Exchange.
The number of shares outstanding of the registrant's Common Stock, as
of December 10, 2001, was 17,288,876.
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, 2001
TABLE OF CONTENTS
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PART I
Item 1. Business.................................................................................... 1
Item 2. Properties................................................................................. 13
Item 3. Legal Proceedings.......................................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders........................................ 14
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...................... 15
Item 6. Selected Financial Data.................................................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 18
Item 7A. Quantitative and Qualitative Disclosures about Market Risk................................. 34
Item 8. Financial Statements and Supplementary Data................................................ 35
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure................................................................... 35
PART III
Item 10. Directors and Executive Officers of the Registrant......................................... 36
Item 11. Executive Compensation..................................................................... 39
Item 12. Security Ownership of Certain Beneficial Owners and Management............................. 43
Item 13. Certain Relationships and Related Transactions............................................. 44
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................... 45
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. home healthcare operations ("Home Healthcare Operations"). The
Company's U.K. Operations supply nursing and para-professional care to the
community and U.K. healthcare institutions and medical grade oxygen to the U.K.
pharmacy market and private patients in Northern Ireland. The Company's Home
Healthcare Operations are concentrated in New Jersey and New York.
The Company was a provider of specialty mail-order pharmaceuticals and medical
supplies. On October 3, 2000, the Company sold a substantial portion of the
assets of its U.S. mail-order operations ("Mail-Order Operations") and
subsequently closed this business segment. In addition, on November 22, 2000,
the Company sold its U.K. subsidiary Amcare, Ltd. ("Amcare"). (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"). Concurrent with the Refinancing, the Company placed 100% of
its ownership interest in Transworld Healthcare (UK) Limited ("TW UK") into a
Voting Trust (as further defined and described in Liquidity and Capital
Resources). As a result of the provisions of the Voting Trust the Company did
not control a majority of the board of directors and the holders of the senior
subordinated notes issued pursuant to the Refinancing 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. As a
result of these rights, for accounting purposes 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 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
holders of the Notes (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 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 principal strategic focus is to become the leading provider of
flexible staffing and services to the U.K. health care industry. The Company's
growth strategy is to take advantage of policy moves by the U.K. government
funded National Health Service ("NHS") and by private payors seeking to treat a
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 has been and will continue to be 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 flexible 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 twelve, twelve, and ten nursing and
care giving operations in the U.K. during fiscal 2001, 2000 and 1999,
respectively.
On September 27, 2001 TW UK acquired all of the issued and outstanding shares of
Staffing Enterprise Limited and Staffing Enterprise (PSV) Limited (collectively
"Staffing Enterprise"), a London based provider of flexible staffing of
specialist nurses and other healthcare professionals to London NHS Trust and
independent hospitals. The consideration included $7,100,000 in cash,
$14,800,000 in demand notes plus an additional sum of up to approximately
$30,800,000 in contingent consideration dependent upon Pre-Tax Profits (as
defined in the agreement for sale and purchase) for the fiscal year ended
September 30, 2002.
In addition to the acquisition of Staffing Enterprise, during fiscal 2001 the
U.K. Operations acquired a total of eleven other flexible staffing agencies for
approximately $9,100,000 in cash and the issuance of $5,700,000 in demand notes.
The transactions include provisions to pay additional amounts, payable in cash,
of up to $13,000,000 in contingent consideration dependent upon future earnings
of the acquired entities.
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. 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. In September 2001, borrowings of the U.K.
subsidiaries were increased by $73,000,000 to fund the acquisition of Staffing
Enterprise and provide additional resources for future acquisitions (See
"Liquidity and Capital Resources - Refinancing").
The Company believes that structuring its U.K. Operations as a stand alone
entity, may enable the U.K. subsidiaries to raise capital on more favorable
terms than may be available currently in the U.S. In addition it may help to
position the Company to maximize the value of its ownership interest in the U.K.
Operations, whether by way of a public offering of the U.K. Operations' shares,
through a strategic business combination, or other alternative means. The
Company is evaluating these options.
-2-
U.K. OPERATIONS
The Company's U.K. Operations provide patient services, principally nursing and
para-professional services and respiratory therapy products to patients
throughout the U.K.
During fiscal 2001, the Company derived 89.3% of its consolidated revenues from
its U.K. Operations, with the following contributions by product line: 94.7% of
its U.K. revenues from patient services, 2.1% from specialty pharmaceutical and
medical supplies and 3.2% from respiratory therapy. For a discussion of revenues
from external customers, a measure of profit or loss and total assets for U.K.
Operations, refer to Note 13 of the Notes to Consolidated Financial Statements
beginning on page F-28. For a discussion of long-lived assets located in the
U.K., refer to "Management's Discussion and Analysis of Financial Condition and
Results of Operations" beginning on page 18.
PATIENT SERVICES.
The Company offers its patient services in the U.K. through Allied Healthcare
(UK) Ltd ("Allied"), Nightingale Nursing Bureau Limited ("Nightingale"),
Crystalglen Limited (operating under the trade name "Nurses Direct"), Balfor
Medical Limited ("Balfor") and Staffing Enterprise. These entities, which
operate 105 branches, 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. Allied's
network includes both Company owned and managed branches and those operated by
third party superintendents. Under the superintendent model, branches are
operated by self employed individuals who are responsible for the operating
costs of the branch and receive a percentage of the gross profit. Allied is
responsible for centralized support services, including payroll administration,
accounts receivable collections, quality assurance and regulatory affairs,
contract administration and central sales and marketing services. Allied owned
and managed branches principally operate 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. In a managed branch all operating costs
are the responsibility of Allied. As of September 30, 2001, Allied is
represented by 57 superintendent branches and 29 managed branches.
Nightingale was acquired in April 2000 and is a provider of nursing and care
staff to the NHS and independent sector in London. Nightingale primarily
recruits its nurses from Australia, where it maintains a branch, and other
Commonwealth countries.
Nurses Direct, which was acquired in June 2001, operates a nursing and care
agency with 14 branches in South East England.
Balfor, which was acquired in August 2001, provides qualified nurses,
specialized theatre staff and nursing auxiliaries to hospitals in the Midlands
and Northern England.
Staffing Enterprise, which was acquired in September 2001, is a London based
provider of temporary staffing of specialist nurses and other healthcare
professionals to London NHS Trust and independent hospitals.
The Company believes that the demand for most forms of nursing and other health
care services is expected to increase in the medium term as the U.K. population
grows older in line with demographic trends. Consequently, the Company
anticipates that requirements for temporary nursing services will increase in
the future, benefiting the Company's flexible staffing operations.
-3-
RESPIRATORY THERAPY.
The Company offers its U.K. respiratory therapy through Allied Oxycare Ltd
("Oxycare") and Medigas Ltd ("Medigas").
Respiratory Therapy. Medigas and its parent Oxycare service patients with
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 in Northern Ireland.
QUALITY ASSURANCE; DEPARTMENT OF HEALTH LICENSES
The Company's U.K. Operations maintain quality assurance policies and procedures
and 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"), subject 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.
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 the Company'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.
The Company's U.K. nursing operations market their nursing agency service via
their branch network 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.
-4-
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 Company's intended focus towards offering integrated home health
care could result in an overall cost saving leading to, the Company believes,
substantial sales opportunities for the Company's U.K. Operations.
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
referral, 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. The Company's nursing operations experience significant competition
in recruiting qualified health care personnel. Most of the registered and
licensed health care professionals employed by the Company are also registered
with and accept placements from competitors. Nightingale primarily recruits its
nurses from Australia, where it maintains a branch, and other Commonwealth
countries.
THIRD-PARTY REIMBURSEMENT
For the years ended September 30, 2001 and 2000, the Company's U.K. Operations
received approximately 61.3% and 60.5%, respectively of revenues from U.K.
governmental payors (primarily the NHS). The remaining 38.7% and 39.5%,
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 collect
payments from 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.
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.
COMPETITION
The Company believes that there are no major integrated service providers and
few multi-regional or national providers of any individual healthcare 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.
healthcare flexible staffing market are: quality of care; breadth of services;
reputation and professional presentation; innovation; execution; 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' compete with local and national 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.
PATENTS AND TRADEMARKS
The Company's U.K. Operations own no patents. The Company's U.K. Operations
operate under the following trade names: "Allied Healthcare Group Ltd," "Allied
Healthcare (UK) Ltd," "Medicare," "Medigas Ltd," "Allied Oxycare Ltd," "Omnicare
Ltd," "Transworld Healthcare (UK) Ltd," "Nightingale Nursing Bureau Ltd,"
"Nursing UK," "Balfor Medical Ltd," "Crystalglen Ltd" (trading as Nurses
Direct), "Staffing Enterprise Ltd," and "Staffing Enterprise (PSV) Ltd."
Trademarks have been registered in the U.K. for the following names: Omnicare,
FlexMed, Allied Healthcare and Nightingale Nursing Bureau. 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.
EMPLOYEES
As of October 31, 2001, the Company's U.K. Operations employed approximately 553
full-time employees and 84 part-time employees.
In addition, the Company's U.K. Operations maintain registers of approximately
26,910 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 2001, the Company derived 100% of its U.S. revenues from Home
Healthcare Operations (formerly Hi-Tech Operations). For a discussion of
revenues from external customers, a measure of profit or loss and total assets
for U.S. operation, refer to Note 13 of the Notes to Consolidated Financial
Statements beginning on page F-28.
HOME HEALTHCARE OPERATIONS.
The Company's Home Healthcare 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 Home Healthcare Operations are
concentrated in New Jersey and New York. During fiscal 2001, the Company's Home
Healthcare Operations derived 75.4% of its revenues from infusion therapy, 19.9%
from respiratory therapy and 4.7% from home medical equipment.
Infusion Therapy. Infusion therapy involves the intravenous administration of
antibiotics, nutrients or other medications to patients at home 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 U.S. 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.
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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.
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 Home Healthcare 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.
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 Home
Healthcare Operations. The Company uses primarily the same sales force to
cross-market its products and services.
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. 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.
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
-7-
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, 2001, 15.8% and 19.8%, respectively, of the
Company's U.S. revenues were directly attributable to the Medicare and Medicaid
programs. 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. The decrease in the percentage of revenues directly
attributable to Medicare during the year ended September 30, 2001 versus 2000
was primarily the result of the closing of the Company's Mail-Order Operations,
which derived most of its revenues from Medicare.
SUPPLIERS
The Company purchases its equipment and supplies, including drugs, home medical
equipment, nutritional solutions and other materials required in connection with
its therapies from various suppliers. The Company believes that there are a
number of available sources of supply for the Company's products.
COMPETITION
The U.S. 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; general reputation with physicians,
other referral sources and potential patients; and for certain payors, price.
PATENTS AND TRADEMARKS
The Company owns no patents in the U.S. The Company owns the following service
marks in the U.S.: "Advocate Home Care," "PLANETWELLNESS," PLANETWELLNESS.COM
and "Respiflow." In addition, the Company owns the PLANETWELLNESS and
PLANETWELLNESS.COM service marks in numerous countries in Europe. The Company
does not believe that its business is dependent upon the use of any patent,
trademark or similar property.
EMPLOYEES
As of October 31, 2001, the Company had approximately 81 full-time employees and
approximately 26 part-time employees in the U.S. The Company considers its
relationship with its U.S. employees to be satisfactory.
-8-
GOVERNMENT REGULATION
U.K. GOVERNMENT REGULATION.
General. The Company's U.K. Operations are subject to regulation by the
government of the U.K. via acts of Parliament related to health care provision.
Approximately 81% of health care in the U.K. is provided under the NHS with the
remaining 19% being provided by private health care organizations. However, all
care provision is regulated by statute and under the general health regulations
of the Department of Health.
Health Care Reform. The U.K. Government has carried out an in-depth review of
healthcare provision in the U.K. and its regulation to ensure consistent quality
in provision of staff and other aspects of care outside the NHS. This began in
1998 when the Government 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 Conservative
government's plans of devolving decisions on patient care down to the family
doctor. Primary Care Groups based in 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.
The U.K. operations are regulated by the Nurses Agencies Act 1957 and 1961
Amendment (England and Wales) and the 1951 Nurses (Scotland) Act. A new Act, the
Care Standards Act 2000, is coming into force (along with regulations made
pursuant to it) which will replace existing legislation in this area and which
will govern the standards of independently provided health care in England and
Wales, with the Regulation of Care (Scotland) Act 2001 applicable to Scotland.
