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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED
SEPTEMBER 30, 1998
COMMISSION FILE NO. 1-11570
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TRANSWORLD HEALTHCARE, INC.
(Exact name of registrant as specified in its charter)
NEW YORK 13-3098275
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
555 MADISON AVENUE
NEW YORK, NEW YORK (212) 750-0064 10022
(Address of principal (Registrant's telephone number, (Zip Code)
executive offices) including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 par value
(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 1, 1998 was approximately
$28,057,926 based on the closing sale price of $4.25 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 1, 1998, was 17,536,076.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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TRANSWORLD HEALTHCARE, INC.
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended September 30, 1998
TABLE OF CONTENTS
PART I
Item 1. Business......................................................1
General.......................................................1
Strategy......................................................1
U.S. Operations...............................................2
U.S. Services and Products....................................2
Specialty Mail-Order Pharmaceutical and
Medical Supplies Operations,Respiratory Therapy
and Home Medical Equipment..............................3
Infusion Therapy..............................................3
U.S. Quality Assurance; JCAHO Accreditations..................4
U.S. Sales and Marketing Activities...........................4
U.S. Third-Party Reimbursement................................5
U.S. Suppliers................................................5
U.S. Competition..............................................6
U.S. Patents and Trademarks...................................6
U.S. Employees................................................6
U.K. Operations...............................................6
U.K. Services and Products....................................6
Patient Services..............................................7
Specialty Pharmaceutical and Medical Supplies Operations
and Respiratory Therapy..................................7
U.K. Quality Assurance; Department of Health Licenses.........7
U.K. Sales and Marketing Activities...........................8
U.K. Recruiting and Training of Personnel.....................8
U.K. Third-Party Reimbursement................................9
U.K. Suppliers................................................9
U.K. Competition..............................................9
U.K. Patents and Trademarks..................................10
U.K. Employees...............................................10
Government Regulation........................................10
U.S. Government Regulation...................................10
U.K. Government Regulation...................................14
Insurance....................................................15
Item 2. Properties...................................................15
Item 3. Legal Proceedings............................................15
The Company..................................................15
HMI..........................................................16
Item 4. Submission of Matters to a Vote of Security Holders..........17
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters..................................18
Item 6. Selected Financial Data............................................19
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations.................21
General............................................................21
Results of Operations..............................................23
Year Ended September 30, 1998 vs.
Eleven Months Ended September 30, 1997...........................23
Eleven Months Ended September 30, 1997
vs. Eleven Months Ended September 30, 1996.......................26
Liquidity and Capital Resources....................................28
General............................................................28
Accounts Receivable................................................28
Credit Facility....................................................29
TNI Sale...........................................................30
Acquisition of HMI/Sale to Counsel.................................30
Year 2000..........................................................31
Litigation.........................................................32
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
Audit Committee....................................................36
Compensation Committee.............................................36
Compliance With Section 16(a) of the
Securities Exchange Act of 1934..................................36
Item 11. Executive Compensation.............................................37
Summary Compensation Table.........................................37
Option Grants in Fiscal 1998.......................................38
Aggregate Option Exercises in Fiscal 1998
and 1998 Fiscal Year-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
1992 Stock Option Plan.............................................39
1997 Non-Employee Director Plan....................................40
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...45
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. This Annual Report contains certain
forward-looking statements and information that are based on the beliefs of
management as well as assumptions made by and information currently available
to management. The statements contained in this Annual Report relating to
matters that are not historical facts are forward-looking statements that
involve risks and uncertainties, including, but not limited to, future demand
for the Company's products and services, general economic conditions,
government regulation, competition and customer strategies, capital deployment,
the impact of pricing and reimbursement and other risks and uncertainties.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those described herein as anticipated, believed, estimated or expected.
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.
infusion and respiratory therapy services and home medical equipment operations
are concentrated in New Jersey and New York 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,
the U.K.'s second largest respiratory supplier as well as a leading medical
supplies distributor, all with operations located throughout the U.K.
The Company changed its fiscal year end from October 31 to September
30 effective for fiscal 1997. This resulted in an eleven month reporting period
ended September 30, 1997 (sometimes referred to herein as the "Eleven Month
Period") included in this Annual Report on Form 10-K.
The Company took a number of significant steps during the fiscal year
ended September 30, 1998 and the Eleven Month Period to realign its business as
a focused regional home health care provider and specialty pharmacy and medical
supply distributor in the U.S. and as an integrated national provider of 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 and the sale of the assets of the Company's Transworld Home
HealthCare - Nursing Division, Inc. ("TNI") operations (the "TNI Sale"), which
provided nursing and para-professional services in New Jersey and Florida; (ii)
exiting businesses that were deemed not to have the potential to earn an
adequate return on capital over the long term (such as wound care and orthotic
product lines in the continental U.S., as well as the Company's pulmonary
rehabilitation center in Cherry Hill, New Jersey); (iii) completing the sale of
substantially all of the assets of Health Management, Inc. ("HMI") to Counsel
Corporation (the "HMI Asset Sale"); and (iv) terminating the agreements to
purchase Kwik Care, Ltd. and VIP Health Services, Inc. (the "VIP Companies"),
nursing service companies serving New York City and the surrounding areas.
The Company'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 strategy is to grow its business in the U.S. and U.K.
both internally and through selected acquisitions.
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The Company's U.S. strategy is focused on expanding its specialty
mail-order pharmacy operation through increasing the number of patients
serviced, while at the same time identifying potential acquisition candidates
in selected alternate site health care product lines. U.S. acquisition
opportunities are reviewed with a focus on quality of management, historical
earnings trends, potential reimbursement changes, and an ability to generate
cash flow on a consistent basis through effective management of accounts
receivable.
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 and to shorten waiting lists for access to care. 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 sixty-nine
locations throughout the U.K.
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. practices 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 additional nursing operations to complement its Allied nursing
operations as well as selected businesses in the U.K. which are already
providing basic treatments and services to patients at home. 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. Consistent with this strategy, the
Company acquired seven nursing operations in fiscal 1997 and 1998 in the U.K.
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); and (ii)
infusion therapy. The Company's U.S. infusion and respiratory therapy services
and home medical equipment operations are concentrated in New Jersey and New
York while its specialty mail-order pharmaceutical and medical supplies
operations provide products to patients nationwide and in Puerto Rico. During
fiscal 1998, the Company derived 44.8% of its revenues from U.S. operations,
with the following contributions by product line: 74.3% of its U.S. revenues
from specialty mail-order pharmaceutical and medical supplies sales,
respiratory therapy and home medical equipment, 14.7% from infusion therapy and
11.0% from patient services. The Company exited patient services (nursing and
para-professional services) in the U.S. in fiscal 1998 through the TNI Sale.
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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, maintenance 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 the cash
savings due to no up front cash outlay. The Company provides
physician-prescribed respiratory medication in pre-mixed, pre-measured unit
doses thereby reducing the risk of over or underdosing, or contamination due to
poor patient mixing technique. As part of its service to patients, the Company
provides direct billing to Medicare, Medicaid and private insurance companies,
thereby reducing or eliminating up-front cash outlays for the patient. In
addition, the Company provides free routine home delivery, eliminating trips to
the pharmacy. During 1997, the Company exited its wound care and orthotic
product lines in the continental U.S. As a result of this action, the Company
recorded special charges of $12,079,000 for the write-off of goodwill and
intangible assets and additional bad debt reserves of $6,060,000 related to the
wound care and orthotic product lines. 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, primarily chronic obstructive pulmonary
disease (e.g., emphysema, chronic bronchitis and asthma). The Company employs a
clinical staff of respiratory care professionals to provide support to its home
respiratory therapy patients. These professionals manage the needs of the
Company's patients according to physician-directed plans of care. The Company's
respiratory therapy revenues are derived primarily from the provision of oxygen
systems, nebulizers (devices to aerosolize medication), home ventilators and
respiratory medication on a unit dose basis. The Company offers its respiratory
therapy services principally in New Jersey and the New York metropolitan area.
Home Medical Equipment. The Company's U.S. product offerings in home
medical equipment consist of patient room equipment (such as hospital beds,
patient lifts and commodes), ambulatory aids (such as walkers and canes) and
bathroom safety items. The Company generally purchases this equipment from
manufacturers and rents it to patients. Accordingly, the Company generally
promotes its home medical equipment and services business as a complementary
product line in each of the markets where it also provides respiratory therapy
and infusion therapy.
INFUSION THERAPY.
Infusion therapy involves the intravenous administration of
antibiotics, nutrients or other medications to patients in their homes usually
as a continuation of treatment initiated in the hospital. The 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); 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); blood products; 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
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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 from its facility located in Clark, New Jersey.
U.S. QUALITY ASSURANCE; JCAHO ACCREDITATIONS
The Company maintains quality assurance policies and procedures and
closely monitors operations in order to provide high quality care with respect
to the services it offers. The Joint Commission on Accreditation of Healthcare
Organizations ("JCAHO"), a not-for-profit private organization that has
established standards for health care organizations, has granted accreditation
status to all of the Company's respiratory and infusion therapy and home
medical equipment facilities. JCAHO does not accredit mail-order pharmacy
operations and 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 is a
prerequisite for entering into contracts with managed care providers and other
intermediaries and for obtaining and maintaining required licensure or
certification.
U.S. SALES AND MARKETING ACTIVITIES
The Company primarily markets its services and products to referral
sources such as physicians, hospital discharge planners and social service
workers, insurance companies, prepaid health plans, health maintenance
organizations ("HMOs"), county medical services and private charitable
organizations. Fundamental to the Company's ability to obtain and retain
referral sources is establishing and maintaining a reputation for quality
service and responsiveness to the requirements of the referral sources.
The Company currently employs full-time sales representatives for its
respiratory products and services, home medical equipment and infusion therapy.
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 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 sales presentations. The representatives maintain contact with these
sources in order to strengthen their relationships. While the sales
representatives strive to develop exclusive provider relationships, referral
sources frequently utilize the services of several home health care companies.
The sales representatives are trained by the Company to provide information to
referral sources concerning the quality and convenience of the Company's home
health care services and the potential cost-saving advantages of such services.
Primarily due to escalating pressures to contain health care costs, third-party
payors are participating to a greater extent in decisions regarding health care
alternatives and are consequently becoming more important in the referral and
case management process. The inability to obtain and maintain managed care
contracts at acceptable profitability may have a material adverse effect on the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- General."
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During the latter part of 1996 and thereafter, there continued to be a
changing regulatory environment with respect to certain of the Company's
product lines, including, for example, developments affecting the respiratory
medications and the diabetic supplies segments of the Company's business. The
Company has increased its internal and external sales and marketing staff, as
well as developed new marketing programs in order to address these
developments. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- General."
U.S. THIRD-PARTY REIMBURSEMENT
Substantially all of the Company's U.S. revenues are attributable to
third-party payors, including Medicare and Medicaid, private insurers, managed
care plans, and HMOs. The amounts received from government programs and private
third-party payors are dependent upon the specific benefits included under the
program or the patient's insurance policies. Like other medical service
providers, the Company is subject to lengthy reimbursement delays as a result
of third-party payment procedures. The Company generally collects payments from
third-party payors within three months after products are supplied or services
are rendered, but pays its accounts payable and employees currently.
The billing and reimbursement process involves the collection, review
and approval of a significant number of required documents. Certain payors such
as Medicare, Medicaid and managed care plans require very specific procedures
and documentation prior to approving any request for reimbursement.
Reimbursement specialists of the Company work together to assess patient
coverage, review the adequacy of documentation, submit documentation and claims
to the third-party payors and expedite payment. The Company accepts assignment
of insurance benefits from the patient, and in most instances the third-party
payors pay the Company directly.
For the year ended September 30, 1998, 60.6% and 12.9%, respectively,
of the Company's U.S. revenues were directly attributable to the Medicare and
Medicaid programs. 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. The increase in the percentage of revenues directly
attributable to Medicare during the year ended September 30, 1998 versus the
Eleven Month Period was primarily the result of a decrease in revenues
attributable to the sale of the Company's nursing operations which derived a
lesser percentage of revenue from Medicare than did 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
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solutions and other materials required in connection with its therapies and
specialty mail-order pharmacy and medical supplies operations, from various
suppliers. The Company believes that there are a number of available sources of
supply for the Company's products. The Company has, from time to time,
experienced difficulties in obtaining generic equivalent diabetic testing
strips due to shipping suspensions or product shortages from its supplier.
Historically, in these instances the Company has been able to obtain equivalent
product from alternate suppliers at similar cost. In the future, any lengthy
shortages or suspensions of their shipments, coupled with the inability to
secure product from alternate suppliers at similar cost, could have a material
adverse effect on the Company's results of operations and cash flows.
U.S. COMPETITION
The home health care market is highly fragmented and consists of
numerous providers, relatively few of which are national or regional in scope.
The Company competes with a large number of companies in all areas in which it
conducts business. The Company believes that the principal competitive factors
in the U.S. are quality of care, including responsiveness of services and
quality of professional personnel; breadth of services offered; referrals from
physicians, hospitals and HMOs; general reputation with physicians, other
referral sources and potential patients; and for certain payors, price.
The Company's mail-order medical supplies, respiratory therapy, home
medical equipment 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 in the U.S. The Company owns the following
service marks in the U.S.: "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 November 30, 1998, the Company had approximately 350 full-time
employees and approximately 150 part-time employees in the U.S. 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, principally nursing and para-professional services, and
(ii) specialty pharmaceutical and medical supplies and respiratory therapy. The
Company's U.K. Operations products and services are provided to patients
throughout the U.K.
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During fiscal 1998, the Company derived 55.2% 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.
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 69 branches spread across the U.K.
The Company believes that the demand for most forms of nursing and
other health care services is expected to increase during the next twenty years
as the U.K. population grows older in line with demographic trends.
Consequently, it is anticipated that requirements for temporary nursing
services will increase in the future, benefiting Allied.
SPECIALTY PHARMACEUTICAL AND MEDICAL SUPPLIES OPERATIONS
AND RESPIRATORY THERAPY
The Company offers its U.K. specialty pharmaceutical and medical
supplies and respiratory therapy through the following Omnicare subsidiaries:
(i) Amcare Ltd ("Amcare"); (ii) Allied Oxycare Ltd ("Oxycare"); and (iii)
Medigas Ltd ("Medigas").
Specialty Pharmaceutical and Medical Supplies Operations. Amcare
supplies ostomy, continence care and wound care products directly to patients
at home under a prescription written by the patients' family doctor. Amcare
also receives reimbursement and remuneration fees from the U.K. Department of
Health for providing dispensing services as defined by the terms of service for
contractors to the NHS and the "Drug Tarriff" (a booklet listing all current
prescribable goods) for prescribable goods. These services are offered
throughout the mainland of the U.K.
Respiratory Therapy. Oxycare and its subsidiary Medigas service
patients with chronic respiratory diseases either directly at home or via the
community pharmacist. Oxycare provides oxygen concentrators, which filter room
air to provide a 95% oxygen gas, to patients in their homes. Medigas supplies
filled oxygen cylinders to pharmacies for patients at home who require lower
volumes of oxygen per day or who may have temporary respiratory conditions.
These services are offered throughout the U.K.
U.K. QUALITY ASSURANCE; DEPARTMENT OF HEALTH LICENSES
The Company's U.K. Operations maintain quality assurance policies and
procedures and closely monitor operations to provide quality care and services
to patients and health care professionals in the U.K. Where appropriate, the
Company's U.K. Operations operate under license of the U.K. Department of
Health and Medicines Control Agency ("MCA"), adhering to the terms and
conditions of service demanded by such licensing authority.
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The European Quality Standards BS EN ISO 9002 have been awarded to
both Amcare and Oxycare. The awarding authority checks the continued adherence
to these standards on a six month basis with procedure manuals being available
for review at any time.
U.K. SALES AND MARKETING ACTIVITIES
The Company's U.K. Operations primarily market their products and
services to health care professionals who act as referral sources to patients.
These health care professionals include medics, nurses, pharmacists,
administrators, the NHS and private health care providers. Other important
targets for promotional activity include patient associations and community
social services organizations. Fundamental to Allied's ability to obtain and
retain referral sources is the ability to establish and maintain a reputation
for quality service and responsiveness to the needs of referral sources and
their patients and clients.
Allied markets its nursing agency service via superintendents and
their staff within each of its sixty-nine 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.
Oxycare and Medigas are marketed directly to the pharmacist for oxygen
cylinders and the NHS Supplies for oxygen concentrator services by a senior
manager. In addition to primary sales activity, delivery drivers play a key
role as secondary sales staff.
In general, the sales representatives and managers of the Company's
U.K. Operations market the Company's U.K. products and services through direct
contact with referral sources in the form of meetings, telephone calls and
solicitations. Contact is maintained with these sources to strengthen their
relationships. While representatives strive to develop the strongest provider
relationship possible, referral sources often choose to use several service and
product providers.
As in many European and U.S. markets, the escalating pressures to
reduce the cost of health care has, for some lines of business (prescribed
products and services, including cylinder oxygen, concentrators and medical
supplies) in the Company's U.K. Operations, resulted in reductions in
reimbursement rates. However, the focus towards offering integrated home health
care can result in an overall cost saving leading to substantial sales
opportunities for the Company's U.K. Operations.
U.K. RECRUITING AND TRAINING OF PERSONNEL
The Company's U.K. Operations recruit, train, provide on-going
education, offer benefits and other programs to its staff appropriate to their
needs and the requirements of the business. Recruiting of staff is conducted
primarily through advertising, direct contact with employment and governmental
organizations and through the use of competitive salary and benefit packages.
-8-
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 year ended September 30, 1998, the Company's U.K. Operations
received approximately 53.8% of revenues from the NHS and other U.K.
governmental payors. The remaining 46.2% of revenues were derived from products
and services provided to the private health care sector and other commercial
organizations, such as privately owned nursing homes.
