Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K
Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
FOR THE TRANSITION PERIOD FROM NOVEMBER 1, 1996
TO SEPTEMBER 30, 1997
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
---------------------------
(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 12, 1997 was approximately
$46,986,595 based on the closing sale price of $7.03125 on such date, as
reported by the Nasdaq National Market(R).
The number of shares outstanding of the registrant's Common Stock, as
of December 12, 1997, was 16,267,689.
DOCUMENTS INCORPORATED BY REFERENCE
None.
TRANSWORLD HEALTHCARE, INC.
TRANSITION REPORT ON FORM 10-K
For the Eleven Months Ended September 30, 1997
TABLE OF CONTENTS
PART I
Item 1. Business............................................................1
General ...........................................................1
Strategy ...........................................................1
Business Realignment................................................2
The Health Management, Inc. Transaction.............................2
U.S. Operations.....................................................4
U.S. Services and Products..........................................4
Specialty Mail-Order Pharmaceutical and Medical Supplies
Operations, Respiratory Therapy and Home Medical Equipment.......5
Patient Services....................................................5
Infusion Therapy....................................................6
U.S. Quality Assurance; JCAHO and CHAP Accreditations...............6
U.S. Sales and Marketing Activities.................................6
U.S. Recruiting and Training of Personnel...........................7
U.S. Third-Party Reimbursement......................................8
U.S. Suppliers......................................................8
U.S. Competition....................................................9
U.S. Patents and Trademarks.........................................9
U.S. Employees......................................................9
U.K. Operations.....................................................9
U.K. Services and Products..........................................9
Patient Services...................................................10
Specialty Pharmaceutical and Medical Supplies and Respiratory
Therapy Operations..............................................10
U.K. Quality Assurance and Department of Health Licenses...........10
U.K. Sales and Marketing Activities................................10
U.K. Recruitment and Training of Personnel.........................11
U.K. Third-Party Reimbursement.....................................11
U.K. Suppliers.....................................................12
U.K. Competition...................................................12
U.K. Patents and Trademarks........................................12
U.K. Employees.....................................................12
Government Regulation..............................................13
U.S. Government Regulation.........................................13
U.K. Government Regulation.........................................16
Insurance..........................................................16
Item 2. Properties.........................................................16
Item 3. Legal Proceedings..................................................17
The Company........................................................17
HMI................................................................17
-i-
Item 4. Submission of Matters to a Vote of Security Holders.................19
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters...............................................20
Item 6. Selected Financial Data.............................................21
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................23
General ...........................................................23
Results of Operations...............................................25
Eleven Months Ended September 30, 1997 vs. Eleven Months
Ended September 30, 1996..........................................25
Year Ended October 31, 1996 vs. Year Ended October 31, 1995.........27
Liquidity and Capital Resources.....................................28
Impact of Recent Accounting Standards...............................32
Inflation...........................................................33
Item 8. Financial Statements and Supplementary Data.........................33
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure..........................................33
PART III
Item 10. Directors and Officers of the Registrant............................34
Board Committees....................................................36
Compliance With Section 16(a) of the Securities Exchange Act
of 1934...........................................................37
Item 11. Executive Compensation..............................................37
Summary Compensation Table..........................................37
Option Grants in the Eleven Month Period............................38
Aggregate Option Exercises during the Eleven Month Period
and the Eleven Month Period End Option Values......................38
Employment Agreements; Termination of Employment and
Change-in-Control Arrangements....................................39
Compensation Committee Interlocks and Insider Participation.........39
Stock Option Plans..................................................39
Indemnification.....................................................41
Item 12. Security Ownership of Certain Beneficial Owners and
Management........................................................41
Item 13. Certain Relationships and Related Transactions......................42
Transactions with Principal Shareholders............................42
Transactions with Directors and Executive Officers..................44
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....46
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. This Transition 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 Transition Report relating to
matters that are not historical facts are forward-looking
-ii-
statements that involve risks and uncertainties, including, but not limited to,
future demand for the Company's products and services, general economic
conditions, government regulation, competition and customer strategies, capital
deployment, the impact of pricing and reimbursement and other risks and
uncertainties. Should one or more of these risks or uncertainties materialize,
or should underlying assumptions prove incorrect, actual results may vary
materially from those described herein as anticipated, believed, estimated or
expected.
-iii-
PART I
ITEM 1. BUSINESS.
GENERAL
Transworld HealthCare, Inc. (the "Company") is a provider of a broad
range of home health care services and products with operations in the United
States ("U.S.") and the United Kingdom ("U.K."). The Company selectively
targets geographic markets and business lines where its convenient, cost
effective products and services can improve patient quality of life, and
prevent hospital admissions or reduce the length of hospital stays. The Company
provides the following services and products to patients in their homes: (i)
specialty mail-order pharmaceuticals, medical supplies, respiratory therapy and
home medical equipment; (ii) patient services, including nursing and
para-professional services; and (iii) infusion therapy. The Company's U.S.
patient, infusion and respiratory therapy services and home medical equipment
operations are concentrated in New Jersey, New York and Florida while its
specialty mail-order pharmaceutical and medical supplies operations provide
products to patients nationwide and in Puerto Rico. The Company's U.K.
operations include the U.K.'s second largest commercial provider of home
nursing and para-professional care with operations located throughout the U.K.,
as well as a leading medical respiratory supplier throughout the U.K.
The Company has changed its fiscal year end from October 31 to
September 30. This resulted in an eleven month reporting period ended September
30, 1997 (sometimes referred to herein as the "Eleven Month Period") included
in this Transition Report on Form 10-K.
The Company's principal executive offices are located at 555 Madison
Avenue, New York, New York 10022, and the Company's telephone number at that
location is (212) 750-0064.
STRATEGY
The Company's growth strategy in the U.S. is to capitalize on
consolidation in the alternate site health care industry by aggressively
pursuing acquisitions of alternate site health care companies in selected
services, products and markets where the Company believes it has the
opportunity to create a comprehensive delivery network. Once it enters a new
market, the Company's strategy is to use its acquired operations as a platform
to: (i) offer comprehensive services and products by cross-marketing its
various businesses; (ii) compete aggressively by marketing to traditional
referral sources and entering into managed care contracts as a preferred
provider; and (iii) leverage its sales and marketing efforts, maximize referral
networks and achieve operational efficiencies. The Company further seeks to
develop market concentrations in each of its services in order to achieve
levels of coverage which make the services attractive to a variety of payors
and patients.
Consistent with this business strategy, over the past four years the
Company has, among other things, expanded its services in New Jersey and New
York. On October 13, 1997, the Company together with its principal shareholder,
Hyperion Partners II L.P. ("HPII") submitted a proposal to Apria Healthcare
Group, Inc. ("Apria") in connection with a potential strategic combination
between the Company and Apria. The terms of the offer were $18.00 ($14.00 in
cash and $4.00 in market value of the combined entity's common stock) in
exchange for each outstanding share of Apria common stock. Apria provides
and/or manages comprehensive integrated home care services through
approximately 350 branch locations in all 50 states with net revenues of $1.2
billion for the year ended December 31, 1996. There can be no assurance that
the Company's proposal will be accepted, or if accepted, when a transaction
will be consummated.
In July 1997, the Company made significant strides toward becoming one
of the only integrated national providers of home and alternate site health
care in the U.K. through the purchase of Omnicare plc ("Omnicare") for
approximately $31,000,000 and Allied Medicare Ltd. ("Allied") for approximately
$60,000,000 (Omnicare and Allied are sometimes collectively referred to herein
as the "U.K. Operations"). Omnicare provides respiratory equipment and services
and supplies a range of medical and surgical products to patients at home
throughout the U.K. through its network of seven regional facilities. Allied is
a national provider of nursing and other care-giving services to home care
patients with 65 locations throughout the U.K.
The Company's growth strategy in the U.K. is to take advantage of
recent major policy moves by the government-funded National Health Service
("NHS") and by private payors to seek to treat a much larger number of patients
than in the past at home or in alternate site treatment centers rather than in
the hospital environment. The Company believes that it has the potential to
become the U.K. market leader in this rapidly developing field as (i) it
already has the capability through Allied to provide or support home or
alternate site treatments throughout the U.K. and (ii) it has developed a range
of treatments tailored to the local market but based on U.S. practice which, it
believes, are not presently offered by any other U.K. supplier.
Consistent with this strategy, it is also the Company's intention to
acquire selected businesses in the U.K. which are already providing basic
treatments and services to patients at home, as well as additional nursing
operations to complement its Allied nursing operations. The Company believes
that the nursing 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.
BUSINESS REALIGNMENT
The Company took a number of significant steps during the Eleven Month
Period to realign its business as a focused regional home health care provider
and specialty pharmacy and medical supply distributor in the U. S. and as an
integrated national provider of home and alternate site health care products
and services in the U.K. These steps included: (i) selling non-core assets such
as the Company's Radamerica, Inc. ("Radamerica") business, which provided
radiation therapy in the Baltimore, Maryland area; (ii) exiting businesses that
were deemed not to have the potential to earn an adequate return on capital
over the long term (such as wound care and orthotic product lines in the
continental U.S., as well as the Company's pulmonary rehabilitation center in
Cherry Hill, New Jersey); (iii) completing the HMI Asset Sale (as defined
below); and (iv) terminating the agreements to purchase Kwik Care, Ltd. and VIP
Health Services, Inc. (the "VIP Companies"). In relation to these actions, the
Company recorded special charges of $34,230,000 and additional bad debt expense
of $7,023,000. Despite these special charges, the Company expects to generate
net cash proceeds of approximately $38,000,000 through asset sales ($12,100,000
of which has been received through September 30, 1997 from the sale of
Radamerica). See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
THE HEALTH MANAGEMENT, INC. TRANSACTION
On November 13, 1996, the Company entered into a number of agreements
including a stock purchase agreement (the "Stock Purchase Agreement") and a
merger agreement (the "Merger Agreement") to acquire 100% of the issued and
outstanding stock of Health Management, Inc. ("HMI"), as well as 100% of HMI's
senior secured indebtedness. HMI is a Buffalo Grove, Illinois based provider of
integrated pharmacy management services to patients with chronic medical
conditions and to health care professionals, drug manufacturers and
-2-
third-party payors involved in such patients' care. The Company believed that
the acquisition of HMI would enable the Company to strengthen its business in
additional chronic disease states and give it the opportunity to combine HMI's
lines of business (principally organ transplant, mental health, oncology, HIV
and infertility) with the Company's specialty pharmaceutical and medical
supplies operation (principally respiratory and diabetic product lines) to
offer its referral sources a broader range of product offerings, distinguishing
the Company from competitors with a more limited range of services.
On November 13, 1996, the Company acquired HMI's senior secured
indebtedness under the credit agreement between HMI and its senior lenders for
$21,263,000 directly from such lenders. On that same day, HMI and the Company
entered into the Stock Purchase Agreement and the Merger Agreement. Under the
Stock Purchase Agreement, the Company agreed to acquire 8,964,292 newly issued
common shares of HMI (representing 49% of the outstanding shares of HMI) at a
purchase price of $1.00 per share. The Merger Agreement provided for a $2.00
per share payment to HMI stockholders for the remaining 51% of HMI's common
shares (approximately 9,300,000 shares).
Prior to the anticipated closing date for the Stock Purchase Agreement
of December 23, 1996, HMI advised the Company of certain adverse developments
regarding HMI's recent financial performance and business prospects. In view of
the disclosures, the consideration payable under the Merger Agreement was
reduced from $2.00 per share to $1.50 per share, and the Stock Purchase
Agreement was consummated on January 13, 1997 for $8,964,000.
Subsequent to the closing of the Stock Purchase Agreement, the Company
was informed by HMI that HMI planned to restate its financial statements for
the quarters ended July 31, 1996 and October 31, 1996 to correct certain errors
to cost of goods sold which had been understated by approximately $1,800,000
and $800,000, respectively, and that it planned to take a charge of
approximately $13,000,000 in the quarter ended January 31, 1997. As a result,
on March 26, 1997 the Merger Agreement was amended to reduce the consideration
payable under the Merger Agreement from $1.50 per share to $.30 per share.
During the three months ended July 31, 1997, events and circumstances
indicated that the Company's investment in HMI might be impaired. Included in
those events was the recognition by HMI of an additional $31,000,000 of charges
related to the impairment of certain facilities and their related goodwill,
continuing deterioration in HMI's financial performance, and an inability of
the Company to obtain the consent of its lenders under the Company's senior
secured revolving credit facility (the "Credit Facility") to consummate the
Merger Agreement.
As a result, on August 1, 1997, the Company announced that it would be
unable to complete the merger with HMI and that HMI and the Company were
actively pursuing alternative transactions. On August 14, 1997, the Company
entered into an agreement in principle with Counsel Corporation ("Counsel")
relating to the sale of substantially all of the businesses and operations of
HMI. The agreement called for the purchase of HMI assets (the "HMI Asset Sale")
by Counsel for approximately $40,000,000. The closing of the transaction was
subject to, among other things, the consummation of the Merger Agreement. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
As a result of the Company's agreement to sell substantially all of
the businesses and operations of HMI to Counsel, the Company was able to
establish its best estimate of the net realizable value of its investment in
HMI. Based on the terms of the HMI Asset Sale, the Company, during its third
fiscal quarter, recorded a pre-tax charge of $20,000,000 to adjust the carrying
value of its investment in HMI to the estimated net realizable value of
$25,000,000 and to record the estimated costs, fees and other expenses to
complete the HMI Asset Sale.
-3-
On October 1, 1997, the Company, through a wholly-owned subsidiary,
completed the merger with HMI. Under the terms of the Merger Agreement, as
amended, HMI stockholders received $.30 in cash for each outstanding share of
HMI common stock not already owned by the Company. Concurrently with the
closing of the merger, the Company completed the HMI Asset Sale to Stadtlander
Drug Distribution Co., Inc. ("Stadtlander"), a subsidiary of Counsel for
$40,000,000. Of the $40,000,000 proceeds, $30,000,000 was received in cash with
$7,500,000 to be paid to the Company as HMI's accounts receivable, existing at
date of sale, are collected, with the remaining $2,500,000 held in escrow for
post-closing adjustments. Of the $30,000,000 proceeds received, $15,000,000 was
used to reduce the senior secured debt owed by the Company under the Credit
Facility, $2,800,000 was used to complete the merger and the remainder was used
for costs, fees and other expenses to complete the HMI Asset Sale as well as to
satisfy liabilities not assumed by Counsel. The Company will further reduce its
senior secured debt under the Credit Facility by $10,000,000 as the remaining
proceeds from the sale are received.
Pursuant to the HMI Asset Sale, Counsel will not assume any
liabilities of HMI other than certain liabilities arising after the closing
under assumed contracts and certain employee-related liabilities. Satisfaction
of liabilities not assumed by Counsel, as well as certain wind-down and
contingent obligations of HMI (including litigation, See "--Legal
Proceedings"), have been considered in determining the net realizable value of
the HMI investment at September 30, 1997.
In connection with the HMI transactions, HPII purchased certain trade
payables of HMI in November and December, 1996 (the "HMI Payables"). On March
26, 1997, HPII and the Company entered into a stock purchase agreement (the "AP
Stock Purchase Agreement"), as amended, pursuant to which HPII would, subject
to shareholder approval and other customary closing conditions, contribute the
HMI Payables to the Company in exchange for shares of Common Stock. See
"Certain Relationships and Related Transactions -- Transactions with Principal
Shareholders."
The total cost of the HMI transaction is approximately $60,000,000
which is comprised of the following amounts: (i) the purchase of HMI's senior
secured indebtedness for $21,263,000; (ii) the purchase of 49% and 51% of the
equity in HMI for $8,964,000 and $2,800,000, respectively; (iii) $10,100,000 of
HMI liabilities not assumed by Counsel upon completion of the Merger Agreement;
(iv) $5,900,000 of wind-down expenses, contingent obligations and reserves for
legal, tax and audit contingencies; (v) stock issuable to HPII in exchange for
HMI Payables for $7,500,000; and (vi) $3,473,000 of other miscellaneous items,
including fees, expenses and estimated post-closing balance sheet adjustments.
U.S. OPERATIONS
U.S. SERVICES AND PRODUCTS
The Company provides the following services and products in the U.S.:
(i) specialty mail-order pharmaceuticals and medical supplies, respiratory
therapy and home medical equipment (including respiratory and diabetic
medications and supplies, as well as ostomy and orthotic products); (ii)
patient services, including nursing and para-professional services; and (iii)
infusion therapy. The Company's U.S. patient, infusion and respiratory therapy
services and home medical equipment operations are concentrated in New Jersey,
New York and Florida while its specialty mail-order pharmaceutical and medical
supplies operations provide products to patients nationwide and in Puerto Rico.
During the Eleven Month Period, the Company derived 78.8% of its revenues from
U.S. operations, with the following contributions by product line: 63.7% of its
U.S. revenues from
-4-
specialty mail-order sales, home medical equipment and respiratory therapy,
21.3% from patient services and 15.0% from infusion therapy.
SPECIALTY MAIL-ORDER PHARMACEUTICAL AND MEDICAL SUPPLIES OPERATIONS,
RESPIRATORY THERAPY AND HOME MEDICAL EQUIPMENT.
Specialty Mail-Order Pharmaceutical and Medical Supplies Operations.
The Company operates mail-order pharmacy and medical supplies operations in
Jacksonville, Florida and Puerto Rico, which specialize in supplying diabetic
patients with glucose monitors and test strips, as well as respiratory,
diabetic, ophthalmic and other commonly prescribed medications. The Company
also provides ostomy products nationwide and orthotic products in Puerto Rico.
The Company believes that its patients elect to receive their prescription
drugs and supplies via mail-order primarily because of convenience and cost
savings. The Company provides physician- prescribed respiratory medication in
pre-mixed, pre-measured unit doses thereby reducing the risk of over or
underdosing, or contamination through having to mix the medication with saline.
As part of its service to patients, the Company provides direct billing to
Medicare, Medicaid and private insurance companies, thereby reducing or
eliminating cash outlays for the patient. In addition, the Company provides
free monthly home delivery, eliminating trips to the local pharmacy. During the
Eleven Month Period, the Company exited its wound care and orthotic product
lines in the continental U.S. As a result of this action, the Company recorded
special charges of $12,079,000 for the write-off of goodwill and intangible
assets and additional bad debt reserves of $6,060,000 related to the wound care
and orthotic product lines. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Results of Operations."
Respiratory Therapy. The Company provides home respiratory services to
patients with a variety of conditions, including chronic obstructive pulmonary
disease (e.g., emphysema, chronic bronchitis and asthma), cystic fibrosis and
neurologically-related respiratory conditions. The Company employs a clinical
staff of 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 complimentary
product line in each of the markets where it also provides respiratory therapy,
patient services and infusion therapy.
PATIENT SERVICES.
The Company offers a broad range of professional nursing and
para-professional services to meet a patient's medical and personal needs,
principally in the home through four branches in New Jersey and three in
Florida. These services include pediatric and adult care, such as ventilator
and dialysis care; administration of infusion therapies, including
chemotherapy, antibiotics, enteral and parenteral feeding; standard skilled
nursing services such as changing dressings, injections, catheterization and
administration of medication; physical, respiratory, occupational and speech
therapy; home health aide services, such as assistance with personal hygiene,
-5-
dressing and feeding; and homemaker services, such as the preparation of meals,
light house cleaning and shopping. The services provided generally are
available 24 hours a day, seven days a week, on a live-in, hourly or shift
basis. In addition, the Company's services include training patients in their
own care, monitoring patient compliance with treatment plans, reporting to
physicians and processing reimbursement claims to third-party payors.
INFUSION THERAPY.
Infusion therapy involves the intravenous administration of nutrients,
antibiotics or other medications to patients in their homes usually as a
continuation of treatment initiated in the hospital. The infusion therapies
provided by the Company include antibiotic and related therapies (therapies
used to treat various infections and diseases); parenteral nutrition therapy
(the intravenous feeding of life sustaining nutrients to patients with impaired
or altered digestive tracts due to gastrointestinal illness, such as an
intestinal obstruction or inflammatory bowel disease); blood products; enteral
nutrition therapy (the administration of nutrients through a feeding tube to
patients who cannot eat as a result of an obstruction to the digestive tract or
because they are otherwise unable to feed themselves orally); chemotherapy (the
intravenous administration of cancer-inhibiting drugs through either rapid or
continuous infusion); pain management (the administration of pain controlling
drugs such as morphine and Demerol to terminally or chronically ill patients);
and other therapies. The Company's related support services include patient
training in the self-administration of infusion therapies, nursing support,
pharmacy operations and related delivery services and insurance reimbursement
assistance. The Company offers these therapies and services to patients in the
New York metropolitan area and in New Jersey markets from its facility located
in Clark, New Jersey.
U.S. QUALITY ASSURANCE; JCAHO AND CHAP 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 respiratory and infusion therapy and home
medical equipment facilities. All branches of the Company's domestic nursing
division are fully accredited with commendation by the Community Health
Accreditation Program, Inc. ("CHAP"), a subsidiary of the National League for
Nursing, a national accreditation organization for home community health care.
Neither JCAHO or CHAP accredit mail-order pharmacy operations. Accordingly, the
Company's U.S. specialty pharmaceutical and medical supplies operations are not
eligible for such accreditation. The Company believes that accreditations of
its eligible facilities by JCAHO and CHAP is a prerequisite for entering into
contracts with managed care providers and other intermediaries and for
obtaining and maintaining required licensure or certification.
U.S. SALES AND MARKETING ACTIVITIES
The Company primarily markets its services and products to referral
sources such as physicians, hospital discharge planners and social service
workers, insurance companies, prepaid health plans, health maintenance
organizations ("HMOs"), county medical services and private charitable
organizations. Fundamental to the
-6-
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
respiratory products and services, home medical equipment and infusion therapy,
and relies on branch administrators and regional sales directors to market its
nursing and para-professional services. The Company uses primarily the same
sales force to cross- market its products and services. The Company uses
full-time and part-time sales employees for its mail-order pharmacy and medical
supplies operations. The Company also employs a full-time sales representative
focused principally on selling the Company's products and services to managed
care organizations. The Company will continue to increase its focus on selling
to managed care organizations in the future.
In general, the sales representatives market the Company's services
through direct contact with referral sources in the form of meetings, telephone
calls and solicitations. The representatives maintain contact with these
sources in order to strengthen their relationships. While the sales
representatives strive to develop exclusive provider relationships, referral
sources frequently utilize the services of several home health care companies.
The sales representatives are trained by the Company to provide information to
referral sources concerning the quality of the Company's home health care
services and the cost-saving advantages of such services. Primarily due to
escalating pressures to contain health care costs, third-party payors are
participating to a greater extent in decisions regarding health care
alternatives and are consequently becoming more important in the referral and
case management process. The inability to obtain and maintain managed care
contracts may have a material adverse effect on the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
General."
During the latter part of 1996 and thereafter, there continued to be a
changing regulatory environment with respect to certain of the Company's
product lines, including, for example, developments affecting the respiratory
medications segment of the Company's business. The Company has increased its
internal and external sales and marketing staff, as well as developed new
marketing programs in order to address these developments. Because of the
recent impact of these changes, there can be no assurance as to the success of
these new marketing initiatives. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- General."
U.S. RECRUITING AND TRAINING OF PERSONNEL
The Company recruits, trains, provides continuing education for, and
offers benefits and other programs to its domestic personnel. Domestic
recruiting is conducted primarily through advertising, employment fairs, direct
contact with community groups and employment programs and through the use of
competitive salary and benefit packages.
The domestic health care industry periodically faces shortages of
certain qualified personnel. Accordingly, the Company has experienced and may
experience intense competition from other companies in recruiting qualified
health care personnel for its operations. The Company's success to date has
depended, to a significant degree, on its ability to recruit and retain
qualified health care personnel. Most of the registered and licensed nurses and
health care para-professionals who are employed by the Company also are
registered with, and accept placements from time to time through, competitors
of the Company. The Company believes it is able to compete successfully for
nursing and para-professional personnel by aggressive recruitment through
newspaper advertisements, flexible work schedules and competitive compensation
arrangements.
-7-
U.S. THIRD-PARTY REIMBURSEMENT
Substantially all of the Company's U.S. revenues are attributable to
third-party payors, including Medicare and Medicaid, private insurers, managed
care plans, and HMOs. The amounts received from government programs and private
third-party payors are dependent upon the specific benefits included under the
program or the patient's insurance policies. Like other medical service
providers, the Company is subject to lengthy reimbursement delays as a result
of third-party payment procedures. The Company generally collects payments from
third-party payors within three months after 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 Eleven Month Period, 53.3% and 14.2%, respectively, of the
Company's U.S. revenues were directly attributable to the Medicare and Medicaid
programs. For the year ended October 31, 1996, 49.8% and 11.8%, respectively,
of the Company's U.S. revenues were directly attributable to the Medicare and
Medicaid programs. The increase in the percentage of revenues directly
attributable to Medicare during the Eleven Month Period was primarily the
result of an increase in revenues attributable to the Company's specialty
mail-order pharmacy and medical supplies operations which derives a greater
percentage of revenue from Medicare than does the rest of the Company. The
Company's payor mix may fluctuate in the future as a result of any acquisitions
completed by it, and such fluctuations will be dependent, to a large degree, on
the relative payor mix of acquired companies.
Because home health care is generally less costly to third-party
payors than hospital-based care, home health care providers have generally
benefited from cost containment initiatives aimed at reducing the costs of
medical care. However, as the home care market becomes a larger percentage of
the total health care market, cost containment initiatives aimed at reducing
the costs of delivering services at non-hospitals are increasing and may
adversely affect the profitability of home health care providers.
U.S. SUPPLIERS
The Company purchases its equipment and supplies, including drugs,
home medical equipment, nutritional solutions and other materials required in
connection with its therapies and specialty mail-order pharmacy and medical
supplies operations, from various suppliers. The Company believes that there
are a number of available sources of supply for the Company's products. The
Company has, from time to time, experienced difficulties in obtaining generic
equivalent diabetic testing strips due to shipping suspensions or product
shortages from its supplier. Historically, in these instances the Company has
been able to obtain equivalent product from alternate suppliers at similar
cost. In the future, any lengthy shortages or suspensions of their shipments,
coupled with the inability to secure product from alternate suppliers at
similar cost, could have a material adverse effect on the Company's results of
operations and cash flows.
-8-
U.S. COMPETITION
The home health care market is highly fragmented and consists of
numerous providers, relatively few of which are national or regional in scope.
The Company competes with a large number of companies in all areas in which it
conducts business. The Company believes that the principal competitive factors
in the U.S. are quality of care, including responsiveness of services and
quality of professional personnel; breadth of services offered; referrals from
physicians, hospitals and HMOs; general reputation with physicians, other
referral sources and potential patients; and price.
The Company's mail-order medical supplies, respiratory therapy, home
medical equipment, home nursing and home infusion services compete with
numerous local, regional and national companies. The Company believes that
there are no dominant competitors in the diabetic and respiratory generic drug
market. The Company's primary competition for its mail-order sales of diabetic
and respiratory drugs is generated from retail pharmacies.
U.S. PATENTS AND TRADEMARKS
The Company owns no patents. The Company owns the following
servicemarks: "Steri-Pharm," "Transworld Nurses, Inc.," "Advocate Home Care,"
"RespiFlow" and "DermaQuest." The Company does not believe that its business is
dependent upon the use of any patent or trademark or similar property.