Regulatory changes include the establishment of a commission in April 2002 to
regulate health care services and social care, including nurses agencies, and
new national minimum standards to be applied to providers of services. Contracts
between nurses agencies and NHS trusts for the provision of services will be
reviewed by a second new commission. 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 Medigas for
the production and distribution of medical grade oxygen to pharmacies throughout
the U.K.
-9-
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. 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 a 5% reduction of Medicare payment
rates for respiratory drugs, 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 Centers for Medicare &
Medicaid Services ("CMS") (formerly the Health Care Financing Administration) to
alter certain reimbursement rates that are not inherently reasonable, Medicare
is proposing additional inherent reasonableness cuts to Medicare payment rates
for albuterol sulfate (a respiratory drug), enteral formulas and various other
products. 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 provided that CMS could 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 CMS's and/or its contractor's use of such authority; and (ii) CMS has
published final regulations implementing the agency's inherent reasonableness
authority. On July 7, 2000 the General Accounting Office released a report that
concluded that CMS and its contractors had used their inherent reasonableness
authority properly, but criticized some of the methodologies utilized for
determining when a payment rate was inherently unreasonable as well as certain
CMS contractor methodologies utilized for arriving at the proposed new payment
amounts. In response, CMS agreed to publish a new final rule that will include
methodology requirements for determining inherent reasonableness reductions
amounts before moving ahead with the proposed inherent reasonableness
reductions. Such regulations have not been adopted by CMS. Consequently, it is
unclear if or when CMS will be able to implement any of its previously proposed
inherent reasonableness reductions for albuterol sulfate, enteral formulas, or
any other items and services supplied by the Company to Medicare beneficiaries.
The Company anticipates that Congress and state legislatures will continue to
review and assess alternative health care delivery and payment systems and may
in the future propose and adopt legislation effecting fundamental changes in the
health care delivery system such as prescription drug benefit for all Medicare
beneficiaries. 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
-10-
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. The Company's facilities are subject to state licensure
laws, including licensing from state boards of pharmacy. Federal laws require
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 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. 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.
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. 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
-11-
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 $11,000 per
false claim. Actions to enforce the False Claims Act may be commenced by a
private citizen (otherwise known as a qui tam relator) on behalf of the Federal
government, and such private citizens can receive a percent of the government's
recovery.
On August 4, 2000 the Company reached a civil settlement with the U.S.
Department of Justice related to an investigation commenced in July 1997 of two
of its U.S. subsidiaries as well as a related qui tam civil whistleblower case.
In addition to its settlement with the federal government, the Company reached a
final settlement with the prior owners of Respiflow, Inc., MK Diabetic Support
Services Inc. and related subsidiaries (the "Prior Owners") in connection with
an ongoing dispute with such persons. The Company also agreed to a corporate
integrity agreement ("CIA") with the Office of Inspector General related to the
Mail-Order operations. The Company's obligations under the CIA were completed on
November 2, 2001.
The Company carefully monitors its submissions of Medicare and Medicaid claims
and all other claims for reimbursement and the Company uses its best efforts to
ensure that such claims are not false or fraudulent. However, to the extent the
Company was investigated and/or found to have violated these laws, it could have
a material adverse effect on the Company.
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. 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.
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
-12-
Company's insurance will be sufficient to cover liabilities that it may incur in
the future.
ITEM 2. PROPERTIES.
The Company owns one and leases fifty-five facilities in the U.K. (of which
twenty-six are for a period of three months or less) and leases a total of three
facilities in the U.S. 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
12 of the Notes to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS.
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. (the "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 receivables due
from Health Management, Inc. ("HMI"). 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 18, 2002.
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.
The Company has been vigorously defending this action. In June 2001, the parties
reached a settlement, which was approved by the court in November 2001, that
fully resolved the litigation. The settlement will not have a material adverse
effect on the Company's consolidated financial position, cash flows or results
of operations.
On August 4, 2000 the Company reached a civil settlement with the U.S.
Department of Justice related to an investigation commenced in July 1997 of two
of its U.S. subsidiaries as well as a related qui tam civil whistleblower case.
In addition to its settlement with the federal government, the Company reached a
final settlement with the Prior Owners in connection with an ongoing dispute
with such persons. The Company also agreed to a CIA with the Office of Inspector
General related to the Mail-Order operations. The Company's obligations under
the CIA were completed on November 2, 2001.
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 and the Company uses its best efforts to ensure that such claims
are not false or fraudulent. However, to the extent the Company is investigated
in the future and/or found to have violated these laws, it could have a material
adverse effect on the Company. The Company believes that it is in substantial
compliance in all material respects with applicable provisions of the Federal
statutes, regulations and
-13-
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.
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.
-14-
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." The following table sets forth, for the periods
indicated, the high and low sales price of the Common Stock on Amex.
PERIOD HIGH LOW
------ ---- ---
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............................... 1-9/16 11/16
Second Quarter.............................. 3 15/16
Third Quarter............................... 3-3/16 2-7/32
Fourth Quarter.............................. 4-13/16 2-15/32
Year Ended September 30, 2001:
First Quarter (through December 10, 2001)... 3-3/32 2-13/32
As of December 10, 2001, there were approximately 157 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."
ITEM 6. SELECTED FINANCIAL DATA.
The financial data for the two years ended September 30, 2001 and balance sheet
data as of September 30, 2001 and 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 year ended September 30,
1999 as set forth below has been derived from the consolidated financial
statements of the Company, audited by PricewaterhouseCoopers LLP, for the period
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
-15-
Discussion and Analysis of Financial Condition and Results of Operations."
ELEVEN MONTHS
ENDED
YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, (2)
------------------------------------------------------------------------------------
2001 2000(1) 1999 1998 1997
------------- ----------------- -------------- ----------- ---------------
FINANCIAL DATA:
Total revenues................... $154,633 $135,408 $154,728 $155,309 $ 93,444
Gross profit..................... 47,979 45,627 55,318 58,117 42,057
Selling, general and administrative
Expenses....................... 37,382 49,041 57,946 51,980 42,931
General and administrative expense
related to Mail-Order operations 3,883
Losses due to sale of subsidiary 354
(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 income (loss).......... 6,360 (24,857) (2,628) 8,648 (35,021)
Interest expense, net............ 8,433 7,847 5,218 5,651 2,792
Foreign exchange loss............ 400
Provision (benefit) for income 24,117 (7,348) (500) 1,844 (5,078)
taxes(10)
Equity in income of and interest
income earned from U.K.
subsidiaries..................... 1,101 (1)
Minority interest.................. 22 (70)
------------- -------------- --------------- ------------- ---------------
(Loss) income before extraordinary
loss........................... (26,612) (24,185) (7,346) 1,153 (32,735)
Extraordinary item(8)............ 759
------------- -------------- --------------- ------------- ---------------
Net (loss) income................ $ (26,612) $ (24,944) $ (7,346) $ 1,153 $ (32,735)
============= ============== =============== ============= ===============
(Loss) income per share of common
stock before extraordinary
item(9):
Basic............................ $ (1.53) $ (1.38) $ (0.42) $ 0.07 $ (2.56)
============= ============== =============== ============= ===============
Diluted......................... $ (1.53) $ (1.38) $ (0.42) $ 0.07 $ (2.56)
============= ============== =============== ============= ===============
Net (loss) income per share of
common stock(9):
Basic............................ $ (1.53) $ (1.42) $ (0.42) $ 0.07 $ (2.56)
============= ============== =============== ============= ===============
Diluted.......................... $ (1.53) $ (1.42) $ (0.42) $ 0.07 $ (2.56)
============= ============== =============== ============= ===============
Weighted average number of common
shares outstanding(9):
Basic............................ 17,408 17,551 17,547 17,327 12,794
============= ============== =============== ============= ===============
Diluted.......................... 17,408 17,551 17,547 17,488 12,794
============= ============== =============== ============= ===============
-16-
SEPTEMBER 30,
----------------------------------------------------- ------------
2001 2000 1999 1998 1997
---------- ---------- ---------- --------- ------------
BALANCE SHEET DATA:
Working capital............ $ 19,730 $ 25,640 $ 26,005 $39,148 $26,411
Accounts receivable, net... 29,555 23,029 30,814 32,223 31,475
Total assets............... 248,073 183,746 172,121 179,708 201,281
Long-term debt............. 175,913 89,677 54,407 57,307 61,400
Total shareholders' equity. 36,354 63,031 91,274 101,905 81,905
- --------------------
(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 sale of Transworld Home
Healthcare - Nursing Division, Inc. ("TNI") in the year ended September
30, 1998. The Company recorded a gain of $606,000 on the sale of
Radamerica, Inc. in the eleven months ended September 30, 1997.
(4) The Company recorded a net charge of $5,082,000 related to legal
settlements 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
substantially all of the assets of HMI to Counsel Corporation (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, Inc. ("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.
(9) Weighted average shares have been restated for the eleven months ended
September 30, 1997 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.
(10) During the year ended September 30, 2001, the Company established a full
valuation allowance against its deferred tax assets.
-17-
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 principal 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 two reportable business segments: (i) U.K. operations and
(ii) U.S. Home Healthcare operations (formerly Hi-Tech). The Company's U.K.
operations supply nursing and para-professional care to the community and U.K.
healthcare institutions and medical grade oxygen to the U.K. pharmacy market and
private patients in Northern Ireland. The Company's Home Healthcare operations
are concentrated in New Jersey and New York.
The Company was a provider of specialty mail-order pharmaceuticals and medical
supplies. On October 3, 2000, the Company sold a substantial portion of the
assets of its U.S. Mail-Order Operations and subsequently closed this business
segment. In addition, on November 22, 2000, the Company sold its U.K. subsidiary
Amcare. (See Note 3 of the Notes to Consolidated Financial Statements).
On December 20, 1999, the Company's U.K. subsidiaries obtained new financing.
Concurrent with the Refinancing, the Company placed 100% of its ownership
interest in TW UK into a Voting Trust (as further defined and described in
Liquidity and Capital Resources). As a result of the provisions of the Voting
Trust the Company did not control a majority of the board of directors and the
holders of the senior subordinated notes issued pursuant to the Refinancing 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. As a result of these rights, for accounting purposes 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,
2001 2000 1999
---- ----- ----
Product Line
- ------------
Net patient services................... 84.5% 59.2% 51.8%
Net respiratory, medical
equipment and supplies sales....... 7.4 32.2 42.2
Net infusion services.................. 8.1 8.6 6.0
----- ----- -----
Total revenues....... 100.0% 100.0% 100.0%
===== ===== =====
-18-
The increase in net patient services as a percentage of total revenues for the
year ended September 30, 2001 as compared to 2000 is primarily due to growth in
the Company's U.K. flexible staffing business 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, 2001 as compared to 2000 is due primarily to the
closing of the Company's U.S. Mail-Order Operations and the sale of Amcare, in
November 2000. 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,
2001 2000 1999
---- ----- ----
Payor
- -----
U.K. NHS and other U.K.
Governmental payors............ 54.7% 43.6% 36.5%
Medicare......................... 1.6 14.7 20.9
Medicaid......................... 2.1 3.3 2.2
Private payors................... 41.6 38.4 40.4
------ ------ -----
Total revenues.......... 100.0% 100.0% 100.0%
===== ===== =====
The increase in NHS and other U.K. governmental payors as a percentage of total
revenues for the year ended September 30, 2001 as compared to 2000 is primarily
due to the U.K. acquisitions which derive the majority of their revenues from
the NHS, and to organic growth in the core flexible staffing business. The
decrease in Medicare as a percentage of total revenues for the year ended
September 30, 2001 as compared to 2000 is primarily due to the Company exiting
the 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 lesser extent, from shifts in existing business among
payors.
The increase in 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 organic growth in the core flexible staffing
business. 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 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.
-19-
At September 30, 2001 and 2000, the Company had $109,426,000 and $90,786,000,
respectively of intangible assets (primarily goodwill) on its balance sheet.
This represented 44.1% of total assets and 301.0% of total stockholders' equity
at September 30, 2001 and 49.4% of total assets and 144.0% of total
stockholders' equity at September 30, 2000. Amortization of intangibles for the
years ended September 30, 2001, 2000 and 1999 was $3,852,000, $3,301,000 and
$3,459,000, respectively. Subsequent acquisitions, when completed, will continue
to increase the amount of intangible assets on the balance sheet. 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 and results of operations.