In general, reimbursement is received regularly and reliably from all
governmental department payors and this is also the case for most of the
remaining customer base. The Company's U.K. Operations generally collects
payments from all third-party payors within two months after products are
supplied or services are rendered but pays its accounts payable and employees
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.
-9-
U.K. PATENTS AND TRADEMARKS
The Company's U.K. Operations own no patents. The Company's U.K.
Operations operate under the following trade names: "Allied Medicare Ltd,"
"Medicare," "Medigas Ltd," "Allied Oxycare Ltd," "Omnicare 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 November 30, 1998, the Company's U.K. Operations employed
approximately 155 full-time employees and 25 part-time employees.
In addition, the Company's U.K. Operations maintain registers of
approximately 675 registered nurses and 2,705 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.
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 are in
substantial compliance with applicable Federal and state laws and regulations
in all material respects. However, changes in the law or new interpretations of
existing laws could have a material effect on permissible activities of the
Company, the relative costs associated with doing business and the amount of
reimbursement for the Company's products and services paid by government and
other third-party payors.
Health Care Reform. Political, economic and regulatory influences are
subjecting the health care industry in the U.S. to fundamental change. Although
Congress has failed to pass comprehensive health care reform legislation, the
Balanced Budget Act of 1997 (the "Balanced Budget Act") made several changes to
the Medicare reimbursement system that affect payment for the products provided
by the Company. Some of these provisions include an expansion of coverage of
diabetic testing supplies to non-insulin-treated Medicare diabetics, a 10%
reduction of Medicare payment rates for diabetic testing strips, as of January
1, 1998, a 5% reduction of Medicare payment rates for respiratory drugs, as of
January 1, 1998, a requirement that skilled nursing facilities provide directly
and bundle into their payment certain items, including medical supplies, which
may have been previously provided by outside suppliers, a freeze on the update
factor for durable medical equipment and supplies, and parenteral and enteral
equipment and supplies, a provision regarding billing for upgraded medical
equipment, and authorization for a competitive pricing demonstration program.
Under the Social Security Act's authority to the Health Care Financing
Administration ("HCFA") to alter certain reimbursement rates that are not
inherently
-10-
reasonable, Medicare is proposing additional cuts to Medicare payment rates as
follows: (i) up to a 3.38% (depending on the state) reduction for diabetic
testing strips as of January 1, 1999; (ii) a 15% reduction in Medicare payment
rates for diabetic lancets as of January 1, 1999, an additional 15% as of
January 1, 2000 and an additional 2.32% as of January 1, 2001; and (iii) a
10.5% reduction for albuterol (a respiratory drug) as of January 1, 1999. 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 and nurses also are subject to state licensing
requirements. The Company believes that it is in substantial compliance with
all applicable licensure requirements.
Fraud and Abuse Laws. The Company is subject to Federal and state laws
prohibiting direct or indirect payments for patient referrals for items and
services reimbursed under Medicare, Medicaid and state programs as well as in
relation to private payors. The Company also is subject to Federal and state
laws governing certain financial relationships with physicians and other fraud
and abuse laws prohibiting the submission of false claims.
The Federal Medicare and Medicaid "Anti-kickback Statute" prohibits
certain conduct involving improper payments in connection with the delivery of
items or services covered by a number of Federal and state health care
programs. Among other things, these prohibitions apply to anyone who knowingly
and willfully solicits, receives, offers, or pays any remuneration in return
for referring an individual to another person for the furnishing, or arranging
for the furnishing, of any item or service that may be paid, in whole or in
part, by the Medicare, Medicaid or other Federal health care programs. To date,
courts have interpreted the Anti-kickback Statute to apply to a broad range of
financial relationships between providers and referral sources, including
physicians and other direct health care providers, as well as persons who do
not have a direct role in the provision of health care services. Violations of
the statute may result in criminal penalties, including fines of up to $25,000
and imprisonment for up to five years for each violation, exclusion from
participation in the Medicare and Medicaid programs, and civil penalties of up
to $50,000 and treble the amount of remuneration for each violation. The
Balanced Budget Act increases accountability and strengthens program integrity
through additional fraud and abuse penalties.
The U.S. Department of Health and Human Services' ("HHS") Office of
Inspector General ("OIG") has adopted regulations creating "safe harbors" from
Federal criminal and civil penalties under the Anti-kickback Statute by
identifying certain types of ownership interests and other financial
arrangements that do not appear to pose a threat of Medicare and Medicaid
program abuse. Additional safe harbors have also been proposed, and OIG
-11-
has recently solicited proposals for developing new and modifying existing safe
harbors. Transactions covered by the Anti-kickback Statute that do not conform
to an applicable safe harbor are not necessarily in violation of the
Anti-kickback Statute, but such arrangements would risk scrutiny and may be
subject to civil sanctions or criminal enforcement action.
The Federal self-referral or "Stark Law" provides that where a
physician has a "financial relationship" with a provider of "designated health
services" (including, among other things, parenteral and enteral nutrients,
equipment and supplies, outpatient prescription drugs and home medical
equipment, which are products and services provided by the Company), the
physician is prohibited from referring a Medicare patient to the health care
provider, and that provider is prohibited from billing Medicare, for the
designated health service. The Stark Law has certain statutory exceptions. In
August 1995, regulations were issued pursuant to the Stark Law as it existed
prior to significant amendments enacted in 1993. The preamble to these
regulations states that HCFA intends to rely on the language and
interpretations in the regulations when reviewing compliance under the Stark
Law, as amended (the "Amended Stark Law"). Certain exceptions from the referral
prohibitions are available under the Amended Stark Law, including the referral
of patients to providers owned by certain qualifying publicly-traded companies
in which a referring physician owns an investment security. At this time, the
Company believes that its investments will qualify for the publicly-traded
securities exception because it has shareholder equity of at least $75,000,000.
Submission of a claim that a provider knows or should know is for services for
which payment is prohibited under the Amended Stark Law, and which does not
meet an exception could result in refunds of any amounts billed, civil money
penalties of not more than $15,000 for each such service billed, and possible
exclusion from the Medicare program. In addition, a state cannot receive
Federal financial participation payments under the Medicaid program for
designated health services furnished to an individual on the basis of a
physician referral that would result in a denial of payment under Medicare if
Medicare covered the services to the same extent as under a state Medicaid
plan.
A number of Federal laws impose civil and criminal liability for
knowingly presenting or causing to be presented a false or fraudulent claim, or
knowingly making a false statement to get a false claim paid or approved by the
government. Under one such law, the "False Claims Act," civil damages may
include an amount that is three times the amount of claims falsely made or the
government's actual damages, and up to $10,000 per false claim. In addition, a
civil penalty of up to $15,000 may be assessed for engaging in other activities
prohibited by this statute. Actions to enforce the False Claims Act may be
commenced by a private citizen on behalf of the Federal government, and such
private citizens receive between 15 and 30 percent of the recovery. Recent
government efforts have been made (with mixed success) to assert that any claim
resulting from a relationship in violation of the Anti-kickback Statute or the
Amended Stark Law is false or fraudulent under the False Claims Act. The
Company carefully monitors its submissions of Medicare and Medicaid claims and
all other claims for reimbursement to assure that they are not false or
fraudulent, and as noted above, believes that it is in substantial compliance
with the Anti-kickback Statute or the Amended Stark Law.
The OIG of HHS instituted "Operation Restore Trust" in May 1995 in the
five states with the highest Medicare expenditures (California, Florida, New
York, Texas and Illinois). Operation Restore Trust is intended to counter
health care fraud, waste and abuse in targeted areas that HHS believes to be
particularly vulnerable to fraud and abuse, including home health care, nursing
homes and home medical equipment. The OIG also has issued "Fraud Alerts"
relating to improper business practices in the provision of medical supplies to
nursing homes, and is expected to issue additional Fraud Alerts in the future
as a means of advising the public of suspect business arrangements and
practices in the health care industry. In addition, providers of home medical
equipment, wound care supplies and other products and services are expected to
be subject to increased scrutiny for practices involving fraud and abuse.
-12-
Many states, including the states in which the Company operates, have
adopted statutes and regulations prohibiting payments for patient referrals and
other types of financial arrangements with health care providers, which, while
similar in certain respects to the Federal legislation, vary from state to
state. Sanctions for violating these state restrictions may include loss of
licensure and civil and criminal penalties. Certain states also have begun
requiring health care practitioners and/or other providers to disclose to
patients any financial relationship with a provider, including advising
patients of the availability of alternative providers.
The Company continues to review all aspects of its operations and
believes that it is in substantial compliance with all material respects with
applicable provisions of the Anti-kickback Statute, the Amended Stark Law,
False Claims and applicable state laws, although because of the broad and
sometimes vague nature of these laws, there can be no assurance that an
enforcement action will not be brought against the Company or that the Company
will not be found to be in violation of one or more of these provisions. The
Company intends to monitor developments under these Federal and state fraud and
abuse laws. At this time, the Company cannot anticipate what impact, if any,
subsequent administrative or judicial interpretation of the applicable Federal
and state fraud and abuse laws may have on the Company's 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.
On November 19, 1997, the Company was notified by the Department of
Justice 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
and the OIG office of Audit Services is assisting the Department of Justice in
this case. 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.
-13-
U.K. GOVERNMENT REGULATION.
General. The Company's U.K. Operations are subject to regulations by
the government of the U.K. via acts of Parliament related to health care
provision. These acts generally fall under the Department of Health and relate
to services provided to the general public under the NHS.
Some 85% of health care in the U.K. is provided under the NHS with the
remaining 15% being provided by private health care organizations. However, all
care provision is regulated under the general health regulations of the
Department of Health.
Health Care Reform. Within the last twelve months, the NHS has
released a green paper "Towards a Healthier Future" and two white papers, one
concerned with community care and the second with primary care reforms.
The Labor government has continued to develop the original Tory plans
of devolving decisions on patient care down to the family doctor. Over the next
few years the plan is to allow the formation of primary care groups where the
decision for patient care and the funding required, will be decided by a group
representing general practitioners, nurses, pharmacists and community care
workers operating in conjunction with the Area Health Authorities.
In addition to this top-level development change, the NHS continues to
seek ways in which it can reduce costs. The Company believes that contractors
to the NHS will continue to come under pressure over the next 5 years, until
the next election, with the current government's determination to fund changes
in the NHS without increasing direct taxation.
Licenses for Contractors and Suppliers. The Company's U.K. Operations
are subject to licensing and approval regulations from both governmental and
non-governmental bodies according to terms of service and operating procedures
decided by the U.K. government.
Allied operates under the Nurses Act (England and Wales) 1957 and 1961
Amendment and the Nurses Agency Act (Scotland) 1957. In addition, Allied is
accredited by various U.K. social services agencies for the supply of carers to
the Community Services, within that specific area. The MCA has granted licenses
to Oxycare and Medigas for the production and distribution of medical grade
oxygen to the network of 12,000 pharmacies throughout the U.K. Amcare operates
as a dispensing appliance contractor and as such holds nine licenses for
premises which provide dispensing services to patients on the mainland of the
U.K. The Company operates under terms of service for pharmacy contractors
outlined in the National Service Act 1977(a) and the NHS (Pharmaceutical
Services) Regulations 1992. Levels of reimbursement and remuneration are
published monthly in the NHS's Drug Tariff.
Fraud and Abuse. In late 1997, the Prescription Pricing Authority
released a report on "Prescription Fraud in the NHS" and certain
recommendations have been introduced to reduce the level of fraud by patients
and contractors to the NHS since April 1998. New prescription forms have been
issued which are more 'secure' for the prescriber while patients have to make
signed undertakings that they are entitled to receive the prescribed drugs.
Regarding contractor fraud with prescriptions, a number of practices were
identified and challenged as to their legality.
-14-
The Company believes that its practices regarding claim for
reimbursement and remuneration is in substantial compliance with applicable law
and it continues to review its practices in light of recent recommendations to
ensure they are in line with governmental regulations.
The Company believes that it is in substantial compliance in all
material respects with U.K. health care laws and regulations applicable to its
U.K. Operations.
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 seven facilities in three states and
Puerto Rico and owns three and leases forty-one facilities in the U.K. (of
which 23 are for a period of three months or less). In addition, there are
thirty-seven facilities in the U.K. which are owned or leased by branch
representatives. Management believes that its existing leases will be
renegotiated as they expire or that alternative properties can be leased on
acceptable terms. The Company also believes that its present facilities are
well maintained and are suitable for it to continue its existing operations.
See Note 10 to the Notes to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS.
THE COMPANY
On April 13, 1998, a shareholder of the Company, purporting to sue
derivatively on behalf of the Company, commenced a derivative suit in the
Supreme Court of the State of New York, County of New York, entitled Kevin Mak,
derivatively and on behalf of Transworld Healthcare, Inc., Plaintiff, vs.
Timothy Aitken, Scott A. Shay, Lewis S. Ranieri, Wayne Palladino and Hyperion
Partners II L.P., Defendants, and Transworld Healthcare, Inc., Nominal
Defendant, Index No. 98-106401. The suit alleges that certain officers and
directors of the Company, and Hyperion Partners II L.P. ("HPII"), breached
fiduciary duties to the Company and its shareholders, in connection with a
transaction, approved by a vote of the Company's shareholders on March 17,
-15-
1998, in which the Company was to issue certain shares of stock to HPII in
exchange for the HMI Payables (as defined and described in "Certain
Relationships and Related Transactions - Transactions with Principal
Shareholders"). The action seeks injunctive relief against this transaction,
damages and costs and attorneys' fees in unspecified amounts. The transaction
subsequently closed and the plaintiff has stipulated to extend the defendants'
time to respond to this suit until December 21, 1998.
The Company was served with a complaint (the "Complaint") on February
12, 1998, in an action (the "Action") entitled Primary Health Services, Inc.,
Chuck Davis and Gregory Gaiser v. Transworld Acquisition Corp., Transworld
Healthcare, Inc., The PromptCare Companies, Inc. and Hyperion Partners II LP,
Index No. 606/95/97, Supreme Court of the State of New York, County of New
York. The Action commenced on December 4, 1997, with the filing of a Summons
with Notice of Complaint against the Company, Transworld Acquisition Corp.
("Acquisition") and Hyperion Partners L.P. The complaint contained, among other
claims, a claim of breach of contract against the Company, Acquisition and The
PromptCare Companies, Inc. for breach of an asset purchase agreement among
Acquisition and the plaintiffs, breach of a management agreement against the
Company, interference with prospective business relations and fraud. The Action
sought compensatory damages of $3,275,000 and punitive damages of $5,000,000.
On July 6, 1998, the Company settled the lawsuit for payment of $93,000 in
exchange for a full release of all claims from the plaintiffs and the action
has been dismissed with prejudice.
HMI
Effective October 1, 1997, HMI became a wholly-owned subsidiary of the
Company.
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. The
plaintiff responded to these motions on February 20, 1998 and the defendants
served a reply brief on March 30, 1998. Oral argument on these motions was held
on November 13, 1998. The court denied defendants' motions to dismiss on
November 13, 1998 and directed the parties to mediate in an attempt to settle
the action. A stipulation was filed on November 23, 1998, extending defendants
time to serve and file their answer to this action until December 18, 1998.
-16-
On July 2, 1998, a former shareholder of HMI purporting to sue on
behalf of a class of shareholders of HMI as of June 6, 1997, commenced a suit
in the Delaware Chancery Court, New Castle County, entitled Kathleen S.
O'Reilly v. Transworld HealthCare, Inc., W. James Nicol, Andre C. Dimitriadis,
Dr. Timothy J. Triche and D. Mark Weinberg, Civil Action No. 16507-NC. The suit
alleges that the Company, as majority shareholder of HMI, and the
then-directors of HMI, breached fiduciary duties to the minority shareholders
of HMI by approving a merger between HMI and a subsidiary of the Company for
allegedly inadequate consideration. The suit seeks an accounting, damages,
attorney's fees and other expenses, all in unspecified amounts. The defendants
filed a motion to dismiss this action on September 18, 1998. The plaintiffs
filed a response to this motion on November 6, 1998. The defendants' reply
brief is due on December 16, 1998.
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. HMI filed its answer to that suit on December 23, 1997. The
plaintiff in the suit subsequently moved for partial summary judgment seeking
advancements of fees in the amount of $824,000; the court granted that motion
on March 18, 1998, and granted a preliminary injunction directing HMI to make
that payment by March 20, 1998. On March 20, 1998, HMI informed the court that
it had no unencumbered assets from which to make such a payment. On April 3,
1998, the court appointed a receiver for HMI to determine if HMI is capable of
complying with that order. 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.
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 of the Company.
See also "Business -- Government Regulation."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of the fiscal year ended September 30, 1998,
no matters were submitted by the Company to a vote of its stockholders.
-17-
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
Eleven Month Period, the fiscal year ended September 30, 1998, and the first
quarter of fiscal 1999, through December 1, 1998.
PERIOD HIGH LOW
------ ---- ---
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................................ 9-7/8 6-13/16
Second Quarter............................... 7-13/16 5-1/2
Third Quarter................................ 7-1/8 5-7/16
Fourth Quarter............................... 6 2-1/8
Year Ended September 30, 1999:
First Quarter (through December 1, 1998)..... 5-13/32 2-1/8
As of December 1, 1998, there were approximately 180 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 senior secured revolving credit
facility (the "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."
-18-
ITEM 6. Selected Financial Data.