U.S. EMPLOYEES
As of December 5, 1997, the Company had approximately 290 full-time
employees and approximately 150 part-time employees in the U.S. In addition,
the Company maintains registries of approximately 315 registered and licensed
nurses and approximately 250 nurses' aides and home health care aides available
for staffing home nursing assignments on a temporary basis. The Company
considers its relationship with its U.S. employees to be satisfactory.
U.K. OPERATIONS
U.K. SERVICES AND PRODUCTS
The Company provides the following services and products in the U.K.:
(i) patient services, including nursing and para-professional services, and
(ii) specialty pharmaceutical and medical supplies and respiratory therapy. The
Company's U.K. operations are provided to patients throughout the U.K.
During the Eleven Month Period, the Company derived 21.2% of its
revenues from U.K. Operations, with the following contributions by product
line: 71.5% of its U.K. revenues from patient services and 28.5% from specialty
pharmaceutical and medical supplies and respiratory therapy.
-9-
PATIENT SERVICES.
The Company offers its U.K. patient services through Allied, a
commercially oriented provider of nursing and care staff services to a broad
range of clients, particularly NHS trusts, nursing homes, private clients and
local authority social services departments. Allied was founded in 1972 as a
home nursing service and has expanded through the establishment of a local area
network. The branch network has expanded substantially in recent years, through
both organic growth and an on-going nursing and care agency acquisition
program. Allied is now represented by 65 branches spread across the U.K.
The Company believes that the demand for most forms of nursing and
other health care services is expected to increase during the next twenty years
as the U.K. population grows older in line with demographic predictions.
Consequently, it is anticipated that requirements for temporary nursing
services will increase in the future. The Company believes that this will
benefit Allied in that more flexible working arrangements are likely to lead to
an increase in demand for temporary coverage from providers such as Allied.
SPECIALTY PHARMACEUTICAL AND MEDICAL SUPPLIES AND RESPIRATORY THERAPY
OPERATIONS.
The Company's Omnicare subsidiary operates in turn through three
principal subsidiaries. Amcare Ltd. ("Amcare") supplies wound care and ostomy
products directly to patients in the home. Omnicare Group Ltd. services
patients with chronic respiratory illnesses through its installed base of 2,400
oxygen concentrators. Oxygen concentrators convert normal room air into a more
healthy oxygen concentrated gas. Medigas Ltd. ("Medigas") supplies oxygen
cylinders and bottled oxygen to pharmacies that in turn fill prescriptions for
patients with temporary respiratory conditions. The Company offers
substantially all of its specialty pharmaceutical and medical supplies and
respiratory therapy products and services throughout the U.K.
U.K. QUALITY ASSURANCE AND DEPARTMENT OF HEALTH LICENSES
The Company's U.K. Operations maintain quality assurance policies and
procedures and closely monitor operations to provide quality care and services
to patients and health care professionals in the U.K. Where appropriate, the
Company's U.K. Operations operate under license of the U.K. Department of
Health and Medicines Control Agency ("MCA"), adhering to the terms and
conditions of service demanded by such licensing authority.
The British Standards Institute has granted accreditation pursuant to
its quality standards to the distribution and customer service functions of
Amcare, which acts as a wholesaler and medical supplies contractor licensed to
health authorities in the U.K.
U.K. SALES AND MARKETING ACTIVITIES
The Company's U.K. Operations primarily market their products and
services to health care professionals who act as referral sources to patients.
These health care professionals include medics, nurses, pharmacists,
administrators, the NHS and private health care providers. Other important
targets for promotional activity include patient associations and community
social services organizations. Fundamental to Allied's ability to obtain and
retain referral sources is the ability to establish and maintain a reputation
for quality service and responsiveness to the needs of referral sources and
their patients and clients.
-10-
Allied markets its nursing agency service via superintendents and
their staff within each of its sixty-five independent locations. These branch
locations are supported by small teams of sales and marketing professionals
based centrally to coordinate and support the sales activity.
Amcare employs representatives to promote the dispensing and delivery
services of the Company in the U.K. and supports this with marketing and
managerial staff centrally based for coordination and customer support
activities.
The oxygen and respiratory therapy business of Omnicare is marketed
directly to the pharmacist for oxygen cylinders and NHS supplies for oxygen
concentrator services by a sales representative and a senior manager,
respectively. In addition to primary sales activity, delivery drivers play a
key role as secondary merchandising staff.
In general, the sales representatives and managers of the Company's
U.K. Operations market the Company's U.K. products and services through direct
contact with referral sources in the form of meetings, telephone calls and
solicitations. Contact is maintained with these sources to strengthen their
relationships. While representatives strive to develop the strongest provider
relationship possible, referral sources often choose to use several service and
product providers.
As in many European and U.S. markets, the escalating pressures to
reduce the cost of health care has, for some lines of business (prescribed
products and services, including cylinder oxygen, concentrators and medical
supplies) in the Company's U.K. Operations, resulted in reductions in
reimbursement rates. However, the focus towards offering integrated home health
care can result in an overall cost saving leading to substantial sales
opportunities for the Company's U.K. Operations.
U.K. RECRUITMENT 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. Recruitment of staff is conducted
primarily through advertising, direct contact with employment and governmental
organizations and through the use of competitive salary and benefit packages.
The U.K. health care industry continues to face shortages of certain
qualified personnel. In particular, Allied's nursing business experiences
significant competition in recruiting qualified health care personnel for its
operations. Most of the registered and licensed health care professionals
employed by Allied are also registered with and accept placements from
competitors.
U.K. THIRD-PARTY REIMBURSEMENT
For the three months ended September 30, 1997, the Company's U.K.
Operations received approximately 60.1% of revenues from either the NHS, social
services or related U.K. governmental departments. The remaining 39.9% 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
-11-
collect payments from all groups within two months after provision of the
product or service but pay their own accounts payable and employees in
accordance with contracts.
The billing and reimbursement process includes the rendering of
invoices for products and services rendered, as well as prescriptions and other
support documentation for reimbursement of drugs and medical supplies.
U.K. SUPPLIERS
The Company's U.K. Operations purchase their equipment and supplies
required in connection with the provision of its services from various approved
suppliers. The Company believes that there are a number of alternative sources
for these items at prices comparable to its current sources.
U.K. COMPETITION
The Company believes that there are no major integrated service
providers and few multi-regional or national providers of any individual
product or service in the U.K. The Company also believes that home health care
providers who possess the infrastructure to provide an integrated network of
products and service will have significant growth opportunities.
The Company believes that the principal competitive factors in the
U.K. are: quality of care; breadth of services; reputation and professional
presentation; innovation; and value for services. The Company believes that the
success of its U.K. Operations is related to all of the above factors.
The Company's U.K. Operations' nursing, medical supplies and
respiratory therapy services compete with local, national and international
companies. The nursing agency business of Allied is the second largest in the
U.K.; however, the leading competitor is approximately three times larger in
sales revenue.
U.K. PATENTS AND TRADEMARKS
The Company's U.K. Operations own no patents. The Company's U.K.
Operations operate under the following trade names: "Allied Medicare Ltd.",
"Medicare", "Medigas Ltd.", "Omnicare plc", "Transworld Healthcare UK Ltd.",
"Amcare Ltd.", "Allied Medicare Services Ltd." and "Allied Medical Nursing
Services". The Company does not believe that its business in the U.K. is
dependent upon the use of any patent or trademark or similar property.
U.K. EMPLOYEES
As of December 5, 1997, the Company's U.K. Operations employed
approximately 140 full-time employees and 30 part-time employees.
In addition, the Company's U.K. Operations maintain registers of
approximately 575 registered nurses and 2,290 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.
-12-
GOVERNMENT REGULATION
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 comply with
applicable Federal and state laws and regulations in all material respects.
However, changes in the law or new interpretations of existing laws could have
a material effect on permissible activities of the Company, the relative costs
associated with doing business and the amount of reimbursement for the
Company's products and services paid by government and other third-party
payors.
Health Care Reform. Political, economic and regulatory influences are
subjecting the health care industry in the U.S. to fundamental change. Although
Congress has failed to pass comprehensive health care reform legislation, the
Balanced Budget Act of 1997 made several changes to the Medicare reimbursement
system that affect payment for the products provided by the Company. Some of
these provisions include an expansion of coverage of diabetic testing supplies
to non-insulin-treated Medicare diabetics, a 10% reduction of Medicare payment
rates for diabetic test strips, 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. The Company anticipates that Congress and state
legislatures will continue to review and assess alternative health care
delivery and payment systems and may in the future propose and adopt
legislation effecting fundamental changes in the health care delivery system.
The Company cannot predict the ultimate timing, scope or effect of any
legislation concerning health care reform. Any proposed Federal legislation, if
adopted, could result in significant changes in the availability, delivery,
pricing and payment for health care services and products. Various state
agencies also have undertaken or are considering significant health care reform
initiatives. Although it is not possible to predict whether any health care
reform legislation will be adopted or, if adopted, the exact manner and the
extent to which the Company will be affected, it is likely that the Company
will be affected in some fashion, and there can be no assurance that any health
care reform legislation, if and when adopted, will not have a material adverse
effect on the Company's business, financial condition, cash flows or results of
operations.
Permits and Licensure. Certain of the Company's facilities are subject
to state licensure laws, including licensing from state boards of pharmacy.
Federal laws require certain of the Company's facilities to comply with rules
applicable to controlled substances. These rules include an obligation to
register with the Drug Enforcement Administration of the United States
Department of Justice and to meet certain requirements concerning security,
record keeping, inventory controls, prescription and order forms and labeling.
The Company's pharmacists, nurses, and certain of its radiology equipment also
are subject to state licensing requirements. The Company believes that it is in
substantial compliance with all applicable licensure requirements.
-13-
Anti-kickback and Fraud and Abuse Laws. The Company is subject to
Federal and state laws prohibiting direct or indirect payments for patient
referrals for items and services reimbursed under Medicare, Medicaid and state
programs as well as in relation to private payors.
The Federal Medicare and Medicaid "Anti-kickback Statute" prohibits
certain conduct involving improper payments in connection with the delivery of
items or services covered by a number of Federal and state health care
programs. Among other things, these prohibitions apply to anyone who knowingly
and willfully solicits, receives, offers, or pays any remuneration in return
for referring an individual to another person for the furnishing, or arranging
for the furnishing, of any item or service that may be paid, in whole or in
part, by the Medicare, Medicaid or other Federal health care programs. To date,
courts have interpreted the Anti-kickback Statute to apply to a broad range of
financial relationships between providers and referral sources, including
physicians and other direct health care providers, as well as persons who do
not have a direct role in the provision of health care services. Violations of
the statute may result in criminal penalties, including fines of up to $25,000
and imprisonment for up to five years for each violation, exclusion from
participation in the Medicare and Medicaid programs, and civil penalties of up
to $50,000 and treble the amount of remuneration for each violation. The
Balanced Budget Act of 1997 increases accountability and strengthens program
integrity through additional fraud and abuse penalties.
The U.S. Department of Health and Human Services ("HHS") has adopted
regulations creating "safe harbors" from Federal criminal and civil penalties
under the Anti-kickback Statute by identifying certain types of ownership
interests and other financial arrangements that do not appear to pose a threat
of Medicare and Medicaid program abuse. Additional safe harbors have also been
proposed, and HHS has recently solicited proposals for developing new and
modifying existing safe harbors. Transactions covered by the Anti-kickback
Statute that do not conform to an applicable safe harbor are not necessarily in
violation of the Anti-kickback Statute, but such arrangements would risk
scrutiny and may be subject to civil sanctions or criminal enforcement action.
The Federal "Stark Law" provides that where a physician has a
"financial relationship" with a provider of "designated health services"
(including, among other things, parenteral and enteral nutrients, equipment and
supplies, outpatient prescription drugs and home medical equipment, which are
products and services provided by the Company), the physician is prohibited
from referring a Medicare or Medicaid patient to the health care provider, and
the provider is prohibited from billing Medicare or Medicaid, for the
designated health service. In August 1995, regulations were issued pursuant to
the Stark Law as it existed prior to its amendment in 1993. The preamble to
these regulations indicates that the Health Care Financing Administration
("HCFA") intends to rely on the language and interpretations in the regulations
when reviewing compliance under the Stark Law, as amended (the "Amended Stark
Law"). Certain exceptions from the referral prohibitions are available under
the Amended Stark Law, including the referral of patients to providers owned by
certain qualifying publicly-traded companies in which a referring physician
owns an investment security. At this time, the Company believes that
investments will qualify for the publicly-traded securities exception because
it has shareholder equity of at least $75,000,000. Submission of a claim that a
provider knows or should know is for services for which payment is prohibited
under the Amended Stark Law, and which does not meet an exception could result
in refunds of any amounts billed, civil money penalties of not more than
$15,000 for each such service billed, and possible exclusion from the Medicare
and Medicaid programs.
A number of Federal laws impose civil and criminal liability for
knowingly presenting or causing to be presented a false or fraudulent claim, or
knowingly making a false statement to get a false claim paid or approved by the
government. Under one such law, the "False Claims Act," civil damages may
include an amount that is three times the amount of claims falsely made or the
government's actual damages, and up to $10,000 per false
-14-
claim. In addition, a civil penalty of up to $15,000 may be assessed for
engaging in other activities prohibited by this statute. Actions to enforce the
False Claims Act may be commenced by a private citizen on behalf of the Federal
government, and such private citizens receive between 15 and 30 percent of the
recovery. Efforts have been made (with mixed success) to assert that any claim
resulting from a relationship in violation of the Anti-kickback Statute or the
Amended Stark Law is false or fraudulent under the False Claims Act. The
Company carefully monitors its submissions of Medicare and Medicaid claims and
all other claims for reimbursement to assure that they are not false or
fraudulent, and as noted above, believes that it is not in violation of the
Anti-kickback Statute or the Amended Stark Law.
The Office of Inspector General ("OIG") of HHS instituted "Operation
Restore Trust" in May 1995 in the five states with the highest Medicare
expenditures (California, Florida, New York, Texas and Illinois). Operation
Restore Trust (which will be expanded to involve additional states, including
New Jersey, over the next two years) is intended to counter health care fraud,
waste and abuse in targeted areas that HHS believes to be particularly
vulnerable to fraud and abuse, including home health care, nursing homes and
home medical equipment. The OIG has issued "Fraud Alerts" relating to improper
business practices in the provision of medical supplies to nursing homes, and
is expected to issue additional Fraud Alerts in the future as a means of
advising the public of suspect business arrangements and practices in the
health care industry. In addition, providers of home medical equipment, wound
care supplies and other products and services are expected to be subject to
increased scrutiny for practices involving fraud and abuse.
Many states, including the states in which the Company operates, have
adopted statutes and regulations prohibiting payments for patient referrals and
other types of financial arrangements with health care providers, which, while
similar in certain respects to the Federal legislation, vary from state to
state. Sanctions for violating these state restrictions may include loss of
licensure and civil and criminal penalties. Certain states also have begun
requiring health care practitioners and/or other providers to disclose to
patients any financial relationship with a provider, including advising
patients of the availability of alternative providers.
The Company continues to review all aspects of its operations and
believes that it complies in all material respects with applicable provisions
of the Anti-kickback Statute, the Amended Stark Law and applicable state laws,
although because of the broad and sometimes vague nature of these 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 Federal
and state fraud and abuse laws, including the Amended Stark Law. At this time,
the Company cannot anticipate what impact, if any, subsequent administrative or
judicial interpretation of the applicable Federal and state laws may have on
the Company's business, financial condition, cash flows or results of
operations.
On July 11 and July 22, 1997, the Company's Respiflow, Inc.
("Respiflow") and MK Diabetic Support Services, Inc. ("MK") subsidiaries,
respectively, each received a letter (the "Audit Letters") from the Office of
Audit Services (a division of the OIG). The Audit Letters indicate, among other
things, that the OIG is conducting an industry-wide audit of marketing fees and
commissions paid from pharmacies to home medical equipment companies. The
Company has been informed that the audit has been extended to cover its
DermaQuest, Inc. ("DermaQuest") subsidiary. The Company is cooperating fully
with the OIG and has produced documentation which it believes is responsive to
the requests set forth in the Audit Letters. While the Company believes that
its former arrangements with home medical equipment suppliers do not violate
any Federal or state laws, it cannot predict whether the audit will ultimately
result in any liability to the government and in such event, the amount
thereof. There can be no assurance that such amount, if any, will not have a
material adverse effect on the Company's consolidated financial position,
results of operations or cash flows.
-15-
On November 19, 1997, the Company was notified by the Office of the
United States Attorney for the Eastern District of Texas that it, Respiflow,
MK, and other non-affiliated entities had been named defendants in a qui tam
action under the Federal False Claims Act. The qui tam action was filed under
seal in the United States District Court, and it will remain under seal while
the government evaluates the merits of the lawsuit and decides whether to
intervene in and take over the conduct of the litigation. The government has
not made a copy of the sealed complaint available to the Company; however, the
Company has been informed that no individuals associated with it or its
affiliates have been named as defendants. The Company further understands that
the issues raised in the lawsuit involve payments to durable medical equipment
dealers who acted as the Company's marketing representatives. The Company
cannot predict whether the Federal government will intervene in this action or
whether the outcome of this action will have a material adverse effect on the
Company's consolidated financial position, results of operations or cash flows.
U.K. GOVERNMENT REGULATION.
The MCA has granted licenses to Omnicare (including Medigas) for the
production and distribution of medical grade oxygen to the pharmacy network
throughout the U.K.
Allied operates under the Nurses Act (England and Wales) 1957 and 1961
Amendment and the Nurses Agency Act (Scotland) 1957. In addition, Allied is
accredited by various U.K. social services agencies.
The Company believes that it complies in all material respects with
U.K. health care laws and regulations applicable to its U.K. Operations.
INSURANCE
Participants in both the U.S. and U.K. 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 condition,
cash flows or results of operations. In addition, claims, regardless of their
merit or eventual outcome, may have a material adverse effect on the Company's
reputation. There can be no assurance that the Company's insurance will be
sufficient to cover liabilities that it may incur in the future.
ITEM 2. PROPERTIES.
The Company leases a total of 15 facilities in three states and Puerto
Rico and owns three and leases seven facilities in the U.K. In addition, there
are 65 facilities in the U.K. which are owned or leased by branch
representatives. Management believes that its existing leases will be
renegotiated as they expire or that alternative properties can be leased on
acceptable terms. The Company also believes that its present facilities are
well
-16-
maintained and are suitable for it to continue its existing operations. See
Note 11 to the Notes to Consolidated Financial Statements.
The Company also leases three facilities related to the former
business of HMI. The Company is obligated to provide access to these facilities
to the purchaser of the HMI business through March 1998. The Company is
currently seeking to either sublet or terminate the leases on these facilities.
ITEM 3. LEGAL PROCEEDINGS.
THE COMPANY
On December 4, 1997, a Summons with Notice of Complaint (the "Summons
with Notice") was filed in the Supreme Court of the State of New York, County
of New York against the Company, Transworld Acquisition Corp. ("Acquisition")
and Hyperion Partners L.P. by Primary Health Services, Inc., Chuck Davis and
Gregory Gaiser. The Summons with Notice contains allegations of, among other
things, breach of an asset purchase agreement among Acquisition and the
plaintiffs and tortious interference with certain business relationships. The
action seeks compensatory damages of $5,000,000 and punitive damages of
$5,000,000. The Company and Acquisition expect to file a notice of appearance
or serve a written demand for the complaint by December 28, 1997. Although it is
too early to predict the ultimate outcome, the Company intends to vigorously
defend this proceeding and currently does not expect that there will be a
material adverse effect on the Company's consolidated financial position,
results of operations or cash flow.
HMI
Effective October 1, 1997, HMI became a wholly-owned subsidiary of the
Company.
HMI and certain of its former directors and officers and its outside
auditors, BDO Seidman, LLP, have been named as defendants in a consolidated
class action securities fraud lawsuit filed on February 29, 1996 in the United
States District Court for the Eastern District of New York entitled In re
Health Management, Inc. Securities Litigation, Master File No. 96 Civ. 0889
(ADS). This consolidated action alleges claims under Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934, arising out of alleged
misrepresentations and omissions by HMI in connection with certain of its
previous securities filings. The consolidated action purports to represent a
class of persons who purchased HMI shares of common stock between August 25,
1994 and February 27, 1996, the date HMI announced that it would have to
restate certain of its financial statements. The consolidated action sought
unspecified monetary damages reflecting the decline in the trading price of the
HMI shares of common stock that allegedly resulted from HMI's February 1996
announcements. HMI reached a settlement of the consolidated action which
received court approval on June 9, 1997. The settlement provided for a cash
payment of $4,550,000 of which $3,200,000 was paid at the time the court's
approval of the settlement became final. In October 1997, subsequent to the
closing of the Merger Agreement, the remaining $1,350,000 was paid. HMI is in
the process of negotiating with its directors and officers liability insurance
carrier with respect to coverage for damages in connection with the stockholder
class action lawsuit and certain payments received from such carrier may reduce
HMI's liability with respect to such settlement.
Certain of HMI's current and former officers and directors have been
named as defendants, and HMI has been named as a nominal defendant, in a
consolidated derivative action filed on March 15, 1996 in the United States
District Court for the Eastern District of New York entitled In re Health
Management, Inc. Stockholders' Derivative Litigation, Master File No. 96 Civ.
1208 (ADS). The consolidated action alleges claims for breach of fiduciary duty
and contribution against the individual director defendants arising out of
alleged misrepresentations and omissions contained in certain of HMI's previous
securities filings. The parties have agreed to file a Stipulation of Voluntary
Dismissal of this action.
-17-
BDO Seidman, LLP had been named as a defendant, and HMI had been named
as a nominal defendant, in a derivative lawsuit filed on June 12, 1996 in the
Supreme Court for the State of New York, County of New York entitled Howard
Vogel, et al. v. BDO Seidman, LLP, et al., Index No. 96-603064. The complaint
alleged claims for breach of contract, professional malpractice, negligent
misrepresentation, contribution and indemnification against BDO Seidman, LLP
arising out of alleged misrepresentations and omissions contained in certain of
HMI's previous securities filings. BDO Seidman, LLP was HMI's auditor at the
time those filings were made and has continued to serve as such. This case has
been discontinued by order of the court.
HMI and certain of its current and former officers have been named as
defendants in an alleged class action lawsuit filed on April 3, 1997 in the
United States District Court for the Eastern District of New York formerly
entitled Nicholas Volonnino et al. v. Health Management, Inc., W. James Nicol,
Paul S. Jurewicz and James Mieszala, 97 Civ. 1646. This action was amended on
September 12, 1997, and is now entitled Dennis Baker et al. v. Health
Management, Inc., BDO Seidman, LLP, Transworld HealthCare, Inc., W. James
Nicol, Paul S. Jurewicz and James Mieszala. This action alleges claims under
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder, arising out of misrepresentations and omissions by HMI
in connection with certain of its previous securities filings and press
releases. The action now purports to represent a class of persons who purchased
shares of HMI common stock between April 26, 1996 and March 17, 1997, the date
HMI announced that it would have to restate certain of its financial statements
and that it was renegotiating its deal with the Company. The action seeks
unspecified compensatory damages for the harm sustained as a result of the
alleged wrongdoing. On November 19, 1997, HMI and the individual defendants
filed a motion to dismiss the claims against them for failure to state proper
claims for relief. The Company made a similar motion on November 24, 1997.
Under HMI's Certificate of Incorporation and Bylaws, certain officers
and directors may be entitled to indemnification, or advancement of expenses
for legal fees in connection with the above lawsuits. HMI may be required to
make payments in respect thereof in the future. HMI has been named as a
defendant in a lawsuit filed on November 25, 1997 in the Chancery Court of the
State of Delaware for New Castle County entitled Clifford E. Hotte v. Health
Management, Inc., CA No. 16060NC. The plaintiff in that action is seeking the
reimbursement and advancement of legal fees and expenses in the amount of
$1,000,000. In addition, a former director of HMI through her attorneys has
demanded advancement of legal fees and expenses in the amount of $150,000.
The enforcement division of the Securities and Exchange Commission
(the "Commission") has issued a formal order of investigation relating to
matters arising out of HMI's public announcement on February 27, 1996 that HMI
would have to restate its financial statements for prior periods as a result of
certain accounting irregularities. HMI is fully cooperating with this
investigation and has responded to the requests of the Commission for
documentary evidence.
-18-
The outcomes of certain of the foregoing lawsuits and the
investigation with respect to HMI are uncertain and the ultimate outcomes could
have a material adverse affect on the Company.
The Company is involved in various other legal proceedings and claims
incidental to its normal business activities. The Company is vigorously
defending its position in all such proceedings. Management believes these
matters should not have a material adverse impact on the financial condition,
cash flows, or results of operations.
See also "Business -- Government Regulation."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of the Eleven Month Period, no matters were
submitted by the Company to a vote of its stockholders.
-19-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock is quoted on the Nasdaq National Market (the
"NASDAQ/NM") and is traded under the symbol "TWHH." The following table sets
forth the high and low sales price of the Common Stock on the NASDAQ/NM for the
fiscal years ended October 31, 1995 and 1996, the Eleven Month Period, and the
first quarter of fiscal 1998, through December 12, 1997.
PERIOD HIGH LOW
------ ---- ---
Year Ended October 31, 1996:
First Quarter............................ 13-1/2 8-1/8
Second Quarter........................... 10-6/8 7-6/8
Third Quarter............................ 10-3/8 8
Fourth Quarter........................... 11-1/4 8-5/8
Eleven Month Period Ended September 30, 1997:
First Quarter............................ 12-5/8 9-3/8
Second Quarter........................... 11-1/2 9-1/8
Third Quarter............................ 10-1/2 8
Fourth Quarter (through September 30,
1997).................................... 9-7/8 6-5/8
Year Ended September 30, 1998:
First Quarter
(through December 12, 1997).............. 9-7/8 6-13/16
As of December 12, 1997, there were approximately 187 stockholders of
record of the Common Stock.
The Company has neither declared nor paid any dividends on its Common
Stock and does not anticipate paying dividends in respect of its Common Stock
in the foreseeable future. Any payment of future dividends will be at the
discretion of the Company's Board of Directors and will depend upon, among
other things, the Company's earnings, financial condition, cash flows, capital
requirements and other relevant considerations, including the extent of its
indebtedness and any contractual restrictions with respect to the payment of
dividends. Under the terms of the Company's Credit Facility, the Company is
prohibited from paying dividends or making other cash distributions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
-20-
ITEM 6. SELECTED FINANCIAL DATA.