In July 2001, the Financial Accounting Standards Board issued Statement No. 141
("FAS 141"), "Business Combinations", and Statement No. 142 ("FAS 142"),
"Goodwill and Other Intangible Assets". The provisions of FAS 141 are effective
for business combinations accounted for by the purchase method and completed
after June 30, 2001. The provisions of FAS 142 are effective for fiscal years
beginning after December 15, 2001. FAS 141 changes the accounting for business
combinations by, among other things, prohibiting the prospective use of
pooling-of-interests accounting. Under FAS 142, goodwill and intangible assets
deemed to have indefinite lives will no longer be amortized but will be subject
to annual impairment tests. In accordance with the transitional provisions of
FAS 142, the Company has not amortized goodwill acquired in business
combinations subsequent to June 30, 2001. Other intangible assets will continue
to be amortized over their estimated useful lives.
RESULTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 2001 VS. YEAR ENDED SEPTEMBER 30, 2000
Revenues. Total revenues for the years ended September 30, 2001 and 2000 were
$154,633,000 and $135,408,000, respectively, an increase of $19,225,000 or
14.2%. This increase 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 ($28,847,000) and increased revenues in the Company's U.K. nursing
operations as a result of acquisitions and an increase in billable hours charged
($28,418,000). The U.S. Home Healthcare operations also experienced an increase
in revenues ($1,108,000) primarily due to an increase in the number of patients
being serviced. These increases were partially offset by the Company's exit of
the U.S. Mail-Order Operations effective October 2000 ($22,476,000) and to the
sale of Amcare in November 2000 ($16,667,000).
-20-
Gross Profit. Total gross profit increased by $2,352,000 to $47,979,000 for the
year ended September 30, 2001 from $45,627,000 for the year ended September 30,
2000. As a percentage of total revenue, gross profit for the year ended
September 30, 2001 decreased to 31.0% from 33.7% for the prior year. The
decrease in gross margins is principally due to growth in the Company's U.K.
nursing operations and the closing of the Company's U.S. Mail-Order Operations,
which realized historical gross margins in excess of 50%. Gross margins for
patient services were essentially flat year over year (30.7% for the year ended
September 30, 2001 versus 31% for the prior year). Gross margins in the
respiratory, medical equipment and supplies sales decreased slightly (37.9% for
the year ended September 30, 2001 versus 40.3% for the prior year) principally
due to the sale of Amcare in November 2000 and slightly increased for infusion
services (28.4% for the year ended September 30, 2001 versus 27.6% for the prior
year) principally due to product mix.
Selling, General and Administrative Expenses. Total selling, general and
administrative expenses for the years ended September 30, 2001 and 2000 were
$41,265,000 and $49,041,000, respectively. This represents a decrease in the
current year of $7,776,000 or 15.9%. This decrease relates primarily to the
decrease in the U.S. Mail-Order Operations due to the Company's decision to exit
this business in September of 2000 ($15,946,000) and the sale of Amcare in
November 2000 ($2,920,000). Partly offsetting this decrease is the change in
accounting for the U.K. subsidiaries from the equity method to consolidation
($6,347,000) as well as higher levels of overhead costs in the U.K. operations
principally due to acquisitions and to support internal growth ($5,016,000).
Overhead costs in the Company's U.S. corporate offices also decreased ($663,000)
principally due to headcount reductions and other cost saving initiatives.
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 Note 3 of
the Notes to Consolidated Financial Statements).
Losses due to Sale of Subsidiary. For the year ended September 30, 2001, the
Company recorded losses of $354,000 due to the sale of Amcare as a result of the
completion of the transaction.
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. Total interest income for the years ended September 30, 2001
and 2000 was $1,587,000 and $1,443,000, respectively. The increase was
attributable to higher interest income earned ($84,000) on a higher level of
funds invested. 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 ($60,000).
Interest Expense. Total interest expense for the years ended September 30, 2001
and 2000 was $10,020,000 and $9,290,000, respectively. The increase was
primarily attributable to a higher level of average borrowings outstanding. 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 ($308,000).
-21-
Provision (Benefit) for Income Taxes. The Company recorded a provision for
income taxes amounting to $24,117,000 for the year ended September 30, 2001
versus a benefit of $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. The difference between the current year provision and the statutory
tax rate resulted principally from the establishment of a full valuation
allowance for deferred tax assets.
Management had been previously committed to implementing tax strategies that
provided for the sale of appreciated assets, including a portion of the
Company's ownership interest in its U.K. subsidiary, to generate sufficient
taxable income to realize the tax net operating losses prior to their
expiration. While the Company believes it will eventually realize the value of
its tax losses, current developments, including the continued expansion of the
U.K. operations has increased the uncertainty as to both the execution of the
original strategy and the appropriateness of a tax strategy which may not align
with the Company's current business strategy. These uncertainties have impaired
the Company's ability to determine whether it is more likely than not that its
deferred tax assets will be realized. Accordingly, a full valuation allowance
for all remaining deferred tax assets has been provided.
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 $319,000,
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 year ended
September 30, 2001 as the Company consolidated its U.K. subsidiaries in the
current fiscal year.
Minority Interest. The Company reported a charge for minority interest of
$22,000 in the year ended September 30, 2001 compared to a benefit $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
$26,612,000 for the year ended September 30, 2001 compared to a loss of
$24,944,000 for the year ended September 30, 2000.
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 U.S. 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 Home
Healthcare operations also experienced an increase in revenues ($2,336,000)
primarily due to an increase in the number of patients being serviced.
-22-
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
Home Healthcare operations.
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 Note 3 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 $9,290,000 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 Company's Credit
Facility($4,153,000). This increase was
-23-
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
($308,000).
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 believed that it was more likely than not that the Company would
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 was based upon, among other factors, management's focus on its business
realignment activities and business strategies primarily with respect to its
U.K. Operations.
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 $319,000,
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, 2001 VS. PRO FORMA YEAR ENDED SEPTEMBER 30, 2000
The following comparisons of year ended September 30, 2001 as compared to pro
forma September 30, 2000 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 revenues for the year ended September 30, 2001 were $154,633,000
as compared to pro forma revenues of $164,255,000 for the year ended September
30, 2000, which represents a decrease of $9,622,000 or 5.9%. This decrease was
primarily attributable to exiting the U.S. Mail-Order Operations ($22,476,000)
and the sale of Amcare ($16,667,000). The impact of exiting these businesses was
substantially offset with increased revenues in the Company's U.K. nursing
operations ($28,418,000) as a result of acquisitions and an increase in the
number of billable hours. The U.S. Home Healthcare operations also experienced
an increase in revenues ($1,108,000) primarily due to an increase in the number
of patients being serviced.
-24-
Gross Profit. Total gross profit for the year ended September 30, 2001was
$47,979,000 as compared to pro forma gross profit of $54,620,000 for the year
ended September 30, 2000. As a percentage of total revenue, gross profit for the
year ended September 30, 2001 decreased to 31.0% from 33.3% pro forma for the
prior year. The decrease in gross margins is principally due to growth in the
Company's U.K. nursing operations and the closing of the Company's U.S.
Mail-Order Operations, which realized historical gross margins in excess of 50%.
Gross margins for patient services were essentially flat year over year (30.7%
for the year ended September 30, 2001 versus 31.3% pro forma for the prior
year). Gross margins in the respiratory, medical equipment and supplies sales
decreased slightly (37.9% for the year ended September 30, 2001 versus 38.53%
pro forma for the prior year) principally due to the sale of Amcare in November
2000 and slightly increased for infusion services (28.4% for the year ended
September 30, 2001 versus 27.6% pro forma for the prior year) principally due to
product mix.
Selling, General and Administrative Expenses. Total selling, general and
administrative expenses for the year ended September 30, 2001 were $41,265,000
as compared to pro forma $55,592,000 for the year ended September 30, 2000,
which represents a decrease of $14,327,000 or 25.8%. This decrease was primarily
attributable to exiting the U.S. Mail-Order Operations ($15,945,000) and the
sale of Amcare ($2,920,000). This decrease was partly offset with increased
costs principally in the U.K. operations due to acquisitions and to support
internal growth ($5,016,000). Overhead costs in the Company's U.S. Corporate
offices also decreased ($663,000) principally due to headcount reductions and
other cost saving initiatives.
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 Note 3 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. Total interest income for the year ended September 30, 2001 was
$1,587,000 as compared to pro forma $1,503,000 for the year ended September 30,
2000, which represents an increase of $84,000. This increase was attributable to
higher interest income earned on a higher level of funds invested.
Interest Expense. Total interest expense for the year ended September 30, 2001
was $10,020,000 as compared to pro forma $9,598,000 for the year ended September
30, 2000, which represents an increase of $422,000. This variance was primarily
attributable to a higher level of borrowings outstanding.
(Provision)Benefit for Income Taxes. The Company recorded a provision for income
taxes for the year ended September 30, 2001 of $24,117,000 for the year ended
September 30, 2001 versus a pro forma benefit of $6,254,000 or 20.5% of loss
before income taxes for the year ended September 30, 2000. The difference
between the current year provision and the statutory tax rate resulted
principally from the establishment of a full valuation allowance for deferred
tax assets.
Management had been previously committed to implementing tax strategies that
provided for the sale of appreciated assets, including a portion of the
Company's ownership interest in its U.K. subsidiary, to generate sufficient
taxable
-25-
income to realize the tax net operating losses prior to their expiration. While
the Company believes it will eventually realize the value of its tax losses,
current developments, including the continued expansion of the U.K. operations
has increased the uncertainty as to both the execution of the original strategy
and the appropriateness of a tax strategy which may not align with the Company's
current business strategy. These uncertainties have impaired the Company's
ability to determine whether it is more likely than not that its deferred tax
assets will be realized. Accordingly, a full valuation allowance for all
remaining deferred tax assets has been provided.
Minority Interest. The Company reported a charge for minority interest of
$22,000 in the year ended September 30, 2001 compared to a benefit $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, the Company still would have reported a
net loss of $26,612,000 for the year ended September 30, 2001 compared to pro
forma $24,944,000 for the year ended September 30, 2000.
PRO FORMA YEAR ENDED SEPTEMBER 30, 2000 VS. 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 Home Healthcare operations
($2,336,000). Partly offsetting the increases from the U.K. and Home Healthcare
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 Home
Healthcare 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 Note 3 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.
Management believed that way was more likely than not that the Company would
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 was based upon, among other factors, management's focus on its business
realignment activities and business strategies primarily with respect to its
U.K. Operations.
-27-
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.
During the year ended September 30, 2001, the Company generated $4,172,000 from
operating activities. Cash requirements for the fiscal year ended September 30,
2001 for capital expenditures ($1,937,000), payments for acquisitions
($14,616,000), payments on revolving loan ($6,550,000) and payments on long-term
debt ($4,038,000), were met through operating cash flows, net payments received
from the sale of businesses ($15,075,000) and from borrowings under the U.K.
subsidiaries' term loan ($72,115,000) (as discussed further in "Refinancing").
In January 2001, the Company initiated a stock repurchase program, whereby the
Company may purchase up to approximately $1,000,000 of its outstanding common
stock in open market transactions or in privately negotiated transactions. As of
September 30, 2001, the Company had acquired 266,200 shares for an aggregate
purchase price of $720,000which are reflected as treasury stock in the
consolidated balance sheet at September 30, 2001. The Company intends to
continue with its stock repurchase program during fiscal 2002.
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.
The Company believes its existing capital resources and those generated from
operating activities and available under existing borrowing arrangements will be
adequate to conduct its operations for the next twelve months.
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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, 2001 and 2000, $29,555,000
(11.9%) and $23,029,000 (12.5%), 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 increased by $6,526,000 from September 30, 2000 to September
30, 2001 primarily due to growth in the Company's U.K. nursing operations
($10,444,000). This increase was offset by improved collections in the Company's
U.K. nursing operations and U.S. Home Healthcare business and the Company's exit
of the U.S. Mail-Order Operations, including the $1,900,000 write-down of the
remaining accounts receivable to their estimated net realizable value, and the
sale of Amcare.
Management's goal is to maintain accounts receivable levels equal to or less
than industry averages, which will tend to mitigate the risk of negative cash
flows from operations by reducing the required investment in accounts
receivable. 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. As of September 30, 2001, 2000 and 1999, the
Company's average DSOs were 60, 51 and 73, respectively. Excluding the impact of
the acquisition of Staffing Enterprise as of September 27, 2001, DSOs as of
September 30, 2001 were 44.
REFINANCING.