The financial data for the year ended September 30, 1998, the Eleven
Month Period ended September 30, 1997 and the year ended October 31, 1996 and
balance sheet data as of September 30, 1998 and 1997 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 Annual Report on Form
10-K. In addition, the selected financial data should be read in conjunction
with "Business - General" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
YEAR ENDED ELEVEN MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,(1) YEAR ENDED OCTOBER 31,
------------ -------------------------- -----------------------------------------
1998 1997(2) 1996 1996(3) 1995(4) 1994(5)
------------ -------------------------- -----------------------------------------
(Unaudited)
(in thousands, except per share data)
FINANCIAL DATA:
Net respiratory, medical
equipment and supplies sales... $ 76,185 $ 52,562 $ 41,754 $ 47,170 $ 42,782 $ 17,022
Net patient services........... 68,887 29,844 17,425 19,164 18,870 12,150
Net infusion services.......... 10,237 11,038 8,724 9,970 9,935 10,551
-------- --------- --------- --------- --------- ---------
Total revenues................. 155,309 93,444 67,903 76,304 71,587 39,723
Cost of revenues.............. 97,192 51,387 30,917 34,680 32,730 18,809
-------- --------- --------- --------- --------- ---------
Gross profit................... 58,117 42,057 36,986 41,624 38,857 20,914
Selling, general and
administrative expenses...... 51,426 42,931 30,062 33,552 29,774 15,968
Gain on sale of assets......... (2,511)(6) (606)(7) - - -
Special charges................ 554 (8) 34,836 (9) - - 3,898(10) -
Equity in losses of HMI........ - 296 - - - -
-------- --------- --------- --------- --------- ---------
Operating income (loss)........ 8,648 (35,400) 6,924 8,072 5,185 4,946
Interest income................ (635) (2,650) (66) (75) (68) (105)
Interest expense............... 6,286 5,063 4,229 4,427 3,767 914
Provision (benefit) for income
taxes........................ 1,844 (5,078) 1,263 1,702 627 1,656
-------- --------- --------- --------- --------- ---------
Income (loss) before
extraordinary item and
cumulative effect
of an accounting change...... 1,153 (32,735) 1,498 2,018 859 2,481
Extraordinary item............. - - (1,435) (1,435)(11) - -
Cumulative effect of an
accounting change.............. - - - - - 300
-------- --------- --------- --------- --------- ---------
Net income (loss).............. $ 1,153 $(32,735) $ 63 $ 583 $ 859 $ 2,781
======== ======== ========= ========= ========= =========
Income (loss) per share before
extraordinary item and
cumulative effect of an
accounting change(12):
Basic.......................... $ 0.07 $ (2.56) $ 0.20 $ 0.29 $ 0.15 $ 0.53
======== ======== ========= ========= ========= =========
Diluted........................ $ 0.07 $ (2.56) $ 0.20 $ 0.26 $ 0.13 $ 0.49
======== ======== ========= ========= ========= =========
Net income (loss) per share(12):
Basic.......................... $ 0.07 $ (2.56) $ 0.01 $ 0.08 $ 0.15 $ 0.60
======== ======== ========= ========= ========= =========
Diluted........................ $ 0.07 $ (2.56) $ 0.01 $ 0.07 $ 0.13 $ 0.55
======== ======== ========= ========= ========= =========
Weighted average number of
shares outstanding(12):
Basic.......................... 17,327 12,794 7,533 7,035 5,637 4,644
======== ======== ========= ========= ========= =========
Diluted........................ 17,488 12,794 7,584 7,833 6,868 5,028
======== ======== ========= ========= ========= =========
-19-
SEPTEMBER 30, OCTOBER 31,
--------------------- -----------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
BALANCE SHEET DATA:
Working capital............ $39,148 $26,411 $26,201 $(4,706)(13) $(4,113)(14)
Accounts receivable, net... 29,614 31,475 24,414 18,906 10,514
Total assets............... 180,778 201,281 90,727 74,912 58,249
Long-term debt............. 57,307 61,400 12,505 20,264 13,758
Total shareholders' equity. 101,905 81,905 67,225 24,086 20,371
(1) The Company changed its fiscal year from October 31 to September 30
effective for fiscal 1997. This resulted in an eleven month reporting
period for the period ended September 30, 1997.
(2) The financial data for the eleven months ended September 30, 1997
includes the results of operations of Omnicare and Allied from their
dates of acquisition (effective July 1, 1997 and June 23, 1997,
respectively).
(3) The financial data for the year ended October 31, 1996 includes the
results of operations of Health Meds, Inc. ("Health Meds") and U.S. Home
Care Infusion Therapy Services Corporation of New Jersey ("USNJ") from
their dates of acquisition (effective October 1, 1996).
(4) The financial data for the year ended October 31, 1995 includes the
results of operations of DermaQuest (effective November 1, 1994), The
Pulmonary Division of Delaware Valley Lung Center, P.C. (effective
January 1, 1995) and Precision Health Care, Inc. (effective March 1,
1995) from their respective dates of acquisition.
(5) 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 Company recorded a gain of $2,511,000 on the TNI Sale in the year
fiscal ended September 30, 1998.
(7) The Company recorded a gain of $606,000 on the sale of Radamerica in the
eleven months ended September 30, 1997.
(8) The Company reported special charges totaling $554,000 in the fiscal year
ended September 30, 1998 resulting from a write-off of expenses related
to its attempted acquisitions of Healthcall Group plc ("Healthcall") and
Apria Healthcare Group, Inc. ("Apria").
(9) The Company reported special charges totaling $34,836,000 in the eleven
months ended September 30, 1997 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.
(10) The Company reported special charges totaling $3,898,000 in the fiscal
year ended October 31, 1995 resulting from a write-off of expenses
related to an abandoned public offering ($2,808,000), a write-off of
expenses related to abandoned acquisitions ($605,000) and expenses
related to the consolidation of certain of the Company's facilities
($485,000).
(11) The Company recorded a non-cash, after-tax, extraordinary charge of
$1,435,000 (net of tax benefit of $879,000) in the fiscal year ended
October 31, 1996 in connection with the repayment of the Company's former
credit agreement.
(12) Weighted average shares have been restated for the eleven months ended
September 30, 1997 and the fiscal years ended October 31, 1996, 1995 and
1994 to reflect the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings per Share"("EPS"). SFAS No. 128
replaced primary EPS with basic EPS and fully diluted EPS with diluted
EPS. The effects of this restatement were to increase basic from primary
income per share before extraordinary item and cumulative effect of an
accounting change by $0.03 and diluted from fully diluted income per
share before extraordinary item and cumulative effect of an accounting
change by $0.01 for the year ended October 31, 1996, to increase basic
from primary income per share before extraordinary item and cumulative
effect of an accounting change and net income by $0.02 and diluted from
fully diluted income per share before extraordinary item and cumulative
effect of an accounting change and net income by $0.01 for the year ended
October 31, 1995 and to
-20-
increase basic from primary income per share before extraordinary item
and cumulative effect of an accounting change by $0.04 and net income by
$0.05 and increase diluted from fully diluted income per share before
extraordinary item and cumulative effect of an accounting change and net
income by $0.02.
(13) Includes a $5,973,000 acquisition payable in connection with the
acquisition of RespiFlow and MK and an $8,832,000 acquisition payable in
connection with the acquisition of DermaQuest.
(14) Includes a $10,750,000 acquisition payable in connection with the
acquisition of RespiFlow and MK.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
The Company changed its fiscal year to end on September 30 from
October 31 effective for fiscal 1997. This resulted in an eleven month
reporting period for the period ended September 30, 1997.
The Company is a provider of a broad range of 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.
infusion and respiratory therapy services and home medical equipment operations
are concentrated in New Jersey and New York 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, the
U.K.'s second largest respiratory supplier as well as a leading medical
supplies distributor all with operations located throughout the U.K.
The Company has 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 1997 purchases 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 69 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 took a number of significant steps during the fiscal year
ended September 30, 1998 and the Eleven Month Period to realign its business as
a focused regional home health care provider and specialty pharmacy and medical
supply distributor in the U.S. and as an integrated national provider of home
and alternate site health care products and services in the U.K. These steps
included (i) selling non-core assets such as the Company's Radamerica business
which provided radiation therapy in the Baltimore, Maryland area and the
Company's TNI operations, which provided nursing and para-professional services
in New Jersey and Florida; (ii) exiting businesses that were deemed not to have
the potential to earn an adequate return on capital over the long term (such as
wound care and orthotic product lines in the continental U.S., as well as the
Company's pulmonary
-21-
rehabilitation center in Cherry Hill, New Jersey); (iii) completing the HMI
Asset Sale; and (iv) terminating the agreements to purchase the VIP Companies.
The Company'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 historical net revenues represented by each of the
Company's product lines:
Eleven Months
Year Ended Ended Year Ended
September 30, September 30, October 31,
1998 1997 1996
---- ---- ----
Product Line
- ------------
Net respiratory, medical
equipment and supplies sales......... 49.0% 56.3% 61.8%
Net patient services................... 44.4 31.9 25.1
Net infusion services.................. 6.6 11.8 13.1
----- ----- -----
Total revenues....... 100.0% 100.0% 100.0%
===== ===== =====
The increase in net patient services (and a 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 and from the Eleven Month Period to the year ended
September 30, 1998 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
Year Ended Ended Year Ended
September 30, September 30, October 31,
Payor 1998 1997 1996
- ----- ---- ---- ----
Medicare......................... 27.2% 42.0% 49.8%
Medicaid......................... 5.8 11.2 11.8
Private payors................... 37.3 33.9 38.4
U.K. NHS and other
governmental payors.............. 29.7 12.9 -
----- ----- -----
Total revenues.......... 100.0% 100.0% 100.0%
===== ===== =====
The decrease in Medicare as a percentage of total revenues for the
year ended September 30, 1998 as compared to the Eleven Month Period and the
Eleven Month Period as compared to fiscal 1996 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
-22-
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
Period would have been as follows: Medicare 27.8%; Medicaid 7.4%; private
payors (including managed care payors) 34.4%; and U.K. NHS and other
governmental payors 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.
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 diabetic supplies to physicians and
other referral sources. In addition, HCFA implemented new procedures regarding
the dispensing of diabetic supplies to patients as of October 1, 1998. These
and other regulatory changes may have a negative impact on revenues and
selling, general and administrative expenses of the Company's diabetic supplies
businesses in the future (which contributed approximately 14.1% of revenue for
the year ended September 30, 1998), 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
YEAR ENDED SEPTEMBER 30, 1998 VS. ELEVEN MONTHS ENDED SEPTEMBER 30, 1997.
Revenues. Total revenues increased by $61,865,000 or 66.2% to
$155,309,000 for the year ended September 30, 1998 from $93,444,000 for the
eleven months ended September 30, 1997 with $13,153,000 accounting for the one
additional months revenue in fiscal 1998. The remaining increase was primarily
attributable to the inclusion of eleven months of results for the year ended
September 30, 1998 versus three months in the comparable prior period for
Allied ($42,322,000 in patient services) and Omnicare ($16,735,000 in
respiratory, medical equipment and supplies sales) as well as an increase in
respiratory, medical equipment and supplies sales due primarily to an increase
in the number of patients serviced in the Company's specialty
-23-
mail-order pharmacy and medical supplies operations ($5,395,000). These
increases were partly offset by a decrease in patient services revenue
attributable to the sale of Radamerica and the TNI Sale ($8,830,000), decreases
in respiratory, medical equipment and supplies sales due to exiting certain
product lines of DermaQuest beginning in the fourth quarter of fiscal 1997
($2,719,000) as well as a reduction in revenue due to the Balanced Budget Act
($1,846,000) and lower infusion services revenue ($1,836,000) due to a decline
in number of patients serviced.
Pursuant to the passage of the Balanced Budget Act, a 10% reduction in
Medicare reimbursement of diabetic testing strips and a 5% reduction in
Medicare reimbursement of respiratory drugs became effective January 1, 1998.
These reductions reduced revenue, increased cost of revenues as a percentage of
revenues and decreased gross profit for respiratory, medical equipment and
supplies sales effective with the reimbursement reduction (as discussed
herein).
In addition, pursuant to the Social Security Act's authority to HCFA
to alter certain reimbursement rates that are not inherently reasonable,
Medicare is proposing further reductions in Medicare reimbursement rates
becoming effective as follows: (i) January 1, 1999 up to an additional 3.38%
reduction for diabetic testing strips (depending on the state); (ii) January 1,
1999 a 15% reduction for diabetic lancets; (iii) January 1, 2000 an additional
15% reduction for diabetic lancets; (iv) January 1, 2001 an additional 2.32%
reduction for diabetic lancets; and (v) January 1, 1999 a 10.5% reduction for
albuterol (a respiratory drug). These reductions are expected to increase cost
of revenues as a percentage of revenues, decrease gross profit and decrease
operating income for respiratory, medical equipment and supplies sales
effective with the reimbursement reduction. The amount of the impact will be
dependent upon product mix, the amount of product cost concessions that the
Company is able to obtain from its suppliers and the number of patients
serviced whose primary insurance coverage is Medicare.
Cost of Revenues. Cost of revenues increased by $45,805,000 to
$97,192,000 for the year ended September 30, 1998 from $51,387,000 for the
eleven months ended September 30, 1997 with $7,920,000 accounting for the one
additional months cost of revenues in fiscal 1998. As a percentage of total
revenues, cost of revenues increased to 62.6% from 55.0% for the year ended
September 30, 1998 and eleven months ended September 30, 1997, respectively.
Cost of revenues as a percentage of sales increased for respiratory, medical
equipment and supplies sales (55.0% for the year ended September 30, 1998
versus 48.9% for the eleven months ended September 30, 1997) increased for
patient services (69.4% for the year ended September 30, 1998 versus 60.8% for
the eleven months ended September 30, 1997) and increased for infusion services
(73.4% for the year ended September 30, 1998 versus 68.6% for the eleven months
ended September 30, 1997). The increase in cost of revenues of respiratory,
medical equipment and supplies sales as a percentage of revenues for fiscal
1998 are primarily attributable to the impact of the recent Balanced Budget
Act, which reduced revenues for diabetic testing strips by 10% and respiratory
drugs by 5% effective January 1, 1998 for Medicare patients and the inclusion
of a full year of Omnicare's results (versus three months in the comparable
period) which carry a higher cost of revenues (70.7%) than the U.S.
respiratory, medical equipment and supplies sales operations (47.6%). The
increase in patient services costs as a percentage of revenues for fiscal 1998
are due to the inclusion of Allied's results for a full year (versus three
months in the comparable prior period) which carry a cost of revenues of 69.4%
and the sale of Radamerica in July 1997 which carried a lower cost of service
(26.4%). The increase in infusion services is a result of an increase in
therapies with higher product costs as well as the effects of reduced
reimbursement rates for certain payors.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $8,495,000 or 19.8% to $51,426,000 for the
year ended September 30, 1998 from $42,931,000 for the eleven months ended
September 30, 1997 with $4,217,000 accounting for the one additional months
expenses
-24-
in fiscal 1998. The remaining increase was primarily attributable to the
inclusion of eleven months of results for fiscal 1998 versus three months in
the comparable prior period for the U.K. Operations ($12,952,000) and
additional costs incurred for overhead related to sales efforts, collections
and additional bad debt expense based upon a higher level of revenue partly
offset by the recording of $7,023,000 of additional bad debt expense recorded
in the eleven months ended September 30, 1997 primarily related to the
Company's DermaQuest product lines ($6,060,000) and pulmonary rehabilitation
center ($663,000) and the sale in July 1997 of Radamerica ($2,922,000).
Gain on Sale of Assets. For the year ended September 30, 1998 the
Company recorded a $2,511,000 gain on the TNI Sale. For the eleven months ended
September 30, 1997 the Company recorded a $606,000 gain on the sale of
Radamerica.
Special Charges. For the year ended September 30, 1998, the Company
recorded $554,000 of special charges primarily relating to costs incurred from
its attempted acquisitions of Healthcall and Apria. The Company recorded
special charges of $34,836,000 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 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.
Equity of Losses of HMI, Net. Equity in losses of HMI was $296,000 for
the eleven months ended September 30, 1997. This represented 49% of HMI's
losses for the three months ended April 30, 1997. The 49% interest in HMI was
acquired in mid January 1997 and was 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 were recorded subsequent to
July 31, 1997.
Interest Income. Interest income decreased by $2,015,000 to $635,000
for the year ended September 30, 1998 from $2,650,000 for the eleven months
ended September 30, 1997 with $65,000 attributable to the one additional months
interest income in fiscal 1998. The gross decrease was primarily attributable
to interest income earned (after elimination of intercompany interest) under a
credit agreement with HMI ($1,796,000) for the eleven months of 1997 and lower
interest income earned on a lower level of funds invested in fiscal 1998 as
compared to fiscal 1997.
Interest Expense. Interest expense, increased by $1,223,000 to
$6,286,000 for the year ended September 30, 1998 from $5,063,000 for the eleven
months ended September 30, 1997 with $585,000 accounting for the one additional
months interest expense in fiscal 1998. The remaining increase was primarily
attributable to an increased level of borrowings under the Credit Facility in
the early part of fiscal 1998.
Provision (Benefit) for Income Taxes. Provision (benefit) for income
taxes as a percentage of income before income taxes was a provision of 61.5%
for the year ended September 30, 1998 and a benefit of 13.4% for the eleven
months ended September 30, 1997. The difference between the 61.5% effective tax
rate for fiscal 1998 and the statutory tax rate resulted from non-deductible
expenses, primarily amortization of intangible assets.
-25-
Net deferred tax assets, net of valuation allowance, were $8,674,000
at September 30, 1998, an increase of $970,000 from net deferred tax assets of
$7,704,000 at September 30, 1997, primarily as a result of an increase in the
provision for doubtful accounts and federal net operating loss carryforwards. A
valuation allowance, was provided for deferred tax assets where it was not
likely that such assets would be realized through future income levels nor
future or prior tax liabilities. During fiscal 1998, the Company decreased the
valuation allowance by $114,000 primarily due to utilization of state net
operating loss carryforwards. 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 Income (Loss). As a result of the foregoing, the Company produced
net income of $1,153,000 for the year ended September 30, 1998 compared to net
loss of $32,735,000 for the eleven months ended September 30, 1997.
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 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 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.
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 expenses
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).
-26-
Gain on Sale of Assets. For the eleven months ended September 30, 1997
the Company recorded a $606,000 gain on the sale of Radamerica.
Special Charges. The Company recorded special charges of $34,836,000
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 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.