The financial data for the Eleven Month Period ended September 30,
1997 and the years ended October 31, 1996 and 1995 and balance sheet data as of
September 30, 1997 and October 31, 1996 as set forth below have been derived
from the consolidated financial statements of the Company for the periods
indicated and should be read in conjunction with those financial statements and
notes thereto included elsewhere in this Transition Report on Form 10-K. In
addition, the selected financial data should be read in conjunction with
"Business -- General" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Eleven Months Ended
September 30,(1) Fiscal Year Ended October 31,
---------------------------- ---------------------------------------------------------
1997(2) 1996 1996(3) 1995(4) 1994(5) 1993(6)
---------------------------- ---------------------------------------------------------
(Unaudited) (in thousands, except per share data)
FINANCIAL DATA:
Net respiratory, medical equipment
and supplies sales................ $52,562 $41,754 $47,170 $42,782 $17,022 $ 732
Net patient services................ 29,844 17,425 19,164 18,870 12,150 6,991
Net infusion services............... 11,038 8,724 9,970 9,935 10,551 8,688
-------- ------- ------- ------- ------- -------
Total revenues...................... 93,444 67,903 76,304 71,587 39,723 16,411
Cost of revenues.................... 51,387 30,917 34,680 32,730 18,809 8,286
-------- ------- ------- ------- ------- -------
Gross profit........................ 42,057 36,986 41,624 38,857 20,914 8,125
Selling, general and administrative
expenses.......................... 42,931 30,062 33,552 29,774 15,968 6,528
Special charges..................... 34,230(7) -- -- 3,898(8) -- --
Equity in losses of HMI............. 296 -- -- -- -- --
-------- ------- ------- ------- ------- -------
Operating (loss) income............. (35,400) 6,924 8,072 5,185 4,946 1,597
Interest income..................... (2,650) (66) (75) (68) (105) (174)
Interest expense.................... 5,063 4,229 4,427 3,767 914 84
(Benefit) provision for income taxes (5,078) 1,263 1,702 627 1,656 736
-------- ------- ------- ------- ------- -------
(Loss) income before extraordinary
item and cumulative effect of an
accounting change................. (32,735) 1,498 2,018 859 2,481 945
Extraordinary item.................. -- (1,435) (1,435)(9) -- -- --
Cumulative effect of an accounting
change............................ -- -- -- -- 300 --
-------- ------- ------- ------- ------- -------
Net (loss) income................... $(32,735) $ 63 $ 583 $ 859 $ 2,781 $ 945
======== ======= ======= ======= ======= =======
(Loss) income per share before extra
ordinary item and cumulative effect
of an accounting change(10):
Primary............................. $ (2.56) $ 0.20 $ 0.26 $ 0.13 $ 0.49 $ 0.25
======== ======= ======= ======= ======= =======
Fully diluted....................... $ (2.56) $ 0.20 $ 0.25 $ 0.12 $ 0.47 $ 0.25
======== ======= ======= ======= ======= =======
Net (loss) income per share(10):
Primary............................. $ (2.56) $ 0.01 $ 0.08 $ 0.13 $ 0.55 $ 0.25
======== ======= ======= ======= ======= =======
Fully diluted....................... $ (2.56) $ 0.01 $ 0.07 $ 0.12 $ 0.53 $ 0.25
======== ======= ======= ======= ======= =======
Weighted average number of shares
outstanding(10):
Primary............................. 12,794 7,533 7,833 6,868 5,028 3,766
======== ======= ======= ======= ======= =======
Fully diluted....................... 12,794 7,584 7,925 6,924 5,227 3,847
======== ======= ======= ======= ======= =======
-21-
September 30, October 31,
-------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------------- ----------- ------------ ----------- ----------
BALANCE SHEET DATA:
Working capital............... $ 26,411 $26,201 $(4,706)(11) $(4,113)(12) $ 6,597
Accounts receivable, net...... 31,475 24,414 18,906 10,514 5,988
Total assets.................. 201,281 90,727 74,912 58,249 17,442
Long-term debt................ 61,400 12,505 20,264 13,758 530
Total shareholders' equity.... 81,905 67,225 24,086 20,371 11,026
- ------------------------------------
(1) The Company has changed its fiscal year from October 31 to September 30.
This has resulted in a eleven month reporting period ended September 30,
1997. Selected financial data as of the eleven months ended September 30,
1996 (unaudited) has been included in this table for comparative
purposes.
(2) The financial data for the eleven months ended September 30, 1997
includes the results of operations of Omnicare and Allied from their
dates of acquisition (effective July 1, 1997 and June 23, 1997,
respectively).
(3) The financial data for the year ended October 31, 1996 includes the
results of operations of Health Meds, Inc. ("Health Meds") and U.S. Home
Care Infusion Therapy Services Corporation of New Jersey ("USNJ") from
their dates of acquisition (effective October 1, 1996).
(4) The financial data for the year ended October 31, 1995 includes the
results of operations of DermaQuest (effective November 1, 1994), The
Pulmonary Division of Delaware Valley Lung Center, P.C. ("DVLC")
(effective January 1, 1995) and Precision Health Care, Inc. (effective
March 1, 1995) from their respective dates of acquisition.
(5) The financial data for the year ended October 31, 1994 includes the
results of operations of RespiFlow and MK (effective April 1, 1994) and
Radamerica (acquired August 5, 1994) from their respective dates of
acquisition.
(6) The financial data for the year ended October 31, 1993 includes the
results of operations of Complete Health Care Services, Inc. (acquired in
June 1993) and The PromptCare Companies, Inc. (acquired in September
1993) from their respective dates of acquisition.
(7) The Company reported special charges totalling $34,230,000 resulting from
a $20,000,000 non-cash charge related to impairment of the investment in
HMI, as well as to record estimated costs, fees and other expenses
related to completion of the HMI Asset Sale, a $12,079,000 non-cash
charge for the write-off of goodwill and other intangible assets related
to exiting the wound care and orthotic product lines of DermaQuest, a
$1,622,000 non-cash charge for the termination of the agreements to
purchase the VIP Companies, a $437,000 charge for closure of the
Company's pulmonary rehabilitation center in Cherry Hill, New Jersey, and
$698,000 of other charges, partly offset by a $606,000 gain on the sale
of Radamerica.
(8) The Company reported special charges totaling $3,898,000 resulting from a
write-off of expenses related to an abandoned public offering
($2,808,000), a write-off of expenses related to abandoned acquisitions
($605,000) and expenses related to the consolidation of certain of the
Company's facilities ($485,000).
(9) The Company recorded a non-cash, after-tax, extraordinary charge of
$1,435,000 (net of tax benefit of $879,000) in the fiscal year ended
October 31, 1996 in connection with the repayment of the Paribas Credit
Agreement (as defined in Management's Discussion and Analysis of
Financial Conditions and Results of Operations -- Liquidity and Capital
Resources -- General).
(10) Weighted average shares have been restated for the years ended October
31, 1996, 1995 and 1994 to give effect to a market price guarantee under
an acquisition agreement. The effects of this restatement were to
decrease fully diluted income before extraordinary loss and extraordinary
loss by $0.01 for the year ended October 31, 1996, to decrease fully
diluted income before extraordinary loss and net income per share by
$0.01 for the year ended October 31, 1995 and to decrease primary income
before extraordinary loss and net income per share by $0.01 for the year
ended October 31, 1994.
(11) Includes a $5,973,000 acquisition payable in connection with the
acquisition of RespiFlow and MK and an $8,832,000 acquisition payable in
connection with the acquisition of DermaQuest.
(12) Includes a $10,750,000 acquisition payable in connection with the
acquisition of RespiFlow and MK.
-22-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
The Company has changed its fiscal year to end on September 30, 1997.
This has resulted in an eleven month reporting period ended September 30, 1997
included in this Transition Report on Form 10-K. Prior to this change the
Company's fiscal year ended on October 31.
The Company is a provider of a broad range of home health care
services and products with operations in the U.S. and the U.K. The Company
provides the following services and products to patients in their homes: (i)
specialty mail-order pharmaceuticals, medical supplies, respiratory therapy and
home medical equipment; (ii) patient services, including home nursing and
para-professional services; and (iii) infusion therapy. The Company's U.S.
patient, infusion and respiratory therapy services and home medical equipment
operations are concentrated in New Jersey, New York and Florida while its
specialty mail-order pharmaceutical and medical supplies operations provide
products to patients nationwide and in Puerto Rico. The Company's U.K.
operations include the second largest commercial provider of home nursing and
para-professional care with operations located throughout the U.K., as well as
a leading medical respiratory supplier to areas throughout the U.K.
The Company took a number of significant steps during the Eleven Month
Period to realign its business as a focused regional home health care provider
and specialty pharmacy and medical supply distributor in the U.S. and as an
integrated national provider of home and alternate site health care products
and services in the U.K. These steps included: (i) selling non-core assets such
as the Company's Radamerica business which provides radiation therapy in the
Baltimore, Maryland area; (ii) exiting businesses that were deemed not to have
the potential to earn an adequate return on capital over the long term (such as
wound care and orthotic product lines in the continental U.S., as well as the
Company's pulmonary rehabilitation center in Cherry Hill, New Jersey): (iii)
completing the HMI Asset Sale; and (iv) terminating the agreements to purchase
the VIP Companies. In relation to these actions, the Company recorded special
charges of $34,230,000 and additional bad debt expense of $7,023,000. Despite
these special charges, the Company expects to generate net cash proceeds of
approximately $38,000,000 through the sale of Radamerica and the HMI Asset
Sale.
In addition to this restructuring and refocusing of its U.S.
operations, the Company made significant strides toward becoming one of the
only integrated national providers of home and alternative site health care in
the U.K. through the purchase of Omnicare for approximately $31,000,000 and
Allied for approximately $60,000,000. Omnicare provides respiratory equipment
and services and supplies a range of medical and surgical products to patients
at home throughout the U.K. through its network of seven regional facilities.
Allied is a national provider of nursing and other care giving services to home
care patients with 65 locations throughout the U.K. The Company intends to
utilize its recently acquired U.K. Operations as a platform to introduce new
products and services to the U.K. market which have already been widely
accepted in the U.S., as well as for add-on acquisitions. The Company believes
the U.K. home health care market is less developed than in the U.S. and
presents a significant opportunity to leverage its existing expertise in home
health care.
The Company's revenue mix and payor mix will be influenced to a
significant degree by the relative contribution of acquired businesses and
their respective payor profiles. Assuming the Company owned 100% of Omnicare
and Allied on November 1, 1996, the products and services offered by these
companies would have accounted for approximately 47.9% of the combined pro
forma revenue ($141,231,000) for the Eleven Month Period. The following table
shows the percentage of net revenues represented by each of the Company's
product lines:
-23-
Eleven Months
Ended Year Ended October 31,
September 30, -------------------------
1997 1996 1995
------------- ------ ------
Net respiratory, medical
equipment and supplies sales 56.3% 61.8% 59.8%
Net patient services............... 31.9 25.1 26.3
Net infusion services.............. 11.8 13.1 13.9
---- ---- ----
Total revenues... 100.0% 100.0% 100.0%
====== ====== ======
The increase in net patient services (and corresponding decline in net
respiratory, medical equipment and supplies sales and net infusion services as
a percentage of total revenues) from the year ended October 31, 1996 to the
Eleven Month Period resulted primarily from the acquisition of Allied
(effective June 23, 1997). Subsequent acquisitions, when completed, will
continue to impact the relative mix of revenues. On a pro forma basis, assuming
the Company owned 100% of Omnicare and Allied on November 1, 1996, the
percentage of total revenues for the eleven months ended September 30, 1997
would have been as follows: net respiratory, medical equipment and supplies
sales 47.3%, net patient services 44.9%; and net infusion services 7.8%.
The following table shows the payor mix for the Company's total
revenues for the periods presented:
Eleven Months
Ended Year Ended October 31,
September 30, -------------------------
Payor 1997 1996 1995
- ------ ------------- ------ ------
Medicare...................... 42.0% 49.8% 48.1%
Medicaid...................... 11.2 11.8 10.8
Private payors................ 33.9 38.4 41.1
U.K. NHS...................... 12.9 -- --
----- ------ ------
Total revenues....... 100.0% 100.0% 100.0%
====== ====== ======
The decrease in Medicare as a percentage of total revenues for the
Eleven Month Period as compared to fiscal 1996 and fiscal 1995 is primarily a
result of the Omnicare and Allied acquisitions. The Company believes that its
payor mix in the future will be determined primarily by the payor profile of
completed acquisitions and, to a lesser extent, from shifts in existing
business among payors. On a pro forma basis, assuming the Company owned 100% of
Omnicare and Allied on November 1, 1996, the payor mix for the eleven months
ended September 30, 1997 would have been as follows: Medicare 27.8%; Medicaid
7.4%; private payors (including managed care payors) 34.4%; and NHS 30.4%.
The Company believes that a substantial portion of its revenues
derived from private payors 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.
-24-
Due to changing interpretation of regulations and statutes by federal
and state regulatory bodies, the specialty pharmacy industry has been subject
to pressure related to its marketing of respiratory therapy medications to
physicians and other referral sources. In addition, HCFA has implemented new
procedures regarding the dispensing of first dose medications to patients.
These and other regulatory changes may have a negative impact on revenues of
the Company's respiratory medications business in the future (which contributed
approximately 18.8% of revenue for the Eleven Month Period), although the
ultimate impact cannot be determined at this time.
The Company's gross margins will be influenced by the revenue mix of
its product lines and by changes in reimbursement rates. The Company
historically has recognized higher gross margins from its specialized
mail-order and medical supplies pharmacy and respiratory therapy operations
than from its nursing and infusion therapy operations. On a pro forma basis,
assuming the Company owned 100% of Omnicare and Allied on November 1, 1996, the
gross profit margin for the Eleven Month Period would have been 38.8% versus
the actual 45.1% for the same period. Subsequent acquisitions, when completed,
will continue to impact the relative mix of revenues and overall gross margin.
The Company amortizes goodwill over a period of 40 years. The Company
has selected the forty-year amortization convention based on the likely period
of time over which related economic benefits will be realized. The Company
believes its estimated goodwill life is reasonable given, among other factors,
the continuing movement of patient care to non-institutional settings,
expanding demand due to demographic trends, the emphasis of the Company on
establishing coverage in each of its local and regional markets and the
[consistent] practice of other home health care companies. At each balance
sheet date, management assesses whether there has been a permanent impairment
in the value of goodwill and the amount of any impairment by comparing
anticipated undiscounted future cash flows from operating activities with the
carrying value of goodwill. The factors considered by management in estimating
future cash flows include current operating results, trends and prospects of
acquired businesses, as well as the effect of demand, competition, market and
other economic factors.
RESULTS OF OPERATIONS
ELEVEN MONTHS ENDED SEPTEMBER 30, 1997 VS. ELEVEN MONTHS ENDED
SEPTEMBER 30, 1996
Revenues. Total revenues increased by $25,541,000 or 37.6% to
$93,444,000 for the eleven months ended September 30, 1997 from $67,903,000 for
the eleven months ended September 30, 1996. This increase was primarily
attributable to the inclusion of Allied ($14,186,000) and Omnicare ($5,661,000)
and an increase of $5,151,000 or 12.3% in net respiratory, medical equipment
and supplies sales resulting primarily from an increase in the number of
patients serviced in the Company's domestic specialty mail-order pharmacy and
medical supplies operations. Net infusion service revenues also increased by
$2,314,000 or 26.5% due primarily to the inclusion of USNJ for the eleven
months ended September 30, 1997.
Cost of Revenues. Cost of revenues increased by $20,470,000 or 66.2%
to $51,387,000 for the eleven months ended September 30, 1997 from $30,917,000
for the eleven months ended September 30, 1996. As a percentage of total
revenues, cost of revenues increased to 55.0% from 45.5% for the eleven months
ended September 30, 1997 and 1996, respectively. Cost of revenues as a
percentage of sales increased for respiratory, medical equipment and supplies
sales (48.9% for the eleven months ended September 30, 1997 versus 39.3% for
the corresponding 1996 period), increased for infusion services (68.6% for the
eleven months ended September 30, 1997 versus 59.9% for the corresponding 1996
period) and increased for patient services (60.8% for the eleven months ended
September 30, 1997 versus 53.2% for the corresponding 1996 period.) The
increases in the respiratory, medical equipment and supplies sales is primarily
attributable to an increase in the mix of higher cost products at the Company's
specialty pharmacy operations. The increase in patient services was as a result
of an
-25-
increase in nursing and para-professional services which carry a higher cost of
service (69.2%) than does radiation therapy (26.4%). Cost of patient services
is expected to increase as a percentage of patient service revenues in the
future as a result of the sale of Radamerica in July 1997 and inclusion of
Allied (which was acquired on June 23, 1997). The increase in infusion services
is as a result of an increase in therapies with higher product costs, as well
as the effects of reduced reimbursement rates for certain payors.
Pursuant to the recent passage of the Balanced Budget Act, a 10%
reduction in Medicare reimbursement of diabetic testing strips will become
effective January 1, 1998. This reduction is expected to increase cost of
revenues as a percentage of revenues and decrease gross profit for respiratory,
medical equipment and supplies sales effective with the reimbursement
reduction. The amount of the impact will be dependent upon product mix, the
amount of product cost concessions that the Company is able to obtain from its
suppliers and number of patients serviced whose primary insurance coverage is
Medicare.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $12,869,000 to $43,931,000 for the eleven
months ended September 30, 1997 from $30,062,000 for the comparable 1996
period. This increase was principally due to an increase in selling, general
and administrative expenses at the Company's specialty mail-order pharmacy and
medical supplies operations ($8,262,000) which increased primarily due to
additional bad debt expense for DermaQuest product lines ($6,060,000). Also
contributing to the increase in selling, general and administrative was the
inclusion of the U.K. Operations ($4,080,000), and additional bad debt expense
for the Company's pulmonary rehabilitation center in Cherry Hill, New Jersey
($663,000).
Special Charges. The Company recorded special charges of $34,230,000
during the eleven months ended September 30, 1997 related to the following
items: (i) $20,000,000 non-cash charge related to impairment of the investment
in HMI as well as to record estimated costs, fees and other expenses related to
completion of the HMI Asset Sale (See "Business -- The Health Management, Inc.
Transaction," "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- General" and Note 3 to the Consolidated Financial
Statements); (ii) $12,079,000 non-cash charge for the write-off of goodwill and
other intangible assets related to exiting the wound care and orthotic product
lines of the Company's DermaQuest subsidiary; (iii) $1,622,000 non-cash charge
for the termination of the agreements to purchase the VIP Companies; (iv)
$437,000 charge for closure of the Company's pulmonary rehabilitation center in
Cherry Hill, New Jersey; and (v) $698,000 of other charges, partly offset by a
$606,000 gain on the sale of Radamerica.
Equity in Losses of HMI. Equity in losses of HMI was $296,000 for the
eleven months ended September 30, 1997 versus $0 for the comparable 1996
period. This represents 49% of HMI's losses for the four months ended April 30,
1997. The 49% interest in HMI was acquired in mid January 1997 and included in
the results of operations effective February 1, 1997. Equity in losses of HMI
for the three months ended July 31, 1997 were accounted for in adjusting the
investment in HMI to estimated net realizable value and was included as a
component of the non-cash charge recorded during that period. Due to the
Company's decision on August 1, 1997 to dispose of HMI, no equity in HMI losses
have been recorded subsequent to July 31, 1997.
Interest Income. Interest income increased by $2,584,000 to $2,650,000
for the eleven months ended September 30, 1997 from $66,000 for the comparable
1996 period. This increase was principally attributable to interest income
earned, after the elimination of intercompany interest (49%) for the eleven
months ended September 30, 1997, under the HMI Credit Agreement ($1,796,000)
and interest earned on funds received from HPII in connection with the purchase
of the Company's Common Stock (See "Liquidity and Capital Resources -- Hyperion
Partners Transactions" and Note 5 to the Consolidated Financial Statements).
-26-
Interest Expense. Interest expense increased by $834,000 to $5,063,000
for the eleven months ended September 30, 1997 from $4,229,000 for the
comparable 1996 period. This increase was primarily attributable to increased
borrowings under the Company's Credit Facility.
(Benefit) Provision for Income Taxes. (Benefit) provision for income
taxes as a percentage of income before income taxes was a benefit of 13.4% for
the eleven months ended September 30, 1997 versus a provision of 45.7% for the
eleven months ended September 30, 1996. The effective rate of 13.4% for the
1997 period was principally a result of both the nondeductibility of the
write-off of goodwill and other intangible assets related to DermaQuest and the
market write-down on the investment in HMI (See Special Charges).
Net deferred tax assets, net of a valuation allowance, were
$7,704,000 at September 30, 1997, an increase of $5,279,000 from net deferred
tax assets of $2,425,000 at October 31, 1996, primarily as a result of an
increase in the provision for doubtful accounts and federal net operating loss
carryforwards. A valuation allowance, was provided for deferred tax assets
where it was not likely that such assets would be realized through future
income levels nor future or prior tax liabilities. During fiscal 1997, the
Company increased the valuation, allowance by $1,859,000 primarily due to the
increase in deferred tax assets for state net operating loss carryforwards
which are not expected to be realized. Management expects that it is more
likely than not that future levels of income will be sufficient to realize
the deferred tax assets, as recorded.
Net Loss. As a result of the foregoing, the Company incurred a net
loss of $32,735,000 for the eleven months ended September 30, 1997 compared to
a net income of $63,000 for the eleven months ended September 30, 1996.
Included in net income for 1996 was an extraordinary loss, net of $1,435,000
resulting from an early extinguishment of debt.
YEAR ENDED OCTOBER 31, 1996 VS. YEAR ENDED OCTOBER 31, 1995
Revenues. Total revenues increased by $4,717,000 or 6.6% to
$76,304,000 for the year ended October 31, 1996 from $71,587,000 for the year
ended October 31, 1995. This increase was primarily attributable to an increase
of $4,388,000 or 10.3% in net respiratory, medical equipment and supplies sales
resulting primarily from an increase in the number of patients serviced in the
Company's specialty mail-order pharmacy and medical supplies operations.
Cost of Revenues. Cost of revenues increased by $1,950,000 or 6.0% to
$34,680,000 for the year ended October 31, 1996 from $32,730,000 for the year
ended October 31, 1995. As a percentage of total revenues, cost of revenues
remained relatively constant at 45.5% and 45.7% for the year ended October 31,
1996 and 1995, respectively. Cost of revenues as a percentage of sale remained
relatively constant for respiratory, medical equipment and supplies sales
(39.2% for the year ended October 31, 1996 versus 39.3% for the corresponding
1995 period), but increased for patient services (53.1% for the year ended
October 31, 1996 and versus 52.1% for the corresponding 1995 period) and
decreased for infusion services (60.4% for the year ended October 31, 1996
versus 61.4% for the corresponding 1995 period).
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $3,778,000 or 12.7% to $33,552,000 for the
year ended October 31, 1996 from $29,774,000 for the comparable 1995 period.
This increase was primarily attributable to an increase in selling, general and
administrative expenses at the Company's specialty mail-order pharmacy and
medical supplies operations ($2,816,000) which increased principally as a
result of the building of infrastructure (such as payroll and payroll related
expenses and office expenses) in order to support the increased patient volumes
($1,849,000). The remaining increase was primarily attributable to an increase
of $978,000 in corporate expenses including a charge of $456,000 in connection
with the resignation of the Company's former Chief Executive Officer.
Interest Income. Interest income remained relatively flat with $75,000
for the year ended October 31, 1996 and $68,000 for the year ended October 31,
1995.
Interest Expense. Interest expense, net increased by $660,000 to
$4,427,000 for the year ended October 31, 1996 from $3,767,000 for the
comparable 1995 period. This increase was primarily attributable to an increase
in interest expense due to borrowings under the Subordinated Loan (as defined
herein) ($1,003,000), partially offset by a decrease in interest expense due to
lower average borrowings and lower average interest rates under the senior
secured credit facilities ($262,000).
-27-
Provision for Income Taxes. Provision for income taxes as a percentage
of income before income taxes was 45.8% for the year ended October 31, 1996 and
42.2% for the year ended October 31, 1995. The increase in the effective tax
rate from the 1995 period to the 1996 period was primarily attributable to
higher levels of non-deductible expenses, primarily goodwill amortization.
Net deferred tax assets, net of a valuation allowance, were $2,425,000
at October 31, 1996, an increase of $200,000 from net deferred assets of
$2,225,000 at October 31, 1995, primarily as a result of an increase in the
provision for doubtful accounts. A valuation allowance, as required by
Statements of Financial Accounting Standards ("SFAS") No. 109, was provided for
deferred tax assets where it was not likely that such assets would be realized
through future income levels nor future or prior tax liabilities. During fiscal
1996, the Company decreased the valuation allowance by $155,000 primarily due
to the realization of state deferred tax assets based on current levels of
income. Based on current levels of income, management expects that levels of
future income should be sufficient to realize the net deferred tax assets.
Income Before Extraordinary Loss. As a result of the foregoing, income
before extraordinary loss increased by $1,159,000 to $2,018,000 for the year
ended October 31, 1996 from $859,000 for the year ended October 31, 1995.
Income before extraordinary loss for 1995 includes non-recurring charges of
$2,376,000 after tax. Income before extraordinary loss decreased by $1,217,000
to $2,018,000 for the year ended October 31, 1996 from $3,235,000 for the year
ended October 31, 1995, excluding the non-recurring charges.
Extraordinary Loss - Early Extinguishment of Debt. An extraordinary
loss (net of tax benefit of $879,000) of $1,435,000 was recorded in the 1996
results of operations, as a result of the write-off of the deferred financing
costs and discount associated with the early extinguishment of borrowings under
the Paribas Credit Agreement.
Net Income. As a result of the foregoing, net income decreased by
$276,000 or 32.1% to $583,000 for the year ended October 31, 1996 from $859,000
for the year ended October 31, 1995. Net income in 1996 includes an
extraordinary loss on early extinguishment of debt of $1,435,000 after tax,
while net income for 1995 includes non-recurring charges of $2,376,000 after
tax. Excluding this loss and charges, net income for the year ended October 31,
1996 would have been $2,018,000, a decrease of $1,217,000 or 37.6% from
$3,235,000 for the year ended October 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
General. During the eleven months ended September 30, 1997, the
Company utilized $130,302,000 ($117,139,000 net of proceeds from asset sales
and other miscellaneous transactions) in investing activities as follows:
$93,586,000 for the acquisition of the U.K. Operations (Omnicare and Allied);
$32,189,000 for the purchase of 49% of HMI and HMI's senior debt and related
advances; $2,694,000 for capital expenditures and $1,833,000 for acquisitions
payable. In addition, the Company utilized $2,653,000 for operating activities.
Substantially all of the financing for the operating and investing activities
was provided by net borrowings under the Company's Credit Facility of
$73,864,000, the equity investment by HPII and Hyperion TW Fund L.P. (the
"Fund") aggregating $50,650,000 and proceeds of $12,100,000 from the sale of
Radamerica.
During fiscal 1996, the Company experienced cash outflows from
operations of $6,594,000, principally as a result of an increase in accounts
receivable of $5,032,000 (net of increases in allowance for doubtful accounts
and receivables acquired in purchase transactions) and payments for debt
discounts and issuance costs. The Company utilized $13,903,000 in investing
activities, consisting of $11,078,000 for payments on acquisitions payable,
$1,785,000 for acquisitions (primarily the acquisition of Health Meds), net of
cash acquired, and $1,040,000 for capital expenditures. During fiscal 1995,
the Company experienced cash outflows from operations of $1,869,000, primarily
as a result of an increase in accounts receivable of $6,258,000 (net of
increases in allowance for doubtful accounts and receivables acquired
-28-
in purchase transactions). The Company utilized $10,391,000 in investing
activities, consisting of $5,957,000 for payments on acquisitions payable,
$3,529,000 for acquisitions, net of cash acquired, and $1,066,000 for capital
expenditures, offset by $161,000 of payments received on notes
receivable-related parties. Cash requirements during the year ended October 31,
1996 for operating and investing activities were met through borrowings under
the Company's former credit agreement with Banque Paribas, as agent (the
"Paribas Credit Agreement"), the Credit Facility and the $10,000,000
Subordinated Loan from HPII, as well as with proceeds from the issuance of
4,400,000 units to HPII. Additional cash requirements in the 1995 fiscal year
were met through borrowings under the Paribas Credit Agreement.