General. As described more fully below, on December 20, 1999, as amended on
September 27, 2001, the Company's U.K. subsidiaries, UK Parent and its
subsidiary TW UK obtained new financing denominated in pounds sterling, which
aggregates approximately $195,270,000 at September 30, 2001. The new financing
consists of a $140,805,000 senior collateralized term and revolving credit
facility (the "Senior Credit Facility"), $15,671,000 in mezzanine indebtedness
(the "Mezzanine Loan") and $38,794,000 of senior subordinated notes (the
"Notes") (each of the foregoing are sometimes referred to collectively herein as
the "Refinancing"). 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) $41,283,000
term loan A, maturing December 17, 2005, (ii) $18,430,000 acquisition term loan
B, maturing December 17, 2006 which may be drawn upon during the first nine
years following closing, (iii) per the September 27, 2001 amendment, $73,720,000
term loan C, maturing June 30, 2007, and (iv) $7,372,000 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
-29-
to LIBOR plus 2.25% to 3.50% per annum. As of December 10, 2001, TW UK had
outstanding borrowings of $105,837,000 under the Senior Credit Facility. As of
December 10, 2001, borrowings under the Senior Credit Facility bore interest at
a rate of 6.32% to 7.57%.
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 December 10, 2001, borrowings under the Mezzanine Loan bore interest
at a rate of 10.98%.
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 $121,000. The fair value of the
Mezzanine Warrants ($2,338,000) 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.
Senior Subordinated Notes and Warrants. Notes. The Notes consist of $32,860,000
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, 2001, $5,934,000 of PIK Notes has been recorded
as additional principal due in the Company's Consolidated Balance Sheet. The
Notes and related PIK 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.
-30-
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.
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.
-31-
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.
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.
ACQUISITIONS.
On September 27, 2001 TW UK acquired all of the issued and outstanding shares of
Staffing Enterprise, a London based provider of flexible staffing of specialist
nurses and other healthcare professionals to London NHS Trust and independent
hospitals. The consideration included $7,100,000 in cash, $14,800,000 in demand
notes plus an additional sum of up to approximately $30,800,000 in contingent
consideration dependent upon Pre-Tax Profits (as defined in the agreement for
sale and purchase) for the fiscal year ended September 30, 2002.
In addition to the acquisition of Staffing Enterprise, during fiscal 2001 the
U.K. Operations acquired a total of eleven other flexible staffing agencies for
approximately $9,100,000 in cash and the issuance of $5,700,000 in
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demand notes. The transactions include provisions to pay additional amounts,
payable in cash, of up to $13,000,000 in contingent consideration dependent upon
future earnings of the acquired entities.
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, which was
completed on October 3, 2000, to sell certain assets of this division located in
Jacksonville, Florida. Under the terms of the transaction, the Company received
$2,000,000 plus $556,000 representing the book value of saleable on-hand
inventory at September 29, 2000. During the year ended September 30, 2000, the
Company 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 upon additional information and revised cost benefit estimates
by management, the Company recorded a charge of $1,900,000 to reflect the
write-down of the remaining accounts receivable to their estimated net
realizable value for the first quarter of fiscal 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 included $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 represented termination benefits for all 97 employees
of the U.S. Mail-Order Operations.
The following table illustrates the different components of the restructuring
accrual at September 30, 2001.
Employee Lease
Related Costs Commitments Total
-------------- ------------ ------------
Beginning balance $480,000 $680,000 $1,160,000
Payments made through
September 30, 2001 (480,000) (181,000) (661,000)
-------------- ------------ -----------
Ending balance $0 $499,000 $499,000
============== ============ ===========
AMCARE SALE.
On November 22, 2000, the Company sold Amcare, a U.K. subsidiary, for
approximately $13,826,000 in cash. In the fourth quarter of fiscal 2000, the
Company recorded a charge for impairment of long-lived assets of approximately
$2,727,000 to reflect the write-down of the carrying value of goodwill,
originally acquired with the purchase of Amcare, to its fair value as well as a
tax charge of approximately $1,654,000 to reflect the tax effect of the
transaction.
Due to the sale of Amcare, the Company recorded losses of $354,000 and realized
a foreign exchange loss of $391,000 in the first quarter ended December 31, 2000
as a result of the completion of the transaction.
-33-
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
In July 2001, the Financial Accounting Standards Board issued FAS 141, "Business
Combinations", and FAS 142, "Goodwill and Other Intangible Assets". The
provisions of FAS 141 are effective for any business combinations accounted for
by the purchase method and are completed after June 30, 2001. The provisions of
FAS 142 are effective for fiscal years beginning after December 15, 2001. FAS
141 changes the accounting for business combinations by, among other things,
prohibiting the prospective use of pooling-of-interests accounting. Under FAS
142, goodwill and intangible assets deemed to have indefinite lives will no
longer be amortized but will be subject to annual impairment tests. In
accordance with the transitional provisions of FAS 142, the Company has not
amortized goodwill acquired in business combinations subsequent to June 30,
2001. Other intangible assets will continue to be amortized over their estimated
useful lives. The Company is currently reviewing the impact of FAS 142 and will
be performing a fair-value analysis at a later date.
INFLATION
Inflation has not had a significant impact on the Company's operations to date.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
FOREIGN CURRENCY EXCHANGE
The Company faces exposure to adverse movements in foreign currency exchange
rates. These exposures may change over time as business practices evolve and
could have a material adverse impact on the Company's consolidated financial
results. The Company's primary exposure relates to non-U.S. dollar denominated
sales in the U.K. where the principal currency is Pounds Sterling. Currently,
the Company does not hedge foreign currency exchange rate exposures.
-34-
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, 2001 $35,331,000
June 30, 2002 $32,855,000
December 31, 2002 $30,378,000
As of September 30, 2001, the Company's Notes ($32,860,000) and PIK Notes
($5,933,000) mature on December 31, 2008 and bear interest at a fixed rate of
9.375%. In addition, the Company had notes payable of $19,323,000, net of
$1,141,000 debt discount, which were issued in connection with the acquisition
of several U.K. flexible staffing agencies. The notes payable are redeemable, at
the holder's option, in fiscal 2003 and bear interest ranging from 4.0% to 5.5%
at September 30, 2001. The table below represents the expected maturity of the
Company's variable rate debt and their weighted average interest rates at
September 30, 2001.
Expected Weighted Average
Fiscal Maturity Rate
--------------------------------
2002 $ 4,868,000 LIBOR +1.85%
2003 6,192,000 LIBOR +2.25%
2004 8,257,000 LIBOR +2.25%
2005 10,321,000 LIBOR +2.25%
2006 27,276,000 LIBOR +3.26%
Thereafter 65,751,000 LIBOR +4.25%
--------------
$ 122,665,000 LIBOR +3.54%
==============
The aggregate fair value of the Company's debt was estimated based on quoted
market prices for the same or similar issues and approximated $181,553,000 at
September 30, 2001.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements and required financial statements schedule
of the Company are located beginning on page F-i of this Annual Report on Form
10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
-35-
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...........57 Chairman of the Board and Chief Executive
Officer
Sarah L. Eames..............43 President and Chief Operating Officer
John B. Wynne...............40 Vice President and Chief Financial
Officer
Leslie J. Levinson..........46 Secretary
Lewis S. Ranieri............54 Director
Scott A. Shay...............44 Director
Jeffrey S. Peris............55 Director
G. Richard Green............62 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 and Chief Operating Officer since June
2001, 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.
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Lewis S. Ranieri has been a Director of the Company since May 1997. From 1988 to
February 2001 he was 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 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 currently serves as the Chairman of the Board of
Signature Bank, a subsidiary of Bank Hapoalim, and is currently a director of
Allied Healthcare (UK) Ltd. and Transworld Healthcare (UK) Ltd., which are both
subsidiaries of the Company, Bank Hapoalim B.M., in Tel Aviv, Israel, Super
Derivatives and Hperion 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. 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. Dr. Peris is
currently Vice President Human Resources and Chief Learning Officer of American
Home Products Corporation since May 2001. Dr. Peris had been the vice president
of business operations of Knoll Pharmaceutical Company (Abbott Laboratories)
where he was responsible for human resources and corporate communications from
April 1998 to May 2001. Dr. Peris had been a management consultant to various
Fortune 100 companies from May 1997 until April 1998. From 1972 until May 1997,
Dr. 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 and is
currently a director of Allied Healthcare (UK) Ltd. 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 in
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 with the Company. See "Executive
Compensation - Employment Agreements; Termination of Employment and
Change-in-Control Arrangements."
-37-
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) considering 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.
Recently Amex amended its rules relating to the structure and membership
requirements of audit committees, including but not limited to modifications to
the definition of an independent director for purposes of audit committees.
Under the Amex rules, Mr. Shay may be deemed not to be independent. Mr. Shay is
not a current employee or an immediate family member of any employee of the
Company. Under applicable Amex rules, Mr. Shay may continue to serve on the
Audit Committee provided that the Company believes that such continued service
would be in the best interest of the Company and its shareholders . In addition
to his substantial and significant financial background, Mr. Shay has a long
standing and intricate knowledge of the Company's affairs having served on its
Board of Directors for over 5 years. The Company believes that the benefits of
such knowledge and experience outweigh any effect should Mr. Shay be deemed not
to be independent for purposes of the Amex rules.
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.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Commission has comprehensive rules relating to the reporting of securities
transactions by directors, officers and shareholders who beneficially own more
than 10% of the Company's Common Stock (collectively, the "Reporting Persons").
These rules are complex and difficult to interpret. Based solely on a review of
Section 16 reports received by the Company from Reporting Persons, the Company
believes that no Reporting Person has failed to file a Section 16 report on a
timely basis during the most recent fiscal year, other than Timothy M. Aitken,
the Chairman and Chief Executive Officer, Sarah L. Eames, the President and
Chief Operating Officer, who may not have timely filed a Form 4 with respect to
one transaction each; and G. Richard Green, a director of the Company, who did
not timely file a Form 4 with respect to one purchase of shares of Common Stock
by Mr. Green's wife as to which Mr. Green disclaims beneficial ownership.
-38-
ITEM 11. EXECUTIVE COMPENSATION.
The following table summarizes all compensation earned and 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, 2001, 2000
and 1999.
SUMMARY COMPENSATION TABLE
LONG -TERM
COMPENSATION AWARDS
---------------------------
RESTRICTED SECURITIES
ANNUAL STOCK UNDERLYING ALL OTHER
COMPENSATION AWARDS OPTIONS COMPENSATION
NAME AND FISCAL ------------ ------ ------- ------------
PRINCIPAL POSITION YEAR SALARY BONUS
------------------ ---- ------ -----
Timothy M. Aitken ................... 2001 $360,089 $150,000 $ - 195,000 $ 18,378(6)
Chairman of the Board 2000 250,000 140,000 - - 72,090(6)
and Chief Executive 1999 250,000 100,000 - - 39,228(6)
Officer
Sarah L. Eames(1) ................... 2001 $333,654 $150,000 $ - 150,000 $ 9,099(6)
President and 2000 256,154 160,000 - - 7,150(6)
Chief Operating Officer 1999 240,000 100,000 - -
John B. Wynne(2) .................... 2001 $181,731 $ 35,000 $ - - $ 7,150(6)
Vice President and 2000 40,385 - - 50,000 -
Chief Financial Officer 1999 - - - - -
Wayne A. Palladino(3) ............... 2001 $ - $ - $ - - $ 6,825(6)
Senior Vice President and 2000 275,191(5) 150,000 - - 91,866(7)
Chief Financial Officer 1999 225,000 100,000 - -
Gregory E. Marsella(4) .............. 2001 $ - $ - $ - - $ -
Vice President, General 2000 - - - - -
Counsel and Secretary 1999 120,192 - - - 4,500(6)
- -------------------
(1) Ms. Eames became Executive Vice President, Business Development and
Marketing of the Company in June 1997, President of the Company in May
1998 and Chief Operating Officer in June 2001.
(2) Mr. Wynne became Vice President of Finance in June 2000 and Vice President
and Chief Financial Officer in August 2000.
(3) Mr. Palladino resigned August 11, 2000 as Senior Vice President and Chief
Financial Officer.
(4) Mr. Marsella became Vice President, General Counsel and Secretary of the
Company in July 1997 and resigned September 3, 1999.
(5) Includes $71,827 payout of vacation time accrued.
(6) Reflects reimbursement for certain travel expenses.
(7) Reflects forgiveness of a loan and reimbursement of certain travel
expenses.
-39-
The following table sets forth certain information regarding individual options
granted in fiscal 2001 to each of the Named Officers pursuant to the Company's
1992 Stock Option Plan. In accordance with the rules of the Commission, the
table sets forth the hypothetical gains or "option spreads" that would exist for
the options at the end of their respective terms. These gains are based on
assumed rates of annual compound stock price appreciation of 5% and 10% from the
date the option was granted to the end of the option's term.