Equity in Losses of HMI, Net. Equity in losses of HMI was $296,000 for
the eleven months ended September 30, 1997 versus $0 for the comparable 1996
period. This represented 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
were 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 a credit agreement with HMI ($1,796,000)
and interest earned on funds received from HPII in connection with the purchase
of the Company's Common Stock (see Note 6 to the Consolidated Financial
Statements).
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 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.
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Net (Loss) Income. 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 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 existinguishment of debt.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL.
During the year ended September 30, 1998 the Company received
$22,241,000 from investing activities as follows: $32,328,000 received from the
HMI Asset Sale partly offset by $11,122,000 paid to complete the merger with HMI
as well as for fees and expenses incurred in connection with the merger and to
satisfy existing HMI obligations which were retained by the Company; $6,029,000
received from asset sales net of utilization of $3,346,000 for capital
expenditures and $1,648,000 for acquisitions and purchases of other intangibles.
Funds generated by investing activities along with net proceeds of $6,492,000
from the exercise of the Company's warrants were used to reduce the Company's
borrowings under the Credit Facility by $29,100,000 and to fund operating
activities.
During the eleven months ended September 30, 1997, the Company
utilized $130,302,000 ($117,138,000 net of proceeds from asset sales and other
miscellaneous transactions) in investing activities as follows: $93,586,000 for
the acquisition of the U.K. Operations (Omnicare and Allied); $32,189,000 for
the purchase of 49% of HMI and HMI's senior debt and related advances;
$2,694,000 for capital expenditures and $1,833,000 for acquisitions payable. In
addition, the Company utilized $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 primarily as a result of an increase in accounts
receivable of $5,032,000 (net of increases in allowance for doubtful accounts
and receivables acquired in purchase transactions) 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.
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, 1998 and
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1997, $29,614,000 (16.4%) and $31,475,000 (15.6%), respectively, of the
Company's total assets consisted of accounts receivable substantially from
third-party payors. Such payors generally required substantial documentation in
order to process claims. The collection time for accounts receivable is
typically the longest for services that relate to new patients or additional
services requiring medical review for existing patients.
Accounts receivable decreased by $1,861,000 from September 30, 1997 to
September 30, 1998 primarily due to the TNI Sale ($1,499,000).
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 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 year ended September 30, 1998, the
Eleven Month Period and the year ended October 31, 1996, the Company's average
DSOs were 67, 73 and 109, respectively. 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 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 March 31, 1998 and June 30, 1998, 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). On
August 13, 1998, the Credit Facility was amended to adjust certain covenants
for 1998 and 1999 bringing the Company into compliance with the Credit
Facility.
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 which commenced on July 31, 1998 and
continue through maturity.
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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, 1998 and December
1, 1998, Eurodollar Rate borrowings bore interest at a rate of 7.375% to
7.5625% and 7% to 7.25% per annum, respectively. As of December 1, 1998, the
Company had outstanding borrowings of $57,255,000 under the Credit Facility.
The unused portion of the Credit Facility was $33,645,000 as of December 1,
1998.
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 Corporation ("Counsel") hereinafter
described, the Company also entered into an amendment to the Credit Facility
with its senior lenders which amendment provided for, among other things, the
lenders consenting to the merger with HMI and the sale to Counsel on the terms
contained in the amendment.
As of August 10, 1998, the Company amended the Credit Facility to
accommodate the TNI Sale. (See "TNI Sale").
TNI SALE.
On July 15, 1998, the Company sold substantially all of the assets of
its domestic home nursing subsidiary for $5,300,000 which was paid in cash at
closing. Subject to the terms of the agreement, $300,000 of such amount was
placed into escrow for a period of one year following the closing to secure
TNI's obligations under the agreement. Proceeds from the sale were used to
reduce borrowings under the Credit Facility ($4,100,000) and to satisfy
transaction costs and liabilities that were retained by the Company.
ACQUISITION OF HMI/SALE TO COUNSEL.
On October 1, 1997, the Company, through a wholly-owned subsidiary,
completed the previously announced merger with HMI. Under the terms of a merger
agreement, HMI stockholders received $.30 in cash for each outstanding share of
HMI common stock not already owned by the Company. Concurrently with the
closing of the merger, the Company completed the HMI Asset Sale to Counsel for
$40,000,000 at which time substantially all of the businesses and operations of
HMI were sold to Counsel. Of the $40,000,000 proceeds, $30,000,000 was received
in cash with $7,500,000 to be paid to the Company as HMI's accounts receivable,
existing at date of sale, were collected, with the remaining $2,500,000 held in
escrow for post-closing adjustments. As of September 30, 1998 an aggregate
(including interest earned on such escrow funds) of $37,648,000 was received
(including the $7,500,000 escrow that was held for accounts receivable
collection) of which, $25,000,000 was used to reduce the senior secured debt
owed by the Company under the Credit Facility, $2,800,000 was used to complete
the merger and the remainder was used for costs, fees and other expenses to
complete the HMI Asset Sale as well as to satisfy liabilities not assumed by
Counsel. The remaining $2,500,000 escrow was fully utilized for post-closing
adjustments.
Pursuant to the HMI Asset Sale, Counsel did not assume any liabilities
of HMI other than certain liabilities arising after the closing under assumed
contracts and certain employee-related liabilities. Satisfaction 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
Company's consolidated financial position.
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YEAR 2000.
General. The Year 2000 computer issue refers to potential conditions
in computer programs whereby a two-digit field rather than a four-digit field
is used to define the applicable year. Unless corrected, some computer programs
may be unable to appropriately function on January 1, 2000 because these
programs will read the "00" in the year 2000 as January 1, 1900. If
uncorrected, the problem could result in computer system failures or equipment
and medical device malfunctions (affecting patient diagnosis and treatment)
thereby disrupting the Company's business operations and subjecting the Company
to potentially significant legal liabilities.
During the early part of 1998, the Company formed a task force
consisting of members of senior management, in-house legal counsel,
representatives from each of the Company's operating subsidiaries (in both the
U.S. and the U.K.), and other Company personnel. The task force also consults
with the Company's insurance carrier and risk management advisors. The task
force developed an action plan to address the potential problems of the Year
2000, which considered the following critical phases: (i) the Company's state
of readiness; (ii) risks of the Company's Year 2000 issues; (iii) costs to
address Year 2000 compliance; and (iv) the Company's contingency plans.
Company's State of Readiness. The information technology ("IT") and IT
infrastructure portions of the Company's Year 2000 project, address the
inventory, assessment, necessary corrective actions, testing and implementation
of external vendor products, mission critical third-party software and
internally developed software. In that regard, the Company believes it has
identified (in both the U.S. and the U.K.), the various software applications
that may be potentially impacted. The Company's assessment of all IT related
components is currently underway and the Company anticipates completing, in most
respects, any remediation of external vendor products, mission critical
third-party software and internally developed software by March 31, 1999. The
Company also expects that by June 30, 1999, implementation and testing of all
remediation will be complete.
With respect to the non-IT portion of the Company's Year 2000 project,
the Company has undertaken a program to inventory, assess and correct or
replace (where necessary) impacted mission critical as well as non-mission
critical vendor and supplier products (including but not limited to drugs,
medical supplies and specialty mail-order pharmaceutical products), medical
equipment, telephone systems, postage machines and other related equipment with
Year 2000 risk. These types of supplies and equipment play a vital role in the
day to day operations of the Company. The Company is implementing (in both the
U.S. and the U.K.), a program of contacting vendors and suppliers, analyzing
and acting upon information provided to replace or otherwise amend any devices
or equipment that pose a Year 2000 impact. The Company is prioritizing its
non-IT efforts by allocating resources to equipment and medical devices that
will have a direct impact on patient safety and health with a goal of
minimizing and/or eliminating the associated risks. The Company recognizes, to
a certain degree, that it is relying upon information that is being provided by
equipment and medical device manufacturers regarding the Year 2000 status of
their respective products. While the Company is attempting to evaluate
information provided by its present vendors and suppliers, there can be no
assurance that in all instances accurate information is being provided. The
Company's assessment of potentially non-IT affected components is currently
underway and the Company anticipates completing, in most respects, any required
corrective actions by March 31, 1999. The Company expects that by June 30,
1999, implementation and testing of all remediation will be complete.
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Lastly, the Company relies heavily upon third party payors, including
to a large extent governmental payors such as Medicare and Medicaid in the U.S.
and the NHS in the U.K. for accurate and timely reimbursement of claims, often
through the use of electronic data interfaces. Although much has been published
publicly stating that the government is working to solve its own Year 2000
issues in a timely manner, the Company has received no assurance that their
systems and interfaces will be converted timely. Failure of any of the
Company's third party payors, especially governmental payors, to solve their
Year 2000 issues could have a material adverse effect on the Company's
financial condition, cash flows, and results of operations.
Risks of the Company's Year 2000 Issues. Failure from any of the
aforementioned IT and/or non-IT equipment and components, including the support
from third parties, could have a material adverse impact on the Company's
operations (in both the U.S. and the U.K.) resulting in the potential inability
to provide health care services to its patients. This inability could result in
the loss of revenue (which at the present time is unable to be quantified) and
give rise to litigation. Failure of the third party payor's systems also could
have a material adverse affect on the Company's financial position, results of
operations and cash flows.
Costs to Address Year 2000 Compliance. As of December 1, 1998 costs
incurred for all efforts of the Company's Year 2000 action plan amount to
$3,000 and have not been material to the Company. These costs have been
expensed as incurred and have been funded by operating cash flows. The
remaining cost of the Year 2000 project is expected to be approximately
$152,000 and is based upon the best estimates from the Company's management and
the Year 2000 task force. This cost will also be expensed as incurred and be
funded by operating cash flows. These estimates as well as anticipated
completion dates were derived by consideration of availability of resources,
utilizing assumptions and relying upon third party representations. However,
there can be no guarantees that these estimates will be achieved and actual
results could be materially different.
The Company's Contingency Plans. Each operating subsidiary (both in
the U.S. and the U.K.) has been asked to develop a contingency plan to restore
the material functions of each of its systems or activities in the case of a
Year 2000 failure. The respective subsidiaries are in the preliminary stages of
defining these plans and will make them more comprehensive, as additional
information becomes available through testing and external sources.
There can be no assurance that the Company will be able to complete
all of the modifications in the required time frame, that unanticipated events
will not occur or that the Company will be able to identify all Year 2000
issues before problems arise. In addition, the Company has no assurance that
third party payors and vendors will have the ability to identify and solve all
or substantially all their Year 2000 issues. Therefore, there can be no
assurance that the Year 2000 issue will not have a material adverse effect on
the Company's financial position, cash flows and results of operations.
LITIGATION.
See "Legal Proceedings" with respect to certain legal proceedings
concerning the Company and HMI.
IMPACT OF RECENT ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (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
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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 will adopt in the first quarter of fiscal
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 on the Company's financial
position or results of operations. SFAS No. 131 is effective for periods
beginning after December 15, 1997.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 addresses the accounting for
derivative instruments including certain derivative instruments embedded in
other contracts and for hedging activities. As the Company currently does not
enter into transactions involving derivative instruments, the Company does not
believe that the adoption of SFAS No. 133 will have a material effect on the
Company's financial statements. SFAS No. 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999.
INFLATION
Inflation has not had a significant impact on the Company's operations
to date.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements and required financial
statements schedule of the Company are located beginning on page F-i of this
Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
Not applicable.
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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.......54 Chairman of the Board and Chief Executive Officer
Sarah L. Eames..........40 President
Wayne A. Palladino......40 Senior Vice President and Chief Financial Officer
Gregory E. Marsella.....35 Vice President, General Counsel and Secretary
Lewis S. Ranieri........51 Director
Scott A. Shay...........41 Director
Jeffrey S. Peris........52 Director
G. Richard Green........59 Director
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Certain biographical information regarding each director and officer
of the Company is set forth below:
Timothy M. Aitken has served as Chairman of the Board and Chief
Executive Officer of the Company since January 15, 1997. Prior to joining the
Company, Mr. Aitken served as an independent consultant to the health care
industry from November 1995 until January 1997. From June 1995 until November
1995, Mr. Aitken served as the vice chairman and president of Apria Healthcare
Group, Inc., a California based home health care company. He has also served as
chairman of the board of Omnicare plc from September 1995 until its acquisition
by the Company. From 1990 until June 1995, Mr. Aitken served as chairman of the
board, president and chief executive officer of Abbey Healthcare Group Inc., a
California based home health care company.
Sarah L. Eames has served as President since May 1998 and Executive
Vice President, Business Development and Marketing of the Company from June
1997 to May 1998. Prior to joining the Company, Ms. Eames was employed by
Johnson & Johnson Professional, Inc. as a business development consultant from
1996 to 1997. From June 1995 until November 1995, Ms. Eames served as Vice
President, Marketing for Apria Healthcare Group, Inc. From 1980 until June 1995
Ms. Eames held various marketing and business development positions at Abbey
Healthcare Group Inc., a predecessor company of Apria Healthcare Group, Inc.
Wayne A. Palladino has been a Vice President and Chief Financial
Officer of the Company since February 1991 and Senior Vice President of the
Company since September 1996. From September 1989 until joining the Company, he
served as the vice president-finance and chief financial officer of ESC
Electronics Corp., an electronics manufacturer. From December 1985 until
January 1991, he was a principal in Pennwood Capital Corporation, a private
investment concern. From January 1984 through December 1985, Mr. Palladino was
a senior associate in the business development unit of W.R. Grace & Co., Inc.
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 May
1995 until June 1997. From June 1990 to June 1995, Mr. Marsella served as
General Counsel for Abbey Medical, Inc., a predecessor company of Apria
Healthcare Group, Inc.
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Lewis S. Ranieri has been a Director of the Company since May 1997.
Since 1988 he has been the chairman of Bank United Corp. He was also the
president and chief executive of the predecessors of Bank United Corp. and the
chairman of Bank United, the subsidiary of Bank United Corp., from 1988 until
July 15, 1996. Mr. Ranieri is also the chairman and president of Ranieri & Co.,
Inc., positions he has held since founding Ranieri & Co., Inc. in 1988. Mr.
Ranieri is a founder of Hyperion Partners L.P. and of Hyperion Partners II L.P.
He is also vice chairman of Hyperion Capital Management, Inc., a registered
investment advisor. Mr. Ranieri is a director of the Hyperion Total Return
Fund, Inc.; The Hyperion 1999 Term Trust, Inc.; The Hyperion 2002 Term Trust,
Inc. and Hyperion 2005 Investment Grade Opportunity Trust, Inc. Mr. Ranieri is
also chairman and president of various other indirect subsidiaries of Hyperion
Partners L.P. and Hyperion Partners II L.P. He is also a director of American
Marine Holdings, Inc. and Delphi Financial Group, Inc. Mr. Ranieri is a former
vice chairman of Salomon Brothers Inc. where he was employed from 1968 to 1987,
and was one of the principal developers of the secondary mortgage market. He is
a member of the National Association of Home Builders Mortgage Roundtable.
Scott A. Shay has been a Director of the Company since January 1996
and served as Acting Chairman of the Board of the Company from September 1996
until January 1997. Mr. Shay has been a managing director of Ranieri & Co.,
Inc. since its formation in 1988. Mr. Shay is currently a director of Bank
United Corp., and Bank United, the subsidiary of Bank United Corp., Bank
Hapoalim B.M., in Tel Aviv, Israel, HomeShark, Inc. and Hyperion Capital
Management, Inc., as well as an officer or director of other direct and
indirect subsidiaries of Hyperion Partners L.P. and Hyperion Partners II L.P.
Mr. Shay is also a director of the general partner of Cardholder Management
Services, L.P. Prior to joining Ranieri & Co., Inc., Mr. Shay was a director of
Salomon Brothers Inc. where he was employed from 1980 to 1988.
Jeffrey S. Peris has been a Director of the Company since May 1998.
Mr. Peris has been the vice president of business operation of Knoll
Pharmaceutical (BASF Pharma) where he is responsible for human resources and
corporate communications since April 1998. Mr. Peris had been a management
consultant to various Fortune 100 companies from May 1997 until April 1998.
From 1972 until May 1997, Mr. Peris was employed by Merck & Co., Inc., where he
served as the executive director of human resources from 1985 until May 1997,
the executive director of marketing from 1976 until 1985, and the director of
clinical biostatistics and research data systems from 1972 until 1976.
G. Richard Green has been a Director of the Company since August 1998.
Mr. Green has been the chairman since 1987 and a director since 1960 of J.H. &
F.W. Green Ltd a U.K. based conglomerate. From 1960 Mr. Green has held various
positions at J.H. & F.W. Green Ltd. and several of its subsidiaries. Mr. Green
was also a director of Abbey Healthcare Group, Inc. from 1991 to 1995. He also
held directorships of Omnicare plc and Medigas Ltd from 1993 to 1996.
All directors of the Company are elected by the shareholders for a
one-year term and hold office until the next annual meeting of shareholders of
the Company and until their successors are elected and qualified. There are no
family relationships among the directors and officers of the Company. All
directors who are not employees of the Company are entitled to receive a fee of
$10,000 per annum. In addition, all directors are reimbursed for all reasonable
expenses incurred by them in acting as a director or as a member of any
committee of the Board of Directors. Officers are chosen by and serve at the
discretion of the Board of Directors.
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."
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The Company has entered into a registration rights agreement with
Paribas Principal, Inc., an affiliate of Banque Paribas, the Company's former
principal senior lender ("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. Ranieri and Shay constitute the Audit
Committee.
COMPENSATION COMMITTEE.
The Compensation Committee reviews and approves overall policy with
respect to compensation matters, including such matters as compensation plans
for employees and employment agreements and compensation for executive
officers. The Compensation Committee consists of Messrs. Ranieri and Shay.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
The Commission has comprehensive rules relating to the reporting of
securities transactions by directors, officers and shareholders who
beneficially own more than 10% of the Company's Common Stock (collectively, the
"Reporting Persons"). These rules are complex and difficult to interpret. Based
solely on a review of Section 16 reports received by the Company from Reporting
Persons, the Company believes that no Reporting Person has failed to file a
Section 16 report on a timely basis during the most recent fiscal year.