The Company believes it has adequate capital resources to conduct its
operations for the next twelve months. Further expansion of the Company's
business (particularly through acquisitions) may require the Company to incur
additional debt or offer additional equity securities if cash generated from
operations, cash on hand and amounts available under the Credit Facility are
inadequate or not available to meet its needs. There can be no assurance that
any such additional debt or equity will be available to the Company, or if
available, will be on terms acceptable to the Company. In addition, covenants
contained in the Credit Facility restrict the Company from entering into
transactions not in the ordinary course of business, including making
acquisitions and issuing capital stock, without consent.
Accounts Receivable. The Company maintains a cash management program
that focuses on the reimbursement function, as growth in accounts receivable
has been the main operating use of cash historically. At September 30, 1997 and
October 31, 1996, $31,475,000 (15.6%) and $24,414,000 (26.9%), respectively, of
the Company's total assets consisted of accounts receivable substantially from
third-party payors. Such payors generally required substantial documentation in
order to process claims. The collection time for accounts receivable is
typically the longest for services that relate to new patients or additional
services requiring medical review for existing patients.
Accounts receivable increased by $7,061,000 from October 31, 1996 to
September 30, 1997 primarily due to the inclusion of Transworld U.K.
($10,376,000).
During fiscal 1996 and the eleven month period ended September 30,
1997, the Company experienced a significant increase in accounts receivable at
its DermaQuest operation whose main product lines include wound care and
orthotic products. Medicare, to whom substantially all DermaQuest claims are
initially submitted for payment, has subjected these claims to an extensive
review process and, in many cases, has required DermaQuest to pursue payment
through the fair hearing process of the Medicare intermediary. This has created
significant delays in payments, in many cases extending beyond twelve months,
leading to the significant buildup in accounts receivable and corresponding
negative impact on cash flow. The Company conducted an extensive review of the
DermaQuest receivables in connection with the decision to discontinue these
product lines in the continental U.S. and, as a result, established additional
reserves of $6,060,000 based on the potential inability to secure required
documentation in a timely manner for reimbursement as a result of no longer
being in these
-29-
business lines. In establishing the net realizable value of its accounts
receivable for DermaQuest, the Company has relied on its historical and
anticipated payment experience. The Company believes that based on current
regulations, its billing and related documentation practices, and its extensive
review, the DermaQuest accounts receivable reflect the net realizable value of
these receivables.
Management's goal is to maintain accounts receivable levels equal to
or less than industry averages, which will tend to mitigate the risk of
recurrence of negative cash flows from operations by reducing the required
investment in accounts receivable and thereby increasing cash flows from
operations. Days sales outstanding ("DSOs") is a measure of the average number
of days taken by the Company to collect its accounts receivable, calculated
from the date services are rendered. For the Eleven Month Period and for each
of the years ended October 31, 1996 and 1995, the Company's average DSOs were
80, 109 and 97, respectively. The decrease in DSO's was primarily due to the
inclusion of the U.K. Operations which tend to have DSO's generally less than
those in the U.S. As the proportion of third-party payors' claims related to
alternate site health care increases, the Company believes that third-party
payors are likely to increase their review of such claims, the effect of which
would be to generally increase DSOs.
Credit Facility. The Company has a $100,000,000 senior secured
revolving credit facility with a group of commercial banks. Subject to certain
exceptions, the Credit Facility prohibits or restricts, among other things, the
incurrence of liens, the incurrence of indebtedness, certain fundamental
corporate changes, dividends, the making of specified investments and certain
transactions with affiliates. In addition, the Credit Facility contains
affirmative and negative financial covenants customarily found in agreements of
this kind, including the maintenance of certain financial ratios, such as
interest coverage, debt to earnings before interest, taxes, depreciation and
amortization ("EBITDA") and minimum EBITDA. At July 31, 1997, the Company was
in technical default of the Credit Facility due to non-compliance with certain
financial covenants (interest coverage, debt to EBITDA and minimum EBITDA)
caused by the recording of the special charges ($34,433,000) and additional bad
debt expense ($3,323,000) related to the business realignment. On September 15,
1997, the Credit Facility was amended to accommodate these charges, bringing
the Company in to compliance with the Credit Facility. Excluding these charges,
the Company would have been in compliance with all financial covenants
contained in the Credit Facility at July 31, 1997. On November 13, 1997, the
Company amended the Credit Facility to adjust certain covenants for 1997 and
for fiscal periods beginning October 1, 1997. As a result the Credit Facility,
as amended, did not contain tests for key financial covenants as of September
30, 1997. At September 30, 1997, the Company was in compliance with all other
covenants contained in the Credit Facility, as amended. The Company was also in
compliance with key financial covenants as of October 31, 1997.
Unused portions of the revolving loans may be borrowed and reborrowed
subject to the approval of the required lenders and other applicable provisions
of the Credit Facility, as amended. The loans mature on July 31, 2001 with
reductions in availability of funds commencing on July 31, 1998 through
maturity. The Credit Facility provides that subject to the terms thereof, the
Company may make borrowings either at the Base Rate (as defined in the Credit
Facility), plus 1% or the Eurodollar Rate, plus 2%. As of September 30, 1997
and December 12, 1997, Eurodollar Rate borrowings bore interest at a rate of
7.66% and 7.69% to 7.97% per annum, respectively. As of December 12, 1997, the
Company had outstanding borrowings of $71,355,000 under the Credit Facility.
The unused portion of the Credit Facility was $28,645,000 as of December 12,
1997.
The loans under the Credit Facility are secured by, among other
things, a lien on substantially all of the Company's and its subsidiaries
assets, a pledge of the Company's ownership interest in its subsidiaries and
guaranties by the Company's subsidiaries.
In connection with the consummation of the merger with HMI and the
subsequent disposition to Counsel hereinafter described, the Company also
entered into an amendment to the Credit Agreement with its senior lenders which
amendment provides for, among other things, the lenders consenting to the
merger with
-30-
HMI and the sale to Counsel on the terms contained in the amendment, and that
additional loans to the Company will require the approval of the required
lenders in accordance with the terms of the amendment; provided, however, that
under certain circumstances contained in the amendment, the lenders and the
Company shall endeavor in good faith to eliminate the approval requirement on
and after January 1, 1998 with respect to up to $3,000,000 of additional
working capital loans. The amendment to the Company's Credit Facility also
provides that the Company shall repay the lenders an additional $10,000,000
from the HMI Asset Sale on the following dates (less any amounts voluntarily
prepaid through such dates): (i) $8,500,000 on December 31, 1997; (ii) $500,000
on February 28, 1998; and (iii) $1,000,000 on June 30, 1998.
The Company also amended the Credit Facility during the eleven months
ended September 30, 1997 to accommodate the sale of the Additional Shares and
the AP Shares (each as defined herein), certain working capital advanced to HMI
and the purchase of Omnicare and Allied.
On July 31, 1997, the Company used the $12,100,000 of proceeds it
received from the disposition of Radamerica to reduce outstanding borrowings
under the Credit Facility.
Hyperion Partners Transactions. On January 8, 1997, the Company
entered into a stock purchase agreement with HPII, a principal stockholder of
the Company, pursuant to which HPII agreed, subject to the conditions stated
therein, to purchase 898,877 shares of Common Stock at a purchase price of
$11.125 per share for an aggregate purchase price of $10,000,000 (the
"Additional Shares"). The closing of the sale of the Additional Shares occurred
on April 21, 1997. The Additional Shares are covered by a registration rights
agreement (the "Registration Agreement"). The Company will bear all expenses,
other than underwriting discounts and commissions, in connection with any such
registration.
Effective March 26, 1997, the Company entered into a stock purchase
agreement with the Fund, an affiliate of HPII, pursuant to which the purchaser
agreed, subject to the conditions stated therein, to purchase 4,116,456 shares
of the Company's Common Stock (the "March Shares") at a purchase price of
$9.875 per share for an aggregate purchase price of $40,650,000. The closing of
the sale of the March Shares occurred on April 21, 1997. At the closing, the
Company and the Fund entered into a registration rights agreement containing
substantially the same terms and conditions as those contained in the existing
Registration Agreement with HPII.
On January 10, 1996, HPII loaned to the Company the sum of $10,000,000
(the "Subordinated Loan"). The Subordinated Loan bore interest at the rate of
20% per annum through May 29, 1996 and 12% thereafter and was repaid on July
31, 1996 with proceeds from the second closing of the sale of the units to HPII
under the HPII Purchase Agreement (as defined herein).
Acquisition of HMI/Sale to Counsel. On October 1, 1997, the Company,
through a wholly-owned subsidiary, completed the previously announced merger
with HMI. Under the terms of the Merger Agreement, HMI stockholders received
$.30 in cash for each outstanding share of HMI common stock not already owned
by the Company. Concurrently with the closing of the merger, the Company
completed the HMI Asset Sale to Counsel for $40,000,000 at which time
substantially all of the businesses and operations of HMI were sold to Counsel.
Of the $40,000,000 proceeds, $30,000,000 was received in cash with $7,500,000
to be paid to the Company as HMI's accounts receivable, existing at date of
sale, are collected, with the remaining $2,500,000 held in escrow for
post-closing adjustments. Of the $30,000,000 proceeds received, $15,000,000 was
used to reduce the senior secured debt owed by the Company under the Credit
Facility, $2,800,000 was used to complete the merger and the remainder was used
for costs, fees and other expenses to complete the HMI Asset Sale as well as to
satisfy liabilities not assumed by Counsel.
Pursuant to the HMI Asset Sale, Counsel will not assume any
liabilities of HMI other than certain liabilities arising after the closing
under assumed contracts and certain employee-related liabilities. Satisfaction
-31-
of liabilities not assumed by Counsel, as well as certain wind-down and
contingent obligations of HMI (including litigation - see "Legal Proceedings"
with respect to certain legal proceedings concerning HMI), have been considered
in determining the net realizable value of the HMI investment at September 30,
1997.
HMI and its subsidiaries (collectively, the "Sellers") and Stadtlander
also entered into a transitional service agreement pursuant to which the
Sellers will provide certain facilities and facilities services to Stadtlander
on a transitional basis, and Stadtlander will act as collection agent for
Sellers with respect to the accounts receivable. Stadtlander will retain
collections of accounts receivable in excess of a specified amount as a
collection fee.
The Company has also agreed to guaranty the Sellers' obligations to
Counsel and Stadtlander in connection with the above transactions.
Public Warrants. In connection with its initial public offering, the
Company issued warrants to purchase 1,600,000 shares of Common Stock. The
warrants were exercisable at $6.294 per share and expired on December 8, 1997.
During 1994, the Company repurchased 500,000 of the public warrants, 250,000
for $1.25 per warrant and 250,000 at $1.3125 per warrant in open market
purchases. Prior to their expiration, 966,863 warrants were exercised for an
aggregate of $6,085,000, substantially all of which was received after
September 30, 1997.
Radamerica Price Support Payment. On July 31, 1997 the Company sold
Radamerica for $13,304,000 of which $12,100,000 and $1,202,000 was received on
July 31, 1997 and November 10, 1997, respectively. In connection with the
disposition of Radamerica, the Company settled the Radamerica price support
payment provided under the acquisition agreement with the owners of Radamerica
with the issuance of 321,276 shares of Common Stock on August 4, 1997.
Year 2000. The Company is currently determining the impact of adapting
its computer systems to handle the year 2000 date value, the cost of which
cannot be reasonably determined at this time.
Litigation. See "Legal Proceedings" with respect to certain legal
proceedings concerning the Company and HMI.
IMPACT OF RECENT ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board (the
"FASB") issued SFAS No. 128, "Earnings per Share." SFAS No. 128 simplifies the
computation of earnings per share ("EPS") and replaces primary EPS with basic
EPS and fully diluted EPS with diluted EPS. SFAS No. 128 is effective for
annual and interim financial statements issued after December 15, 1997 and
earlier application is not permitted. SFAS No. 128 requires the restatement of
EPS data for all prior periods. The Company has not yet determined the impact
that this statement will have on its EPS amounts when adopted.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which established standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and losses) in the
financial statements. SFAS No. 130 requires that all items that are recognized
under accounting standards and components of comprehensive income be reported
in a financial statement, that is displayed with the same prominence as other
financial statements. SFAS No. 130 addresses disclosure issues; and therefore,
will not have any effect on the financial position or results of operations of
the Company. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997 and the Company is in the process of evaluating its
implementation, which is anticipated for fiscal 1999.
-32-
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." SFAS No. 131, which
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise," changes the way public companies report information about segments
by moving to the management approach to segment reporting. In addition, SFAS
No. 131 has requirements relating to disclosure of products, services,
customers, and the material countries in which the entity holds assets and
reports revenues. As with SFAS No. 130, SFAS No. 131 addresses disclosure
issues and therefore will not have an effect on the Company's financial
position or results of operations. SFAS No. 131 is effective for periods
beginning after December 15, 1997.
INFLATION
Inflation has not had a significant impact on the Company's operations
to date.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements and required financial
statements schedule of the Company are located beginning on page F-i of this
Transition Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
-33-
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT.
The following table sets forth certain information concerning the
Company's directors and officers:
NAME AGE POSITIONS WITH THE COMPANY
Timothy M. Aitken........53 Chairman of the Board and Chief Executive
Officer
Robert W. Fine*..........62 President, Chief Operating Officer and Director
Sarah L. Eames...........39 Executive Vice President, Business Development
and Marketing
Wayne A. Palladino.......39 Senior Vice President and Chief Financial
Officer
Gregory E. Marsella......34 Vice President, General Counsel and Secretary
Kevin M. Buhrman.........46 Vice President
Lewis S. Ranieri.........50 Director
Scott A. Shay............40 Director
- -------------------
* See Mr. Fine's biography below concerning his intention to resign from
the Company.
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. Since September 1995,
he has also served as chairman of the board of Omnicare plc, a publicly listed
company in the U.K. From 1990 until June 1995, Mr. Aitken served as chairman of
the board, president and chief executive officer of Abbey Healthcare Group
Inc., a California based home health care company.
Robert W. Fine has been a Director of the Company since July 1988. Mr.
Fine has served as Chief Operating Officer of the Company since June 1993,
President of the Company since August 1995 and Acting Chief Executive Officer
of the Company from May 1996 to January 1997. From June 1993 until August 1995,
he also served as a Vice President of the Company. From November 1990 until
June 1993, Mr. Fine was the president of the domestic operations of Fortress
Company, a manufacturer of wheelchairs and related equipment. Mr. Fine has
indicated his intention to resign as the President, Chief Operating Officer and
a Director of the Company upon finalization of severance arrangements with the
Company. Subject to final documentation, it is also anticipated that Mr. Fine
will provide certain consulting services to the Company until approximately
June 1998.
Sarah L. Eames has served as Executive Vice President, Business
Development and Marketing of the Company since June 1997. 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
-34-
1995 Ms. Eames held various marketing and business development positions at
Abbey Healthcare Group Inc., a predecessor company of Apria Healthcare Group,
Inc.
Wayne A. Palladino has been a Vice President and Chief Financial
Officer of the Company since February 1991 and Senior Vice President of the
Company since September 1996. From September 1989 until joining the Company, he
served as the vice president-finance and chief financial officer of ESC
Electronics Corp., an electronics manufacturer. From December 1985 until
January 1991, he was a principal in Pennwood Capital Corporation, a private
investment concern. From January 1984 through December 1985, Mr. Palladino was
a senior associate in the business development unit of W.R. Grace & Co., Inc.
Gregory E. Marsella, has served as Vice President, General Counsel and
Secretary of the Company since July 1997. Prior to joining the Company, Mr.
Marsella served as corporate counsel for Apria Healthcare Group, Inc. From June
1990 to June 1995, Mr. Marsella served as General Counsel for Abbey Medical,
Inc., a predecessor company of Apria Healthcare Group, Inc.
Kevin M. Buhrman has been a Vice President of the Company since June
1992. Since June 1992, Mr. Buhrman has been the principal officer in charge of
Transworld Home HealthCare ---- Nursing Division, Inc. ("TNI"), which is the
Company's U.S. nursing and para-professional operation. From February 1990 to
June 1992, Mr. Buhrman was executive vice president of TNI. From February 1988
to 1990, Mr. Buhrman was the corporate administrator of TNI's New Jersey
offices. From 1970 through 1988, he managed the Respiratory Care Department of
Riverview Medical Center in Red Bank, New Jersey.
Lewis S. Ranieri has been a Director of the Company since May 1997.
Since 1988 he has been the chairman of Bank United Corp. He was also the
president, chief executive 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 chairman
of Hyperion Capital Management, Inc., a registered investment advisor and The
Hyperion Total Return Fund, Inc. He is director of the Hyperion 1999 Term
Trust, Inc., The Hyperion 1997 Term Trust, Inc., The Hyperion 2002 Term Trust,
Inc. and Hyperion 2005 Investment Grade Opportunity Trust, Inc. Mr. Ranieri is
also chairman and president of various other indirect subsidiaries of Hyperion
Partners L.P. and Hyperion Partners II L.P. He is also chairman of the board
and a director of American Marine Holdings, Inc. Mr. Ranieri is also a director
of Delphi Financial Group, Inc. Mr. Ranieri is a former vice chairman of
Salomon Brothers Inc. where he was employed from 1968 to 1987, and was one of
the principal developers of the secondary mortgage market. He is a member of
the National Association of Home Builders Mortgage Roundtable.
Scott A. Shay has been a director of the Company since January 1996
and served as Acting Chairman of the Board of the Company from September 1996
until January 1997. Mr. Shay has been a managing director of Ranieri & Co.,
Inc. since its formation in 1988. Mr. Shay is currently a director of Bank
United Corp., Bank Hapoalim B.M., in Tel Aviv, Israel and Hyperion Capital
Management, Inc., as well as an officer or director of other direct and
indirect subsidiaries of Hyperion Partners L.P. and Hyperion Partners II L.P.
Mr. Shay is also a director of the general partner of Cardholder Management
Services, L.P., one of the largest credit card servicers in the United States.
Prior to joining Ranieri & Co. Inc., Mr Shay was a director of Salomon Brothers
Inc. where he was employed from 1980 to 1988.
-35-
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.
Other than Timothy M. Aitken and Sarah L. Eames none of the Company's
executive officers have employment agreements or letters with the Company. See
"Executive Compensation -- Employment Agreements; Termination of Employment and
Change-in-Control Arrangements."
In May 1996, Joseph J. Raymond resigned as Chief Executive Officer of
the Company. In order to facilitate an orderly transition of responsibilities,
Mr. Raymond remained as Chairman of the Board until August 15, 1996. Effective
with Mr. Raymond's resignation, Mr. Fine assumed the additional role of Acting
Chief Executive Officer and in September 1996, Mr. Shay became Acting Chairman.
Messrs. Fine and Shay relinquished such additional duties effective January 15,
1997, when Mr. Aitken joined the Company. See "Certain Relationships and
Related Transactions -- Transactions with Directors and Executive Officers."
Mr. Yoken resigned as a Director effective December 19, 1997.
The Company is seeking to fill the vacancies on the Board of Directors
created by the resignation of Mr. Yoken and the expected resignation of
Mr. Fine.
Pursuant to a shareholders' agreement, dated as of August 5, 1994, by
and among the Company, Paribas Principal, Inc., an affiliate of Banque Paribas,
the Company's former principal senior lender ("Paribas Principal") and Mr.
Raymond, upon the request of Paribas Principal, the Company and Mr. Raymond
have agreed to use their best efforts to cause a representative of Paribas
Principal to be elected to the Board of Directors. The Company has also entered
into a registration rights agreement with Paribas Principal. Such registration
rights agreement precludes the Company from granting further registration
rights with respect to its Common Stock without the consent of Paribas
Principal.
BOARD COMMITTEES
The Company's Board of Directors has an Audit Committee and a
Compensation Committee but does not have a nominating committee. The members of
each committee are appointed by the Board of Directors.
Audit Committee. The Audit Committee recommends to the Board of
Directors the auditing firm to be selected each year as independent auditors of
the Company's financial statements and to perform services related to the
completion of such audit. The Audit Committee also has responsibility for: (i)
reviewing the scope and results of the audit; (ii) reviewing the Company's
financial condition and results of operations with management; (iii)
considering the adequacy of the internal accounting and control procedures of
the Company; and (iv) reviewing any non-audit services and special engagements
to be performed by the independent auditors and considering the effect of such
performance on the auditors' independence. Messrs. Shay and Yoken constituted
the Audit Committee from May 28, 1997 through the date of Mr. Yoken's
resignation. The Company intends to reconstitute the Audit Committee upon
filling the vacancies in the Board of Directors.
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 consisted of
Messrs. Ranieri,
-36-
Shay and Yoken from May 28, 1997 through the date of Mr. Yoken's resignation.
The Company intends to reconstitute the Compensation Committee upon filling the
vacancies in the Board of Directors.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
The Commission has comprehensive rules relating to the reporting of
securities transactions by directors, officers and shareholders who
beneficially own more than 10% of the Company's Common Stock (collectively, the
"Reporting Persons"). These rules are complex and difficult to interpret. Based
solely on a review of Section 16 reports received by the Company from Reporting
Persons, the Company believes that no Reporting Person has failed to file a
Section 16 report on a timely basis during the Eleven Month Period other than
(i) Robert W. Fine, the President and Chief Operating Officer of the Company,
who filed a Form 4 late with respect to one transaction that occurred in March
1997, (ii) Sarah L. Eames, the Executive Vice President, Business Development
and Marketing of the Company, who failed to timely file her Form 3, (iii) Wayne
A. Palladino, the Senior Vice President and Chief Financial Officer of the
Company, who filed two Form 4s late with respect to eleven transactions that
occurred in November 1996 and one transaction that occurred in August 1997, (vi)
Kevin M. Buhrman, a Vice President of the Company, who filed two Form 4s late
with respect to two transactions that occurred in October 1995 and February
1997, (v) Richard A. Yoken, a former Director of the Company, who filed a Form 4
late with respect to one transaction that occurred in March 1997, and
(vi) Michael P. Garippa, a former Vice President of the Company, who filed a
Form 4 late with respect to one transaction that occurred in May 1997.
ITEM 11. EXECUTIVE COMPENSATION.
The following table summarizes all compensation earned by or paid to
the Company's Chief Executive Officer and each of the four other most highly
compensated executive officers of the Company whose annual salary and bonus
exceeded $100,000 (collectively, the "Named Officers") for services rendered in
all capacities to the Company for the Eleven Month Period and the two fiscal
years ended October 31, 1996.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION AWARDS
---------------------------------------
ANNUAL
COMPENSATION RESTRICTED SECURITIES
NAME AND FISCAL ------------------- STOCK UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS AWARDS OPTIONS COMPENSATION
- ------------------ ------ ------ ----- ------ ------- ------------
Timothy M. Aitken(1).......... Eleven Month
Chairman of the Board Period $138,461 $ -- $-- 500,000 $53,428.18(5)
and Chief Executive 1996 -- -- -- -- --
Officer 1995 -- -- -- -- --
Robert W. Fine(2).............. Eleven Month
President and Period $194,615 $ -- $-- 60,000 $ --
Chief Operating Officer 1996 228,461 -- -- -- --
1995 218,000 -- -- 15,000 --
Wayne A. Palladino............. Eleven Month
Senior Vice President and Period $154,807 $ -- $-- 45,000 $ --
Chief Financial Officer 1996 181,731 -- -- -- --
1995 174,134 -- -- 15,000 --
H. Gene Berger(3).............. Eleven Month
Executive Vice President Period $167,596 $ -- $-- -- $ --
1996 181,731 -- -- -- --
1995 175,293 -- -- 15,000 --
Michael P. Garippa(4).......... Eleven Month
Vice President Period $140,632 $ -- $-- -- $ --
1996 129,087 87,500 -- 10,000 --
1995 125,004 87,500 -- -- --
- ------------------------------------
-37-
(1) Mr. Aitken became Chief Executive Officer and Chairman of the Company
effective January 1997.
(2) Mr. Fine served as Acting Chief Executive Officer from May 1996 until
January 1997. Mr. Fine has indicated his intention to resign as
President and Chief Operating Officer of the Company. See "Directors
and Officers of the Registrant."
(3) Mr. Berger resigned as an Executive Vice President of the Company
effective October 31, 1997.
(4) Mr. Garippa resigned as a Vice President of the Company effective
June 27, 1997.
(5) Reflects reimbursement for certain travel expenses.
The following table sets forth certain information regarding
individual options granted during the Eleven Month Period 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 THE ELEVEN MONTH PERIOD
PERCENTAGE OF POTENTIAL REALIZABLE VALUE AT
SECURITIES TOTAL OPTIONS ASSUMED ANNUAL RATES OF
UNDERLYING GRANTED TO STOCK PRICE APPRECIATION FOR
OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION OPTION TERM(3)
NAME GRANTED FISCAL YEAR PER SHARE DATE 5% 10%
---- --------- ------------- ----------- ------ ----------------------------
Timothy M. Aitken(1)..... 500,000 56.0% $7.25 1/15/07 1,001,521 2,213,099
Robert W. Fine(2)........ 60,000 6.7% $7.25 8/13/02 120,182 265,572
Wayne A. Palladino(2).... 45,000 5.0% $7.25 8/13/02 90,137 199,179
- -----------------------------
(1) One hundred thousand shares are exercisable immediately, with 133,333
shares exercisable in three equal installments commencing January 15,
1998 and then on the next two successive anniversaries thereof subject
to the terms of Mr. Aitken's employment agreement.
(2) Exercisable in three equal installments commencing on August 13, 1998
and on the next two successive anniversaries thereof subject to the
terms of the option agreement.
(3) The 5% and 10% assumed annual compound rates of stock price
appreciation are mandated by the Commission and do not represent the
Company's estimate or projection of future Common Stock prices.
AGGREGATE OPTION EXERCISES DURING THE ELEVEN MONTH PERIOD
AND THE ELEVEN MONTH PERIOD END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES AT THE ELEVEN MONTH PERIOD AT THE ELEVEN MONTH
ACQUIRED VALUE END PERIOD-END(1)
NAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE - EXERCISABLE/UNEXERCISABLE
---- ----------- --------- ------------------------- -------------------------
Timothy M. Aitken.......... -- -- 100,000/400,000 $231,250/$925,000
Robert W. Fine............. 18,045 $107,278 110,000/ 65,000 $535,125/$147,188
Wayne A. Palladino......... 114,987 $986,753 0/ 50,000 $0/$112,500
H. Gene Berger............. -- -- 99,768/ 0 $536,344/ $0
Michael P. Garippa......... 36,667 $204,837 0/ 0 $0/ $0
-38-
(1) Calculated on the basis of $9.5625 per share, the closing sale price of
the Common Stock as reported on the NASDAQ/NM on September 30, 1997,
minus the exercise price.
EMPLOYMENT AGREEMENTS; TERMINATION OF EMPLOYMENT AND CHANGE-IN-
CONTROL ARRANGEMENTS
In January 1997, the Company entered into an employment agreement with
Mr. Aitken, which expires in January 1998. The agreement will renew for
one-year terms absent notice of non-renewal from either party. This agreement
provides for a base salary of $250,000, increasing to $300,000 if the agreement
is renewed. The agreement contains, among other things, customary
confidentiality and termination provisions and provides that in the event of
the termination of the executive following a "change of control" of the Company
(as defined therein), Mr. Aitken will be entitled to receive a cash payment of
up to 2.9 times his average annual base salary during the preceding five years.