OPTION GRANTS IN FISCAL 2001
PERCENTAGE OF
SECURITIES TOTAL OPTIONS POTENTIAL REALIZABLE VALUE AT
UNDERLYING GRANTED TO ASSUMED ANNUAL RATES OF
OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION STOCK PRICE APPRECIATION FOR
NAME GRANTED FISCAL PER OPTION TERM (2)
(1) YEAR SHARE DATE 5% 10%
---- ----- ------ ---- --------------------------------
Timothy M. Aitken.. 195,000 48.8% $1.75 12/06/05 $ 94,284 $ 208,337
Sarah L. Eames..... 150,000 37.5 $1.75 12/06/05 72,524 160,259
- -------------------
(1) One half are exercisable immediately and the remaining half are
exercisable on December 6, 2001 subject to the
terms of the applicable option agreement.
(2) The 5% and 10% assumed annual compound rates of stock price appreciation
are mandated by the Commission and do not represent the Company's
estimate or projection of future Common Stock prices.
AGGREGATE OPTION EXERCISES IN FISCAL 2001
AND 2001 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......... - - 747,500 / 97,500 $165,750 / $117,000
Sarah L. Eames............ - - 235,000 / 75,000 122,500 / 90,000
John B. Wynne............. - - 16,667 / 33,333 19,000 / 38,000
- ---------------------
(1) Calculated on the basis of $2.95 per share, the closing sale price of
the Common Stock as reported on Amex on September 30, 2001, 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 September 2001, the Company entered into employment agreements with Mr.
Aitken and Ms. Eames, which expire in September 2004. Effective October 1, 2001,
the applicable agreement provides for a base salary of $380,000 and $365,000 for
Mr. Aitken and Ms. Eames, respectively. The agreements contain, among other
things, customary confidentiality and termination provisions and provide that
in the event of the termination of the executive following a "change of control"
of the Company (as defined therein), Mr. Aitken and Ms. Eames will be entitled
to receive a cash payment of up to 2.9 times their average annual base salary
during the preceding twelve months.
-40-
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, Hyperion TW Fund L.P. (the "Fund") and Hyperion TW Fund L.P. (the "TWH
Fund"), each of which are principal shareholders of the Company.
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 December
10, 2001, the number of shares of Common Stock available for issuance thereunder
is 1,645,635 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.
-41-
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.
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.
-42-
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.
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 December 10, 2001, 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).................... 865,000 4.8%
Sarah L. Eames(2)....................... 314,000 1.8%
John B. Wynne(3)........................ 16,667 *
Lewis S. Ranieri(4)..................... 11,425,210 66.1%
Scott A. Shay(4)........................ 11,425,210 66.1%
Jeffrey S. Peris(5)..................... 7,000 *
G. Richard Green(6)..................... 10,600 *
Hyperion Partners II L.P.(7)............ 11,425,210 66.1%
Hyperion TW Fund L.P.(8)................ 11,425,210 66.1%
Hyperion TWH Fund LLC(9)................ 11,425,210 66.1%
Dimensional Fund Advisors, Inc(10)...... 959,000 5.5%
All executive officers and directors as
A group (7 persons)(11).............. 12,638,477 68.5%
- ------------------
* Less than one percent.
(1) Includes 845,000 shares subject to options exercisable within 60 days from
December 10, 2001.
(2) Includes 310,000 shares subject to options exercisable within 60 days from
December 10, 2001.
(3) Includes 16,667 shares subject to options exercisable within 60 days from
December 10, 2001.
-43-
(4) Includes 6,854,454 shares of Common Stock acquired under a purchase
agreement dated November 20, 1995, as amended (the "HPII Purchase
Agreement") which HPII has purchased, 4,148,456 shares of Common Stock
which the Fund has purchased and 422,300 shares of Common Stock which TWH
Fund has purchased (each of which are affiliates of Messrs. Ranieri and
Shay) and as to which Messrs. Ranieri and Shay disclaim beneficial
ownership. See "Certain Relationships and Related Transactions -
Transactions with Principal Shareholders."
(5) Includes 5,000 shares subject to options exercisable within 60 days from
December 10, 2001.
(6) Includes 5,000 shares subject to options exercisable within 60 days from
December 10, 2001 and 2,600 shares purchased by Mr. Green's wife as to
which Mr. Green disclaims beneficial ownership.
(7) Includes 4,148,456 shares of Common Stock which the Fund (an affiliate of
HPII) has purchased and 422,300 shares of Common Stock which the TWH Fund
(an affiliated of HPII) has purchased and as to which HPII disclaims
beneficial ownership. 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 6,854,454 shares of Common Stock which HPII (an affiliate of the
Fund) has purchased and 422,300 shares of Common Stock which the TWH Fund
(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 4,148,456 shares of Common Stock which the Fund (an affiliate of
the TWH Fund) has purchased and 6,854,454 shares of Common Stock which HPII
(an affiliate of the TWH Fund) has purchased and as to which the TWH Fund
disclaims beneficial ownership. The address of the Fund is 50 Charles
Lindbergh Parkway, Uniondale, New York 11553.
(10) Dimensional Fund Advisors Inc. ("Dimensional"), an investment advisor
registered under Section 203 of the Investment Advisors Act of 1940,
furnishes investment advice to four investment companies registered under
the Investment Company Act of 1940, and serves as investment manager to
certain other investment vehicles, including commingled group trusts. These
investment companies and investment vehicles are the "Portfolios". In its
role as investment advisor and investment manager, Dimensional possessed
both investment and voting power over 959,000 shares of the Company's stock
as of September 30, 2001. The Portfolios own all securities reported in
this statement, and Dimensional disclaims beneficial ownership of such
securities.. The address of Dimensional is 1299 Ocean Avenue, 11th floor,
Santa Monica, California 90401.
(11) Includes all shares held by Messrs. Aitken, Wynne, Ranieri, Shay, Peris,
Green and Ms. Eames, and those shares subject to options held by such
individuals exercisable within 60 days from December 10, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
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."
-44-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Index to Consolidated Financial Statements Page
------------------------------------------ ----
Report of Independent Auditors F-1
Report of Independent Accountants F-2
Consolidated Balance Sheets - September 30, 2001 and 2000 F-3
Consolidated Statements of Operations - For the Years Ended September 30, 2001, 2000
and 1999 F-4
Consolidated Statements of Changes in Stockholders' Equity - For the Years Ended
September 30, 2001, 2000 and 1999 F-5
Consolidated Statements of Cash Flows - For the Years Ended September 30, 2001, 2000
and 1999 F-6
Notes to Consolidated Financial Statements F-8
(a)(2) Index to Consolidated Financial Statements Schedule
---------------------------------------------------
Schedule II - Valuation and Qualifying Accounts S-1
Schedules other than those listed above are omitted because
they are not required or are not applicable or the information
is shown in the audited consolidated financial statements or
related notes.
(b) Reports on Form 8-K
-------------------
None.
(c) Exhibits
--------
The exhibits listed in the Exhibit Index below are filed as
part of this Annual Report on Form 10-K.
-45-
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 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).
10.3 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).
10.4 Voting Trust Agreement dated December 17, 1999 by and among UK Parent,
TW UK, the Company, Triumph and the Trustee.
10.5 Securities Purchase Agreement of UK Parent and TW UK , dated December
17, 1999.
-46-
Exhibit
Number Title
- ------ -----
10.6 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.
10.7 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.
10.8 Warrant Instrument to subscribe for Shares in TW UK in favor of the
mezzanine lenders, dated as of December 17, 1999.
10.9 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).
10.10 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).
10.11 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).
10.12 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
(incorporated herein by reference to Exhibit 10.73 to the Company's
Annual Report on Form 10-K for the year ended September 30, 2000).
10.13 Agreement for Sale and Purchase of Staffing Enterprise Limited and
Staffing Enterprise (PSV) Limited between Allied Healthcare (UK) Limited
and David Christopher Pain and Deborah Kay Pain dated September 27, 2001
(incorporated herein by reference to Exhibit 10.2 to the Company's
Current Report on Form 8-K dated October 11, 2001).
10.14 Second Amendment Agreement dated September 27, 2001 relating to the
Mezzanine Credit Agreement dated December 17, 1999 among Allied
Healthcare Group Limited, Transworld Healthcare (UK) Limited, BNP
Paribas as Arranger, Underwriter and Agent, Barclays Bank PLC as Agent
and Security Agent and Others (incorporated herein by reference to
Exhibit 10.2 to the Company's Current Report on Form 8-K dated October
11, 2001).
10.15 Second Amendment Agreement dated September 27, 2001 relating to the
Senior Credit Agreement dated December 17, 1999 among Allied Healthcare
Group Limited, Transworld Healthcare (UK) Limited, BNP Paribas as
Arranger, Underwriter and Agent, Barclays Bank PLC as Agent and Security
Agent and Others (incorporated herein by reference to Exhibit 10.2 to
the Company's Current Report on Form 8-K dated October 11, 2001).
-47-
Exhibit
Number Title
- ------ -----
10.16* Employment Agreement, dated September 24, 2001, between the Company and
Timothy M. Aitken.
10.17* Employment Agreement, dated September 24, 2001, between the Company and
Sarah L. Eames.
11 Statement re: computation of earnings per share (computation can be
determined clearly from the material contained in this Annual Report on
Form 10-K).
21.1* Subsidiaries of the Company.
23.1* Consent of Ernst & Young LLP, independent auditors of the Company.
23.2* Consent of PricewaterhouseCoopers LLP, former independent accountants of
the Company.
- ---------------------
*Filed herewith.
-48-
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 20, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Timothy M. Aitken Chairman of the Board and Chief Executive December 20, 2001
- -------------------------------- Officer (Principal Executive Officer)
Timothy M. Aitken
/s/ John B. Wynne Vice President and Chief Financial
- -------------------------------- Officer (Principal Financial and December 20, 2001
John B. Wynne Accounting Officer)
/s/ Lewis S. Ranieri Director
- ------------------------------- December 20, 2001
Lewis S. Ranieri
/s/ Scott A. Shay Director
- -------------------------------- December 20, 2001
Scott A. Shay
/s/ Jeffrey S. Peris Director
- -------------------------------- December 20, 2001
Jeffrey S. Peris
/s/ G. Richard Green Director
- -------------------------------- December 20, 2001
G. Richard Green
-49-
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, 2001
and 2000 F-3
Consolidated Statements of Operations - for the
years ended September 30, 2001, 2000 and 1999 F-4
Consolidated Statements of Changes in
Stockholders' Equity - for the years ended
September 30, 2001, 2000 and 1999 F-5
Consolidated Statements of Cash Flows - for the
years ended September 30, 2001, 2000 and 1999 F-6
Notes to Consolidated Financial Statements F-8
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 sheets of Transworld
Healthcare, Inc. as of September 30, 2001 and 2000 and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
then ended. Our audits also included the financial statement schedule listed in
the Index at Item 14(a) for the years ended September 30, 2001 and 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 audits.
We conducted our audits 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 audits provide 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, 2001 and 2000, and the consolidated results of
its operations and its cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule for the years ended September
30, 2001 and 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.
/s/ Ernst & Young LLP
New York, New York
November 19, 2001
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Transworld Healthcare, Inc.
In our opinion, the consolidated statements of operations, of cash flows and of
changes in stockholders' equity for the year ended September 30, 1999 (listed in
the accompanying index on page F-i) present fairly, in all material respects,
the results of operations and cash flows of Transworld Healthcare, Inc. and its
subsidiaries (the "Company") for the year ended September 30, 1999, in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule for the
year ended September 30, 1999 listed in the accompanying index on page F-i
presents 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 audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States of America, 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 audit provide a reasonable
basis for the opinion expressed above. We have not audited the consolidated
financial statements of the Company for any period subsequent to September 30,
1999.