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ITEM 11. EXECUTIVE COMPENSATION.
The following table summarizes all compensation earned by or paid to
the Company's Chief Executive Officer and each of the four other most highly
compensated executive officers of the Company whose annual salary and bonus
exceeded $100,000 (collectively, the "Named Officers") for services rendered in
all capacities to the Company for the fiscal year ended September 30, 1998, the
Eleven Month Period and the fiscal year 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)........ 1998 $ 243,423 $ -- $ -- 150,000 $52,742(2)
Chairman of the Board Eleven Month
and Chief Executive Period 138,461 -- -- 500,000 53,428(2)
Officer 1996 -- -- -- -- --
Sarah L. Eames............... 1998 $ 187,404 $ -- $ -- 100,000 $ --
President Eleven Month
Period 47,115 -- -- 60,000 --
1996 -- -- -- -- --
Wayne A. Palladino........... 1998 $ 181,731 $ -- $ -- 100,000 $ --
Senior Vice President and Eleven Month
Chief Financial Officer Period 154,807 -- -- 45,000 --
1996 181,731 -- -- -- --
Gregory E. Marsella.......... 1998 $ 121,154 $ -- $ -- -- $ --
Vice President, Eleven Month
General Counsel and Period 26,923 -- -- 48,000 --
Secretary 1996 -- -- -- -- --
- --------------
(1) Mr. Aitken became Chief Executive Officer and Chairman of the Company
effective January 1997.
(2) Reflects reimbursement for certain travel expenses.
-37-
The following table sets forth certain information regarding
individual options granted in fiscal 1998 to each of the Named Officers
pursuant to the Company's 1992 Stock Option Plan. In accordance with the rules
of the Commission, the table sets forth the hypothetical gains or "option
spreads" that would exist for the options at the end of their respective terms.
These gains are based on assumed rates of annual compound stock price
appreciation of 5% and 10% from the date the option was granted to the end of
the option's term.
OPTION GRANTS IN FISCAL 1998
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 (2)
NAME GRANTED(1) FISCAL YEAR PER SHARE DATE 5% 10%
---- ---------- ----------- --------- ---- ----------------------------
Timothy M. Aitken. 150,000 29.1% $2.625 9/16/03 $108,786 $240,388
Sarah L. Eames.... 100,000 19.4 $2.625 9/16/03 72,524 160,259
Wayne A. Palladino 100,000 19.4 $2.625 9/16/03 72,524 160,259
- --------------
(1) One half are exercisable immediately (with forfeiture if employment
terminates before September 16, 1999), with the remaining half
exercisable on September 16, 1999 subject to the terms of the option
agreement.
(2) The 5% and 10% assumed annual compound rates of stock price appreciation
are mandated by the Commission and do not represent the Company's
estimate or projection of future Common Stock prices.
AGGREGATE OPTION EXERCISES IN FISCAL 1998
AND 1998 FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ACQUIRED VALUE AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
NAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ----------- -------- ------------------------- -------------------------
Timothy M. Aitken......... -- -- 308,333 / 341,667 $131,250 / $131,250
Sarah L. Eames............ -- -- 83,334 / 76,666 87,500 / 87,500
Wayne A. Palladino........ -- -- 55,000 / 50,000 87,500 / 87,500
Gregory E. Marsella....... -- -- 26,667 / 21,333 0 / 0
- --------------
(1) Calculated on the basis of $4.375 per share, the closing sale price of
the Common Stock as reported on the NASDAQ/NM on September 30, 1998,
minus the exercise price.
-38-
EMPLOYMENT AGREEMENTS; TERMINATION OF EMPLOYMENT AND
CHANGE-IN-CONTROL ARRANGEMENTS
In January 1997, the Company entered into an employment agreement with
Mr. Aitken, which expired in January 1998. The agreement renewed for a one-year
term in January 1998 and will renew for one-year terms absent notice of
non-renewal from either party. This agreement provided for a base salary of
$250,000, increasing to $300,000 when the agreement was renewed in January
1998. The agreement contains, among other things, customary confidentiality and
termination provisions and provides that in the event of the termination of the
executive following a "change of control" of the Company (as defined therein),
Mr. Aitken will be entitled to receive a cash payment of up to 2.9 times his
average annual base salary during the preceding five years.
In connection with Ms. Eames' employment with the Company, the
Company has agreed that if Ms. Eames' employment is terminated (other than for
cause) while Ms. Eames resides in California, she will be entitled to a
severance payment equal to one year's salary (currently $240,000 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 consists of
Messrs. Ranieri and Shay. Messrs. Ranieri and Shay among others, control the
general partner of HPII and the Fund, each of which are principal shareholders
of the Company, which principal shareholders engaged in certain transactions
with the Company described under Item 13 of this Report under the heading
"Certain Relationships and Related Transactions - Transactions with Principal
Shareholders." See also "Directors and Officers of the Registrant - Board
Committees."
STOCK OPTION PLANS
1992 STOCK OPTION PLAN.
In July 1992, the Company's Board of Directors and shareholders
approved the Company's 1992 Stock Option Plan (the "Option Plan"). The Option
Plan provides for the grant of options to key employees, officers, directors
and non-employee independent contractors of the Company. The Option Plan is
administered by the Compensation Committee of the Board of Directors. The
number of shares of Common Stock available for issuance thereunder is 3,000,000
shares as of September 30, 1998. Beginning in fiscal 1998 and ending in July
2002 the number of shares available for issuance under the Option Plan, as
amended, increases by one percent of the number of shares of Common Stock
outstanding as of the first day of each fiscal year. As of December 1, 1998,
the number of shares of Common Stock available for issuance thereunder is
3,175,361 shares.
Options granted under the Option Plan may be either incentive stock
options ("Incentive Options"), which are intended to meet the requirements of
Section 422 of the Internal Revenue Code of 1986, as amended, or options that
do not qualify as Incentive Options ("Non-Qualified Options"). Under the Option
Plan, the Compensation Committee may grant (i) Incentive Options at an exercise
price per share which is not less than the fair market value of a share of
Common Stock on the date on which such Incentive Options are granted (and not
less than 110% of the fair market value in the case of any optionee who
beneficially owns more than 10% of the total combined voting power of the
Company) and (ii) Non-Qualified Options at an exercise price per share which is
determined by the Compensation Committee (and which may be less than the fair
market value of a share of Common Stock on the date on which such Non-Qualified
Options are granted). The Option Plan
-39-
further provides that the maximum period in which options may be exercised will
be determined by the Compensation Committee, except that Incentive Options may
not be exercised after the expiration of ten years from the date the Incentive
Option was initially granted (and five years in the case of any optionee who
beneficially owns more than 10% of the total combined voting power of the
Company). Under the Option Plan, if an optionee's employment is terminated,
generally the unexercised Incentive Options must be exercised within three
months after termination. However, if the termination is due to the optionee's
death or permanent disability, the option must be exercised within one year of
the termination of employment. If the optionee's employment is terminated for
cause by the Company, or if the optionee voluntarily terminates his employment,
his options will expire as of the termination date. Any option granted under
the Option Plan will be nontransferable, except by will or by the laws of
descent and distribution, and generally may be exercised upon payment of the
option price in cash or by delivery of shares of Common Stock with a fair
market value equal to the option price.
Shares delivered under the Option Plan will be available from
authorized but unissued shares of Common Stock or from shares of Common Stock
reacquired by the Company. Shares of Common Stock that are subject to options
under the Option Plan which have terminated or expired unexercised will return
to the pool of shares available for issuance under the Option Plan.
On September 16, 1998, the Company granted options to purchase shares
of Common Stock at $2.625 per share under the Option Plan as follows: (i)
150,000 to Mr. Aitken; (ii) 100,000 to Ms. Eames; and (iii) 100,000 to Mr.
Palladino.
1997 NON-EMPLOYEE DIRECTOR PLAN.
In May 1997, the Company adopted the Company's 1997 Option Plan for
Non-Employee Directors (the "Director Plan") pursuant to which 100,000 shares
of Common Stock of the Company were reserved for issuance upon the exercise of
options granted to non-employee directors of the Company. The purpose of the
Director Plan is to encourage ownership of Common Stock by non-employee
directors of the Company whose continued services are considered essential to
the Company's future progress and to provide them with a further incentive to
remain as directors of the Company. The Director Plan is administered by the
Board of Directors. Directors of the Company who are not employees of the
Company or any subsidiary or affiliate of the Company are eligible to
participate in the Director Plan. The term of the Director Plan is ten years
from the date of approval by the stockholders; however, options outstanding on
the expiration of the term shall continue to have full force and effect in
accordance with the provisions of the instruments evidencing such options. The
Board of Directors may suspend, terminate, revise or amend the Director Plan,
subject to certain limitations.
Under the Director Plan, the Board of Directors may from time to time
at its discretion determine which of the eligible directors should receive
options, the number of shares subject to such options and the dates on which
such options are to be granted. Each such option is immediately exercisable for
a period of ten years from the date of grant generally, but may not be
exercised more than 90 days after the date an optionee ceases to serve as a
director of the Company. Options granted under the Director Plan are not
transferable by the optionee other than by will, laws of descent and
distribution, or as required by law.
Common Stock may be purchased from the Company upon the exercise of an
option by payment in cash or cash equivalent, through the delivery of shares of
Common Stock having a fair market value equal to the cash exercise price of the
option or any combination of the above, subject to the discretion of the Board
of Directors.
-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 state law. The Company also has entered
into indemnification agreements with each of its directors and officers.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the number and percentage of shares of
Common Stock beneficially owned, as of December 1, 1998, 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 except as otherwise indicated in this table;
and (iv) all executive officers and directors of the Company as a group (8
persons).
NUMBER OF SHARES
BENEFICIALLY PERCENTAGE
NAME OWNED BENEFICIALLY OWNED
- ---- ---------------- ------------------
Timothy M. Aitken(1)........................... 461,666 2.6%
Sarah L. Eames(2).............................. 87,334 *
Wayne A. Palladino(3).......................... 159,190 *
Gregory E. Marsella(4)......................... 26,667 *
Lewis S. Ranieri(5)............................ 13,818,021 67.3%
Scott A. Shay(5)............................... 13,818,021 67.3%
Jeffrey S. Peris............................... -- --
G. Richard Green............................... 3,000 *
Hyperion Partners II L.P.(6)................... 13,818,021 67.3%
Hyperion TW Fund L.P.(7)....................... 13,818,021 67.3%
All executive officers and directors as
a group (8 persons)(8)...................... 14,555,878 68.8%
- --------------
* Less than one percent.
The above table does not include any shares of Common Stock which may be
beneficially owned by Mr. Fine who resigned as President and Chief
Operating Officer of the Company effective January 5, 1998.
-41-
(1) Includes 441,666 shares subject to options exercisable within 60 days
from December 1, 1998.
(2) Includes 83,334 shares subject to options exercisable within 60 days from
December 1, 1998.
(3) Includes 70,000 shares subject to options exercisable within 60 days from
December 1, 1998.
(4) Includes 26,667 shares subject to options exercisable within 60 days from
December 1, 1998.
(5) Includes 6,669,565 shares of Common Stock and 3,000,000 shares of Common
Stock underlying the warrants exercisable within 60 days from December 1,
1998 (the "Warrants") acquired pursuant to the HPII Purchase Agreement
(as defined herein) which HPII has purchased and 4,148,456 shares of
Common Stock which the Fund (each of which are affiliates of Messrs.
Ranieri and Shay) has purchased and as to which Messrs. Ranieri and Shay
disclaim beneficial ownership. See "Certain Relationships and Related
Transactions - Transactions with Principal Shareholders."
(6) Includes 4,148,456 shares of Common Stock which the Fund (an affiliate of
HPII) has purchased and as to which HPII disclaims beneficial ownership
and 3,000,000 shares of Common Stock subject to Warrants exercisable
within 60 days from December 1, 1998. The address of HPII is 50 Charles
Lindbergh Parkway, Uniondale, New York 11553. See "Certain Relationships
and Related Transactions - Transactions with Principal Shareholders."
(7) Includes 6,669,565 shares of Common Stock and 3,000,000 shares subject to
the Warrants exercisable within 60 days from December 1, 1998 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.
(8) Includes all shares held by Messrs. Aitken, Palladino, Marsella, Ranieri,
Shay, Peris and Green and Ms. Eames, and those shares subject to options
and Warrants held by such individuals exercisable within 60 days from
December 1, 1998.
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 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
-42-
with all other shareholders shall terminate in the event that the aggregate
number of shares of Common Stock owned by Mr. Palladino and certain former
officers of the Company shall be less than 415,000 shares or on the date when
any person or group unaffiliated with HPII becomes the beneficial owner of 25%
or more of the then-outstanding shares of the Company's capital stock.
Mr. Palladino in his individual capacity, has agreed to take all steps
necessary, including voting his shares for the election of HPII's designees to
the Board of Directors, and to utilize his best efforts, to secure the election
by the Company's shareholders of HPII's designees to the Board of Directors.
The Company has also agreed to such provisions (other than the voting of
shares).
The HPII Purchase Agreement further provides that commencing July 31,
1996, all actions to be taken by the Board of Directors will require the
affirmative vote of a majority of the directors present at a duly constituted
meeting (which is the status currently), except that it shall require the
affirmative vote of 66-2/3% of the entire Board of Directors to authorize any
action taken with respect to a proposed acquisition, whether by purchase of
stock or assets, of another company and any action to increase above seven (7)
the number of directors constituting the entire Board of Directors. See
"Directors and Officers of the Registrant."
HPII purchased certain trade payables of HMI in November and December,
1996 (the "HMI Payables") aggregating approximately $18,300,000 at various
discounts. On March 26, 1997, HPII and the Company entered into the a stock
purchase agreement (the "AP Stock Purchase Agreement"), as amended, pursuant to
which HPII and the Company agreed, subject to the conditions stated in the AP
Stock Purchase Agreement, that the Company would issue the shares of its 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
(as defined herein), plus (iii) 30% of the next $10,000,000 of Net Recovery,
plus (iv) 50% of any amount of Net Recovery in excess of $30,000,000; (B) "Net
Recovery" means the amount realized or recovered by the Company on or after
September 1, 1997 on or in respect of (i) any indebtedness owed by HMI and/or
its subsidiaries to the Company; (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. This transaction was approved at a special meeting of the
shareholders held on March 17, 1998 and subsequently during April 1998, HPII
contributed the HMI Payables to the Company in exchange for 1,159,288 shares of
the Company's Common Stock with a value per share of $6.00. The aggregate value
of the Payable Shares was $6,956,000. The shares of Common Stock issued
pursuant to this agreement are also covered by a registration agreement entered
into with HPII in connection with the HPII Purchase Agreement. The Company will
bear all expenses, other than underwriting discounts and commissions, in
connection with any such registration.
On April 13, 1998, a shareholder derivative action was filed against
certain officers and directors of the Company, alleging that consummation of
the AP Stock Purchase Agreement was against best interests of the Company's
shareholders (see "Legal Proceedings").
-43-
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 Mr. Palladino. On such date, the Company loaned Mr. Palladino the
funds necessary to consummate such purchases. On April 8, 1998, the Company
forgave the loan provided that Mr. Palladino remain employed by the Company as
follows: one-third as of April 9, 1998, one-third on January 1, 1999 and the
remaining one-third on September 30, 1999. This loan bears interest at the
prime rate of the Company's principal lender plus 1% per annum, is secured by a
pledge of the purchased stock, but is otherwise non-recourse to Mr. Palladino.
Mr. Palladino among others, (collectively, the "Restricted
Transferees") has entered into a stock restriction agreement (the "Restriction
Agreement"), pursuant to which he agreed to limit the transferability of his
shares of Common Stock as well as other "Common Equivalents" to the extent
described therein. Unless otherwise consented to in writing by HPII, none of
the Restricted Transferees may transfer any of his shares of Common Stock or
other Common Equivalents owned by him if, at the time of such transfer or after
giving effect thereto, the Restricted Transferee's "Shareholder Percentage"
would be less than the lesser of 0.75 and the "HPII Percentage." For purposes
of the Restriction Agreement, the term "Shareholder Percentage" means a
fraction, the denominator of which is the number of Common Equivalents that
such shareholder and his related persons owned or had the right to acquire on
the date of the HPII Purchase Agreement, and the numerator of which is the
numerical amount of the denominator less the number of Common Equivalents
transferred by such Restricted 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."
-44-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements Page
Financial Statements Index F-i
Report of Independent Accountants F-1
Consolidated Balance Sheets - September 30, 1998 and 1997 F-2
Consolidated Statements of Operations - For the Year Ended
September 30, 1998, Eleven Months Ended September 30, 1997
and Year Ended October 31, 1996 F-3
Consolidated Statements of Changes in Stockholders'
Equity - For the Year Ended September 30, 1998, Eleven
Months Ended September 30, 1997 and Year Ended
October 31, 1996 F-4
Consolidated Statements of Cash Flows - For the Year Ended
September 30, 1998, Eleven Months Ended September 30, 1997
and Year Ended October 31, 1996 F-5
Notes to Consolidated Financial Statements F-7
Quarterly Financial Information (Unaudited) F-34
(a)(2) Financial Statements Schedule
Schedule II - Valuation and Qualifying Accounts S-1
Schedules other than those listed above are omitted because they
are not required or are not applicable or the information is shown
in the audited financial statements or related notes.
(b) Reports on Form 8-K
The Company filed on July 16, 1998 a Current Report on Form 8-K
dated July 15, 1998 concerning an Item 5 event.
(c) Exhibits
The exhibits listed in the Index to Exhibits below are filed as
part of this Annual Report on Form 10-K.
-45-
EXHIBIT INDEX
Exhibit
Number Title
- ------ -----
3.1 Restated Certificate of Incorporation of the Company filed on December
12, 1990, as amended on August 7, 1992 (incorporated herein by
reference to Exhibit 3.1 to the Company's Quarterly Report on Form
10-Q for the Quarter ended April 30, 1997).