In connection with Ms. Eames' employment with the Company, the Company
has agreed that if Ms. Eames' employment is terminated (other than for cause)
while Ms. Eames resides in California, she will be entitled to a severance
payment equal to one year's salary (currently $175,000 per year). If her
employment is thereafter terminated (other than for cause), she will be
entitled to one year's salary plus relocation expenses to California.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors consisted
of Messrs. Ranieri, Shay and Yoken from May 28, 1997 through the date of Mr.
Yoken's resignation. From November 1, 1996 until May 28, 1997, the
Compensation Committee consisted of Messrs. Shay and Yoken. Messrs. Ranieri and
Shay among others, control the general partner of HPII and the Fund, each of
which are principal shareholders of the Company, which principal shareholders
engaged in certain transactions with the Company described under Item 13 of
this Report under the heading "Certain Relationships and Related Transactions
- -- Transactions with Principal Shareholders." See also "Directors and Officers
of the Registrant -- Board Committees."
STOCK OPTION PLANS
1992 Stock Option Plan. In July 1992, the Company's Board of Directors
and shareholders approved the Company's 1992 Stock Option Plan (the "1992
Option Plan"). The 1992 Option Plan provides for the grant of options to key
employees, officers, directors and non-employee independent contractors of the
Company. The 1992 Option Plan is administered by the Compensation Committee of
the Board of Directors. The number of shares of Common Stock available for
issuance thereunder is 3,000,000 shares.
Options granted under the 1992 Option Plan may be either incentive
stock options ("Incentive Options"), which are intended to meet the
requirements of Section 422 of the Internal Revenue Code of 1986, as amended,
or options that do not qualify as Incentive Options ("Non-Qualified Options").
Under the 1992 Option Plan, the Compensation Committee may grant (i) Incentive
Options at an exercise price per share which is not less than the fair market
value of a share of Common Stock on the date on which such Incentive Options
are granted (and not less than 110% of the fair market value in the case of any
optionee who beneficially owns more than 10% of the total combined voting power
of the Company) and (ii) Non-Qualified 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 1992 Option Plan further provides that
the maximum period in which options may be exercised will be determined by the
Compensation Committee, except that Incentive Options may not be exercised
after the expiration of ten years from the date the Incentive Option was
initially granted (and five years in the case of any optionee
-39-
who beneficially owns more than 10% of the total combined voting power of the
Company). Under the 1992 Option Plan, if an optionee's employment is
terminated, generally the unexercised Incentive Options must be exercised
within three months after termination. However, if the termination is due to
the optionee's death or permanent disability, the option must be exercised
within one year of the termination of employment. If the optionee's employment
is terminated for cause by the Company, or if the optionee voluntarily
terminates his employment, his options will expire as of the termination date.
Any option granted under the 1992 Option Plan will be nontransferable, except
by will or by the laws of descent and distribution, and 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 1992 Option Plan will be available from
authorized but unissued shares of Common Stock or from shares of Common Stock
reacquired by the Company. Shares of Common Stock that are subject to options
under the 1992 Option Plan which have terminated or expired unexercised will
return to the pool of shares available for issuance under the 1992 Option Plan.
On August 13, 1997, the Company granted options to purchase shares of
Common Stock at $7.25 per share under the 1992 Option Plan as follows: (i)
60,000 to Mr. Fine; (ii) 60,000 to Ms. Eames; (iii) 45,000 to Mr. Palladino;
(iv) 48,000 to Mr. Marsella; and (v) 6,000 to Mr. Buhrman.
Effective January 15, 1997, the Company granted Mr. Aitken options
under the 1992 Option Plan to purchase 500,000 shares of Common Stock at an
exercise price of $11.375 per share. Such options were repriced on August 13,
1997 to an exercise price of $7.25 per share.
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
in 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.
-40-
INDEMNIFICATION
As permitted under the Business Corporation Law of the State of New
York, the Company's Restated Certificate of Incorporation provides that a
director of the Company will not be personally liable to the Company or its
shareholders for monetary damages for breach of a fiduciary duty owed to the
Company or its shareholders. By its terms and in accordance with the law of the
State of New York, however, this provision does not eliminate or otherwise
limit the liability of a director of the Company for any breach of duty based
upon (i) an act or omission (A) resulting from acts committed in bad faith or
involving intentional misconduct or involving a knowing violation of law or (B)
from which the director personally derived a financial benefit to which he was
not legally entitled, or (ii) an improper declaration of dividends or purchases
of the Company's securities.
The Company's Restated Certificate of Incorporation and By-Laws
provide that the Company shall indemnify its directors and officers to the
fullest extent permitted by New York law. The Company also has entered into
indemnification agreements with each of its directors and officers.
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 12, 1997, by (i) all persons
known by the Company to be the beneficial owner of more than 5% of the
outstanding Common Stock; (ii) each director of the Company; (iii) each of the
"named executive officers" as defined under the rules and regulations of the
Securities Act of 1933, as amended (the "Securities Act"), except as otherwise
indicated in the table; and (iv) all directors and executive officers of the
Company as a group (8 persons).
Numbers of Shares
Beneficially Percentage
NAME Owned Beneficially Owned
---- ----------------- ------------------
Timothy M. Aitken(1).................. 233,333 1.4%
Robert W. Fine(2)..................... 158,388 *
Wayne A. Palladino.................... 89,190 *
Lewis Ranieri(3)...................... 12,415,333 64.4%
Scott A. Shay(3)...................... 12,415,333 64.4%
Hyperion Partners II L.P.(4).......... 12,415,333 64.4%
Hyperion TW Fund L.P.(5).............. 12,415,333 64.4%
All executive officers and directors
as a group (8 persons)(3)(6)....... 13,000,517 66.0%
-41-
- ------------------------------------
* Less than one percent.
The above table does not include any shares of Common Stock which
may be beneficially owned by Messrs. Garippa and Berger, each of
whom previously resigned from the Company. See "Executive
Compensation--Summary Compensation Table."
(1) Includes 233,333 shares subject to options exercisable within 60
days from December 12, 1997.
(2) Includes 115,000 shares subject to options exercisable within 60
days from December 12, 1997. Mr. Fine has indicated his intention to
resign as a Director, President and Chief Operating Officer of the
Company. See "Officers and Directors of the Registrant."
(3) Includes 5,298,877 shares of Common Stock and 3,000,000 shares of
Common Stock underlying the warrants (the "Warrants") acquired
pursuant to the HPII Purchase Agreement (as defined herein) which
HPII has purchased and 4,116,456 shares of Common Stock which the
Fund (each of which are affiliates of Messrs. Ranieri and Shay) has
purchased and as to which Messrs. Ranieri and Shay disclaim
beneficial ownership. Excludes any shares of Common Stock included
in the Payable Shares. See "Certain Relationships and Related
Transactions -- Transactions with Principal Shareholders."
(4) Includes 4,116,456 shares of Common Stock which the Fund (an
affiliate of HPII) has purchased and as to which HPII disclaims
beneficial ownership and 3,000,000 shares subject to Warrants
exercisable within 60 days from December 12, 1997. The address of
HPII is 50 Charles Lindbergh Parkway, Uniondale, New York 11553.
Excludes any shares of Common Stock included in the Payable Shares.
See "Certain Relationships and Related Transactions -- Transactions
with Principal Shareholders."
(5) Includes 5,298,877 shares of Common Stock and 3,000,000 shares
subject to the Warrants which HPII (an affiliate of the Fund) has
purchased and as to which the Fund disclaims beneficial ownership.
The address of the Fund is 50 Charles Lindbergh Parkway, Uniondale,
New York 11553.
(6) Includes all shares held by Messrs. Aitken, Fine, Palladino, Ranieri
and Shay and three other executive officers, and those
shares subject to options held by such individuals exercisable
within 60 days from December 12, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
TRANSACTIONS WITH PRINCIPAL SHAREHOLDERS
Under a unit purchase agreement dated November 20, 1995, as amended
(the "HPII Purchase Agreement") pursuant to which HPII acquired its initial
equity interest in the Company, until July 31, 2001, HPII has the right to
designate to the Board of Directors of the Company the greater of three
directors and 40% of the number of Directors constituting the entire Board of
Directors. Messrs. Ranieri and Shay are the HPII designees presently serving on
the Board of Directors.
The HPII Purchase Agreement also provides that for a period of five
(5) years commencing on May 30, 1996, all shares of Common Stock held by HPII
will be voted by HPII on any matter submitted to the shareholders in the same
proportion as the votes cast by the other holders of Common Stock.
Notwithstanding the foregoing, HPII retains its right to vote its shares of
Common Stock in any manner it chooses with respect to the following specified
matters: (i) the election to the Board of Directors of HPII's designees; (ii)
amendments to the Company's By-Laws or Certificate of Incorporation; (iii)
mergers and the sale, lease or exchange of the
-42-
Company's assets; (iv) the authorization or issuance of Company securities; (v)
a reclassification of securities or reorganization of the Company; (vi) the
liquidation or dissolution of the Company; and (vii) any affiliated party
transaction. The HPII Purchase Agreement provides that the requirement that
HPII votes its shares in proportion with all other shareholders shall terminate
in the event that the aggregate number of shares of Common Stock owned by
Messrs. Raymond, Fine, Palladino and Berger shall be less than 415,000 shares
or on the date when any person or group unaffiliated with HPII becomes the
beneficial owner of 25% or more of the then-outstanding shares of the Company's
capital stock.
Messrs. Fine and Palladino have agreed in their individual capacities
to take all steps necessary, including voting their shares for the election of
HPII's designees to the Board of Directors, and to utilize their best efforts,
to secure the election by the Company's shareholders of HPII's designees to the
Board of Directors. The Company has also agreed to such provisions (other than
the voting of shares).
The HPII Purchase Agreement further provides that commencing July 31,
1996, all actions to be taken by the Board of Directors will require the
affirmative vote of a majority of the directors present at a duly constituted
meeting (which is the status currently), except that it shall require the
affirmative vote of 66-2/3% of the entire Board of Directors to authorize any
action taken with respect to a proposed acquisition, whether by purchase of
stock or assets, of another company and any action to increase above seven (7)
the number of directors constituting the entire Board of Directors, except in
connection with the appointment of the Paribas Principal designee. See
"Directors and Officers of the Registrant."
HPII purchased the HMI Payables aggregating approximately $18,300,000
at various discounts. On March 26, 1997, the Company entered into the AP Stock
Purchase Agreement, as amended, pursuant to which HPII and the Company agreed,
subject to the conditions stated in the AP Stock Purchase Agreement, that the
Company would issue such number of shares of Common Stock (the "Payable
Shares") equal to the Agreed Value (as defined herein) divided by the Agreed
Price (as defined herein) in consideration of the assignment by HPII to the
Company of the HMI Payables. For the purposes of the AP Stock Purchase
Agreement, (A) "Agreed Value" means the sum of the following amounts: (i)
$4,000,000, plus (ii) 10% of the first $20,000,000 of Net Recovery, plus (iii)
30% of the next $10,000,000 of Net Recovery, plus (iv) 50% of any amount of Net
Recovery in excess of $30,000,000; (B) "Net Recovery" means the amount realized
or recovered by the Company on or after September 1, 1997 on or in respect of
(i) any indebtedness owed by HMI and/or its subsidiaries to the Company; (ii)
any investment made by the Company in HMI and/or its subsidiaries; and (iii)
the HMI Payables (including, without limitation, by reason of any claims
against third parties relating to the purchase of any of the foregoing), net of
(x) the merger consideration paid by the Company to acquire HMI and (y) all
reasonable out-of-pocket costs and expenses incurred by the Company in
connection with such realization or recovery. Net Recovery does not include any
tax benefit to the Company from the net loss on its equity and debt investments
in HMI; and (C) "Agreed Price" means the lesser of $7 5/8 and the closing price
of the Common Stock of the Company on the last trading day prior to the closing
of the AP Stock Purchase Agreement. Closing of the transaction is subject to,
among other things, approval of the Company's shareholders. The shares of
Common Stock issued pursuant to this agreement are also covered by the
Registration Agreement.
On January 8, 1997, the Company entered into a stock purchase
agreement with HPII pursuant to which HPII agreed, subject to the conditions
stated therein, to purchase the Additional Shares for an aggregate purchase
price of $10,000,000. The closing of the sale of the Additional Shares occurred
on April 21, 1997. The Additional Shares are also covered by the Registration
Agreement. See "Management" Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
-43-
Effective March 26, 1997, the Company entered into a stock purchase
agreement with the Fund, an affiliate of HPII, pursuant to which the purchaser
agreed, subject to the conditions stated therein, to purchase the March Shares
for an aggregate purchase price of $40,650,000. The closing of the sale of the
March Shares occurred on April 21, 1997. At the closing, the Company and the
Fund entered into a registration rights agreement containing substantially the
same terms and conditions as those contained in the existing Registration
Agreement with HPII. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
TRANSACTIONS WITH DIRECTORS AND EXECUTIVE OFFICERS
On December 14, 1992, Mr. Fine and a former principal shareholder of
the Company, each sold 6,666 shares of Common Stock at a price of $5.00 per
share to each of Messrs. Palladino and Buhrman, respectively. On such date, the
Company loaned Messrs. Palladino and Buhrman the funds necessary to consummate
such purchases. These loans bear interest at the prime rate of the Company's
principal lender plus 1% per annum, are secured by a pledge of the purchased
stock, but are otherwise non-recourse to such purchasers. Interest only is
payable on these loans, until April 30, 1998, when the entire principal balance
and all accrued interest shall be due and payable.
Messrs. Fine and Palladino among others, (collectively, the
"Restricted Transferees") have entered into a stock restriction agreement (the
"Restriction Agreement"), pursuant to which they have agreed to limit the
transferability of their shares of Common Stock as well as other "Common
Equivalents" to the extent described therein. Unless otherwise consented to in
writing by HPII, none of the Restricted Transferees may transfer any of his
shares of Common Stock or other Common Equivalents owned by him if, at the time
of such transfer or after giving effect thereto, the Restricted Transferee's
"Shareholder Percentage" would be less than the lesser of 0.75 and the "HPII
Percentage." For purposes of the Restriction Agreement, the term "Shareholder
Percentage" means a fraction, the denominator of which is the number of Common
Equivalents that such shareholder and his related persons owned or had the
right to acquire on the date of the HPII Purchase Agreement, and the numerator
of which is the numerical amount of the denominator less the number of Common
Equivalents transferred by such Restricted Transferee; and the term "HPII
Percentage" means a fraction, the denominator of which is the number of Common
Equivalents purchased by HPII or which HPII has the right to purchase pursuant
to the HPII Purchase Agreement, and the numerator of which is the numerical
amount of the denominator less the number of Common Equivalents transferred by
HPII. The effect of the Restriction Agreement, in general, is to limit a
Restricted Transferee's ability to sell his shares of Common Stock to the
extent that his shareholdings would be less than 75% of his current holdings
or, if less, the HPII Percentage.
Certain directors and executive officers of the Company have been
granted options to purchase shares of Common Stock under the Company's stock
option plans. See "Executive Compensation -- Stock Option Plans."
During the Eleven Month Period, the Company paid to an affiliate of
Mr. Aitken, the sum of $96,000 for consulting services rendered in connection
with potential financing opportunities.
-44-
Effective June 24, 1997, the Company acquired Omnicare for $2.79 for
each issued and to be issued share of Omnicare. Mr. Aitken, Chairman and Chief
Executive Officer of the Company, is the Non Executive Chairman of Omnicare and
held options to acquire 75,000 and 25,000 ordinary shares of Omnicare at $1.30
and $2.19 per ordinary share, respectively. Mr. Aitken did not participate in
any actions by the Board of Directors with respect to Omnicare.
-45-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
FINANCIAL STATEMENTS INDEX Page
----
Report of Independent Accountants F-1
Consolidated Balance Sheets -- September 30, 1997 and October 31, 1996 F-2
Consolidated Statements of Operations -- For the Eleven Months Ended
September 30, 1997 and Years Ended October 31, 1996 and 1995 F-3
Consolidated Statements of Changes in Stockholders' Equity -- For the Eleven
Months Ended September 30, 1997 and Years Ended October 31, 1996 and
1995 F-4
Consolidated Statements of Cash Flows -- For the Eleven Months Ended
September 30, 1997 and Years Ended October 31, 1996 and 1995 F-5
Notes to Consolidated Financial Statements F-7
Quarterly Financial Information (Unaudited) F-40
(a)(2) Financial Statements Schedule Index
Schedule VIII -- Valuation and Qualifying Accounts S-1
Schedules other than those listed above are omitted because they are
not required or are not applicable or the information is shown in the audited
financial statements or related notes.
(b) Reports on Form 8-K
The Company filed on August 8, 1997 a Current Report on Form
8-K dated July 31, 1997 concerning an Item 2 event.
The Company filed on August 11, 1997 a Current Report on Form
8-K dated August 1, 1997 concerning an Item 5 event.
The Company filed on August 18, 1997 a Current Report on Form
8-K dated August 14, 1997 concerning an Item 5 event.
Exhibits
(c) The exhibits listed in the Index to Exhibits below are filed
as part of this Transition Report on Form 10-K.
-46-
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 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 Shareholders Agreement, dated as of August 5, 1994, by and among the
Company, Joseph J. Raymond and Paribas Principal (incorporated herein
by reference to Exhibit 10.5 to the Company's Annual Report on Form
10-K for the year ended October 31, 1994).
10.2 Registration Rights Agreement, dated as of August 5, 1994, by and
among the Company and Paribas Principal (incorporated herein by
reference to Exhibit 10.6 to the Company's Annual Report on Form 10-K
for the year ended October 31, 1994).
10.3 Transworld Home HealthCare, Inc. 1992 Stock Option Plan, as amended
(incorporated herein by reference to Exhibit 10.13 to the Company's
Annual Report on Form 10-K for the year ended October 31, 1994).
10.4 Agreement, dated June 5, 1992, among Kinder Investments L.P.,
Richard Elkin, Joseph J. Raymond, Elliott H. Vernon and United States
Home Health Care Corp. regarding Buy-Out and Registration Rights, as
amended (incorporated herein by reference to Exhibit 10.14 to the
Company's Registration Statement (No. 33-50876) on Form S-1).
10.5 Amended and Restated Management Agreement, dated as of November 1,
1994, between MK, RespiFlow, DermaQuest and E/L Associates
(incorporated herein by
-47-
Exhibit
Number Title
- ------- ------
reference to Exhibit 10.23 to the Company's Annual Report on
Form 10-K for the year ended October 31, 1994).
10.6 Amendment to Amended and Restated Management Agreement, dated as of
November 1, 1995, between the Company and E/L Associates (incorporated
herein by reference to Exhibit 10.54 to the Company's Annual Report on
Form 10-K for the year ended October 31, 1995).
10.7 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).
10.8 Amendment Agreement, effective as of May 5, 1995, to the Stock
Purchase Agreement, dated as of April 1, 1995, as amended, among the
Company, Edward Mashek, Walter Kraemer and Lorraine Andrews
(incorporated herein by reference to Exhibit 10.36 to the Company's
Annual Report on Form 10-K for the year ended October 31, 1995).
10.9 Amended and Restated Asset Purchase Agreement, dated as of March 1,
1995, among DermaQuest, Precision, and Les Capella (incorporated
herein by reference to Exhibit 10.1 to the Company's Quarterly Report
on Form 10-Q for the quarter ended April 30, 1995).
10.10 Asset Purchase Agreement between PromptCare and DVLC effective as of
January 1, 1995 (incorporated herein by reference to Exhibit 2 to the
Company's Current Report on Form 8-K filed on or about February 15,
1995).
10.11 DermaQuest Amendment Agreement, dated as of March 1, 1995, among the
Company, Edward Mashek, Walter Kraemer, Lorraine Andrews and E/L
Associates (incorporated herein by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended January
31, 1995).
10.12 Asset Purchase Agreement, dated as of May 28, 1993, among TNI,
Complete Health Care Services, Inc. and others (incorporated herein by
reference to Exhibit 2 to the Company's Quarterly Report on Form 10-Q
for the quarter ended April 30, 1993).
10.13 Exchange Offer and Confidential Investment Summary, dated August 23,
1993, (incorporated herein by reference to Exhibit 1 to the Company's
Current Report on Form 8-K dated September 30, 1993).
10.14 Stock Purchase Agreement, dated as of April 1, 1994, among the
Company, Edward Mashek, Walter Kraemer and Lorraine Andrews
(incorporated herein by reference to Exhibit 1 to the Company's
Current Report on Form 8-K dated May 3, 1994).
-48-
Exhibit
Number Title
- ------- ------
10.15 Amendment, dated July 29, 1994, to the Stock Purchase Agreement among
the Company, Edward Mashek, Walter Kraemer and Lorraine Andrews
(incorporated herein by reference to Exhibit 2 to the Company's Current
Report on Form 8-K dated August 5, 1994).
10.16 Amendment among the Company, Edward Mashek, Walter Kraemer and Lorraine
Andrews, dated November 28, 1994, to the Stock Purchase Agreement,
as amended (incorporated herein by reference to Exhibit 1 to Amendment
No. 2 to the Company's Current Report on Form 8-K, originally filed on
May 3, 1994).
10.17 Stock Purchase Agreement, dated as of November 1, 1994, by and among
the Company, Edward Mashek, Walter Kraemer and Lorraine Andrews
(incorporated herein by reference to Exhibit 1 to the Company's Current
Report on Form 8-K dated December 28, 1994).
10.18 DermaQuest Amendment Agreement, dated as of November 1, 1995, which
amended a Stock Purchase Agreement, dated as of November 1, 1994, among
the Company and Edward Mashek, Walter Kraemer and Lorraine Andrews
(incorporated herein by reference to Exhibit 10.55 to the Company's
Annual Report on Form 10-K for the year ended October 31, 1995).
10.19 Unit Purchase Agreement, dated as of November 20, 1995, as amended, by
and between the Company and HPII (incorporated herein by reference to
Exhibit 10.56 to the Company's Annual Report on Form 10-K for the year
ended October 31, 1995).
10.20 Subordinated Note Purchase Agreement, dated as of January 10, 1996,
between the Company and HPII (incorporated herein by reference to
Exhibit 10.57 to the Company's Annual Report on Form 10-K for the year
ended October 31, 1995).
10.21 Amendment dated February 16, 1996 to Subordinated Note Purchase
Agreement between the Company and HPII (incorporated herein by
reference to Exhibit 10.4 to the Company's Quarterly Report on Form
10-Q for the quarter ended April 30, 1996).
10.22 Amendment dated May 30, 1996 to Subordinated Note Purchase Agreement,
dated as of January 10, 1996, as amended on February 16, 1996, between
the Company and HPII (incorporated herein by reference to Exhibit 10.5
to the Company's Quarterly Report on Form 10-Q for the quarter ended
April 30, 1996).
10.23 Credit Agreement among the Company, Various Lending Institutions and
Bankers Trust Company, as Agent dated as of July 31, 1996 (incorporated
herein by reference to Exhibit 1 to the Company's Current Report on
Form 8-K dated July 31, 1996).
-49-
Exhibit
Number Title
- ------- ------
10.24 Pledge Agreement dated as of July 31, 1996 in favor of Bankers Trust
Company, as Collateral Agent (incorporated herein by reference to
Exhibit 10.59 to the Company's Annual Report on Form 10-K for the year
ended October 31, 1996).
10.25 Security Agreement among the Company, Various Subsidiaries and Bankers
Trust Company, as Collateral Agent dated as of July 31, 1996
(incorporated herein by reference to Exhibit 10.60 to the Company's
Annual Report on Form 10-K for the year ended October 31, 1996).
10.26 Subsidiaries Guaranty dated as of July 31, 1996 (incorporated herein by
reference to Exhibit 10.61 to the Company's Annual Report on Form 10-K
for the year ended October 31, 1996).
10.27 First Amendment to Credit Agreement and to Pledge Agreement, dated as
of November 13, 1996, between the Company and Bankers Trust Company
(incorporated herein by reference to Exhibit 3 to the Schedule 13D
filed by the Company, HPII, Hyperion Ventures II L.P., Hyperion Funding
II Corp., Lewis S. Ranieri and Scott A. Shay on or about November 22,
1996).
10.28 Second Amendment to Credit Agreement, dated as of January 13, 1997,
between the Company and Bankers Trust Company (incorporated herein by
reference to Exhibit 2 to the Company's Current Report on Form 8-K
dated January 22, 1997).
10.29 Third Amendment to Credit Agreement, dated as of April 17, 1997,
between the Company and Bankers Trust Company (incorporated herein by
reference to Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the Quarter ended April 30, 1997).
10.30 Fourth Amendment to Credit Agreement, dated as of May 30, 1997 between
the Company and Bankers Trust Company (incorporated herein by reference
to Exhibit 19.1 to the Company's Quarterly Report on Form 10-Q for the
Quarter ended July 31, 1997).
10.31 Fifth Amendment to Credit Agreement, dated as of June 30, 1997 between
the Company and Bankers Trust Company (incorporated herein by reference
to Exhibit 19.2 to the Company's Quarterly Report on Form 10-Q for the
Quarter ended July 31, 1997).
10.32* Sixth Amendment to Credit Agreement, dated as of September 15, 1997
between the Company and Bankers Trust Company.
10.33 Seventh Amendment to Credit Agreement, dated as of October 1, 1997
between the Company and Bankers Trust Company (incorporated herein by
reference to Exhibit 1 to the Company's Current Report on Form 8-K
dated October 10, 1997).
-50-
Exhibit
Number Title
- ------- ------
10.34* Eighth Amendment to Credit Agreement, dated as of November 12, 1997
between the Company and Bankers Trust Company.
10.35 Agreement dated May 14, 1996 between the Company and Joseph J. Raymond
relating to resignation (incorporated herein by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the quarter
ended April 30, 1996).
10.36 Agreement dated May 14, 1996 between the Company and Joseph J. Raymond
relating to consulting services (incorporated herein by reference to
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended April 30, 1996).
10.37 Purchase and Sale Agreement, dated as of November 12, 1996, between the
Company and European American Bank (incorporated herein by reference to
Exhibit 6 to the Schedule 13D filed by the Company, HPII, Hyperion
Ventures II L.P., Hyperion Funding II Corp., Lewis S. Ranieri and Scott
A. Shay on or about November 22, 1996).
10.38 Purchase and Sale Agreement, dated of November 12, 1996, between the
Company and the Chase Manhattan Bank (incorporated herein by reference
to Exhibit 7 to the Schedule 13D filed by the Company, HPII, Hyperion
Ventures II L.P., Hyperion Funding II Corp., Lewis S. Ranieri and Scott
A. Shay on or about November 22, 1996).
10.39 Agreement, dated as of November 13, 1996, between the Company, HMI,
Home Care Management, Inc., HMI Illinois, Inc., HMI Pennsylvania, Inc.,
Health Reimbursement Corporation, HMI Retail Corp., Inc., HMI PMA, Inc.
and HMI Maryland, Inc. (incorporated herein by reference to Exhibit 8
to the Schedule 13D filed by the Company, HPII, Hyperion Ventures II
L.P., Hyperion Funding II Corp., Lewis S. Ranieri and Scott A. Shay on
or about November 22, 1996).
10.40 Subsidiary Assumption Agreement, dated as of November 13, 1996, among
Transworld Acquisition Corp., IMH Acquisition Corp. and Bankers Trust
Company, as Agent and as Collateral Agent (incorporated herein by
reference to Exhibit 10.71 to the Company's Annual Report on Form 10-K
for the year ended October 31, 1996).
10.41 Agreement and Plan of Merger, dated as of November 13, 1996, among the
Company, IMH Acquisition Corp. and HMI (incorporated herein by
reference to Exhibit 4 to the Schedule 13D filed by the Company, HPII,
Hyperion Ventures II L.P., Hyperion Funding II Corp., Lewis S. Ranieri
and Scott A. Shay on or about November 22, 1996).