/s/ 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,
2001 2000
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 15,357 $ 7,867
Accounts receivable, less allowance for doubtful
accounts of $24,611 and $21,219, respectively 29,555 23,029
Inventories 972 1,871
Deferred income taxes 12,287
Assets held for sale 2,317
Prepaid expenses and other assets 7,336 5,952
--------- ---------
Total current assets 53,220 53,323
Property and equipment, net 7,545 7,674
Assets limited to use 71,020 17,230
Intangible assets, net 109,426 90,786
Deferred income taxes 10,256
Deferred financing costs and other assets 6,862 4,477
--------- ---------
Total assets $ 248,073 $ 183,746
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 4,868 $ 3,806
Accounts payable 2,160 4,101
Accrued expenses 20,795 15,789
Taxes payable 5,667 3,987
--------- ---------
Total current liabilities 33,490 27,683
Long-term debt 175,913 89,677
Deferred income taxes and other long term liabilities 702 1,763
Minority interest 1,614 1,592
--------- ---------
Total liabilities 211,719 120,715
--------- ---------
Commitments and contingencies (Note 12)
Stockholders' equity:
Preferred stock, $.01 par value; authorized
2,000 shares, issued and outstanding - none
Common stock, $.01 par value; authorized
40,000 shares, issued 17,555 and
17,551 shares, respectively 176 176
Additional paid-in capital 128,077 128,070
Accumulated other comprehensive loss (5,600) (6,248)
Retained deficit (85,579) (58,967)
--------- ---------
37,074 63,031
Less cost of treasury stock (266 shares) (720)
--------- ---------
Total stockholders' equity 36,354 63,031
--------- ---------
Total liabilities and stockholders' equity $ 248,073 $ 183,746
========= =========
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,
2001 2000 1999
------------ ------------- ---------------
Revenues:
Net patient services $ 130,719 $ 80,210 $ 80,169
Net respiratory, medical equipment and supplies sales 11,409 43,619 65,277
Net infusion services 12,505 11,579 9,282
--------- --------- ---------
Total revenues 154,633 135,408 154,728
--------- --------- ---------
Cost of revenues:
Patient services 90,614 55,370 54,620
Respiratory, medical equipment and supplies sales 7,081 26,024 37,650
Infusion services 8,959 8,387 7,140
--------- --------- ---------
Total cost of revenues 106,654 89,781 99,410
--------- --------- ---------
Gross profit 47,979 45,627 55,318
Selling, general and administrative expenses 37,382 49,041 57,946
General and administrative expenses related to Mail-Order
operations (Note 3) 3,883
Losses due to sale of subsidiary (Note 3) 354
Impairment of long-lived assets (Note 3) 15,073
Restructuring charge (Note 3) 1,288
Legal Settlements, net (Note 12) 5,082
--------- --------- ---------
Operating income (loss) 6,360 (24,857) (2,628)
Interest income (1,587) (1,443) (227)
Interest expense 10,020 9,290 5,445
Foreign exchange loss 400
--------- --------- ---------
Loss before income taxes, equity income,
minority interest and extraordinary loss (2,473) (32,704) (7,846)
Provision (benefit) for income taxes 24,117 (7,348) (500)
Equity in income of and interest income earned
from U.K. subsidiaries (Note 2) 1,101
--------- --------- ---------
Loss before minority interest and extraordinary loss (26,590) (24,255) (7,346)
Minority interest 22 (70)
--------- --------- ---------
Loss before extraordinary loss (26,612) (24,185) (7,346)
Extraordinary loss on early extinguishment of debt
(net of income tax benefit of $408) 759
--------- --------- ---------
Net loss $(26,612) $(24,944) $ (7,346)
========= ========= =========
Basic and diluted loss per share of common
stock before extraordinary loss $ (1.53) $ (1.38) $ (0.42)
========= ========= =========
Basic and diluted net loss per share of
common stock $ (1.53) $ (1.42) $ (0.42)
========= ========= =========
Weighted average number of common shares outstanding:
Basic and Diluted 17,408 17,551 17,547
========= ========= =========
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) TREASURY
SHARES AMOUNT CAPITAL (LOSS) INCOME EARNINGS SHARES TOTAL
-------- -------- ------------ --------------- ------------- --------- ------------
Balance, September 30, 1998 17,536 175 125,461 2,946 (26,677) 101,905
Comprehensive loss:
Net loss (7,346) (7,346)
Foreign currency translation adjustment (3,351) (3,351)
-------
Comprehensive loss (10,697)
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
Comprehensive loss:
Net loss (24,944) (24,944)
Foreign currency translation adjustment (5,843) (5,843)
-------
Comprehensive loss (30,787)
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
Comprehensive loss:
Net loss (26,612) (26,612)
Foreign currency translation adjustment 648 648
---------
Comprehensive loss (25,964)
Issuance of common stock for:
Exercise of stock options 4 7 7
Cost of treasury shares (720) (720)
------ ---- -------- -------- --------- ------ ---------
Balance, September 30, 2001 17,555 $176 $128,077 $ (5,600) $ (85,579) $ (720) $ 36,354
====== ==== ======== ======== ========= ====== =========
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,
2001 2000 1999
------------- ------------- --------------
Cash flows from operating activities:
Net loss $(26,612) $(24,944) $ (7,346)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 2,042 2,119 2,312
Amortization of goodwill 3,839 3,145 3,168
Amortization of other intangible assets 13 156 291
Amortization of debt issuance costs 1,117 1,182 1,086
Provision for doubtful accounts 3,568 9,026 12,272
Impairment of long-lived assets 15,073
Losses due to sale of subsidiary 354
Restructuring charge 1,288
Interest in kind 3,964 2,975
Minority interest 22 (70)
Equity in income of U.K. subsidiaries (411)
Extraordinary loss on early extinguishment of debt 1,167
Deferred income taxes 21,494 (9,529) (2,684)
Changes in assets and liabilities, excluding the effect of businesses
acquired and sold:
Increase in accounts receivable (3,952) (2,967) (11,173)
(Increase) decrease in inventories (276) 829 1,208
Increase in prepaid expenses and other assets (1,378) (424) (491)
Increase (decrease) in accounts payable 850 (1,865) 2,359
(Decrease) increase in accrued expenses and other liabilities (873) 2,621 2,256
-------- -------- --------
Net cash provided by (used in) operating activities 4,172 (629) 3,258
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (1,937) (1,207) (2,642)
Proceeds from sale of property and equipment 52 184 90
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 (14,616) (13,687) (3,694)
Notes receivable - payments received 58
Proceeds limited to future acquisitions (52,487) (18,395)
Proceeds from sale of business 15,075
Payments on acquisitions payable (2,163) (130)
Purchases of other intangible assets (16)
-------- -------- --------
Net cash (used in) provided by investing activities (56,076) 33,964 (6,334)
-------- -------- --------
(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,
2001 2000 1999
-------------- ----------- --------------
Cash flows from financing activities:
Payments for financing fees and issuance costs (2,004) (2,849) (346)
Proceeds from notes payable 2,012
Payments on long-term debt (55,755)
Borrowing under revolving loan 781
Payments on revolving loan (6,550) (5,121) (1,500)
Borrowing under acquisition loan 5,632
Proceeds from long-term debt 72,115
Principal payments on long-term debt (4,038) (2,187) (73)
Payments for treasury shares acquired (720)
Stock options and warrants exercised, net, including tax benefit 7 66
----------- ---------- ------------
Net cash provided by (used in) financing activities 58,810 (57,487) (1,853)
----------- ---------- ------------
Effect of exchange rate on cash 584 (1,135) (326)
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 7,490 2,709 (5,255)
Cash and cash equivalents,
beginning of period 7,867 5,158 10,413
----------- ---------- ------------
Cash and cash equivalents,
end of period $ 15,357 $ 7,867 $ 5,158
=========== ========== ============
Supplemental cash flow information:
Cash paid for interest $ 5,670 $ 5,612 $ 4,192
=========== ========== ============
Cash paid for income taxes, net $ 2,101 $ 2,031 $ 1,948
=========== ========== ============
Supplemental disclosure of non-cash investing and financing activities:
Details of business acquired in purchase transactions:
Fair value of assets acquired $ 44,395 $ 18,841 $ 3,730
=========== ========== ============
Liabilities assumed or incurred $ 6,080 $ 1,470 $ 36
=========== ========== ============
Cash paid for acquisitions (including related expenses) $ 18,297 $ 15,731 $ 3,694
Cash acquired 3,681 2,044
----------- ---------- ------------
Net cash paid for acquisitions $ 14,616 $ 13,687 $ 3,694
=========== ========== ============
Issuance of notes payable $ 20,018
===========
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 (CONTINUED)
(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.
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.
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.
F-8
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
The 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.
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 the rental of home medical equipment (including
respiratory equipment) are recognized over the rental period (typically on
a month-to-month basis) and approximated $6,275, $6,148 and $5,844 in
fiscal 2001, 2000 and 1999, 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, 2001, 2000 and
1999, 55%, 44% and 36%, respectively of the Company's net revenues were
attributable to the NHS and other U.K. governmental payor programs. For the
years ended September 30, 2001, 2000 and 1999, the Company's net revenues
attributable to the Medicare and Medicaid programs were approximately 4%,
18% and 23%, respectively, of the Company's total revenues.
INCOME TAXES:
The Company accounts for income taxes using the liability method in
accordance with Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes." Under this method, deferred income tax
assets and liabilities reflect tax carryforwards and the net effects of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting and income tax purposes, as determined
under currently enacted tax rates. Deferred tax assets are recorded if
future realization is more likely than not.
Deferred taxes are 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.
F-9
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
EARNINGS PER SHARE:
Basic Earnings per Share ("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, 2001, 2000 and 1999, the Company
had outstanding stock options and warrants to purchase 579, 3,940 and 3,683
shares, respectively of common stock ranging in price from $4.31 to $7.25,
$2.63 to $12.45 and $4.31 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, 2001 2000 and 1999, the Company had an
incremental weighted average of 82, 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.
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 Note 3).
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 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 or above the quoted market price on the date of the
grant, there is no compensation expense recognized in the accompanying
consolidated financial statements.
The Company adopted the disclosure only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," which requires certain financial
statement disclosures, 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 10).
COMPREHENSIVE INCOME:
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
F-10
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
available for sale and minimum pension liability. Currency translation is
the only item of other comprehensive income impacting the Company.
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents include highly liquid short-term investments
purchased with initial maturities of 90 days or less.
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 a Permitted Acquisition (as defined in the
Senior Credit Agreement).
INVENTORIES:
Inventories, which consist primarily of finished goods, include
pharmaceuticals, ancillary medical supplies and certain medical equipment,
are valued at the lower of cost (determined using a first-in, first-out
method) or market.
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
F-11
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
establishing significant coverage in its local and regional markets, the
consistent practice with other alternate site health care companies and
other factors.
At each balance sheet date, or if a significant adverse change occurs in
the Company's business, management assesses the carrying amount of
enterprise goodwill. The Company measures impairment of goodwill by
comparing the future undiscounted cash flows (without interest) to the
carrying amount of goodwill. This evaluation is done at the reportable
business segment level (primarily by subsidiary). If the carrying amount of
goodwill exceeds the future discounted cash flows, the excess carrying
amount of goodwill is written off. Factors considered by management in
estimating future cash flows include current operating results, the effects
of any current or proposed changes in third-party reimbursement or other
governmental regulations, trends and prospects of acquired businesses, as
well as the effect of demand, competition, market and other economic
factors (See Note 3).
RECENT ACCOUNTING PRONOUNCEMENTS:
In July 2001, the Financial Accounting Standards Board issued Statement No.
141 ("FAS 141"), "Business Combinations", and Statement No. 142 ("FAS
142"), "Goodwill and Other Intangible Assets". The provisions of FAS 141
are effective for business combinations accounted for by the purchase
method completed after June 30, 2001. The provisions of FAS 142 are
effective for fiscal years beginning after December 15, 2001. FAS 141
changes the accounting for business combinations by, among other things,
prohibiting the prospective use of pooling-of-interests accounting. Under
FAS 142, goodwill and intangible assets deemed to have indefinite lives
will no longer be amortized but will be subject to annual impairment tests.
In accordance with the transitional provisions of FAS 142, the Company has
not amortized goodwill acquired in business combinations subsequent to June
30, 2001. Other intangible assets will continue to be amortized over their
estimated useful lives. The Company is currently reviewing the impact of
FAS 142 and will be performing a fair-value analysis at a later date.
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, 2001 and 2000, other assets included $6,761 and $4,349 of
deferred financing costs net of accumulated amortization of $1,554 and $746
respectively. Amortization of deferred financing costs is included in
interest expense in the accompanying Consolidated Statements of Operations.
FOREIGN CURRENCY TRANSLATION:
Assets and liabilities of foreign subsidiaries whose functional currency is
other than the U.S. dollar are translated to U.S. dollars using the
exchange rates in effect at the balance sheet date. Results of operations
are translated using weighted average exchange rates during the period.
Adjustments resulting from the translation process are included as a
separate component of stockholders' equity.
F-12
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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. At September 30, 2001, 72.7% of accounts receivable is
due from the NHS and other U.K. governmental payors. The remaining accounts
receivable balance is comprised of various other third-party payors and
self-pay patients (none of which is greater than 10% of the balance). At
September 30, 2000, 46.0%, 9.2% and 4.3% 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 short-term maturity of those instruments.
The estimated fair value of the Company's outstanding borrowings was
$181,553 and $94,392 at September 2001 and 2000, respectively, compared to
$180,781 and $93,483 total debt outstanding.