3.2 Certificate of Amendment to the Restated Certificate of Incorporation
of the Company filed on June 28, 1995 (incorporated herein by
reference to Exhibit 3.2 to the Company's Quarterly Report on Form
10-Q for the Quarter ended April 30, 1997).
3.3 Certificate of Amendment to the Restated Certificate of Incorporation
of the Company filed on October 9, 1996 (incorporated herein by
reference to Exhibit 3.3 to the Company's Quarterly Report on Form
10-Q for the Quarter ended April 30, 1997).
3.4 Certificate of Amendment to the Restated Certificate of Incorporation
of the Company filed on May 6, 1997 (incorporated herein by reference
to Exhibit 3.4 to the Company's Quarterly Report on Form 10-Q for the
Quarter ended April 30, 1997).
3.5* Certificate of Amendment to the Restated Certificate of Incorporation
of the Company filed on April 16, 1998.
3.6 Restated By-laws of the Company, as amended (incorporated herein by
reference to Exhibit 3.4 to the Company's Annual Report on Form 10-K
for the year ended October 31, 1996).
4.1 Specimen Certificate of Common Stock (incorporated herein by reference
to Exhibit 4.1 to the Company's Registration Statement (No. 33-50876)
on Form S-1).
10.1 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).
10.2 Transworld Home HealthCare, Inc. 1992 Stock Option Plan, as amended
(incorporated herein by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998).
10.3 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).
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Exhibit
Number Title
- ------ -----
10.4 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).
10.5 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).
10.6 Amended and Restated Asset Purchase Agreement, dated as of March 1,
1995, among DermaQuest, Precision Health Care, Inc., and Les Capella
(incorporated herein by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended April 30, 1995).
10.7 Asset Purchase Agreement between The PromptCare Companies, Inc. and
The Pulmonary Division of Delaware Valley Lung Center, P.C. effective
as of January 1, 1995 (incorporated herein by reference to Exhibit 2
to the Company's Current Report on Form 8-K filed on or about
February 15, 1995).
10.8 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).
10.9 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).
10.10 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).
10.11 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).
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Exhibit
Number Title
- ------ -----
10.12 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).
10.13 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).
10.14 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).
10.15 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).
10.16 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).
10.17 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).
10.18 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).
10.19 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).
10.20 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).
-48-
Exhibit
Number Title
- ------ -----
10.21 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).
10.22 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).
10.23 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).
10.24 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).
10.25 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).
10.26 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).
10.27 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).
10.28 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).
10.29 Sixth Amendment to Credit Agreement, dated as of September 15, 1997
between the Company and Bankers Trust Company (incorporated herein by
reference to Exhibit 10.32 to the Company's Transition Report on Form
10-K for transition period from November 1, 1996 to September 30,
1997).
10.30 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).
-49-
Exhibit
Number Title
- ------ -----
10.31 Eighth Amendment to Credit Agreement, dated as of November 12, 1997
between the Company and Bankers Trust Company (incorporated herein by
reference to Exhibit 10.34 to the Company's Transition Report on Form
10-K for transition period from November 1, 1996 to September 30,
1997).
10.32 Ninth Amendment to Credit Agreement, dated as of February 5, 1998
between the Company and Bankers Trust Company (incorporated herein by
reference to Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the Quarter ended December 31, 1997.
10.33 Tenth Amendment to Credit Agreement, dated as of April 7, 1998 between
the Company and Bankers Trust Company (incorporated herein by
reference to Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the Quarter ended June 30, 1998).
10.34 Eleventh Amendment to Credit Agreement, dated as of July 15, 1998
between the Company and Bankers Trust Company (incorporated herein by
reference to Exhibit 10.2 to the Company's Quarterly Report on Form
10-Q for the Quarter ended June 30, 1998).
10.35* Twelfth Amendment to Credit Agreement, dated as of August 12, 1998
between the Company and Bankers Trust Company.
10.36* Thirteenth Amendment to Credit Agreement, dated as of October 1, 1998
between the Company and Bankers Trust Company.
10.37 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).
10.38 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).
10.39 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).
-50-
Exhibit
Number Title
- ------ -----
10.40 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).
10.41 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).
10.42 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).
10.43 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).
10.44 Stock Purchase Agreement, dated as of November 13, 1996, between HMI
and the Company (incorporated herein by reference to Exhibit 5 to the
Schedule 13D filed by the Company, HPII, Hyperion Ventures II L.P.,
Hyperion Funding II Corp., Lewis S. Ranieri and Scott A. Shay on or
about November 22, 1996).
10.45 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).
10.46 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).
10.47 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).
-51-
Exhibit
Number Title
- ------ -----
10.48 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).
10.49 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).
10.50 Letter Agreement amending Agreement and Plan of Merger, dated January
13, 1997, between the Company and HMI (incorporated herein by
reference to Exhibit 1 to the Company's Current Report on Form 8-K
dated January 22, 1997).
10.51 Letter Agreement dated March 26, 1997, amending Agreement and Plan of
Merger between the Company and HMI (incorporated herein by reference
to Exhibit 1 to the Company's Current Report on Form 8-K dated
March 27, 1997).
10.52 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).
10.53 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).
10.54 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).
10.55 Letter Agreement dated July 7, 1997 amending Agreement and Plan of
Merger between the Company and HMI (incorporated herein by reference
to Exhibit 10.53 to the Company's Transition Report on Form 10-K for
transition period from November 1, 1996 to September 30, 1997).
10.56 Asset Purchase Agreement dated as of October 1, 1997 among HMI, Health
Reimbursement Corporation, HMI Illinois, Inc., HMI Maryland, Inc., HMI
Pennsylvania, Inc., HMI PMA, Inc., HMI Retail Corp., Inc., Home Care
Management, Inc., the Company, Stadtlander Drug Distribution Co., Inc.
and Counsel (incorporated herein by reference to Exhibit 2 to the
Company's Current Report on Form 8-K dated October 10, 1997).
-52-
Exhibit
Number Title
- ------ -----
10.57 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).
10.58 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).
10.59 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).
10.60 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).
10.61 Transition Agreement dated October 1, 1997, by and among HMI, Health
Reimbursement Corporation, HMI Illinois, Inc., HMI Maryland, Inc., HMI
Pennsylvania, Inc., HMI PMA, Inc., HMI Retail Corp., Inc., Home Care
Management, Inc. and Stadlander Drug Distribution Co., Inc.
(incorporated herein by reference to Exhibit 10.59 to the Company's
Transition Report on Form 10-K for transition period from November 1,
1996 to September 30, 1997).
10.62 Letter Agreement dated June 12, 1997 amending Agreement and Plan of
Merger between the Company and HMI (incorporated herein by reference
to Exhibit 10.60 to the Company's Transition Report on Form 10-K for
transition period from November 1, 1996 to September 30, 1997).
10.63 Asset Purchase Agreement dated as of June 5, 1998 between the Company,
TNI and Pediatric Services of America, Inc. (incorporated herein by
reference to Exhibit 99.1 to the Company's Current Report on Form 8-K
dated July 15, 1998).
11 Statement re: computation of earnings per share (computation can be
determined clearly from the material contained in this Annual Report
on Form 10-K).
21.1* Subsidiaries of the Company.
23.1* Consent of PricewaterhouseCoopers LLP, independent accountants of the
Company.
27* Financial Data Schedule.
- ---------------------
* Filed herewith.
-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 15, 1998
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 15, 1998
- ---------------------- Executive Officer (Principal
Timothy M. Aitken Executive Officer)
/s/ Wayne A. Palladino Senior Vice President and Chief December 15, 1998
- ---------------------- Financial Officer (Principal
Wayne A. Palladino Financial and Accounting Officer)
/s/ Lewis S. Ranieri Director December 15, 1998
- ----------------------
Lewis S. Ranieri
/s/ Scott A. Shay Director December 15, 1998
- ----------------------
Scott A. Shay
/s/ Jeffrey S. Peris Director December 15, 1998
- ----------------------
Jeffrey S. Peris
/s/ G. Richard Green Director December 15, 1998
- ----------------------
G. Richard Green
-54-
TRANSWORLD HEALTHCARE, INC.
Financial Statements Index Page
Report of Independent Accountants F-1
Consolidated Balance Sheets - September 30, 1998
and 1997 F-2
Consolidated Statements of Operations - For the
Year Ended September 30, 1998, Eleven Months
Ended September 30, 1997 and Year Ended
October 31, 1996 F-3
Consolidated Statements of Changes in
Stockholders' Equity - For the Year Ended
September 30, 1998, Eleven Months
Ended September 30, 1997 and Year Ended
October 31, 1996 F-4
Consolidated Statements of Cash Flows - For the
Year Ended September 30, 1998, Eleven
Months Ended September 30, 1997 and
Year Ended October 31, 1996 F-5
Notes to Consolidated Financial Statements F-7
Quarterly Financial Information (Unaudited) F-34
Financial Statements Schedule Index
Schedule II - Valuation and Qualifying Accounts S-1
F-i
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Transworld Healthcare, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of
Transworld Healthcare, Inc. and its subsidiaries at September 30, 1998 and 1997
and the results of their operations and their cash flows for the year ended
September 30, 1998, the eleven month period ended September 30, 1997 and the
year ended October 31, 1996, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
December 11, 1998
F-1
TRANSWORLD HEALTHCARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------- -------------
ASSETS
Current assets:
Cash and temporary investments $ 10,413 $ 10,626
Accounts receivable, less allowance for doubtful
accounts of $15,367 and $11,909 29,614 31,475
Inventories 4,188 3,226
Investment in Health Management, Inc. 22,367
Deferred income taxes 6,732 6,530
Income tax refund receivable 2,742
Prepaid expenses and other current assets 8,061 6,093
--------- ---------
Total current assets 59,008 83,059
Property & equipment, net 9,888 8,448
Intangible assets, net 105,784 103,385
Deferred income taxes 3,483 2,356
Other assets 2,615 4,033
--------- ---------
Total assets $ 180,778 $ 201,281
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt, including
obligations under capital leases $ 40 $ 25,051
Accounts payable 2,728 7,844
Accrued expenses, related parties 7,500
Accrued expenses 13,971 13,672
Income taxes payable 3,022 2,387
Acquisitions payable 99 194
--------- ---------
Total current liabilities 19,860 56,648
Long-term debt, including obligations under
capital leases 57,307 61,400
Deferred income taxes and other 1,706 1,328
--------- ---------
Total liabilities 78,873 119,376
--------- ---------
Commitments and contingencies (Note 10)
Stockholders' equity:
Preferred stock, $.01 par value; authorized
2,000 shares, issued and outstanding - none
Common stock, $.01 par value; authorized
40,000 shares, issued and outstanding
17,536 and 15,300 shares 175 153
Additional paid-in capital 125,461 111,774
Translation adjustment 2,946 (2,192)
Retained deficit (26,677) (27,830)
--------- ---------
Total stockholders' equity 101,905 81,905
--------- ---------
Total liabilities and stockholders' equity $ 180,778 $ 201,281
========= =========
See notes to consolidated financial statements.
F-2
TRANSWORLD HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ELEVEN
YEAR ENDED MONTHS ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, OCTOBER 31,
1998 1997 1996
--------- --------- ---------
Revenues:
Net respiratory, medical equipment and supplies sales $ 76,185 $ 52,562 $ 47,170
Net patient services 68,887 29,844 19,164
Net infusion services 10,237 11,038 9,970
--------- --------- ---------
Total revenues 155,309 93,444 76,304
--------- --------- ---------
Cost of revenues:
Respiratory, medical equipment and supplies sales 41,898 25,687 18,481
Patient services 47,779 18,132 10,174
Infusion services 7,515 7,568 6,025
--------- --------- ---------
Total cost of revenues 97,192 51,387 34,680
--------- --------- ---------
Gross profit 58,117 42,057 41,624
Selling, general and administrative expenses 51,426 42,931 33,552
Gain on sale of assets (2,511) (606)
Special charges 554 34,836
Equity in losses of Health Management Inc., net 296
--------- --------- ---------
Operating income (loss) 8,648 (35,400) 8,072
Interest income (635) (2,650) (75)
Interest expense 6,286 5,063 4,427
--------- --------- ---------
Income (loss) before income taxes and extraordinary loss 2,997 (37,813) 3,720
Provision (benefit) for income taxes 1,844 (5,078) 1,702
--------- --------- ---------
Income (loss) before extraordinary loss 1,153 (32,735) 2,018
Extraordinary loss on early extinguishment of debt
(net of income tax benefit of $879) (1,435)
--------- --------- ---------
Net income (loss) $ 1,153 $ (32,735) $ 583
========= ========= =========
Basic income (loss) per share of common stock from:
Income (loss) before extraordinary loss $ 0.07 $ (2.56) $ 0.29
Extraordinary loss on early extinguishment of debt (0.21)
--------- --------- ---------
Net income (loss) per share $ 0.07 $ (2.56) $ 0.08
========= ========= =========
Diluted income (loss) per share of common stock from:
Income (loss) before extraordinary loss $ 0.07 $ (2.56) $ 0.26
Extraordinary loss on early extinguishment of debt (0.19)
--------- --------- ---------
Net income (loss) per share $ 0.07 $ (2.56) $ 0.07
========= ========= =========
Weighted average number of common shares outstanding:
Basic 17,327 12,794 7,035
========= ========= =========
Diluted 17,488 12,794 7,833
========= ========= =========
See notes to consolidated financial statements.
F-3
TRANSWORLD HEALTHCARE, INC.
CONSOLIDATED 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, 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 3) 321 3 (3)
Exercise of stock options and
warrants, including tax benefit 210 2 703 705
Cancellation of common stock from:
Termination of VIP agreement
(Note 3) (40) (354) (354)
Repayment of Radamerica notes
receivable (146) (1) (1,258) (1,259)
------ ----- --------- -------- --------- -----------
Balance, September 30, 1997 15,300 153 111,774 (2,192) (27,830) 81,905
Net income 1,153 1,153
Translation adjustment 5,138 5,138
Issuance of common stock for:
HPII and HMI Payables
transaction (Note 6) 1,159 12 6,944 6,956
Exercise of stock options and
warrants 1,090 11 6,483 6,494
Cancellation of common stock from:
Repayment of related party
notes receivable (13) (1) (80) (81)
Issuance of options for services rendered 340 340
------ ----- --------- -------- --------- -----------
Balance, September 30, 1998 17,536 $ 175 $ 125,461 $ 2,946 $ (26,677) $ 101,905
====== ===== ========= ======== ========= ===========
See notes to consolidated financial statements.
F-4
TRANSWORLD HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
ELEVEN
YEAR ENDED MONTHS ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, OCTOBER 31,
1998 1997 1996
--------- --------- ---------
Cash flows from operating activities:
Net income (loss) $ 1,153 $ (32,735) $ 583
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,981 1,324 1,191
Amortization of goodwill 2,841 1,458 1,074
Amortization of other intangible assets 306 408 494
Amortization of debt discount and issuance costs 1,151 830 912
Provision for doubtful accounts 8,318 12,973 6,394
Gain on sale of assets (2,511) (606)
Special charges 34,836
Equity in losses of HMI 637
Deferred income taxes (988) (5,574) (200)
Payment for debt discount & issuance costs (17) (1,564) (3,331)
Extraordinary loss on early extinguishment of debt 2,314
Changes in assets and liabilities, excluding the effect of businesses
acquired and sold:
Increase in accounts receivable (7,372) (11,351) (11,426)
Increase in inventories (897) (102) (92)
Increase in prepaid expenses and other assets (246) (4,457) (1,511)
(Decrease) increase in accounts payable (5,270) 1,910 (1,123)
Increase (decrease) in accrued
expenses and other liabilities 1,396 (640) (1,873)
--------- --------- ---------
Net cash provided by (used in) operating activities (155) (2,653) (6,594)
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures (3,346) (2,694) (1,040)
Notes receivable - payments received 4,683
Proceeds from termination of VIP agreement 500
Proceeds from sale of fixed assets 60 550
Proceeds from sale of Radamerica, net of cash
overdraft when sold 1,204 12,114
Proceeds from sale of TNI's assets 4,765
Proceeds from sale of HMI's assets 32,328
Advances to and investment in HMI (11,122) (36,872)
Acquisitions - net of cash acquired (846) (93,586) (1,785)
Payment on acquisition payable (406) (1,833) (11,078)
Purchases of other intangibles (396)
--------- --------- ---------
Net cash provided by (used in) investing activities 22,241 (117,138) (13,903)
--------- --------- ---------
(Continued)
See notes to consolidated financial statements.
F-5
TRANSWORLD HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
ELEVEN
YEAR ENDED MONTHS ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, OCTOBER 31,
1998 1997 1996
--------- --------- ---------
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
Payments on short-term debt (2,000)
Borrowing under revolving loan 96,847 18,482
Payments on revolving loan $ (29,100) (22,983) (10,990)
Proceeds from long-term debt 55 47 18
Principal payments on long-term debt (58) (340) (21,091)
Stock options and warrants exercised, net,
including tax benefit 6,492 939 423
--------- --------- ---------
Net cash (used in) provided by financing activities (22,611) 124,974 24,180
--------- --------- ---------
Effect of exchange rate on cash 312 845
--------- --------- ---------
(Decrease) increase in cash (213) 6,028 3,683
Cash and temporary investments,
beginning of period 10,626 4,598 915
--------- --------- ---------
Cash and temporary investments,
end of period $ 10,413 $ 10,626 $ 4,598
========= ========= =========
Supplemental cash flow information:
Cash paid for interest $ 5,330 $ 3,993 $ 3,763
========= ========= =========
Cash (refunded) paid for income taxes, net $ (506) $ 2,312 $ 2,086
========= ========= =========
Supplemental disclosure of non-cash investing and financing activities:
Details of business acquired in purchase transactions:
Fair value of assets acquired $ 1,151 $ 106,402 $ 4,058
========= ========= =========
Liabilities assumed or incurred $ 305 $ 11,951 $ 2,171
========= ========= =========
Cash paid for acquisitions (including
related expenses) $ 846 $ 94,451 $ 1,887
Cash acquired 865 102
--------- --------- ---------
Net cash paid for acquisitions $ 846 $ 93,586 $ 1,785
========= ========= =========
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 year ended October 31, 1996 and the eleven months ended
September 30, 1997, the Company completed the following significant
acquisitions:
COMPANY DATE OF ACQUISITION NATURE OF BUSINESS
------- ------------------- ------------------
Health Meds, Inc. ("Health Meds") October 1996 Respiratory mail-order pharmacy
U.S. HomeCare Infusion Therapy Services October 1996 Infusion therapy
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).