10.42 Stock Purchase Agreement, dated as of November 13, 1996, between HMI
and the Company (incorporated herein by reference to Exhibit 5 to the
Schedule 13D filed by the Company, HPII, Hyperion Ventures II L.P.,
Hyperion Funding II Corp., Lewis S. Ranieri and Scott A. Shay on or
about November 22, 1996).
-51-
Exhibit
Number Title
- ------- ------
10.43 Asset Purchase Agreement, dated as of October 14, 1996, between
RespiFlow, Health Meds, O.W. Edwards and Rick Hedrick (incorporated
herein by reference to Exhibit A to the Company's Current Report on
Form 8-K dated October 28, 1996).
10.44 Asset Purchase Agreement, dated as of October 31, 1996, between
Transworld Acquisition Corp., the Company, USNJ and U.S. HomeCare
Corporation (incorporated herein by reference to Exhibit B to the
Company's Current Report on Form 8-K dated October 28, 1996).
10.45 DermaQuest Amendment Agreement, dated as of February 1, 1996, among
the Company, DermaQuest, Edward Mashek, Walter Kraemer and Lorraine
Andrews (incorporated herein by reference to Exhibit 10 to the
Company's Quarterly Report on Form 10-Q for the quarter ended January
31, 1996).
10.46 Stock Purchase Agreement, dated January 8, 1997, by and between the
Company and HPII (incorporated herein by reference to Exhibit 10.79 to
the Company's Annual Report on Form 10-K for the year ended October
31, 1996).
10.47 Employment Agreement, dated as of January 13, 1997, between the
Company and Timothy M. Aitken (incorporated herein by reference to
Exhibit 10.80 to the Company's Annual Report on Form 10-K for the year
ended October 31, 1996).
10.48 Letter Agreement amending Merger Agreement, dated January 13, 1997,
between the Company and HMI (incorporated herein by reference to
Exhibit 1 to the Company's Current Report on Form 8-K dated January
22, 1997).
10.49 Letter Agreement dated March 26, 1997, amending the Merger Agreement
between the Company and HMI (incorporated herein by reference to
Exhibit 1 to the Company's Current Report on Form 8-K dated March 27,
1997).
10.50 Stock Purchase Agreement between the Company and HPII dated as of
March 26, 1997 (incorporated herein by reference to Exhibit 1 to the
Company's Current Report on Form 8-K dated as of April 16, 1997).
10.51 Stock Purchase Agreement between the Company and the Fund dated as of
March 26, 1997 (incorporated herein by reference to Exhibit 2 to the
Company's Current Report on Form 8-K dated as of April 16, 1997).
10.52 Recommended Cash Offer by Henry Cooke Corporate Finance Ltd. on behalf
of Transworld Healthcare (U.K.) Limited, a subsidiary of the Company
for Omnicare plc (incorporated herein by reference to Exhibit 2.1 to
the Company's Current Report on Form 8-K/A Amendment No. 1 dated as of
July 2, 1997).
-52-
Exhibit
Number Title
- ------- ------
10.53* Letter Agreement dated July 7, 1997 amending the Merger Agreement
between the Company and HMI.
10.54 Asset Purchase Agreement dated as of October 1, 1997 among HMI, Health
Reimbursement Corporation, HMI Illinois, Inc., HMI Maryland, Inc., HMI
Pennsylvania, Inc., HMI PMA, Inc., HMI Retail Corp., Inc., Home Care
Management, Inc., the Company, Stadtlander and Counsel (incorporated
herein by reference to Exhibit 2 to the Company's Current Report on
Form 8-K dated October 10, 1997).
10.55 Amendment dated as of August 14, 1997 to Stock Purchase Agreement
dated March 26, 1997 between HPII and the Company (incorporated herein
by reference to Exhibit 3 to the Company's Current Report on Form 8-K
dated October 10, 1997).
10.56 Stock Purchase Agreement between the Company, Parkway Ventures, Inc.
and Radamerica, Inc. dated as of July 31, 1997 (incorporated herein by
reference to Exhibit (c) to the Company's Current Report on Form 8-K
dated July 31, 1997).
10.57 Agreement for Sale and Purchase of Allied Medicare Limited between
Transworld Healthcare (U.K.) Limited and Vanessa Rosamunde Wynn
Griffiths and David Wynn Griffiths dated July 1, 1997 (incorporated
herein by reference to Exhibit 2.1 to the Company's Current Report on
Form 8-K dated July 3, 1997).
10.58 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).
10.59* Transition Agreement dated October 1, 1997, by and among HMI, Health
Reimbursement Corporation, HMI Illinois, Inc., HMI Maryland, Inc., HMI
Pennsylvania, Inc., HMI PMA, Inc., HMI Retail Corp., Inc., Home Care
Management, Inc. and Stadlander.
10.60* Letter Agreement dated June 12, 1997 amending the Merger Agreement
between the Company and HMI.
11 Statement re: computation of earnings per share (computation can be
determined clearly from the material contained in this Transition
Report on Form 10-K).
21.1* Subsidiaries of the Company.
23.1* Consent of Coopers & Lybrand L.L.P., independent accountants of the
Company.
27* Financial Data Schedule
- ---------------------
*Filed herewith.
-53-
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 24, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Timothy M. Aitken Chairman of the Board and Chief December 24, 1997
- ------------------------------- Executive Officer (Principal Executive
Timothy M. Aitken Officer)
/s/ Robert W. Fine
- ------------------------------- President, Chief Operating Officer and December 24, 1997
Robert W. Fine Director
/s/ Wayne A. Palladino Senior Vice President and Chief Financial December 24, 1997
- ------------------------------- Officer (Principal Financial and
Wayne A. Palladino Accounting Officer)
/s/ Lewis S. Ranieri Director December 24, 1997
- -------------------------------
Lewis S. Ranieri
/s/ Scott A. Shay Director December 24, 1997
- -------------------------------
Scott A. Shay
-54-
TRANSWORLD HEALTHCARE, INC.
Financial Statements Index Page
Report of Independent Accountants F-1
Consolidated Balance Sheets - September 30, 1997
and October 31, 1996 F-2
Consolidated Statements of Operations - For the
Eleven Months Ended September 30, 1997 and
Years Ended October 31, 1996 and 1995 F-3
Consolidated Statements of Changes in
Stockholders' Equity - For the Eleven Months
Ended September 30, 1997 and Years Ended
October 31, 1996 and 1995 F-4
Consolidated Statements of Cash Flows - For the
Eleven Months Ended September 30, 1997 and
Years Ended October 31, 1996 and 1995 F-5
Notes to Consolidated Financial Statements F-7
Quarterly Financial Information (Unaudited) F-40
Financial Statements Schedule Index
Schedule VIII - Valuation and Qualifying Accounts S-1
F-i
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of Transworld HealthCare, Inc.:
We have audited the consolidated financial statements and the financial
statements schedule of Transworld HealthCare, Inc. (the "Company") as listed in
the index on page F-(i) of this Form 10-K. These financial statements and
financial statements schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statements schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, based on our audits, the financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of the Company as of September 30, 1997 and October 31, 1996 and 1995 and the
consolidated results of its operations and its cash flows for the eleven months
ended September 30, 1997 and for each of the two years in the period ended
October 31, 1996 in conformity with generally accepted accounting principles.
In addition, in our opinion, the financial statements schedule referred to
above, when considered in relation to the basic financial statements taken as a
whole, presents fairly, in all material respects, the information required to
be included therein.
Coopers & Lybrand L.L.P.
New York, New York
November 24, 1997
F-1
TRANSWORLD HEALTHCARE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
September 30, October 31,
1997 1996
------------- -----------
ASSETS
Current assets:
Cash and temporary investments $10,626 $ 4,598
Accounts receivable, less allowance for doubtful
accounts of $11,909 and $5,471 31,475 24,414
Inventories 3,226 1,829
Investment in Health Management, Inc. 22,367
Deferred income taxes 2,742 600
Income tax refund receivable 6,530 2,902
Prepaid expenses and other current assets 6,093 2,204
-------- --------
Total current assets 83,059 36,547
Property & equipment, net 8,448 3,934
Notes receivable, related parties 964
Intangible assets, net 103,385 44,496
Deferred income taxes 2,356
Other assets 4,033 4,786
-------- --------
Total assets $201,281 $ 90,727
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt, including
obligations under capital leases $ 25,051 $ 21
Accounts payable 7,844 2,975
Accrued expenses, related parties 7,500
Accrued expenses 13,672 5,548
Income taxes payable 2,387
Acquisitions payable 194 1,802
-------- --------
Total current liabilities 56,648 10,346
Long-term debt, including obligations under
capital leases 61,400 12,505
Deferred income taxes and other 1,328 651
-------- --------
Total liabilities 119,376 23,502
-------- --------
Commitments and contingencies (Note 11)
Stockholders' equity:
Preferred stock, $.01 par value; authorized
2,000 shares, issued and outstanding - none
Common stock, $.01 par value; authorized
30,000 shares, issued and outstanding
15,300 and 9,940 shares 153 99
Additional paid-in capital 111,774 62,221
Translation adjustment (2,192)
Retained (deficit) earnings (27,830) 4,905
-------- --------
Total stockholders' equity 81,905 67,225
-------- --------
Total liabilities and stockholders' equity $201,281 $ 90,727
======== ========
See notes to consolidated financial statements.
F-2
TRANSWORLD HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ELEVEN MONTHS
ENDED YEAR ENDED OCTOBER
SEPTEMBER 30, 31,
--------------- --------------------
1997 1996 1995
--------------- --------- ---------
Revenues:
Net respiratory, medical equipment and supplies sales $ 52,562 $47,170 $42,782
Net patient services 29,844 19,164 18,870
Net infusion services 11,038 9,970 9,935
--------------- --------- ---------
Total revenues 93,444 76,304 71,587
--------------- --------- ---------
Cost of revenues:
Respiratory, medical equipment and supplies sales 25,687 18,481 16,798
Patient services 18,132 10,174 9,830
Infusion services 7,568 6,025 6,102
--------------- --------- ---------
Total cost of revenues 51,387 34,680 32,730
--------------- --------- ---------
Gross profit 42,057 41,624 38,857
Selling, general and administrative expenses 42,931 33,552 29,774
Special charges 34,230 3,898
Equity in losses of Health Management, Inc., net 296
--------------- --------- ---------
Operating (loss) income (35,400) 8,072 5,185
Interest income (2,650) (75) (68)
Interest expense 5,063 4,427 3,767
--------------- --------- ---------
(Loss) income before income taxes and extraordinary loss (37,813) 3,720 1,486
(Benefit) provision for income taxes (5,078) 1,702 627
--------------- --------- ---------
(Loss) income before extraordinary loss (32,735) 2,018 859
Extraordinary loss on early extinguishment of debt
(net of income tax benefit of $879) (1,435)
--------------- --------- ---------
Net (loss) income $(32,735) $ 583 $ 859
=============== ========= =========
Primary (loss) income per share of common stock from:
(Loss) income before extraordinary loss $ (2.56) $ 0.26 $ 0.13
Extraordinary loss on early extinguishment of debt (0.18)
--------------- --------- ---------
Net (loss) income per share $ (2.56) $ 0.08 $ 0.13
=============== ========= =========
Fully diluted (loss) income per share of common stock
from:
(Loss) income before extraordinary loss $ (2.56) $ 0.25 $ 0.12
Extraordinary loss on early extinguishment of debt (0.18)
--------------- --------- ---------
Net (loss) income per share $ (2.56) $ 0.07 $ 0.12
=============== ========= =========
Weighted average number of common shares outstanding:
Primary 12,794 7,833 6,868
=============== ========= =========
Fully diluted 12,794 7,925 6,924
=============== ========= =========
See notes to consolidated financial statements.
F-3
TRANSWORLD HEALTHCARE, INC.
CONSOLIDATD STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
COMMON STOCK ADDITIONAL RETAINED
------------------ PAID-IN TRANSLATION (DEFICIT)
SHARES AMOUNT CAPITAL ADJUSTMENT EARNINGS TOTAL
-------- -------- ------------ ------------- ----------- ----------
Balance, October 31, 1994 4,641 $ 46 $ 16,862 $ 3,463 $ 20,371
Net income 859 859
Issuance of common stock for:
Exercise of warrants 200 2 1,684 1,686
Exercise of stock options, including
tax benefit 219 3 1,167 1,170
-------- -------- ------------ ------------- ----------- ----------
Balance, October 31, 1995 5,060 51 19,713 4,322 24,086
Net income 583 583
Issuance of common stock for:
Private offering 4,400 44 38,307 38,351
Payment on acquisition payable 370 4 3,828 3,832
Exercise of stock options and
warrants, including tax benefit 110 373 373
-------- -------- ------------ ------------- ----------- ----------
Balance, October 31, 1996 9,940 99 62,221 4,905 67,225
Net loss (32,735) (32,735)
Translation adjustment $(2,192) (2,192)
Issuance of common stock for:
Private offering 5,015 50 50,465 50,515
Radamerica per share price
guarantee (Note 6) 321 3 (3)
Exercise of stock options and
warrants, including tax benefit 210 2 703 705
Cancellation of common stock from:
Termination of VIP agreement (Note
3) (40) (354) (354)
Repayment of Radamerica notes
receivable (Note 8) (146) (1) (1,258) (1,259)
-------- -------- ------------ ------------- ----------- ----------
Balance, September 30, 1997 15,300 $153 $111,774 $(2,192) $(27,830) $ 81,905
======== ======== ============ ============= =========== ==========
See notes to consolidated financial statements.
F-4
TRANSWORLD HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
ELEVEN MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED OCTOBER 31,
--------------- ----------------------
1997 1996 1995
--------------- ---------- ----------
Cash flows from operating activities:
Net (loss) income $ (32,735) $ 583 $ 859
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization 1,324 1,191 1,267
Amortization of goodwill 1,458 1,074 834
Amortization of other intangible assets 408 494 677
Amortization of debt discount and issuance costs 830 912 902
Provision for doubtful accounts 12,973 6,394 5,732
Special charges 34,230
Equity in losses of HMI 637
Deferred income taxes (5,574) (200) (1,866)
Payment for debt discount & issuance costs (1,564) (3,331) (534)
Extraordinary loss on early extinguishment of debt 2,314
Changes in assets and liabilities, excluding the effect of
businesses acquired:
Increase in accounts receivable (11,351) (11,426) (11,990)
(Increase) decrease in inventories (102) (92) 17
Increase in prepaid expenses and other assets (4,457) (1,511) (83)
Increase (decrease) in accounts payable 1,910 (1,123) 2,029
(Decrease) increase in accrued expenses and other
liabilities (640) (1,873) 287
--------------- ---------- ----------
Net cash used in operating activities (2,653) (6,594) (1,869)
--------------- ---------- ----------
Cash flows from investing activities:
Capital expenditures (2,694) (1,040) (1,066)
Notes receivable - related parties 161
Notes receivable - payments received 4,683
Proceeds from termination of VIP agreement 500
Proceeds from sale of fixed assets 550
Proceeds from sale of subsidiary, net of cash overdraft
when sold 12,114
Advances to and investment in HMI (36,872)
Acquisitions -net of cash acquired (93,586) (1,785) (3,529)
Payment on acquisition payable (1,833) (11,078) (5,957)
--------------- ---------- ----------
Net cash used in investing activities (117,138) (13,903) (10,391)
--------------- ---------- ----------
(Continued)
See notes to consolidated financial statements.
F-5
TRANSWORLD HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
ELEVEN
MONTHS ENDED YEAR ENDED OCTOBER
SEPTEMBER 30, 31,
--------------- ---------------------
1997 1996 1995
--------------- ---------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock $ 50,650 $ 39,600
Payment of costs associated with issuance of
common stock (175) (1,249)
Proceeds from notes payable 10,000
Payments on notes payable (11) (10,013)
Proceeds from short-term debt 1,000 $ 1,000
Payments on short-term debt (2,000) (5,000)
Borrowing under revolving loan 96,847 18,482 8,850
Payments on revolving loan (22,983) (10,990) (3,850)
Proceeds from long-term debt 47 18 7,400
Principal payments on long-term debt (340) (21,091) (4,391)
Stock options and warrants exercised,
including tax benefit 939 423 2,856
--------------- ---------- ---------
Net cash provided by financing activities 124,974 24,180 6,865
--------------- ---------- ---------
Effect of exchange rate on cash 845
--------------- ---------- ---------
Increase (decrease) in cash 6,028 3,683 (5,395)
Cash and temporary investments,
beginning of period 4,598 915 6,310
--------------- ---------- ---------
Cash and temporary investments,
end of period $ 10,626 $ 4,598 $ 915
=============== ========== =========
Supplemental cash flow information:
Cash paid for interest $ 3,993 $ 3,763 $ 2,639
=============== ========== =========
Cash paid for income taxes $ 2,312 $ 2,086 $ 2,179
=============== ========== =========
Supplemental disclosure of non-cash investing
and financing activities:
Details of business acquired in purchase
transactions:
Fair value of assets acquired $106,402 $ 4,058 $14,906
=============== ========== =========
Liabilities assumed or incurred $ 11,951 $ 2,171 $11,240
=============== ========== =========
Cash paid for acquisitions (including
related expenses) $ 94,451 $ 1,887 $ 3,666
Cash acquired 865 102 137
--------------- ---------- ---------
Net cash paid for acquisitions $ 93,586 $ 1,785 $ 3,529
=============== ========== =========
Additional non-cash activities are disclosed
in the notes to the consolidated financial statements.
See notes to consolidated financial statements.
F-6
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1. THE COMPANY:
Transworld HealthCare, Inc. (the "Company") is a provider of a broad range
of home health care services and products with operations in the United
States ("U.S.") and the United Kingdom ("U.K."). The Company provides the
following services and products to patients in their homes: (i) specialty
mail-order pharmaceuticals, medical supplies, respiratory therapy and home
medical equipment; (ii) patient services, including nursing and
para-professional services; and (iii) infusion therapy.
During the years ended October 31, 1995 and 1996 and the eleven months
ended September 30, 1997, the Company completed the following
acquisitions:
Company Date of Acquisition Nature of Business
------- ------------------- ------------------
DermaQuest Surgical Supply, Inc. November 1994 Mail-order medical supplies
("DermaQuest")
Delaware Valley Lung Center, P.A. January 1995 Pulmonary therapy
("DVLC")
Precision Health Care, Inc. March 1995 Mail-order orthotic products
("Precision")
Health Meds, Inc. ("Health Meds") October 1996 Respiratory mail-order pharmacy
U.S. HomeCare Infusion Therapy October 1996 Infusion therapy
Services Corporation of New Jersey
("U.S. HomeCare"), a subsidiary of
U.S. HomeCare Corporation
Omnicare plc ("Omnicare") July 1997 Respiratory equipment and
services and medical and surgical
products
Allied Medicare Limited ("Allied") July 1997 Nursing and para-professional
services
The consolidated financial statements presented herein are those of the
Company and include the results of the aforementioned acquired companies
from their respective dates of acquisition (Note 3).
F-7
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
FISCAL YEAR CHANGE:
The Company changed its fiscal year end from October 31 to September 30
effective for fiscal 1997.
The following table presents certain financial information for the eleven
months ended September 30, 1997 and 1996.
ELEVEN MONTHS ENDED
SEPTEMBER 30,
-------------------------
1997 1996
---- ----
(unaudited)
Revenues $93,444 $67,903
========== ==========
Gross profit $42,057 $36,986
========== ==========
(Loss) income before income taxes and $ (37,813) $2,761
extraordinary loss
(Benefit) provision for income taxes (5,078) 1,263
--------- ---------
(Loss) income before extraordinary $ (32,735) 1,498
loss
Extraordinary loss (1,435)
Net (loss) income $ (32,735) $63
========== =========
Net (loss) income per share of common stock:
Primary $ (2.56) $0.01
========= =========
Fully diluted $ (2.56) $0.01
========= =========
Weighted average number of common shares outstanding:
Primary 12,794 7,533
====== ======
Fully diluted 12,794 7,584
====== ======
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. Intercompany transactions and balances
are eliminated in consolidation.
F-8
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
CASH AND TEMPORARY INVESTMENTS:
Cash and temporary investments include highly liquid short-term
investments purchased with initial maturities of 90 days or less.
CONCENTRATIONS OF CREDIT RISK:
Financial instruments which potentially subject the Company to
concentrations of credit risk are temporary cash investments. The Company
places its temporary cash investments with high credit quality financial
institutions and invests in investment grade financial instruments and
time deposits with several commercial lending institutions with original
maturities of three months or less. The Company believes no significant
concentration of credit risk exists with respect to these temporary cash
investments.
The Company grants credit without collateral to its patients, who are
primarily insured under third-party agreements. Accounts receivable at
September 30, 1997 is comprised of amounts due from Medicare, Medicaid and
the National Health Services ("NHS") (31.6%, 8.4% and 20.0%, respectively)
and various other third-party payors and self-pay patients (none of which
comprise greater than 10% of the balance). At October 31, 1996, 49.8% and
11.0% of accounts receivable were due from 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).
INVENTORIES:
Inventories are valued at the lower of cost (first-in, first-out method)
or market. Inventories, which are primarily finished goods, include
pharmaceuticals, ancillary medical supplies and certain medical equipment.
PROPERTY AND EQUIPMENT:
Property and equipment, including revenue producing equipment, are carried
at cost and are being depreciated over their estimated useful lives of
three to seven years, using primarily the straight-line method. Revenue
producing equipment consists of home medical equipment (e.g., respiratory
equipment, beds, wheelchairs). Maintenance and repairs are charged against
results of operations as incurred. Leasehold improvements are amortized
over the related lease terms or estimated useful lives, whichever is
shorter. When assets are retired or otherwise disposed of, the cost and
related accumulated depreciation are removed from the accounts, and any
resulting gain or loss is reflected in results of operations.
F-9
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
REVENUE RECOGNITION:
Patient and infusion revenues are recognized when services are performed
and are recorded net of estimated contractual adjustments based on
agreements with third-party payors, where applicable. Revenues from home
medical equipment are recognized over the period the equipment is rented
(typically on a month-to-month basis) and approximated $5,402, $5,072 and
$4,191 in 1997, 1996 and 1995, respectively. Revenues from the sale of
pharmaceuticals and supplies are recognized when products are delivered
and are recorded at amounts expected to be paid by third-party payors. The
Company receives a majority of its revenue from third-party insurance
companies and Medicare and Medicaid. The amount paid by third-party payors
is dependent upon the benefits included in the patient's policy or as
allowable amounts set by third-party payors. Certain revenues are subject
to review by third-party payors, and adjustments, if any, are recorded
when determined. For the eleven months ended September 30, 1997 and years
ended October 31, 1996 and 1995, the Company's net revenues attributable
to the Medicare and Medicaid programs were approximately 53%, 62% and 59%,
respectively, of the Company's total revenues. For the eleven months ended
September 30, 1997, 13% of the Company's net revenues were attributable to
NHS programs.
INCOME TAXES:
Deferred taxes are provided primarily for bad debts, federal and state net
operating losses, acquisition liabilities, depreciation and amortization
of intangibles, which are reported for Federal income tax purposes in
different periods than for financial reporting purposes.
INTANGIBLE ASSETS:
Intangible assets primarily includes goodwill, net, which amounted to
$102,679 and $43,950 at September 30, 1997 and October 31, 1996,
respectively, and is being amortized on a straight-line basis over forty
years. Accumulated amortization of goodwill at September 30, 1997 and
October 31, 1996 was $2,390 and $2,109, respectively. Also included in
intangible assets at September 30, 1997 and October 31, 1996 are covenants
not to compete, net, of $706 and $546, respectively, which are being
amortized over periods ranging from two to three years. Accumulated
amortization of such covenants at September 30, 1997 and October 31, 1996
was $1,593 and $1,276, respectively.
The Company selected the forty-year amortization period based on the
likely period of time over which the related economical benefit will be
realized. The Company believes the estimated goodwill life is reasonable
given the continuing movement of patient care to noninstitutional
settings, expanding demand due to demographic trends, the emphasis of the
Company in establishing significant coverage in its local and regional
markets, the consistent practice with other alternate site health care
companies and other factors.
F-10
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
At each balance sheet date, management assesses whether there has been a
permanent impairment in the amount of goodwill and the amount of any
impairment by comparing anticipated undiscounted future cash flows from
operating activities with the carrying value of goodwill. Factors
considered by management in estimating future cash flows include current
operating results, trends and prospects of acquired businesses, as well as
the effect of demand, competition, market and other economic factors.
DEFERRED FINANCING COSTS:
Costs incurred in obtaining long-term financing are amortized over the
terms of the long-term financing agreements using the interest method. At
September 30, 1997 and October 31, 1996, other assets include $3,559 and
$2,824, respectively of deferred financing costs associated with the
Credit Facility (as defined and described in Note 5), net of accumulated
amortization of $1,005 and $176, respectively.
On July 31, 1996, $740 of unamortized costs associated with the Credit
Agreement (as defined and described in Note 5) was written-off and
included in the extraordinary charge for the early extinguishment of the
Credit Agreement. Amortization of deferred financing costs is included in
interest expense in the Statements of Operations.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS:
The presentation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
and disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these
estimates.
FOREIGN CURRENCY TRANSLATION:
For international operations, assets and liabilities are translated using
current exchange rates in effect at the balance sheet date of translation
and revenue and expense items are translated using weighted average
exchange rates during the period. Resulting translation adjustments are
recorded as a separate component of stockholders' equity. Gains and losses
resulting from foreign currency transactions are included in determining
net income.
F-11
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:
Primary and fully diluted earnings per share are computed using the
weighted average number of shares of common stock outstanding, after
giving effect to contingently issuable shares under the acquisition
agreements and dilutive stock options and warrants using the treasury
stock method. Fully diluted earnings per share also reflect the
incremental dilution related to stock options due to the use of the market
price at the end of the period when it is higher than the average price
for the period. Stock options and warrants are not included in the primary
and fully diluted loss per share calculations for the eleven months ended
September 30, 1997 as the effect of such inclusion would be anti-dilutive.
The weighted average number of shares of common stock outstanding have
been restated for the years ended October 31, 1996 and 1995 to give effect
to a market price guarantee under an acquisition agreement. The only
effects of this restatement were to decrease fully diluted income before
extraordinary loss and net income per share by $0.01 for the year ended
October 31, 1995 and to decrease fully diluted income before extraordinary
loss and extraordinary loss by $0.01 for the year ended October 31, 1996.
F-12
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
The weighted average number of shares used in the primary and fully
diluted earnings per share computation for the eleven months ended
September 30, 1997 and the years ended October 31, 1996 and 1995 are as
follows:
ELEVEN
MONTHS ENDED YEAR ENDED OCTOBER 31,
SEPTEMBER 30, ----------------------
1997 1996 1995
---- ---- ----
WEIGHTED AVERAGE NUMBER OF SHARES
USED IN PRIMARY CALCULATION:
Weighted average number of shares
outstanding 12,517 6,622 4,937
Weighted average number of shares
contingently issuable per
acquisition agreements 277 413 700
Incremental shares, after application of
treasury stock method, of stock
options and warrants 798 1,231
------- ----- -----
Shares used in calculation of primary
income (loss) per common share 12,794 7,833 6,868
======== ===== =====
WEIGHTED AVERAGE NUMBER OF SHARES
USED IN FULLY DILUTED CALCULATION:
Weighted average number of shares
outstanding 12,517 6,622 4,937
Weighted average number of shares
contingently issuable per acquisition
agreements 277 413 700
Incremental shares, after application of
treasury stock method, of stock
options and warrants 890 1,287
------- ----- -----
Shares used in calculation of fully
diluted income (loss) per common
share 12,794 7,925 6,924
====== ===== =====
F-13
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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 expected future undiscounted cash flows is less than the
carrying amount of the asset, a loss is recognized for the difference
between the fair value and carrying value of the asset.