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, contractual allowance, valuation of
inventories, accrued expenses, depreciation and amortization.
RECLASSIFICATIONS:
Certain prior year balances have been reclassified to conform to the
current year presentatation.
F-13
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
3. BUSINESS COMBINATIONS AND DISPOSALS:
COMBINATIONS:
On September 27, 2001 TW UK acquired all of the issued and outstanding
shares of Staffing Enterprise Limited and Staffing Enterprise (PSV) Limited
(collectively "Staffing Enterprise"), a London based provider of flexible
staffing of specialist nurses and other healthcare professionals to London
NHS Trust and independent hospitals. The consideration included $7,100 in
cash, $14,800 in demand notes plus an additional sum of up to approximately
$30,800 in contingent consideration dependent upon Pre-Tax Profits (as
defined in the agreement for sale and purchase) for the fiscal year ended
September 30, 2002.
The following table displays the unaudited pro forma results of operations
and related per share information for the two years ended September 30,
2001 and 2000, as if the acquisition of Staffing Enterprise was completed
as of October 1, 1999 and the U.K. subsidiaries had been consolidated for
the entire year ended September 30, 2000:
2001 2000
--------------- ---------------
(unaudited) (unaudited)
Net revenues $208,528 $212,314
Loss before extraordinary loss (24,181) (21,657)
Net loss (24,181) (22,415)
Loss per share of common stock
before extraordinary loss:
Basic and Diluted (1.39) (1.23)
Net loss per share of common stock:
Basic and Diluted (1.39) (1.28)
The acquisition was accounted for as a purchase business combination.
Accordingly, the total cost of the acquisition was preliminarily allocated
on the basis of the estimated fair value of the assets acquired and
liabilities assumed and incurred. Assets acquired and liabilities assumed
were assigned preliminary values of approximately $11,200 and $4,200,
respectively, with the remaining portion of approximately $14,900
attributable to goodwill and other identifiable intangible assets. As the
acquisition was completed on September 27, 2001, there are no amounts
relating to Staffing Enterprise included in the Consolidated Statement of
Operations for fiscal 2001.
In addition to the acquisition of Staffing Enterprise, during fiscal 2001
the U.K. Operations acquired a total of 11 other flexible staffing agencies
for approximately $9,144 in cash and the issuance of $5,720 in demand notes
and resulted in the Company recording approximately $13,300 of additional
goodwill and other identifiable intangible assets. The transactions include
provisions to pay additional amounts, payable in cash, of up to $12,993 in
contingent consideration dependent upon future earnings of the acquired
entities. These acquisitions were accounted for as purchase business
combinations.
F-14
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
3. BUSINESS COMBINATIONS AND DISPOSALS (CONTINUED):
The pro forma results of operations and related per share information for
these acquisitions have not been presented as the amounts are considered
immaterial.
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 contingent consideration dependent upon Pre-Tax
Profits (as defined in the agreement for sale and purchase) for certain
periods ending in 2000 and 2001. As of September 30, 2001, $2,163 of
contingent consideration has been earned and paid in cash.
Approximately $13,691 of the purchase price for this 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 preliminary values of
approximately $3,435 and $2,029, respectively, with the remaining portion
of $16,119 attributable to goodwill and other identifiable intangible
assets.
The pro forma results of operations and related per share information for
Nightingale have not been presented as amounts are considered immaterial.
DISPOSITIONS:
U.S MAIL-ORDER
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 received $2,000 plus an additional
$556 representing the book value of on-hand saleable inventory at September
29, 2000. The Company recognized a pre-tax charge for impairment of
long-lived assets of $12,346 for the year ended September 30, 2000,
principally reflecting the write-down of intangible assets to their fair
value. The fair values of the assets to be sold were recorded as assets
held for sale in the accompanying Consolidated Balance Sheet at September
30, 2000.
Based upon additional information and revised cost benefit estimates by
management, the Company recorded an additional charge of $1,900 to reflect
the write-down of the remaining accounts receivable to their estimated net
realizable value for the first quarter of fiscal 2001. In addition to the
write-down, the Company incurred operating expenses of $1,983 prior to the
closing of the U.S. Mail-Order Operations.
F-15
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
3. BUSINESS COMBINATIONS AND DISPOSALS (CONTINUED):
The Company 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 $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. For the year ended September
30, 2000, no amounts related to the lease or employee related obligations
were paid.
The following table illustrates the different components of the
restructuring accrual at September 30, 2001:
EMPLOYEE LEASE
RELATED COSTS COMMITMENTS TOTAL
--------------- ------------- -------------
Beginning balance $480 $680 $1,160
Payments made through
September 30, 2001 (480) (181) (661)
---------------- ------------- -------------
Ending balance $0 $499 $499
=============== ============= =============
AMCARE LTD.
On November 22, 2000, the Company sold its U.K. subsidiary, Amcare Ltd.
("Amcare"), for approximately $13,826 in cash. In fiscal 2000, the Company
recorded a charge for impairment of long-lived assets of approximately
$2,727 to reflect the write-down of the carrying value of goodwill,
originally acquired with the purchase of Amcare, to its fair value as well
as a tax charge of approximately $1,654 to reflect the tax effect of the
transaction.
The Company recorded an additional loss of $354 and realized a foreign
exchange loss of $391 in fiscal 2001 as a result of the completion of the
transaction.
OTHER.
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, 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.
F-16
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 at
September 30:
2001 2000
--------- ---------
Revenue producing equipment $11,683 $10,867
Furniture, fixtures and equipment 7,682 6,499
Land, buildings and leasehold improvements 1,004 1,028
--------- ---------
20,369 18,394
Less, accumulated depreciation and amortization 12,824 10,720
--------- ---------
$7,545 $7,674
========= =========
Depreciation and amortization of property and equipment for the years ended
September 30, 2001, 2000 and 1999 was $2,042, $2,119 and $2,312,
respectively. The net book value of revenue producing equipment was $5,508
and $5,489 at September 30, 2001 and September 30, 2000, respectively.
5. INTANGIBLE ASSETS:
Intangible assets, net consist of the following at September 30:
2001 2000
----------- -----------
Goodwill $121,110 $99,419
Covenants not-to-compete 250 908
Other intangible assets - 398
---------- ----------
121,360 100,725
Less accumulated amortization 11,934 9,939
---------- ----------
$109,426 $ 90,786
========== ==========
Amortization of intangibles for the years ended September 30, 2001, 2000
and 1999 was $3,852, $3,301 and $3,459, 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.
6. ACCRUED EXPENSES:
Accrued expenses consist of the following at September 30:
2001 2000
----------- -----------
Payroll and related expenses $10,785 $ 7,184
Acquisition related expenses 1,946 254
Other 8,064 8,351
----------- -----------
$20,795 $15,789
=========== ===========
F-17
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
7. DEBT:
Outstanding borrowings consist of the following at September 30:
FINAL
FACILITY 2001 2000 INTEREST RATE MATURITY
--------- --------- -------- ---------------- -------------
SENIOR CREDIT FACILITIES:
Term loan A $ 35,091 $ 38,913 LIBOR + 2.25% Dec. 17, 2005
Term loan C 73,720 - LIBOR + 3.5% Jun. 30, 2007
Acquisition loan - 6,643 LIBOR + 2.75% Dec. 17, 2006
--------- --------
Total senior credit facilities 108,811 45,556
MEZZANINE TERM LOAN(1) 13,854 12,920 LIBOR + 7% Dec. 17, 2007
NOTES WITH WARRANTS 38,793 35,007 9.375% Dec. 17, 2008
NOTES PAYABLE(2) 19,323 - 4.00% to 5.50% Sept. 27, 2001
--------- --------
180,781 93,483
LESS, CURRENT MATURITIES 4,868 3,806
--------- --------
$ 175,913 $ 89,677
========= ========
-------------------------------
1) Net of unamortized discount of $1,817 and $2,093 as of September 30,
2001 and 2000, respectively.
2) Net of unamortized discount of $1,141 as of September 30, 2001.
On December 20, 1999, as amended on September 27, 2001, the Company's U.K.
subsidiaries obtained new financing denominated in pounds sterling. The
new financing consists of a senior collateralized term and revolving
credit facility (the "Senior Credit Facility"), mezzanine indebtedness
(the "Mezzanine Loan") and the Notes.
Senior Credit Facility. The Senior Credit Facility consists of a term loan
A, maturing December 17, 2005, (ii) acquisition term loan B, maturing
December 17, 2006 which may be drawn upon during the first nine years
following closing, (iii) per the September 27, 2001 amendment, $73,720
term loan C, maturing June 30, 2007, and (iv) a revolving credit 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 2.25% to 3.50% per annum. As of September 30, 2001,
the Company had outstanding borrowings of $108,811 under the Senior Credit
Facility and $31,994 in available borrowings. As of September 30, 2001 and
2000, borrowings under the senior credit facilities bore interest at a
rate of 6.96% to 8.21% and 8.11% to 8.86%, respectively.
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.
F-18
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
7. DEBT (CONTINUED):
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 September 30, 2001 and 2000, borrowings under the mezzanine term loan
bore interest at a rate of 11.97% and 13.11%, respectively.
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 $121. The fair value of the
Mezzanine Warrants ($2,338) 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.
Senior Subordinated Notes. The Notes consist of $32,860 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.
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, 2001, $5,934 of PIK Notes has been recorded as additional
principal due in the Company's Consolidated Balance Sheet. The Notes and
related PIK Notes mature nine years from issuance.
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 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
F-19
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
7. DEBT (CONTINUED):
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.
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.
At September 30, 2001, the Company had outstanding notes payable of
$19,323, net of $1,141 of unamortized discount, issued in connection with
the acquisition of certain U.K. flexible staffing agencies. The notes
payable are secured by the Company's senior credit lender which requires
the Company to keep an amount on deposit for the sole purpose of
repaying the notes payable. These notes bear interest at rates ranging
from 4.00% to 5.50% and mature in fiscal 2003.
In connection with the repayment of the Company's 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.
Annual maturities of long-term debt for each of the next five years are:
YEAR ENDING SEPTEMBER 30,
-------------------------
2002 $ 4,868
2003 25,515
2004 8,257
2005 10,321
2006 27,276
Thereafter 104,544
------------
$ 180,781
============
F-20
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
7. DEBT (CONTINUED):
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, 2001 $35,331
June 30, 2002 $32,855
December 31, 2002 $30,378
8. STOCKHOLDERS' EQUITY:
In January 2001, the Company initiated a stock repurchase program,
whereby the Company may purchase up to approximately $1,000 of its
outstanding common stock in open market or privately negotiated
transactions. As of September 30, 2001, the Company had acquired 266 shares
for an aggregate purchase price of $720 which are reflected as treasury
stock in the consolidated balance sheet at September 30, 2001. The Company
intends to continue with its stock repurchase program during fiscal 2002.
9. INCOME TAXES:
The provision (benefit) for income taxes from continuing operations for the
years ended September 30, is summarized as follows:
2001 2000 1999
------- --------- ---------
Current:
Federal $ - $ - $ 68
State - - 52
Foreign 2,623 2,606 2,063
Deferred:
Federal 21,462 (10,070) (3,136)
State - 116 328
Foreign 32 - 125
-------- --------- ----------
Provision (benefit)
income taxes $ 24,117 $ (7,348) $ (500)
======== ========= ==========
F-21
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
9. INCOME TAXES (CONTINUED):
For 2001, 2000 and 1999, 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 are as follows:
2001 2000
--------- ---------
Current:
Provision for doubtful accounts $ 6,704 $ 6,415
Accrued expenses 431 5,528
Other, net 162 344
--------- ---------
Current deferred tax assets 7,297 12,287
--------- ---------
Non-current:
Federal net operating loss 17,894 9,327
State net operating losses 1,666 1,546
Capital losses 768 768
Other, net 72 161
Depreciation and amortization (1,406) (1,081)
Other, net (548) (501)
--------- ---------
Non-current deferred tax assets, net 18,446 10,220
--------- ---------
25,743 22,507
Valuation allowance (26,291) (1,546)
--------- ---------
Net deferred tax (liability) asset $ (548) $ 20,961
========= =========
Management had been previously committed to implementing tax strategies
that provided for the sale of appreciated assets, including a portion of
the Company's ownership interest in its U.K. subsidiary, to generate
sufficient taxable income to realize the tax net operating losses prior to
their expiration. While the Company believes it will eventually realize the
value of its tax losses, current developments, including the continued
expansion of the U.K. operations has increased the uncertainty as to both
the execution of the original strategy and the appropriateness of a tax
strategy which may not align with the Company's current business strategy.