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.
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-7
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, 1998 is comprised of amounts due from Medicare, Medicaid and
the National Health Services ("NHS") and other U.K. governmental payors
(27.6%, 5.6% and 24.8%, respectively) and various other third-party payors
and self-pay patients (none of which comprise greater than 10% of the
balance). At September 30, 1997, 31.6%, 8.4% and 20.0% of accounts
receivable was due from Medicare, Medicaid and the NHS and other U.K.
governmental payors, 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. Buildings are being depreciated over
their useful lives of twenty-five to fifty years and leasehold
improvements are amortized over the related lease terms or estimated
useful lives, whichever is shorter. When assets are retired or otherwise
disposed of, the cost and related accumulated depreciation are removed
from the accounts, and any resulting gain or loss is reflected in results
of operations.
F-8
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 $6,711, $5,402 and
$5,072 in fiscal 1998, 1997 and 1996, 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, Medicaid and the NHS and other U.K. governmental
payors. 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
year ended September 30, 1998, eleven months ended September 30, 1997 and
year ended October 31, 1996, the Company's net revenues attributable to
the Medicare and Medicaid programs were approximately 33%, 53% and 62%,
respectively, of the Company's total revenues. For the year ended
September 30, 1998 and eleven months ended September 30, 1997, 30% and
13%, respectively of the Companies net revenues were attributable to NHS
and other U.K. governmental payors 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
$104,898 and $102,679 at September 30, 1998 and September 30, 1997,
respectively, and is being amortized on a straight-line basis over forty
years. Accumulated amortization of goodwill at September 30, 1998 and
September 30, 1997 was $5,268 and $2,390, respectively. Other intangible
assets, net at September 30, 1998 and September 30, 1997, amounted to $886
and $706, respectively, and are being amortized over periods ranging from
five to fifteen years. Accumulated amortization of such intangibles at
September 30, 1998 and September 30, 1997 was $1,140 and $1,593,
respectively.
The Company selected the forty-year amortization period based on the
likely period of time over which the related economical benefit will be
realized. The Company believes the estimated goodwill life is reasonable
given the continuing movement of patient care to noninstitutional
settings, expanding demand due to demographic trends, the emphasis of the
Company in establishing significant coverage in its local and regional
markets, the consistent practice with other alternate site health care
companies and other factors.
F-9
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, 1998 and September 30, 1997, other assets include $2,425 and
$3,559, respectively of deferred financing costs associated with the
Credit Facility (as defined and described in Note 5), net of accumulated
amortization of $2,156 and $1,005, 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.
EARNINGS PER SHARE:
Effective December 31, 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share" ("EPS"). SFAS No. 128
F-10
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
replaced primary EPS with basic EPS and fully diluted EPS with diluted
EPS. Basic EPS is computed using the weighted average number of common
shares outstanding, after giving effect to issuable shares per agreements.
Diluted EPS is computed using the weighted average number of common shares
outstanding, after giving effect to issuable shares per agreements and
dilutive stock options and warrants using the treasury stock method. At
September 30, 1998, September 30, 1997 and October 31, 1996 the Company
had outstanding stock options and warrants to purchase 3,965, 3,809 and
3,148 shares, respectively of common stock ranging in price from $4.38 to
$12.45, $7.88 to $12.45 and $10.40 to $12.45 per share, respectively, that
were not included in the computation of diluted EPS because the exercise
price was greater than the average market price of the common shares. In
addition, for the eleven months ended September 30, 1997, the Company had
an incremental weighted average of 699 shares of stock options and warrants
which were not included in the diluted calculation as the effect of such
inclusion would have been anti-dilutive due to a net loss position.
The weighted average number of shares of common stock outstanding have
been restated for the eleven months ended September 30, 1997 and year
ended October 31, 1996 to reflect the provisions of SFAS No. 128. The only
effects of this restatement were to increase basic from primary income
before extraordinary loss and extraordinary loss per share by $0.03 for
the year ended October 31, 1996 and to increase diluted from fully diluted
income before extraordinary loss and extraordinary loss per share by $0.01
for the year ended October 31, 1996.
The weighted average number of shares used in the basic and diluted
earnings per share computation for the year ended September 30, 1998,
eleven months ended September 30, 1997 and the year ended October 31, 1996
are as follows:
ELEVEN MONTHS
YEAR ENDED ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, OCTOBER 31,
1998 1997 1996
---- ---- ----
Weighted average number of shares outstanding 16,663 12,517 6,622
Weighted average number of shares
contingently issuable per agreements 664 277 413
------ ------ -----
Shares used in calculation of basic
income (loss) per common share 17,327 12,794 7,035
Incremental shares, after application of treasury
stock method, of stock options and warrants 161 798
------ ------ -----
Shares used in calculation of diluted income
(loss) per common share 17,488 12,794 7,833
====== ====== =====
F-11
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:
The accompanying Balance Sheet and Statements of Operations of the Company
have been prepared in accordance with the Accounting Principles Board's
Opinion No. 25, Accounting for Stock Issued to Employees ("APB No. 25").
Under APB No. 25, generally, no compensation expense is recognized in the
accompanying financial statements in connection with the awarding of stock
options grants to employees provided that, as of the grant date, all terms
associated with the award are fixed and the quoted market price of the
Company's stock, as of the grant date, is equal to or less than the amount
an employee must pay to acquire the stock as defined.
Effective November 1996, the Company adopted the disclosures required by
SFAS No. 123, "Accounting for Stock-Based Compensation", including pro
forma operating results had the Company prepared it financial statements
in accordance with the fair value based method of accounting for
stock-based compensation, and they have been included in Note 9.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Cash, accounts receivable, accounts payable and accrued liabilities are
reflected in the financial statements 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, 1998 and 1997.
IMPACT OF RECENT ACCOUNTING STANDARDS:
In June 1997, the Financial Accounting Standards Board ("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 will adopt in the first
quarter of fiscal year 1999.
F-12
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 addresses the accounting
for derivative instruments including certain derivative instruments
embedded in other contracts and for hedging activities. As the Company
currently does not enter into transactions involving derivative
instruments, the Company does not believe that the adoption of SFAS No.
133 will have a material effect on the Company's financial statements.
SFAS No. 133 is effective for all fiscal quarters of all fiscal years
beginning after June 15, 1999.
RECLASSIFICATIONS:
Prior years financial statements have been reclassified to conform with
the current year's presentation.
3. BUSINESS COMBINATIONS AND DISPOSALS:
During the eleven months ended September 30, 1997 and the year ended
October 31, 1996, the Company acquired the entities described below, which
were accounted for by the purchase method of accounting. The results of
operations of the acquired companies are included in the Company's
Statements of Operations from their respective dates of acquisition.
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.
F-13
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
3. BUSINESS COMBINATIONS AND DISPOSALS (CONTINUED):
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.
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.
F-14
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
3. BUSINESS COMBINATIONS AND DISPOSALS (CONTINUED):
Eleven Months Year Ended
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:
Basic (2.56) 0.27
Diluted (2.56) 0.25
Net (loss) income per share of common stock:
Basic (2.56) 0.07
Diluted (2.56) 0.06
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.
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.
F-15
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
3. BUSINESS COMBINATIONS AND DISPOSALS (CONTINUED):
DISPOSITIONS
RADAMERICA
Effective July 31, 1997 the Company sold Radamerica, Inc. ("Radamerica")
for $13,304 and received $12,100 in fiscal 1997 with the remaining $1,204
subsequently received on November 10, 1997. As part of the consideration
for the acquisition of Radamerica, the Company had issued 250 shares of
its common stock valued at $5,000 based on a $20 per share market price
guarantee to the selling shareholders of Radamerica. Per the agreement,
the incremental amount due under the market price guarantee of $8.25 was
paid to the selling shareholders through issuance of 321 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 basic and diluted
earnings per share calculations.
The Company recognized a pre-tax gain on the sale of Radamerica of
approximately $606.
TNI
Effective July 12, 1998, the Company sold substantially all of the assets
of Transworld Home HealthCare Nursing Division, Inc. ("TNI") for $5,300
which was paid in cash at closing with $300 of such amount placed into
escrow for a period of one year following the closing to collateralize
TNI's obligations under the agreement (the "TNI Sale").
Results for TNI through July 12, 1998 have been included in the overall
Company's results for the year ended September 30, 1998. The Company
recognized a pre-tax gain on the TNI Sale of approximately $2,511.
TERMINATION OF PENDING ACQUISITIONS
VIP COMPANIES
On June 30, 1994, the Company entered into stock purchase agreements, as
amended, to acquire all of the issued and outstanding capital stock of VIP
Health Services, Inc. and Kwik Care, Ltd. (collectively, the "VIP
Companies"). On July 23, 1997, the Company and the VIP Companies
terminated the stock purchase agreements principally due to delays in
completing the transaction.
F-16
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
3. BUSINESS COMBINATIONS AND DISPOSALS (CONTINUED):
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
The Company acquired 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 pharmacy management services
to patients with chronic medical conditions and to health care
professionals, drug manufacturers and third-party payors involved in such
patients' care.
On November 13, 1996, the Company acquired HMI's senior secured
indebtedness under the credit agreement between HMI and its senior lenders
for $21,263 directly from such lenders. In mid January 1997 the Company
acquired 8,964 newly issued shares of HMI common stock, representing
approximately 49% of HMI's outstanding common stock for $1 per share or
$8,964.
The $9,714 investment in HMI was recorded as of January 31, 1997 and
represents 49% of HMI's equity in net tangible assets and after fair value
adjustments $15,835 was preliminarily allocated to goodwill, which was
being amortized on a straight-line basis over thirty years. The
acquisition of 49% of the outstanding shares of HMI common stock was
accounted for by the Company under the equity method of accounting
(effective as of January 31, 1997). 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.
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.
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 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 transaction with HMI and purchased the remaining 51% of the
outstanding shares of HMI's common stock (the "Merger"). The 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
F-17
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
3. BUSINESS COMBINATIONS AND DISPOSALS (CONTINUED):
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 remaining $2,500 escrow was fully utilized for
post-closing adjustments. The Company further reduced its senior secured
debt under the Credit Facility by $10,000 as the remaining proceeds from
the sale were 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 did 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 was 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; (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 $6,956; and (vi) $4,017 of
other miscellaneous items, including fees, expenses and estimated
post-closing balance sheet adjustments.
4. PROPERTY AND EQUIPMENT:
Major classes of property and equipment consist of the following:
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
---- ----
Revenue producing equipment $10,076 $8,302
Furniture, fixtures and equipment 7,257 6,097
Land, buildings and leasehold improvements 1,470 1,221
------- ------
18,803 15,620
Less, accumulated depreciation and amortization 8,915 7,172
------- ------
$ 9,888 $8,448
======= ======
The net book value of revenue producing equipment was $5,542 and $4,638 at
September 30, 1998 and September 30, 1997, respectively.
5. DEBT:
On July 31, 1996, the Company completed a $100,000 senior secured
revolving credit facility, underwritten by a commercial bank who is also
acting as Agent Bank (the "Credit Facility"). This facility replaced the
Company's existing $35,000 credit agreement (the "Credit Agreement"). In
F-18
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
5. DEBT (CONTINUED):
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 year ended September
30, 1998 to accommodate the TNI Sale. 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 Payable
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, the purchases of Omnicare and Allied
and to amend certain financial convenants.
As of September 30, 1997, $25,000 of the Credit Facility was classified as
current, as the Credit Facility, as amended, required repayment of $25,000
from the proceeds of the Asset Sale and accordingly the Company made
repayments equaling $25,000 during the year ended September 30, 1998. In
addition, on July 15, 1998 the Company reduced outstanding borrowings
under the Credit Facility by $4,100 with proceeds from the TNI 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.
The Credit Facility provides that subject to the terms thereof, the
Company may make borrowings either at the Base Rate (as defined in the
Credit Facility), plus 1% or the Eurodollar Rate (ranging from 5.375% to
5.5625% at September 30, 1998 and 5.66% at September 30, 1997), plus 2%.
As of September 30, 1998, the Company had $57,255 outstanding under the
Credit Facility and the unused portion under the Credit Facility was
$36,145. Additional borrowings require the approval of the required banks
under the Credit Facility.
The loans under the Credit Facility are collateralized by, among other
things, a lien on substantially all of the Company's and its domestic
subsidiaries' assets, a pledge of the Company's ownership interest in its
subsidiaries and guaranties by the Company's domestic subsidiaries. The
loans mature on July 31, 2001 with quarterly reductions in availability
which commenced July 31, 1998 and continue through final maturity. The
availability at September 30, 1998 was $93,400.
Subject to certain exceptions, the Credit Facility prohibits or restricts,
among other things, the incurrence of liens, the incurrence of
indebtedness, certain fundamental corporate changes, dividends, the making
of specified investments and certain transactions with affiliates. In
addition, the Credit Facility contains affirmative and negative financial
covenants customarily found in agreements of this kind including the
maintenance of certain financial ratios, such as interest coverage, debt
to earnings before interest, taxes, depreciation and amortization
("EBITDA") and minimum EBITDA. At March 31, 1998 and June 30, 1998, 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). On August 13, 1998, the Credit Facility was
amended to adjust certain covenants for 1998 and 1999 bringing the Company
into compliance with the Credit Facility.
F-19
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
5. DEBT (CONTINUED):
Long-term debt consists of the following:
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------- -------
Credit Facility, due July 31, 2001, with monthly
interest at Eurodollar Rate (ranging from 5.375% to
5.5625% at September 30, 1998 and 5.66% at
September 30, 1997), plus 2% collateralized by a lien
on all Company assets $57,255 $86,355
Equipment leases with monthly principal plus
interest ranging from 6.9% to 12.7% through
2002, collateralized by related equipment 92 96
------- -------
57,347 86,451
Less, current maturities 40 25,051
------- -------
$57,307 $61,400
======= =======
Annual maturities of long-term debt for each of the next four years are:
YEAR ENDING SEPTEMBER 30,
1999 $ 40
2000 20
2001 57,285
2002 2
-------
$57,347
=======
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 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
F-20
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
6. STOCKHOLDERS' EQUITY (CONTINUED):
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 shares of
common stock (the "Payable Shares") as determined by a formula geared to
the net cash proceeds ultimately realized by the Company upon sale of the
HMI assets. The value per share of the Payable Shares was determined by
the market value of the Company's common stock on the date of issuance.
This transaction was approved at a special meeting of the shareholders
held on March 17, 1998 and subsequently during April 1998, HPII was issued
1,159 shares of the Company's common stock with a value per share of
$6.00. The aggregate value of the Payable Shares was $6,956 (Note 10).
7. BUSINESS REALIGNMENT:
The Company took a number of significant steps during the year ended
September 30, 1998 and the eleven months ended September 30, 1997 to
realign its business as a focused regional home health care provider and
specialty pharmacy and medical supply distributor in the U.S. and an
integrated national provider of home and alternate site health care
products and services in the U.K. These steps included: (i) selling
non-core assets (i.e.: Radamerica and TNI); (ii) exiting businesses that
were deemed not to have the potential to earn an adequate return on
capital over the long term (such as wound care and orthotic product lines
in the continental U.S., as well as the Company's pulmonary rehabilitation
center in Cherry Hill, New Jersey); (iii) completing the Asset Sale; and
(iv) terminating the agreements to purchase the VIP Companies. In
addition, the Company attempted the acquisitions of Healthcall Group plc
("Healthcall") and Apria Healthcare Group, Inc. ("Apria").
For the year ended September 30, 1998, the Company recorded $554 of
special charges primarily related to costs incurred from its attempted
acquisitions of Healthcall and Apria and recorded a gain of $2,511 on the
TNI Sale (Note 3).
F-21
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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 $34,836, 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, Inc.'s ("DermaQuest")
product lines in the continental U.S. (principally wound care and
orthotics); (iii) $1,622 for the termination of the agreements to purchase
the VIP Companies (Note 3); (iv) $437 principally for the write-off of
goodwill and other intangible assets and estimated costs associated with
the closure of the Company's pulmonary rehabilitation center in Cherry
Hill, New Jersey (Note 3); and (v) $698 of other charges. In addition the
Company recorded a gain of $606 on the sale of Radamerica in the eleven
months ended September 30, 1997 (Note 3).
In addition to these special charges, during the eleven months ended
September 30, 1997, the Company recognized additional bad debt expenses of
$7,023 principally related to its DermaQuest product lines ($6,060) and
pulmonary rehabilitation center ($663), which is reflected in selling,
general and administrative 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.