STOCK-BASED COMPENSATION:
Effective November 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." The Company has elected to continue to account for
stock-based compensation in accordance with Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees."
Accordingly, pro forma net (loss) income and (loss) earnings per share
information has been presented in Note 10 as required under SFAS No. 123.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Cash, accounts receivable, accounts payable and accrued liabilities are
reflected in the financial statement at fair value because of the
short-term maturity of those instruments. The estimated fair value of the
Company's borrowing under the Credit Facility approximates the carrying
value at September 30, 1997 and October 31, 1996.
IMPACT OF RECENT ACCOUNTING STANDARDS:
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings per Share." SFAS No. 128 simplifies the
computation of earnings per share ("EPS") and replaces primary EPS with
basic EPS and fully diluted EPS with diluted EPS. SFAS No. 128 is
effective for annual and interim financial statements issued after
December 15, 1997 and earlier application is not permitted. SFAS No. 128
requires the restatement of EPS data for all prior periods. The Company
has not yet determined the impact that this statement will have on its EPS
amounts when adopted.
F-14
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which established standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and
losses) in the financial statements. SFAS No. 130 requires that all items
that are recognized under accounting standards and components of
comprehensive income be reported in a financial statement, that is
displayed with the same prominence as other financial statements. SFAS No.
130 addresses disclosure issues; and therefore, will not have any effect
on the financial position or results of operations of the Company. SFAS
No. 130 is effective for fiscal years beginning after December 15, 1997
and the Company is in the process of evaluating its implementation, which
is anticipated for fiscal year 1999.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." SFAS No. 131, which
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise," changes the way public companies report information about
segments by moving to the management approach to segment reporting. In
addition, SFAS No. 131 has requirements relating to disclosure of
products, services, customers, and the material countries in which the
entity holds assets and reports revenues. As with SFAS No. 130, SFAS No.
131 addresses disclosure issues and therefore will not have an effect in
the Company's financial position or results of operations. SFAS No. 131 is
effective for periods beginning after December 15, 1997.
RECLASSIFICATIONS:
Prior years financial statements have been reclassified to conform with the
current year's presentation.
3. BUSINESS COMBINATIONS AND DISPOSALS:
During the years ended October 31, 1995 and 1996 and the eleven months
ended September 30, 1997, the Company acquired the entities described
below, which were accounted for by the purchase method of accounting. The
results of operations of the acquired companies are included in the
Company's statement of operations from their respective dates of
acquisition.
DERMAQUEST
Effective November 1, 1994, the Company acquired all of the issued and
outstanding capital stock of DermaQuest, a mail-order wound care products
company serving nursing home and home care patients, for $3,000 in
promissory notes which were repaid during fiscal 1995. Additional
contingent consideration was provided for in the purchase agreement, as
amended effective November 1, 1995, whereby the Company may have been
required to make additional payments based on the 1995 and 1996 earnings
levels of DermaQuest as described below. The Company issued a $4,000
letter of credit under its Credit Agreement, as collateral for any
contingent payments. An additional payment due of $8,832 was recorded as
of October 31, 1995 based on the purchase agreement and was satisfied
through the payment of $5,000 in cash and issuance of 370 shares of common
stock valued at $10.35 during the 1996 fiscal year. No additional payment
was required for the year ending October 31, 1996. The total cost of the
DermaQuest acquisition was
F-15
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
3. BUSINESS COMBINATIONS (CONTINUED):
$11,832 and was allocated on the basis of the fair value of the assets
acquired and liabilities assumed and incurred, resulting in the allocation
of $1,539 and $1,993 to assets and current liabilities, respectively. The
excess amounts were allocated to covenants not to compete of $100 and
goodwill of $12,186 ($8,832 recorded on October 31, 1995 as a result of
the additional payment) which are being amortized on a straight-line basis
over three and forty years, respectively (Note 7).
OMNICARE
At the end of June 1997 Transworld HealthCare (UK) Limited ("Transworld
UK"), a wholly owned subsidiary of the Company, acquired Omnicare pursuant
to a recommended cash offer to acquire all the issued and to be issued
shares of Omnicare not already owned by Transworld UK for approximately
$29,028, which was paid during July 1997. In addition, 1,765 shares had
previously been purchased from Hyperion Partners II L.P. ("HPII"), a
related party, on May 30, 1997 for $2,857. Accordingly, the Company has
included the results of operations, financial position and cash flows of
Omnicare in its consolidated results effective July 1, 1997.
Omnicare provides respiratory equipment and services to patients at home
in the U.K. under the terms of contracts and licenses with various NHS
agencies. The Company also dispenses and supplies a range of medical and
surgical products, principally ostomy products, to patients at home, as
well as providing those patients with advisory and other services through
its network of regional care centers.
The total cost of the acquisition was allocated on the basis of the fair
value of the assets acquired and liabilities assumed and incurred.
Accordingly, assets and liabilities were assigned values of approximately
$9,669 and $6,016, respectively, with the excess of $28,232 allocated to
goodwill which is being amortized on a straight-line basis over forty
years.
ALLIED
Effective June 23, 1997, Transworld UK acquired all of the issued and
outstanding capital stock of Allied, a privately held provider of nursing
and other care-giving services to home care patients throughout 65
locations in the U.K., for approximately $60,042. Accordingly, the Company
has included the results of operations, financial position and cash flows
of Allied in its consolidated results effective June 23, 1997.
The total cost of the acquisition was allocated on the basis of the fair
value of the assets acquired and liabilities assumed and incurred.
Accordingly, assets and liabilities were assigned values of approximately
$10,062 and $7,667, respectively, with the excess allocated to covenants
not to compete of $734 and goodwill of $56,913. The covenants and goodwill
are being amortized on a straight-line basis over three and forty years,
respectively.
F-16
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
3. BUSINESS COMBINATIONS (CONTINUED):
COMBINED PRO FORMAS
The following represents the unaudited pro forma results of operations and
related per share information assuming the Company acquired Omnicare and
Allied at the beginning of the respective periods presented. The pro forma
results for the eleven months ended September 30, 1997 are based on the
historical financial statements of the Company for the eleven months ended
September 30, 1997 (including Omnicare and Allied from the dates of
acquisition), Omnicare for the eight months ended June 30, 1997 and Allied
for the thirty-six weeks ended June 22, 1997. The pro forma results for
the year ended October 31, 1996 are based on the historical financial
statements of the Company and Omnicare for the year ended October 31, 1996
and December 31, 1996, respectively and Allied for the fifty-two weeks
ended October 13, 1996.
The unaudited pro forma information is not necessarily indicative either
of the results of operations that would have occurred had the acquisitions
been made on the dates indicated or that may occur in the future.
Eleven Months
Ended Year Ended
September 30, October 31,
1997 1996
---------------- -------------
(unaudited) (unaudited)
Net revenues $141,231 $126,837
(Loss) income before extraordinary loss (32,695) 1,934
Net (loss) income (32,695) 499
(Loss) income per share of common stock
before extraordinary loss:
Primary (2.56) 0.25
Fully diluted (2.56) 0.24
Net (loss) income per share of common stock:
Primary (2.56) 0.06
Fully diluted (2.56) 0.06
F-17
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
3. BUSINESS COMBINATIONS (CONTINUED):
DVLC
Effective January 31, 1995, the Company acquired certain assets and
assumed certain liabilities of DVLC for approximately $500. DVLC is a
provider of pulmonary rehabilitation and diagnostics which operates in
Cherry Hill, New Jersey.
The cost of the acquisition was allocated on the basis of the fair value
of the assets acquired and liabilities assumed and incurred, resulting in
goodwill and covenants not to compete of $312 and $200, respectively,
which are being amortized on a straight-line basis over forty and three
years, respectively (Note 7).
PRECISION
Effective March 1, 1995, the Company acquired certain of the assets and
assumed certain liabilities of Precision, an orthotics distribution
company serving nursing home and home care patients. Pursuant to the
Precision purchase agreement, as amended, the purchase price of the assets
acquired from Precision was $360. On June 6, 1995, $30 was paid with the
balance payable in 33 equal monthly installments. The cost of the
acquisition was allocated on the basis of the fair value of the assets
acquired and liabilities assumed and incurred, resulting in goodwill of
$388 which is being amortized on a straight-line basis over forty years.
HEALTH MEDS
Effective October 1, 1996, the Company acquired certain assets and assumed
certain liabilities of Health Meds, a respiratory mail-order pharmacy for
$1,400.
The cost of the acquisition was allocated on the basis of the fair value
of the assets acquired and the liabilities assumed and incurred, resulting
in goodwill of $1,621 which is being amortized on a straight-line basis
over forty years.
U.S. HOMECARE
Effective October 1, 1996, the Company acquired certain assets and assumed
certain liabilities of U.S. HomeCare, a provider of infusion therapy to
patients in their homes for $2,000. As of October 31, 1996, $350 was paid
and $1,650 was recorded in acquisitions payable. The remaining $1,650 plus
accrued interest was paid on November 1, 1996.
The cost of the acquisition was allocated on the basis of the fair value
of the assets acquired and the liabilities assumed and incurred, resulting
in goodwill and covenants not to compete of $2,206 and $50, respectively,
which are being amortized on a straight-line basis over forty and five
years, respectively.
F-18
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
3. BUSINESS COMBINATIONS (CONTINUED):
The pro forma results of operations and related per share information for
Health Meds and U.S. HomeCare have not been presented as the impact is not
material.
DISPOSITION
RADAMERICA
Effective July 31, 1997 the Company sold Radamerica, Inc. ("Radamerica")
for $13,304 and received $12,100 in fiscal 1997 with the remaining $1,204
subsequently received on November 10, 1997. As part of the consideration
for the acquisition of Radamerica, the Company had issued 250 shares of
its common stock valued at $5,000 based on a $20 per share market price
guarantee to the selling shareholders of Radamerica. Per the agreement,
the incremental amount due under the market price guarantee of $8.25 was
paid to the selling shareholders through issuance of 321,276 shares of
common stock of the Company during August 1997.
Results for Radamerica through July 31, 1997 have been included in the
overall Company's results for the eleven months ended September 30, 1997.
Accordingly, for purposes of earnings per share calculations, the weighted
average actual shares issued of the Company's common stock under the per
share market price guarantee have been included in both primary and fully
diluted earnings per share calculations.
The Company recognized a pre-tax gain on the sale of Radamerica of
approximately $606. The gain on the sale has been recorded in special
charges (Note 7).
TERMINATION OF PENDING ACQUISITIONS
VIP COMPANIES
On June 30, 1994, the Company entered into stock purchase agreements, as
amended, to acquire all of the issued and outstanding capital stock of VIP
Health Services, Inc. and Kwik Care, Ltd. (collectively, the "VIP
Companies"). On July 23, 1997, the Company and the VIP Companies
terminated the stock purchase agreements principally due to delays in
completing the transaction.
As a result of the termination of the agreements, the Company has taken a
pre-tax non-cash charge of approximately $1,622 during its third quarter
of fiscal 1997 relating to the termination of the transaction, a contract
deposit and other acquisition-related expenses. This charge has been
recorded in special charges (Note 7).
HMI
On November 13, 1996, the Company entered into a number of agreements
including a stock purchase agreement (the "Stock Purchase Agreement") and
a merger agreement (the "Merger Agreement") to acquire 100% of the issued
and outstanding stock of Health Management, Inc. ("HMI") in a series of
transactions. HMI is a Buffalo Grove, Illinois based provider of
integrated
F-19
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
3. BUSINESS COMBINATIONS (CONTINUED):
pharmacy management services to patients with chronic medical conditions
and to health care professionals, drug manufacturers and third-party
payors involved in such patients' care.
Also, on November 13, 1996, the Company acquired HMI's senior secured
indebtedness under the credit agreement between HMI and its senior lenders
(the "HMI Credit Agreement") for $21,263 directly from such lenders.
In mid January 1997, the Stock Purchase Agreement was completed, pursuant
to which the Company acquired 8,964 newly issued shares of HMI common
stock, representing approximately 49% of HMI's outstanding common stock
for $1 per share or $8,964.
The $9,714 investment in HMI was recorded as of January 31, 1997 and
represents 49% of HMI's equity in net tangible assets and after fair value
adjustment $15,835 was preliminary allocated to goodwill, which was being
amortized on a straight-line basis over thirty years.
The Merger Agreement, as amended on March 26, 1997, provided for the
acquisition by the Company of the remaining issued and outstanding common
shares of HMI, not previously owned by the Company for $.30 per share.
The acquisition of 49% of the outstanding shares of HMI common stock was
accounted for by the Company under the equity method of accounting
(effective as of January 31, 1997). Equity in HMI net losses for the three
months ended July 31, 1997 were accounted for in the reduction of the
investment in HMI to net realizable value. Due to the Company's decision
on August 1, 1997 to dispose of HMI, no equity in HMI losses have been
booked subsequent to July 31, 1997.
For the years ended April 30, 1997 and 1996, HMI reported net sales of
$158,419 and $158,860, respectively and net losses of $66,099 and $10,927,
respectively. Included in the net loss for the year ended April 30, 1997
are charges of $49,982, related to (i) a write-off for the impairment of
certain facilities and the related goodwill ($30,944); (ii) an additional
provision reflecting a change in the estimation of the allowance for
doubtful accounts ($10,000); (iii) estimated costs related to the
settlement of stockholder class action litigation ($4,550); (iv) costs and
other expenses related to the closing or sale of three retail pharmacies,
including a goodwill write-off ($2,813); (v) costs associated with
overpayments from New York State Medicaid ($1,400); and (vi) estimated
costs related to the settlement of a derivative lawsuit ($275). Included
in the net loss for the year ended April 30, 1996 are charges of $16,840,
related to (i) a write-off of medical device inventory ($2,840); (ii) an
additional provision reflecting a change in the estimation of the
allowance for doubtful accounts ($8,400); (iii) costs associated with
organizational consideration and other cost reduction programs ($3,600);
and (iv) professional fees related to HMI's litigation and restatement of
fiscal 1995 financial statements ($2,000).
The table below contains summarized financial information of HMI as of
July 31, 1997 for balance sheet data and for the six months ended July 31,
1997 for statement of operations data based on unaudited financial
information provided by HMI.
F-20
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
3. BUSINESS COMBINATIONS (CONTINUED):
CONDENSED BALANCE SHEET DATA JULY 31, 1997
- ---------------------------- -------------
(unaudited)
Current assets $36,123
Noncurrent assets 2,590
Current liabilities 62,113
Noncurrent liabilities 585
SIX MONTHS ENDED
CONDENSED STATEMENT OF OPERATIONS DATA JULY 31, 1997
- -------------------------------------- ----------------
(unaudited)
Net revenues $77,041
Gross profit 13,408
Operating loss (38,597)
Net loss (38,089)
During the three months ended July 31, 1997, events and circumstances
indicated that the Company's investment in HMI might be impaired. Included
in those events was the recognition by HMI of $31,000 of charges related
to the impairment of certain facilities and the related goodwill,
continuing deterioration in HMI's financial performance, and an inability
of the Company to obtain the consent of its lenders under the Credit
Facility to consummate the Merger Agreement.
As a result, on August 1, 1997, the Company announced that it would be
unable to complete the merger with HMI and that HMI and the Company were
actively pursuing alternative transactions. On August 14, 1997, the
Company entered into an agreement with Counsel Corporation ("Counsel")
relating to the sale of substantially all of the businesses and operations
of HMI. The agreement called for the purchase of HMI assets (the "Asset
Sale") by Counsel for approximately $40,000. The closing of the
transaction was subject to, among other things, the consummation of the
Merger Agreement.
As a result of the Company's agreement in principle to sell substantially
all of the operations and assets of HMI to Counsel, the Company was able
to establish its best estimate of the net realizable value of its
investment in HMI. Based on the proposed terms of the Asset Sale, the
Company, during its third fiscal quarter, recorded a pre-tax charge of
$20,000 to adjust the carrying value of
F-21
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
3. BUSINESS COMBINATIONS (CONTINUED):
its investment in HMI to the estimated net realizable value of $25,000,
and to record the estimated costs, fees and other expenses to complete the
Asset Sale.
On October 1, 1997, the Company, through a wholly-owned subsidiary,
completed the merger with HMI. Under the terms of the Merger Agreement,
HMI stockholders received $.30 in cash for each outstanding share of HMI
common stock not already owned by the Company. Concurrently with the
closing of the merger, the Company completed the Asset Sale to Counsel for
$40,000. Of the $40,000 proceeds, $30,000 was received in cash with $7,500
being paid to the Company as HMI's accounts receivable, existing at date
of sale, are collected, with the remaining $2,500 held in escrow for
post-closing adjustments. Of the $30,000 proceeds received, $15,000 was
used to reduce the senior secured debt owed by the Company under the
Credit Facility (Note 5), $2,800 was used to complete the merger and the
remainder was used for costs, fees and other expenses to complete the
Asset Sale, as well as to satisfy liabilities and wind-down costs not
assumed by Counsel. The Company will further reduce its senior secured
debt under the Credit Facility by $10,000 as the remaining proceeds from
the sale are received. The Company also amended its Credit Facility on
October 1, 1997 to accommodate the merger with HMI and the sale to
Counsel.
Pursuant to the Asset Sale, Counsel will not assume any liabilities of HMI
other than certain liabilities arising after the closing under assumed
contracts and certain employee-related liabilities.
The total cost of the HMI transaction is approximately $60,000 which is
comprised of the following amounts: (i) the purchase of HMI's senior
secured indebtedness for $21,263; (ii) the purchase of 49% and 51% of the
equity in HMI for $8,964 and $2,800, respectively; (iii) $10,100 of HMI
liabilities not assumed by Counsel upon completion of the Merger
Agreement; (iv) $5,900 of wind-down expenses, contingent obligations and
reserves for legal, tax and audit contingencies; (v) stock issuable to
HPII in exchange for HMI Payables (as defined in Note 6) for $7,500; and
(vi) $3,473 of other miscellaneous items, including fees, expenses and
estimated post-closing balance sheet adjustments.
F-22
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 consist of the following:
SEPTEMBER 30, OCTOBER 31,
1997 1996
--------------- ----------------
Revenue producing equipment $8,302 $2,826
Furniture, fixtures and equipment 6,097 4,708
Land, buildings and leasehold improvements 1,221 1,023
------ -------
15,620 8,557
Less, accumulated depreciation
and amortization 7,172 4,623
------ ------
$8,448 $3,934
====== ======
The net book value of revenue producing equipment was $4,638 and $1,232 at
September 30, 1997 and October 31, 1996, respectively.
5. DEBT:
On August 5, 1994, the Company entered into a credit agreement with an
institutional lender, as Agent, and various banks (the "Credit
Agreement"), which provided for a term loan of $18,000 and revolving loans
of up to $10,000. On March 2, 1995, such agreement was amended and
provided for a total term loan of $23,000 and revolving loans of up to
$12,000.
On January 10, 1996, the Company's Credit Agreement was amended to permit
the issuance of equity units under the unit purchase agreement (Note 6),
to permit the issuance of the 20% Subordinated Notes described below, to
allow the payment in cash of the remaining $5,973 RespiFlow, Inc.
("RespiFlow") / MK Diabetic Support Services, Inc. ("MK Diabetic")
acquisition payable (plus interest from its due date of August 15, 1995),
which was paid on January 10, 1996, and to amend and modify certain
definitions and covenants in the Credit Agreement.
On January 10, 1996, HPII purchased from the Company $10,000 of 20%
subordinated notes (the "Subordinated Notes") due October 10, 1996. On May
30, 1996 the interest rate on the Subordinated Notes was reduced to 12%.
On July 31, 1996, the Subordinated Notes were repaid with proceeds from
the Second Closing (as defined in Note 6).
On May 28, 1996, the required lenders under the Credit Agreement consented
to the use of the $5,400 proceeds from the Initial Closing (as defined in
Note 6) to: (i) pay $1,000 plus accrued interest for the remainder of the
DermaQuest acquisition payable (Note 3); (ii) pay interest accrued through
the Initial Closing (Note 6) on the Subordinated Notes; and (iii) to use
the remainder for general corporate and working capital purposes.
On July 31, 1996, the Company completed a new $100,000 senior secured
revolving credit facility, underwritten by a commercial bank who is also
acting as Agent Bank (the "Credit Facility"). This
F-23
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
5. DEBT (CONTINUED):
new facility replaced the Company's existing $35,000 Credit Agreement. On
July 31, 1996, the Credit Agreement was repaid out of proceeds from the
Second Closing (Note 6) and borrowings under the Credit Facility. In
connection with the repayment of the Credit Agreement, the Company
recorded a non-cash, after-tax, extraordinary charge of $1,435 (net of tax
benefit of $879) in fiscal 1996, relating to the write-off of the deferred
financing costs and discount associated with the Credit Agreement.
The Company amended the Credit Facility during the eleven months ended
September 30, 1997 to accommodate the sale of the Additional Shares (as
defined in Note 6) and the AP Shares (as defined in Note 6), the purchase
of HMI's senior debt and 100% of HMI's common stock, certain working
capital advances to HMI, the sale of substantially all of HMI's assets and
the purchase of Omnicare and Allied.
The loans under the Credit Facility are collateralized by, among other
things, a lien on substantially all of the Company's and its domestic
subsidiaries' assets, a pledge of the Company's ownership interest in its
subsidiaries and guaranties by the Company's domestic subsidiaries. The
loans mature on July 31, 2001 with reductions in availability commencing
July 31, 1998 through final maturity. As of September 30, 1997, $25,000 of
the Credit Facility, was classified as current as the Credit Facility, as
amended, requires repayment of $25,000 from the proceeds of the Asset
Sale.
On July 31, 1997 the Company used the $12,100 it received from the sale of
Radamerica to reduce outstanding borrowings under the Credit Facility. On
October 1, 1997, the Company paid down $15,000 of borrowings under the
Credit Facility from proceeds from the Asset Sale.
The Credit Facility provides that subject to the terms thereof, the
Company may make borrowings either at the Base Rate (as defined in the
Credit Facility), plus 1% or the Eurodollar Rate (5.66% at September 30,
1997), plus 2%. As of September 30, 1997, the Company had $86,355
outstanding under the Credit Facility and the unused portion under the
Credit Facility was $13,645. Additional borrowings require the approval of
the required banks under the Credit Facility.
Subject to certain exceptions, the Credit Facility prohibits or restricts,
among other things, the incurrence of liens, the incurrence of
indebtedness, certain fundamental corporate changes, dividends, the making
of specified investments and certain transactions with affiliates. In
addition, the Credit Facility contains affirmative and negative financial
covenants customarily found in agreements of this kind including the
maintenance of certain financial ratios, such as interest coverage, debt
to earnings before interest, taxes, depreciation and amortization
("EBITDA") and minimum EBITDA. At July 31, 1997, the Company was in
technical default of the Credit Facility due to non-compliance with
certain financial covenants (interest coverage, debt to EBITDA and minimum
EBITDA) caused by the recording of special charges ($34,433) and
additional bad debt expense ($3,323) related to the business realignment.
On September 15, 1997, the Credit Facility was amended to accommodate
these charges, bringing the Company into compliance with the Credit
Facility. Excluding these charges, the Company would have been in
compliance with all financial covenants contained in the Credit Facility
at July 31, 1997. Subsequent to September 30,
F-24
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
5. DEBT (CONTINUED):
1997, the Company amended the Credit Facility to adjust certain covenants
for fiscal 1997 and for fiscal periods beginning October 1, 1997. As a
result, the Credit Facility, as amended, did not contain tests for key
financial covenants as of September 30, 1997. On September 30, 1997, the
Company was in compliance with all financial covenants contained in the
Credit Facility, as subsequently amended.
Long-term debt consists of the following:
SEPTEMBER 30, OCTOBER 31,
1997 1996
------------- -----------
Credit Facility, due July 31, 2001, with monthly
interest at Eurodollar Rate (5.66% at
September 30, 1997), plus 2% collateralized by
a lien on all Company assets $86,355 $12,492
Equipment leases with monthly principal plus
interest ranging from 6.9% to 12.5% through 2002,
collateralized by related equipment 96 34
-------- --------
86,451 12,526
Less, current maturities 25,051 21
-------- --------
$61,400 $12,505
======= =======
Annual maturities of long-term debt for each of the next five years are:
YEAR ENDING SEPTEMBER 30,
1998 $25,051
1999 29
2000 1,364
2001 60,005
2002 2
-------
$86,451
=======
6. STOCKHOLDERS' EQUITY:
On November 20, 1995, the Company entered into a unit purchase agreement,
as amended, with HPII under which the Company sold an aggregate of 4,400
units at a purchase price of $9.00 per unit (for an aggregate purchase
price of $39,600) to the institutional investor in two separate closings.
Each unit is comprised of one share of the Company's restricted common
stock and a 0.6818 non-callable, five year stock purchase warrant with
each whole warrant entitling the holder to purchase an additional share of
the Company's common stock at $12.45 per share (the "Warrants").
F-25
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
6. STOCKHOLDERS' EQUITY (CONTINUED):
The initial closing (the "Initial Closing") was completed on May 30, 1996
following the receipt of shareholder approval (which was obtained at the
Company's annual meeting of shareholders on April 16, 1996), at which time
the Company sold 600 units or 9.8% of the issued and outstanding shares of
the Company, after giving effect to the sale, at a purchase price of $9.00
per unit for an aggregate purchase price of $5,400. The second closing
(the "Second Closing"), which was subject to receipt of New York State
Department of Health approval of the transaction, (which was received in
June of 1996) was completed on July 31, 1996. At the Second Closing, the
Company sold an additional 3,800 units for an aggregate purchase price of
$34,200. Gross proceeds of $39,600 were reduced by $1,249 of offering
costs.
On April 21, 1997, HPII purchased an additional 899 shares of the
Company's common stock at $11.125 per share and Hyperion TW Fund L.P.
purchased 4,177 shares of the Company's common stock at $9.875 per share
for an aggregate purchase price of $50,650 (collectively, the "Additional
Shares").
HPII has purchased certain of HMI's trade payables (the "HMI Payables")
aggregating approximately $18,300 at various discounts. On March 26,
1997, the Company entered into a stock purchase agreement (the "AP Stock
Purchase Agreement"), with HPII, as amended, pursuant to which HPII and
the Company agreed, that subject to the conditions stated in the AP Stock
Purchase Agreement, the Company would issue such number of AP Shares
determined by a formula geared to the net cash proceeds ultimately
realized by the Company upon sale of the HMI assets. The value per share
of the AP Shares will be determined by the market value of the Company's
common stock on the date of issuance. The value of the AP Shares is
currently estimated to be approximately $7,500. Completion of this
transaction is subject to customary closing conditions including
shareholder approval.
Payment of the Radamerica per share price guarantee in August 1997
resulted in the reclassification of $3 from additional paid-in capital to
common stock.