These uncertainties have impaired the Company's ability to determine
whether it is more likely than not that its deferred tax assets will be
realized. Accordingly, a full valuation allowance for all remaining
deferred tax assets has been provided.
As of September 30, 2001, the Company has a Federal net operating loss
carryforward of approximately $53,000 which if unused, will expire in the
years 2018 through 2021. The Company has a capital loss carryforward of
approximately $2,000 which, if unused, will expire in the year 2003.
F-22
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
9. INCOME TAXES (CONTINUED):
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 for the years ended September 30 are as follows:
2001 2000 1999
-------- --------- ---------
Income taxes at 34% $ (841) $(11,151) $(2,668)
State income taxes, net of
Federal benefit - - 560
Nondeductible expenses, primarily
amortization and write down
of intangible assets 1,305 1,648 1,076
Legal settlement - 510 -
Valuation allowance 24,745 (332) 3
Foreign tax on sale of subsidiary - 1,654 -
Tax contingency - - 416
Other, net (1,092) 323 113
------- -------- -------
(Benefit) provision for income taxes $24,117 (7,348) $ (500)
======= ======== =======
Income (loss) before income taxes generated from the U.K. operations for
the years ended September 30, 2001, 2000 and 1999 was $3,684, $(2,046) and
$3,416, 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 $(965).
10. STOCK OPTION PLAN AND WARRANTS:
Under the Company's 1992 Option Plan ("Option Plan"), options may be
granted by the Compensation Committee of the Board of Directors which
determines the exercise price, vesting provi sions and term of such grants.
Beginning in fiscal 1999 and ending in July 2002, the number of shares
available for issuance under the Option Plan, as amended, increases by one
percent of the number of shares of Common Stock outstanding as of the first
day of each fiscal year.
F-23
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
10. STOCK OPTION PLAN AND WARRANTS (CONTINUED):
Following is a summary of transactions under the Option Plan during the
year ended September 30, 2001, 2000 and 1999:
2001 2000 1999
----------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF STOCK EXERCISE OF STOCK EXERCISE OF STOCK EXERCISE
OPTIONS PRICE ($) OPTIONS PRICE ($) OPTIONS PRICE ($)
----------------------------------------------------------------------
Outstanding beginning of year 1,040 5.22 1,130 5.37 1,390 5.49
Granted 400 1.75 100 1.81 10 4.31
Exercised (4) 1.75 (15) 4.38
Forfeited (42) 5.59 (190) 4.34 (255) 6.04
----------- ----------- -----------
Outstanding end of year 1,394 4.22 1,040 5.22 1,130 5.37
=========== =========== ===========
Weighted-average fair
value of options granted
during the year 0.34 0.93 2.08
=========== ============ ============
Available for future grants 1,470
===========
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,
2001, 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.
F-24
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
10. STOCK OPTION PLAN AND WARRANTS (CONTINUED):
A summary of the 1,394 options outstanding as of September 30, 2001 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 ($)
------------------ ------------- ----------------- ------------------ --------------- -----------------
1.75 392 1.75 4.2 196 1.75
1.81 100 1.81 3.7 33 1.81
2.63 323 2.63 2.0 323 2.63
4.31 10 4.31 7.2 7 4.31
7.25 69 7.25 .9 69 7.25
7.25 500 7.25 6.3 500 7.25
------- -------
1.75 to 7.25 1,394 4.22 4.3 1,128 5.68
======= =======
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 and net loss per share
would have been adjusted to the pro forma amounts indicated in the table
below for the three years ended September 30:
2001 2000 1999
----------- ------------- ------------
Net loss - reported $(26,612) $(24,944) $(7,346)
Net loss - pro forma (26,708) (25,186) (8,155)
Basic and diluted loss per share - reported (1.53) (1.42) (0.42)
Basic and diluted loss per share - pro forma (1.53) (1.44) (0.46)
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:
2001 2000 1999
------ ------ ------
Expected life (years) 4 4 4
Risk-free interest rate 5.5% 5.5% 5.5%
Volatility 61.4% 61.0% 55.7%
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.
F-25
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
11. 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.
12. COMMITMENTS AND CONTINGENCIES:
EMPLOYMENT AGREEMENTS:
The Company has two employment agreements with certain of its executive
officers that provide for minimum aggregate annual compensation of $745 in
fiscal 2002. The agreements contain, among other things, customary
confidentiality and termination provisions and provide that in the event
of the termination of the executive following a "change of control" of the
Company (as defined therein), or significant change in their
responsibilities, such person will be entitled to receive a cash payment
of up to 2.9 times their average annual base salary during the preceding
twelve months.
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.
F-26
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED):
Future minimum rental commitments required under operating leases that
have non-cancelable lease terms in excess of one year as of September 30,
2001 are as follows:
2002 $1,260
2003 946
2004 709
2005 657
2006 654
Thereafter 1,260
------
$5,486
======
Rent expense under non-capitalized, non-cancelable lease agreements for
the years ended September 30, 2001, 2000 and 1999 amounted to $1,972,
$2,871 and $2,431, respectively.
CONTINGENCIES:
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. The Company has
been vigorously defending this action. In June 2001, the parties reached a
settlement, which was approved by the court in November 2001, that fully
resolved the litigation. The settlement will not have a material adverse
effect on the Company's consolidated financial position, cash flows or
results of operations.
On August 4, 2000 the Company reached a civil settlement in the amount of
$10,000 with the U.S. Department of Justice related to an investigation
commenced in July 1997 of two of its U.S. subsidiaries as well as a
related qui tam civil whistleblower case. The Company also agreed to a
corporate integrity agreement ("CIA") with the Office of Inspector General
related to the Mail-Order operations. As of November 2, 2001 the Company's
obligations under the CIA have been completed.
In addition to its settlement with the federal government, the Company
reached a final settlement with the prior owners of Respiflow, Inc., MK
Diabetic Support Services Inc. 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 owned as of August 4, 2000 (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-27
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED):
The Company recorded a one-time net charge of $5,082 related to the
settlement of all of these matters in fiscal 2000.
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.
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.
The Company is involved in various other legal proceedings and claims
incidental to its normal business activities. The Company is vigorously
defending its position in all such proceedings. Management believes these
matters should not have a material adverse impact on the consolidated
financial position, cash flows or results of operations.
13. OPERATIONS BY BUSINESS SEGMENTS AND GEOGRAPHIC AREAS:
During the year ended September 30, 2001 the Company operated in two
reportable business segments: (i) U.K. operations and (ii) U.S. Home
Healthcare ("Home Healthcare") operations (formerly Hi-Tech). The U.K.
operations derive revenues from nursing and para-professional services,
and delivery of oxygen concentrators and cylinders throughout the U.K. The
Home Healthcare operations derive revenues from infusion and respiratory
therapy services and the sale and lease of home medical equipment
principally in New Jersey and New York.
During the years ended September 30, 2000 and 1999, the Company also
operated the U.S. Mail Order Operations which derived its revenues from
the mail-order sale of diabetic test strips and glucose monitors,
respiratory, diabetic, maintenance and other commonly prescribed
medications, as well as ostomy and orthotic products.
F-28
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
13. OPERATIONS BY BUSINESS SEGMENTS AND GEOGRAPHIC AREAS (CONTINUED):
The Company uses differences in geographic areas, as well as in products
and services to identify the reportable segments. The Company evaluates
performance and allocates resources based on profit and loss from
operations before corporate expenses, interest and income taxes. The
accounting policies of the business segments are the same as those
described in the summary of significant accounting policies. Inter segment
sales are not material. The following tables present certain financial
information by reportable business segments and geographic areas of
operations for the years ended September 30, 2001, 2000 and 1999.
YEAR ENDED SEPTEMBER 30, 2001
-----------------------------------------
U.K. U.S.
HOME
OPERATIONS HEALTHCARE TOTAL
------------- ------------ ----------
Revenues to unaffiliated customers $ 138,041 $ 16,592 $ 154,633
========= ======== =========
Segment operating profit $ 12,676 $ 620 $ 13,296
========= ========
Corporate expenses (3,053)
U.S. Mail-Order (Note 3) (3,883)
Interest expense, net (8,433)
Foreign exchange loss (Note 3) (400)
---------
Loss before income taxes and minority
interest $ (2,473)
=========
Depreciation and amortization $ 5,080 $ 767 $ 5,847
========= ========
Corporate depreciation and amortization 47
---------
Total depreciation and amortization $ 5,894
=========
Identifiable assets, September 30, 2001 $ 236,472 $ 10,899 $ 247,371
========= ========
Corporate assets 702
---------
Total assets, September 30, 2001 $ 248,073
=========
Capital expenditures $ 1,244 $ 678 $ 1,922
======== ======== ---------
Corporate capital expenditures 15
---------
Total capital expenditures $ 1,937
=========
F-29
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
13. OPERATIONS BY BUSINESS SEGMENTS AND GEOGRAPHIC AREAS (CONTINUED):
YEAR ENDED SEPTEMBER 30, 2000
---------------------------------------------------------------
U.K. U.S. U.S. U.S.
HOME
OPERATIONS MAIL-ORDER HEALTHCARE 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) (15,073)
Legal settlements, net (Note 12) (5,082)
Restructuring charge (Note 3) (1,288)
Interest expense, net (7,847)
---------
Loss before income taxes, equity
income, minority interest and
extraordinary loss $ (32,704)
=========
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
=========
YEAR ENDED SEPTEMBER 30, 1999
-------------------------------------------------------------------
U.K. U.S. U.S. U.S.
HOME
OPERATIONS MAIL-ORDER HEALTHCARE 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
========
F-30
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
13. 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.
HOME
OPERATIONS MAIL-ORDER HEALTH CARE 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) (15,073)
Legal settlements, net (Note 12) (5,082)
Restructuring charge (Note 3) (1,288)
Interest expense, net (8,095)
---------
Loss before income taxes, minority
interest and extraordinary loss $ (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
=========
14. PROFIT SHARING PLAN:
The Company has a profit sharing plan pursuant to Section 401(k) of the
Internal Revenue Code, concerning all U.S. employees who meet certain
requirements. These requirements include, among other things, at least one
year of service and attainment of the age of 21.
The plan operates as a salary reduction plan whereby participants
contribute anywhere from 1% to 15% of their compensation, not to exceed
the maximum available under the Code.
The Company may make an additional matching contribution at its discretion
which had been in the form of its common stock through December 31, 1998
and will be in cash thereafter. The Company's
F-31
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
14. PROFIT SHARING PLAN (CONTINUED):
contributions to the plan were approximately $19, $22 and $28 for the
years ended September 30, 2001, 2000 and 1999, 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 $26, $80 and $91
for the years ended September 30, 2001, 2000 and 1999, respectively.
15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents the comparative unaudited quarterly results
for the years ended September 30, 2001 and 2000:
2001 QUARTER ENDED DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, TOTAL
--------------- ------------ --------------- ----------------- -------------
Total revenues $ 36,922 $ 35,917 $ 37,420 $ 44,374 $154,633
========== ========== ========== ======== ========
Gross profit $ 11,223 $ 11,272 $ 11,650 $ 13,834 $ 47,979
========== ========== ========== ======== ========
Net (loss) income $ (2,796) (a) $ (448) $ 40 $(23,408) (b) $(26,612)
========== ========== ========== ======== ========
Basic and diluted net (loss)
per share of common stock $ (0.16) $ (0.03) $ 0.00 $ (1.35) $ (1.53)
========== ========== ========== ======== ========
(a) The Company recorded an additional charge of $1,900 to reflect the
write-down of the remaining U.S. Mail-Order operations accounts
receivable to their estimated net realizable value.
(b) The Company recorded a full valuation allowance of $24,745 for all
remaining deferred tax assets.
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 $ (1,004) $ (485) $ (7,599) (a) $ (15,856) $ (24,944)
========== ========== ========== =========== ==========
Basic and diluted net loss
per share of common stock
before extraordinary loss $ (0.01) $ (0.03) (0.43) $ (0.90) (b) & (c) $ (1.38)
========== ========== ========== =========== ==========
Basic and diluted net loss
per share of common stock $ (0.06) $ (0.03) $ (0.43) $ (0.90) $ (1.42)
========== ========== ========== =========== ==========
(a) The Company recorded a net charge of $5,082 related to legal
settlements with the DOJ, OIG and Prior Owners.
(b) The Company recorded a $1,288 restructuring charge related to exiting
its U.S. Mail-Order Operations.
(c) 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-32
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, 2001 $21,219 $ 3,568 $ 347 (B) $ 523(A) $24,611
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
(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