7. BUSINESS REALIGNMENT:
The Company took a number of significant steps during the eleven months
ended September 30, 1997 to realign its business as a focused regional
home health care provider and specialty pharmacy and medical supply
distributor in the U.S. and an integrated national provider of home and
alternate site health care products and services in the U.K. These
steps included: (i) selling non-core assets (i.e.: Radamerica); (ii)
exiting businesses that were deemed not to have the potential to earn an
adequate return on capital over the long term (such as wound care and
orthotic product lines in the continental U.S., as well as the Company's
pulmonary rehabilitation center in Cherry Hill, New Jersey); (iii)
completing the Asset Sale; and (iv) terminating the agreements to purchase
the VIP Companies.
F-26
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
7. BUSINESS REALIGNMENT (CONTINUED):
For the eleven months ended September 30, 1997, the Company incurred
pre-tax special charges in relation to these actions of $34,230, made up
of the following items: (i) $20,000 related to the impairment of the
investment in HMI as well as to record estimated costs, fees and other
expenses related to the sale of the HMI assets (Note 3); (ii) $12,079 for
the write-off of goodwill and other intangible assets related to the
decisions to exit substantially all of DermaQuest's product lines in the
continental U.S. (principally wound care and orthotics); (iii) $1,622 for
the termination of the agreements to purchase the VIP Companies
(Note 3); (iv) $437 principally for the write-off of goodwill and other
intangible assets and estimated costs associated with the closure of the
Company's pulmonary rehabilitation center in Cherry Hill, New Jersey (Note
3); and (v) $698 of other charges, partly offset by a gain of $606 on the
sale of Radamerica (Note 3).
In addition to these special charges, during the eleven months ended
September 30, 1997, the Company recognized additional bad debt expenses of
$7,023 principally related to its DermaQuest product lines ($6,060) and
pulmonary rehabilitation center ($663), which is reflected in selling,
general and administrative expense. The Company established these reserves
as a result of the decision to discontinue these product lines, and the
associated impact on the ability to secure required documentation in a
timely manner for reimbursement.
During the fourth quarter of 1995, the Company recorded special charges
totaling $3,898 related to the write-off of expenses related to an
abandoned public offering ($2,808), write-off of expenses related to
abandoned acquisitions ($605) and expenses related to the consolidation of
certain of the Company's facilities ($485).
The decision to abandon the proposed public offering was made during the
fourth quarter of 1995 following management's assessment of the ability to
complete the financing. Financing was subsequently arranged through an
institutional investor (Note 6). The special charge of $2,808 is primarily
made up of legal, accounting, underwriting, printing, and "roadshow"
expenses.
Pursuant to the decision to abandon the public offering, management
assessed the recoverability of deferred expenses related to certain
potential acquisitions which had been capitalized based on the completion
of both the public offering and the acquisitions. Management made the
determination that, as of October 31, 1995, these expenses would not be
recoverable. The special charge of $605 is primarily made up of legal and
accounting expenses.
The decision to consolidate certain of the Company's facilities was made
during the fourth quarter of 1995 and relates to the consolidation of
redundant facilities in the New York/New Jersey market into an existing
Company location in New Jersey. Included in the special charge of $485 are
costs associated with closing down the New York Facility, exclusive of
personnel costs and as of September 30, 1997 all amounts have been paid
out.
F-27
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
8. RELATED PARTY TRANSACTIONS:
Notes receivable from related parties and stockholders consisted of the
following:
September 30, OCTOBER 31,
1997 1996
------------------------- -----------------------
Notes due from officers and employees $ 134 $ 134
Notes due from related parties 964
------ ------
134 1,098
Less current maturities, (included in prepaid expenses
and other current assets on the balance sheet) 134 134
------ ------
$ 0 $ 964
====== ======
Interest on the notes due from officers and employees are at rates ranging
from prime (8.5% and 8.25% at September 30, 1997 and October 31, 1996,
respectively) to prime plus 1% and are due April 30, 1998.
The Company loaned an aggregate of $1,100 to two of the four sellers of
Radamerica. Interest on these notes was at prime plus 0.75%. As of October
31, 1996, $136 of the loans had been repaid and on August 4, 1997 the
remaining balance of $964 plus $297 of interest was paid in 146 shares
of Company stock and $2 in cash (Note 3).
Interest expense-related parties, net was $0, $3 and $132 for the eleven
months ended September 30, 1997 and the years ended October 31, 1996 and
1995, respectively.
During the eleven months ended September 30, 1997, the Company paid an
affiliate of Mr. Aitken (the Company's Chairman of the Board and Chief
Executive Officer), the sum of $96 for consulting services rendered in
connection with potential financing opportunities.
F-28
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
9. INCOME TAXES:
The (benefit) provision for income taxes from continuing operations before
extraordinary loss is summarized as follows:
ELEVEN MONTHS YEAR ENDED OCTOBER 31,
ENDED SEPTEMBER 30, --------------------------
1997 1996 1995
---- ---- ----
Current:
Federal $(243) $1,637 $1,944
State 213 265 549
Foreign 55
Deferred:
Federal (4,443) (215) (1,465)
State (763) 15 (401)
Foreign 103
-------- ------ ------
(Benefit) provision for
income taxes $(5,078) $1,702 $ 627
======== ====== ======
F-29
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
9. INCOME TAXES (CONTINUED):
For 1997, 1996 and 1995, 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, 1997 and October 31, 1996
and 1995 are as follows:
OCTOBER 31,
SEPTEMBER 30, ---------------
1997 1996 1995
---- ---- ----
Deferred tax assets:
Current
Provision for doubtful accounts $4,396 $2,172 $2,006
Inventory capitalization 33 9 11
Accrued expenses 1,882 677 409
Other, net 219 44 43
------ ------ ------
Current deferred tax assets 6,530 2,902 2,469
------ ------ ------
Non-current:
Federal net operating loss 1,695
State net operating losses 2,186 151 312
Other, net 464 57
Valuation allowance (1,989) (130) (285)
------- ------- ------
Non-current deferred tax
assets 2,356 78 27
----- ------- -------
Deferred tax liabilities:
Non-current:
Depreciation and amortization 865 490 297
Other, net 317 65 (26)
------ ------- ------
Deferred tax liabilities 1,182 555 271
------ ------- -------
Net deferred tax assets $ 7,704 $2,425 $2,225
====== ====== ======
F-30
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
9. INCOME TAXES (CONTINUED):
The valuation allowance at September 30, 1997 relates to deferred tax
assets established for certain state net operating loss carryforwards
which are not expected to be realized based on historical or future
earnings. The increase in the valuation allowance of $1,859 is primarily
due to the increase in state net operating loss carryforwards which are
not expected to be realized. Management expects that it is more likely
than not that future levels of income will be sufficient to realize the
deferred tax assets, as recorded.
As of September 30, 1997, the Company has state net operating loss
carryforwards of $16,068 which, if unused, will expire in the years 1998
through 2012, and has a federal net operating loss carryforward of $5,507
which if unused, will expire in 2012.
Reconciliations of the differences between income taxes on income from
continuing operations computed at Federal statutory tax rates and
consolidated provisions for income taxes are as follows:
ELEVEN MONTHS YEAR ENDED OCTOBER 31,
ENDED SEPTEMBER 30, ------------------
1997 1996 1995
---- ---- ----
Income taxes computed at Federal
statutory tax rate $(12,856) $1,265 $505
State income taxes, net of
Federal benefits (2,222) 350 (187)
Nondeductible expenses, primarily
amortization of intangible assets 4,291 266 41
Valuation allowance, state taxes 1,859 (155) 232
Market writedown on investment in
subsidiary 3,200
Other, net 650 (24) 36
--------- ------ -----
(Benefit) provision for income taxes $ (5,078) $1,702 $627
======== ====== ====
F-31
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
10. STOCK OPTION PLAN AND WARRANTS:
The Company has a stock option plan which provides for either incentive
stock options or nonqualified stock options (the "Plan"). The Plan gives
eligible employees, officers, directors and non-employee independent
contractors options to purchase up to 3,000 shares of stock, of which
options to purchase 1,284 shares of stock were outstanding as of
September 30, 1997. Options under the Plan may be granted by the
Compensation Committee of the Board of Directors which determines the
exercise price, vesting provisions and term of such grants. The vesting
provisions provide for vesting of options over a period of between two
and three years. Following is a summary of transactions under the plan
during the years ended October 31, 1995 and 1996 and the eleven months
ended September 30, 1997:
STOCK
OPTIONS
-------
Outstanding - October 31, 1994 at $1.25 to $8.88 per share 759
Granted during 1995 ($7.88 per share) 260
Exercised during 1995 ($1.25 to $5.50 per share) (148)
Canceled during 1995 ($3.18 to $8.88 per share) (19)
-----
Outstanding - October 31, 1995 at $1.25 to $8.75 per share 852
Granted during 1996 ($8.88 to $10.00 per share) 70
Exercised during 1996 ($1.25 to $7.88 per share) (159)
Canceled during 1996 ($3.18 to $8.75 per share) (14)
-----
Outstanding - October 31, 1996 $1.25 to $10.00 per share 749
Granted during 1997 ($7.25 to $12.00 per share) 893
Exercised during 1997 ($2.78 to $10.00 per share) (282)
Cancelled during 1997 ($5.50 to $12.00 per share) (76)
------
Outstanding - September 30, 1997 ($3.18 to $10.00 per share) 1,284
=====
Available for future grants 1,200
=====
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 stock. As of September 30, 1997
no options under the Directors Plan have been granted. Options under the
Directors Plan may be granted by the Board of Directors which determines
the exercise price, vesting provisions and term of such grant. All
options granted under the Plan are immediately exercisable, provided
however that, among other things, no option shall be exercisable after
the expiration of ten years from the date of grant.
F-32
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
10. STOCK OPTION PLAN AND WARRANTS (CONTINUED):
Of the 852 options outstanding as of October 31, 1995, 471 were
exercisable as of that date.
Of the 749 options outstanding as of October 31, 1996, 583 were
exercisable as of that date.
As of September 30, 1997, 472 of the 1,284 options outstanding were
exercisable.
The Company has adopted the disclosure-only provisions of SFAS No. 123
"Accounting for Stock- Based Compensation." In accordance with SFAS No.
123, the Company continues to apply APB Opinion 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 cost. If the Company had elected to recognize
compensation cost based on the fair value of the options at grant date as
prescribed by SFAS No. 123, net income and earnings per share would have
been reduced to the pro forma amounts indicated in the table below:
ELEVEN MONTHS YEAR ENDED OCTOBER 31,
ENDED SEPTEMBER 30, ----------------------
1997 1996 1995
---- ---- ----
Net (loss) income - as reported $(32,735) $583 $859
Net (loss) income - pro forma (33,731) 447 859
Primary (loss) earnings per share - as reported (2.56) .08 .13
Primary (loss) earnings per share - pro forma (2.64) .06 .13
Fully diluted (loss) earnings per share - as reported (2.56) .07 .12
Fully diluted (loss) earnings per share - pro forma (2.64) .06 .12
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: expected dividend yield of 0%; expected volatility 52.5%;
risk-free interest rate of 6.00%; and expected lives of 4 years. The
compensation cost as generated by the Black-Scholes Model, may not be
indicative of the future benefit, if any, that may be received by the
option holder.
Effective January 15, 1997, the Company granted Mr. Aitken (the Company's
Chairman of the Board and Chief Executive Officer) options under the 1992
Option Plan to purchase 500 shares of Common Stock at an exercise
price of $11.375 per share. Such options were repriced on August 13, 1997
to an exercise price of $7.25 per share.
In connection with the initial public offering, the Company issued
warrants to purchase 1,600 common shares. The warrants are exercisable at
$6.294 (reduced from $6.50 in accordance with an anti-dilution clause in
the agreement) per share and expire on December 8, 1997. During 1994, the
Company repurchased 500 of the public warrants, 250 for $1.25 per warrant
and 250 at $1.3125 per warrant in open market purchases. As of September
30, 1997, 7 warrants were exercised for $44. Subsequently, an additional
960 warrants were exercised for an aggregate of $6,041.
F-33
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
11. COMMITMENTS AND CONTINGENCIES:
The Company has employment agreements with certain of its executive
officers and management personnel which provide for minimum aggregate
annual compensation of $387 in fiscal 1998. The contracts expire between
October 1997 and July 1998 and contain customary termination and
non-compete provisions. One of the contracts, which amounts to $71 of the
1998 minimum aggregate compensation, contains a change in control
provision that would entitle the individual to up to 2.9 times of his
salary then in effect, plus any unpaid bonus and unreimbursed expense
upon a change of control of the Company (as defined) or significant
change in the responsibilities of such person.
In fiscal 1996, the Company paid $350 to its former Chairman of the Board
and Chief Executive Officer ("Chairman") in connection with his
resignation. The Company also entered into a consulting agreement with
its former Chairman, which expires on April 30, 2000, which provides for
annual compensation of $150 less the amount by which certain amounts paid
to or on his behalf exceed $60.
Beginning in fiscal 1995, the Company had adopted a performance based
bonus plan for the Company's executive officers and certain other
employees. Under this plan, amounts granted may be up to 50% of their
base salaries at the sole discretion of the Compensation Committee.
Bonuses may be paid in whole or in part, in cash or shares of common
stock.
The Company has entered into various operating lease agreements for
office space and equipment. Certain of these leases provide for renewal
options extending to the year 2006.
Future minimum non-cancelable lease payments at September 30, 1997 are as
follows:
1998 $1,629
1999 1,519
2000 1,362
2001 1,162
2002 970
Thereafter 1,819
------
$8,461
======
Total rental expense for the eleven months ended September 30, 1997 and
the year ended October 31, 1996 and 1995 amounted to $1,848, $1,645 and
$1,563, respectively.
F-34
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED):
On November 2, 1994, an action was filed in the Supreme Court of the
State of New York, County of Westchester against the Company, alleging
that one of its drivers negligently caused the death of plaintiff's
husband while operating his motor vehicle during a delivery for the
Company. The plaintiffs are seeking $12,580 in damages. The case was
settled on April 16, 1997 for $760, of which the Company's portion
amounted to $710, and was paid on May 6, 1997 by the Company's insurance
carrier. Since this settlement was within the policy limits of the
Company's insurance policies it did not have any effect on the Company's
consolidated financial position, results of operations or cash flows.
On December 4, 1997, a Summons with Notice of Complaint (the "Summons
with Notice") was filed in the Supreme Court of the State of New York,
County of New York against the Company, Transworld Acquisition Corp.
("Acquisition") and Hyperion Partners L.P. by Primary Health Services,
Inc., Chuck Davis and Gregory Gaiser. The Summons with Notice contains
allegations of, among other things, breach of an asset purchase agreement
among Acquisition and the plaintiffs and tortious interference with
certain business relationships. The action seeks compensatory damages of
$5,000 and punitive damages of $5,000. The Company and Acquisition expect
to file a notice of appearance or serve a written demand for the
complaint by December 28, 1997. Although it is too early to predict the
ultimate outcome, the Company intends to vigorously defend this
proceeding and currently does not expect that there will be a material
adverse effect on the Company's consolidated financial position, results
of operations or cash flows.
On July 11 and July 22, 1997, the Company's Respiflow and MK
subsidiaries, respectively, each received a letter (the "Audit Letters")
from the Office of Audit Services (a division of the U.S. Department of
Health and Human Services, Office of Inspector General) ("OIG"). The
Audit Letters indicate, among other things, that the OIG is conducting an
industry-wide audit of marketing fees and commissions paid from
pharmacies to home medical equipment companies. The Company has been
informed that the audit has been extended to cover the Company's
DermaQuest subsidiary. The Company is cooperating fully with the OIG and
has produced documentation which it believes is responsive to the
requests set forth in the Audit Letters. While the Company believes that
its former arrangements with home medical equipment suppliers do not
violate any Federal or state laws, it cannot predict whether the audit
will ultimately result in any liability to the government and in such
event, the amount thereof. There can be no assurance that such amount, if
any, will not have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
On November 19, 1997, the Company was notified by the Office of the
United States Attorney for the Eastern District of Texas that it,
Respiflow, MK Diabetic, and other non-affiliated entities had been named
defendants in a qui tam action under the Federal False Claims Act. The
qui tam action was filed under seal in the United States District Court,
and it will remain under seal while the government evaluates the merits
of the lawsuit and decides whether to intervene in and take over the
conduct of the litigation. The government has not made a copy of the
sealed complaint available to the Company; however, the Company has been
informed that no individuals associated with it or its affiliates have
been named as defendants. The Company further understands that the issues
raised in the lawsuit involve payments to durable medical equipment
dealers who acted as the Company's marketing representatives. The Company
cannot predict whether the Federal government will intervene in this
action or whether the outcome of this action will have a material adverse
effect on the Company's consolidated financial position, results of
operations or cash flows.
F-35
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED):
Effective October 1, 1997, HMI became a wholly-owned subsidiary of the
Company.
HMI and certain of its former directors and officers and its outside
auditors, BDO Seidman, LLP, have been named as defendants in a
consolidated class action securities fraud lawsuit filed on February 29,
1996 in the United States District Court for the Eastern District of New
York entitled In re Health Management, Inc. Securities Litigation, Master
File No. 96 Civ. 0889 (ADS). This consolidated action alleges claims
under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934,
arising out of alleged misrepresentations and omissions by HMI in
connection with certain of its previous securities filings. The
consolidated action purports to represent a class of persons who
purchased HMI shares of common stock between August 25, 1994 and February
27, 1996, the date HMI announced that it would have to restate certain of
its financial statements. The consolidated action sought unspecified
monetary damages reflecting the decline in the trading price of the HMI
shares of common stock that allegedly resulted from HMI's February 1996
announcements. HMI reached a settlement of the consolidated action which
received court approval on June 9, 1997. The settlement provided for a
cash payment of $4,550 of which $3,200 was paid at the time the court's
approval of the settlement became final. In October 1997, subsequent to
the closing of the Merger Agreement, the remaining $1,350 was paid. HMI
is in the process of negotiating with its directors and officers
liability insurance carrier with respect to coverage for damages in
connection with the stockholder class action lawsuit and certain payments
received from such carrier may reduce HMI's liability with respect to
such settlement.
Certain of HMI's current and former officers and directors have been
named as defendants, and HMI has been named as a nominal defendant, in a
consolidated derivative action filed on March 15, 1996 in the United
States District Court for the Eastern District of New York entitled In re
Health Management, Inc. Stockholders' Derivative Litigation, Master File
No. 96 Civ. 1208 (ADS). The consolidated action alleges claims for breach
of fiduciary duty and contribution against the individual director
defendants arising out of alleged misrepresentations and omissions
contained in certain of HMI's previous securities filings. The parties
have agreed to file a Stipulation of Voluntary Dismissal of this action.
BDO Seidman, LLP had been named as a defendant, and HMI had been named as
a nominal defendant, in a derivative lawsuit filed on June 12, 1996 in
the Supreme Court for the State of New York, County of New York entitled
Howard Vogel, et al. v. BDO Seidman, LLP, et al., Index No. 96-603064.
The complaint alleged claims for breach of contract, professional
malpractice, negligent misrepresentation, contribution and
indemnification against BDO Seidman, LLP arising out of alleged
misrepresentations and omissions contained in certain of HMI's previous
securities filings. BDO Seidman, LLP was HMI's auditor at the time those
filings were made and has continued to serve as such. This case has been
discontinued by order of the court.
F-36
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED):
HMI and certain of its current and former officers have been named as
defendants in an alleged class action lawsuit filed on April 3, 1997 in
the United States District Court for the Eastern District of New York
formerly entitled Nicholas Volonnino et al. v. Health Management, Inc.,
W. James Nicol, Paul S. Jurewicz and James Mieszala, 97 Civ. 1646. The
action was amended on September 12, 1997, and is now entitled Dennis
Baker et al. v. Health Management, Inc., BDO Seidman, LLP, Transworld
HealthCare, Inc., W. James Nicol, Paul S. Jurewicz and James Mieszala.
This action alleges claims under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder,
arising out of misrepresentations and omissions by HMI in connection with
certain of its previous securities filings and press releases. The action
now purports to represent a class of persons who purchased shares of HMI
common stock between April 26, 1996 and March 17, 1997, the date HMI
announced that it would have to restate certain of its financial
statements and that it was renegotiating its deal with the Company. The
action seeks unspecified compensatory damages for the harm sustained as a
result of the alleged wrongdoing. On November 19, 1997, HMI and the
individual defendants filed a motion to dismiss the claims against them
for failure to state proper claims for relief. The Company made a similar
motion on November 24, 1997.
Under HMI's Certificate of Incorporation and Bylaws, certain officers and
directors may be entitled to indemnification, or advancement of expenses
for legal fees in connection with the above lawsuits. HMI may be required
to make payments in respect thereof in the future. HMI has been named as
a defendant in a lawsuit filed on November 25, 1997 in the Chancery Court
of the State of Delaware for New Castle County entitled Clifford E. Hotte
v. Health Management, Inc., CA No. 16060NC. The plaintiff in that action
is seeking reimbursement and advancement of legal fees and expenses in
the amount of $1,000. In addition, a former director of HMI through her
attorneys has demanded advancement of legal fees and expenses in the
amount of $150.
The enforcement division of the Securities and Exchange Commission (the
"Commission") has issued a formal order of investigation relating to
matters arising out of HMI's public announcement on February 27, 1996
that HMI would have to restate its financial statements for prior periods
as a result of certain accounting irregularities. HMI is fully
cooperating with this investigation and has responded to the requests of
the Commission for documentary evidence.
F-37
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED):
The outcomes of certain of the foregoing lawsuits and the investigation
with respect to HMI are uncertain and the ultimate outcomes could have a
material adverse affect on the Company.
The Company is involved in various other legal proceedings and claims
incidental to its normal business activities. The Company is vigorously
defending its position in all such proceedings. Management believes
these matters should not have a material adverse impact on the financial
condition, cash flows, or results of operations.
F-38
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
12. OPERATIONS BY GEOGRAPHIC AREAS:
The following table presents certain financial information by geographic
areas of operations for the eleven months ended September 30, 1997. Prior
to fiscal 1997 the Company did not operate outside the United States.
ELEVEN MONTHS ENDED SEPTEMBER 30, 1997
------------------------------------------------------
UNITED UNITED
STATES KINGDOM TOTAL
-------------- ------------------ -----------------
Revenues $ 73,597 $19,847 $93,444
============== ================== ===============
Operating (loss) profit $(12,790) $1,775 $(11,015)
============== ==================
General corporate expenses (24,385)
------------
Operating income (35,400)
Interest expense, net (2,413)
------------
(Loss) before income taxes $(37,813)
=============
Identifiable assets, September 30, 1997 $ 51,585 $108,325 $159,910
=============== ==================
Advances to and investments in HMI 22,367
Corporate assets 19,004
---------
Total assets at September 30, 1997 $201,281
=========
13. 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 contribution at its discretion which
will always be in the form of its common stock. The Company's
contributions to the plan were $54 and $8 for the years ended
December 31, 1996 and 1995, respectively.
14. SUBSEQUENT EVENTS
On October 13, 1997, the Company together with HPII submitted a proposal
to Apria Healthcare Group, Inc. ("Apria") in connection with a potential
strategic combination between the Company and Apria. The terms of the
offer were $18.00 ($14.00 in cash and $4.00 in market value of the
combined entity's common stock) in exchange for each outstanding share of
Apria common stock. Apria provides and/or manages comprehensive
integrated home care services through approximately 350 branch locations
in all 50 states with net revenues of $1.2 billion for the year ended
December 31, 1996. There can be no assurance that the Company's proposal
will be accepted, or if accepted, when a transaction will be consummated.
F-39
TRANSWORLD HEALTHCARE, INC.
QUARTERLY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
The following table presents the comparative quarterly results for the
eleven months ended September 30, 1997 and the year ended October 31,
1996:
1997 quarter ended January 31, April 30, July 31, September 30, Total
------------------ ----------- --------- -------- ------------- -----
Total revenues $20,297 $20,669 $23,439 $29,039 $93,444
======= ======= ======= ======= =======
Gross profit $10,808 $10,419 $10,865 $9,965 $42,057
======= ======= ======= ======= =======
Net income (loss) $1,123 $233 $(30,387) $(3,704) $(32,735)
======= ======= ======= ======= =======
Primary net income (loss) per
share of common stock(2)(3) $0.10 $0.02 $ (1.89) $(0.24) $(2.56)
======= ======= ======= ======= =======
Fully diluted net income (loss)
per share of common
stock (2)(3): $0.10 $0.02 $ (1.89) $(0.24) $(2.56)
======= ======= ======= ======= =======
1996 quarter ended January 31, April 30, July 31, October 31, Total
------------------ ----------- --------- -------- ----------- -----
Total revenues $19,644 $17,522 $19,236 $19,902 $76,304
======= ======= ======= ======= =======
Gross profit $10,700 $ 9,622 $10,421 $10,881 $41,624
======= ======= ======= ======= =======
Income before extraordinary loss(1) $821 $119 $292 $786 $2,018
======= ======= ======= ======= =======
Net income (loss) $821 $119 $(1,050) $ 693 $ 583
======= ======= ======= ======= =======
Primary income per share of common
stock(2)(3):
Income before extraordinary loss(1) $ 0.12 $ 0.02 $ 0.04 $ 0.07 $ 0.26
Extraordinary loss on early
extinguishment of debt(1) (0.19) (0.01) (0.18)
--------- ------- -------- ------- -------
Net income (loss) per share of
common stock $ 0.12 $ 0.02 $ (0.15) $ 0.06 $ 0.08
======= ======= ======= ======= =======
Fully diluted income per share of
common stock(2)(3):
Income before extraordinary loss(1) $ 0.12 $ 0.02 $ 0.04 $ 0.07 $ 0.25
Extraordinary loss on early
extinguishment of debt(1) (0.19) (0.01) (0.18)
--------- ------- -------- ------- -------
Net income (loss) per share of
common stock $ 0.12 $ 0.02 $(0.15) $ 0.06 $ 0.07
======= ======= ======= ======= =======
(1) See Note 5 to the Consolidated Financial Statements regarding
extraordinary loss. Amounts booked to extraordinary loss in the fourth
quarter of fiscal 1996 relate to a change in estimate for the income tax
benefit.
(2) The sum of the per share amounts for the quarters does not necessarily
equal that of the year because of computations are made independently.
(3) Weighted average shares have been restated for the three months ended
January 31, 1996, April 30, 1996, July 31, 1996, October 31, 1996,
January 31, 1997 and April 30, 1997 and for the year ended October 31,
1996 to give effect to a market price guarantee under an acquisition
agreement. The effects of this restatement was to decrease previously
reported primary and fully diluted income before extraordinary loss
and net income per share by $0.01 for the quarter ended January 31, 1997
and to decrease fully diluted income before extraordinary loss and
extraordinary loss per share by $0.01 for the year ended October 31,
1996.
F-40
TRANSWORLD HEALTHCARE, INC.
(IN THOUSANDS)
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
- ---------------------------- ---------------- -------------------------------------- ------------------ ----------------
Additions Charged to
--------------------------------------
Balance at Balance at
Beginning Cost and Other End of
Description of Period Expenses Accounts Deductions Period
- ---------------------------- ---------------- ---------------- ---------------- ------------------ ----------------
Allowance for doubtful
accounts:
Eleven months ended
September 30, 1997 $5,471 $13,071 $155(B) $6,788 $11,909
Year ended
October 31, 1996 5,137 6,394 70(B) 6,130(A) 5,471
Year ended
October 31, 1995 4,009 5,732 5(B) 4,609(A) 5,137
(A) Doubtful accounts written, off, net of recoveries and amounts
related to acquisitions.
(B) Assumed in acquisitions.
S-1