F-22
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
8. INCOME TAXES:
The provision (benefit) for income taxes from continuing operations before
extraordinary loss is summarized as follows:
YEAR ENDED ELEVEN MONTHS ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, OCTOBER 31,
1998 1997 1996
------ ------- -------
Current:
Federal $ (200) $ (243) $ 1,637
State 150 213 265
Foreign 924 55
Deferred:
Federal 769 (4,443) (215)
State 85 (763) 15
Foreign 116 103
------ ------- -------
Provision (benefit) for
income taxes $1,844 $(5,078) $ 1,702
====== ======= =======
For 1998, 1997 and 1996, 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, 1998 and 1997 and October
31, 1996 are as follows:
SEPTEMBER 30,
---------------- OCTOBER 31,
1998 1997 1996
---- ---- ----
Deferred tax assets:
Current:
Provision for doubtful accounts $4,930 $4,396 $2,172
Inventory capitalization 20 33 9
Accrued expenses 1,557 1,882 677
Other, net 225 219 44
------ ------ ------
Current deferred tax assets 6,732 6,530 2,902
------ ------ ------
Non-current:
Federal net operating loss 1,810 1,695
State net operating losses 2,050 2,186 151
Capital losses 991
Other, net 507 464 57
Valuation allowance (1,875) (1,989) (130)
------ ------ ------
Non-current deferred tax assets 3,483 2,356 78
------ ------ ------
Deferred tax liabilities:
Non-current:
Depreciation and amortization 1,089 865 490
Other, net 452 317 65
------ ------ ------
Deferred tax liabilities 1,541 1,182 555
------ ------ ------
Net deferred tax assets $8,674 $7,704 $2,425
====== ====== ======
F-23
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
8. INCOME TAXES (CONTINUED):
The valuation allowance at September 30, 1998 relates to deferred tax
assets established for certain state net operating loss carryforwards and
deferred tax assets which are not expected to be realized based on
historical or future earnings. The decrease in the valuation allowance of
$114 is primarily due to the utilization of state net operating loss
carryforwards. 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, 1998, the Company has state net operating loss
carryforwards of $17,128 which, if unused, will expire in the years 1999
through 2013, and has a federal net operating loss carryforward of $5,957
which if unused, will expire in 2018. The Company has a capital loss
carryforward of $2,916 which if unused, will expire in 2002.
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 ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, OCTOBER 31,
1998 1997 1996
------- ------- -------
Income taxes computed at Federal
statutory tax rate $ 1,019 $(12,856) $ 1,265
State income taxes, net of
Federal benefits 268 (2,222) 350
Nondeductible expenses, primarily
amortization of intangible assets 711 4,291 266
Valuation allowance, state taxes (114) 1,859 (155)
Market writedown on investment in 3,200
subsidiary
Other, net (40) 650 (24)
------- ------- -------
Provision (benefit) for income taxes $ 1,844 $(5,078) $ 1,702
======= ======= =======
Income (loss) before income taxes and extraordinary loss generated from the
U.K. Operations for the year ended September 30,1998, the eleven months ended
September 30, 1997 and the year ended October 31, 1996 was $1,332, ($868) and
$0, respectively.
F-24
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
9. STOCK OPTION PLAN AND WARRANTS:
The Company has a stock option plan which provides for either incentive
stock options or nonqualified stock options (the "Option Plan"). The
Option Plan gives eligible employees, officers, directors and
non-employee independent contractors options to purchase up to 3,000
shares of stock, of which options to purchase 1,390 shares of stock were
outstanding as of September 30, 1998. Options under the Option Plan may
be granted by the Compensation Committee of the Board of Directors which
determines the exercise price, vesting provisions and term of such
grants. The vesting provisions provide for vesting of options over a
period of between two and three years. Following is a summary of
transactions under the Option Plan during the year ended October 31,
1996, the eleven months ended September 30, 1997 and the year ended
September 30, 1998:
STOCK WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
------- --------------
Outstanding - October 31, 1995 ($1.25 to $8.75 per share) 852 $4.93
Granted during 1996 ($8.88 to $10.00 per share) 70 9.20
Exercised during 1996 ($1.25 to $7.88 per share) (159) 4.92
Canceled during 1996 ($3.18 to $8.75 per share) (14) 7.66
-----
Outstanding - October 31, 1996 ($1.25 to $10.00 per share) 749 5.29
Granted during 1997 ($7.25 to $12.00 per share) 893 7.38
Exercised during 1997 ($2.78 to $10.00 per share) (282) 4.34
Cancelled during 1997 ($5.50 to $12.00 per share) (76) 9.63
-----
Outstanding - September 30, 1997 ($3.18 to $10.00 per share) 1,284 6.70
Granted during 1998 ($2.63) 515 2.63
Exercised during 1998 ($3.18 to $7.88 per share) (126) 4.21
Cancelled during 1998 ($4.38 to $7.88 per share) (283) 6.32
-----
Outstanding - September 30, 1998 ($2.63 to $10.00 per share) 1,390
=====
Available for future grants 966
=====
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, 1998
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 Directors 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.
Of the 749 options outstanding as of October 31, 1996, 583 were
exercisable (with a weighted average exercise price of $4.47) as of that
date.
Of the 1,284 options outstanding as of September 30, 1997, 472 were
exercisable (with a weighted average exercise price of $5.61) as of that
date.
F-25
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
9. STOCK OPTION PLAN AND WARRANTS (CONTINUED):
A summary of the 1,390 options outstanding as of September 30, 1998 is as
follows:
Weighted
Average Weighted Average Weighted
Exercise Price Remaining Average
Exercise Number of Options Contractual Life Number Exercise Price of
Price Outstanding Outstanding in Years Exercisable Options Exercisable
----- ----------- ----------- -------- ----------- -------------------
$ 2.63 515 $2.63 4.9 175 $2.63
4.38 45 4.38 0.1 45 4.38
5.50 5 5.50 0.6 5 5.50
6.38 3 6.38 3 6.38
7.25 739 7.25 3.4 337 7.25
7.88 70 7.88 1.6 70 7.88
8.75 3 8.75 3 8.75
10.00 10 10.00 7 10.00
----- ---
2.63 to 10.00 1,390 5.49 3.8 645 5.88
===== ===
The Company has adopted the disclosure-only provisions of SFAS No. 123
"Accounting for Stock-Based Compensation." In accordance with SFAS No.
123, the Company continues to apply APB No. 25 and related
Interpretations to account for stock-based compensation using the
intrinsic value method for its stock option plans and, accordingly, does
not recognize compensation expense. If the Company had elected to
recognize compensation expense based on the fair value of the options at
grant date as prescribed by SFAS No. 123, net income and earnings per
share would have been reduced to the pro forma amounts indicated in the
table below:
ELEVEN MONTHS
YEAR ENDED ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, OCTOBER 31,
1998 1997 1996
---- ---- ----
Net income (loss) - as reported $1,153 $(32,735) $583
Net income (loss) - pro forma 113 (33,731) 447
Basic earnings (loss) per share - as reported 0.07 (2.56) 0.08
Basic earnings (loss) per share - pro forma 0.01 (2.64) 0.06
Diluted earnings (loss) per share - as reported 0.07 (2.56) 0.07
Diluted earnings (loss) per share - pro forma 0.01 (2.64) 0.06
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:
1998 1997 1996
---- ---- ----
Expected life (years) 4 4 4
Risk-free interest rate 5.5% 6.0% 6.0%
Volatility 55.9% 52.5% 52.5%
Expected dividend yield 0% 0% 0%
F-26
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
9. STOCK OPTION PLAN AND WARRANTS (CONTINUED):
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
Option Plan to purchase 500 shares of common stock at an exercise price
of $11.375 per share. Such options were repriced on August 13, 1997 to an
exercise price of $7.25 per share which represented the fair value at
that date.
In connection with the initial public offering, the Company issued
warrants to purchase 1,600 common shares. The warrants were exercisable
at $6.294 (reduced from $6.50 in accordance with an anti-dilution clause
in the agreement) per share and expired on December 8, 1997. During 1994,
the Company repurchased 500 of the public warrants, 250 for $1.25 per
warrant and 250 at $1.3125 per warrant in open market purchases. During
the eleven months ended September 30, 1997, 7 warrants were exercised for
$44 and prior to their expiration an additional 960 warrants were
exercised for an aggregate of $6,041 in fiscal 1998.
10. 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 $491 in fiscal 1998. The contracts expire between
December 1998 and August 1999 and contain customary termination and
non-compete provisions. One of the contracts, which amounts to $85 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. One of these leases provides for renewal
options extending to the year 2005.
F-27
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED):
Future minimum non-cancelable lease payments at September 30, 1998 are as
follows:
1999 $ 1,865
2000 1,731
2001 1,579
2002 1,242
2003 889
Thereafter 3,363
-------
$10,669
=======
Total rental expense for the year ended September 30, 1998, eleven months
ended September 30, 1997 and the year ended October 31, 1996 amounted to
$2,320, $1,848 and $1,645, respectively.
On April 13, 1998, a shareholder of the Company, purporting to sue
derivatively on behalf of the Company, commenced a derivative suit in the
Supreme Court of the State of New York, County of New York, entitled
Kevin Mak, derivatively and on behalf of Transworld Healthcare, Inc.,
Plaintiff, vs. Timothy Aitken, Scott A. Shay, Lewis S. Ranieri, Wayne
Palladino and Hyperion Partners II L.P., Defendants, and Transworld
Healthcare, Inc., Nominal Defendant, Index No. 98-106401. The suit
alleges that certain officers and directors of the Company, and HPII,
breached fiduciary duties to the Company and its shareholders, in
connection with a transaction, approved by a vote of the Company's
shareholders on March 17, 1998, in which the Company was to issue certain
shares of stock to HPII in exchange for the HMI Payables (Note 6). The
action seeks injunctive relief against this transaction, and damages,
costs and attorneys' fees in unspecified amounts. The transaction
subsequently closed and the plaintiff has stipulated to extend the
defendants' time to respond to this suit until December 21, 1998.
The Company was served with a complaint (the "Complaint") on February 12,
1998, in an action (the "Action") entitled Primary Health Services, Inc.,
Chuck Davis and Gregory Gaiser v. Transworld Acquisition Corp.,
Transworld Healthcare, Inc., The PromptCare Companies, Inc. and Hyperion
Partners II LP, Index No. 606/95/97, Supreme Court of the State of New
York, County of New York. The Action commenced on December 4, 1997, with
the filing of a Summons with Notice of Complaint against the Company,
Transworld Acquisition Corp. ("Acquisition") and Hyperion Partners L.P.
The complaint contained, among other claims, a claim of breach of
contract against the Company, Acquisition and The PromptCare Companies,
Inc. for breach of an asset purchase agreement among Acquisition and the
plaintiffs, breach of a management agreement against the Company,
interference with prospective business relations and fraud. The Action
sought compensatory damages of $3,275 and punitive damages of $5,000. On
July 6, 1998, the Company settled the lawsuit for payment of $93 in
exchange for a full release of all claims from the plaintiffs and the
action has been dismissed with prejudice.
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 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
F-28
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED):
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, 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.
In addition to the above allegations, during the normal course of
business the Company continues to carefully monitor and review its
submission of Medicare, Medicaid and all other claims for reimbursement.
The Company believes that it is substantially in compliance, in all
material respects, with the applicable provisions of the Federal
statutes, regulations and laws and applicable state laws. Because of the
broad and sometimes vague nature of these laws, there can be no assurance
that an enforcement action will not be brought against the Company, or
that the Company will not be found to be in violation of one or more of
these provisions. At present, the Company cannot anticipate what impact,
if any, subsequent administrative or judicial interpretation of the
applicable Federal and state laws may have on the Company's consolidated
financial position, results of operations or cash flows.
Effective October 1, 1997, HMI became a wholly-owned subsidiary of the
Company.
Certain of HMI's current and former officers and directors were named as
defendants, and HMI was 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 alleged 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. A Stipulation
and Order of Voluntary Dismissal with Prejudice of this action was filed
on February 7, 1998.
BDO Seidman, LLP was named as a defendant, and HMI was 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
F-29
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED):
Seidman, LLP was HMI's auditor at the time those filings were made. A
stipulation providing for the discontinuation of this action with
prejudice was entered into between the parties on November 24, 1997.
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. The plaintiffs responded to this motion on
February 20, 1998 and the defendants served a reply brief on March 30,
1998. Oral argument on this motion was held on November 13, 1998. The
court denied defendants' motion to dismiss on November 13, 1998 and
directed the parties to mediate in an attempt to settle the action. A
stipulation was filed on November 23, 1998, extending defendants' time to
serve and file their answer to this action until December 18, 1998.
On July 2, 1998, a former shareholder of HMI purporting to sue on behalf
of a class of shareholders of HMI as of June 6, 1997, commenced a suit in
the Delaware Chancery Court, New Castle County, entitled Kathleen S.
O'Reilly v. Transworld HealthCare, Inc., W. James Nicol, Andre C.
Dimitriadis, Dr. Timothy J. Triche and D. Mark Weinberg, Civil Action No.
16507-NC. The suit alleges that the Company, as majority shareholder of
HMI, and the then-directors of HMI, breached fiduciary duties to the
minority shareholders of HMI by approving a merger between HMI and a
subsidiary of the Company for allegedly inadequate consideration. The
suit seeks an accounting, damages, attorney's fees and other expenses,
all in unspecified amounts. The defendants filed a motion to dismiss this
action on September 18, 1998. The plaintiffs filed a response to this
motion on November 6, 1998. The defendants' reply brief is due on
December 16, 1998.
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. HMI filed its answer to that suit on December 23,
1997. The plaintiff in the suit subsequently moved for partial summary
judgement seeking advancements of fees in the amount of $824; the court
granted that motion on March 18, 1998, and granted a preliminary
injunction directing HMI to make that payment by March 20, 1998. On March
20, HMI informed the court that it had no unencumbered assets from which
to make such a payment. On April 3, 1998, the court appointed a receiver
for HMI to determine if HMI is capable of complying with that order. In
addition, a former director of HMI through her attorneys has demanded
advancement of legal fees
F-30
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED):
and expenses in the amount of $150.
On January 29, 1998, certain shareholders of HMI, who alleged that they
had dissented from the merger of HMI with a subsidiary of the Company,
commenced an action in the Chancery Court of the State of Delaware for
New Castle County, entitled Lawrence E. Steinberg et al. v. Health
Management, Inc., C.A. No. 16166, seeking appraisal of the value of their
HMI shares. HMI filed an answer in that action, contending, among other
things, that certain of the named plaintiffs had failed to timely demand
such appraisal rights. Those plaintiffs subsequently requested that the
court dismiss the action as to them and instead order that their shares
of HMI be converted into the right to receive the $.30 per share merger
consideration. The court granted that order on May 5, 1998, dismissing
the appraisal action as to those plaintiffs, and directing that the
action would be dismissed in its entirety on August 6, 1998 unless
another dissenting shareholder assumed the prosecution of the action.
Subsequently, no shareholder assumed such prosecution and the case has
been dismissed pursuant to the court's May 5, 1998 order.
The enforcement division of the Securities and Exchange Commission (the
"Commission") has issued a formal order of investigation relating to
matters arising out of HMI's public announcement on February 27, 1996
that HMI would have to restate its financial statements for prior periods
as a result of certain accounting irregularities. HMI is fully
cooperating with this investigation and has responded to the requests of
the Commission for documentary evidence.
The outcomes of certain of the foregoing lawsuits and the investigation
with respect to HMI are uncertain and the ultimate outcomes could have a
material adverse affect on the Company.
The Company is involved in various other legal proceedings and claims
incidental to its normal business activities. The Company is vigorously
defending its position in all such proceedings. Management believes these
matters should not have a material adverse impact on the financial
condition, cash flows, or results of operations.
F-31
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
11. OPERATIONS BY GEOGRAPHIC AREAS:
The following table presents certain financial information by geographic
areas of operations for the year ended September 30, 1998 and eleven
months ended September 30, 1997. Prior to fiscal 1997 the Company did not
operate outside the U.S.
YEAR ENDED SEPTEMBER 30, 1998
------------------------------------------
U.S. U.K. TOTAL
-------- -------- --------
Revenues $ 69,630 $ 85,679 $155,309
======== ======== ========
Operating profit (Note 7) $ 6,237 $ 6,986 $ 13,223
======== ========
General corporate expenses (4,575)
--------
Operating income 8,648
Interest expense, net (5,651)
--------
Income before income taxes $ 2,997
========
Identifiable assets, September 30, 1998 $ 47,740 $115,442 $163,182
======== ========
Corporate assets 17,596
--------
Total assets at September 30, 1998 $180,778
========
ELEVEN MONTHS ENDED SEPTEMBER 30, 1997
------------------------------------------
U.S. U.K. TOTAL
-------- -------- --------
Revenues $ 73,597 $ 19,847 $ 93,444
======== ======== ========
Operating (loss) profit (Note 7) $(12,790) $ 1,775 $(11,015)
======== ========
General corporate expenses (24,385)
--------
Operating loss (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
========
F-32
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
12. 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
had been and will be in the form of its common stock through December 31,
1998 and will be in cash thereafter. The Company's contributions to the
plan were $27, $54 and $8 for the year ended December 31, 1997, 1996 and
1995 respectively.
In addition to the U.S. plan described above, the Company also sponsors
personal pension plans at selected UK subsidiaries. The plans operate as
salary reduction plans, which also allows for lump sum contributions,
whereby participants contribute anywhere from 1% to 40% of their
compensation, not to exceed the maximum available under the U.K. tax
laws.
The Company may make an additional contribution (which varies according
to employee contracts and contribution elections) which is in the form of
cash. The Company's contributions to the U.K. plans were $43 for the year
ended September 30, 1998 and $8 for the eleven months ended September 30,
1997.
F-33
TRANSWORLD HEALTHCARE, INC.
QUARTERLY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
The following table presents the comparative quarterly results for the
year ended September 30, 1998 and the eleven months ended September 30,
1997:
1998 quarter ended December 31, March 31, June 30, September 30, Total
------------------ ------------ --------- -------- ------------- -----
Total revenues $ 37,805 $ 37,323 $ 39,861 $ 40,320 $155,309
======== ======== ======== ======== ========
Gross profit $ 14,279 $ 13,225 $ 15,078 $ 15,535 $ 58,117
======== ======== ======== ======== ========
Net income (loss) $ 347 $ (595) $ 271 $ 1,130 $ 1,153
======== ======== ======== ======== ========
Basic net income (loss) per share of
common stock (1) $ 0.02 $ (0.03) $ 0.02 $ 0.06 $ 0.07
======== ======== ======== ======== ========
Diluted net income (loss) per share of
common stock (1) $ 0.02 $ (0.03) $ 0.02 $ 0.06 $ 0.07
======== ======== ======== ======== ========
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)
======== ======== ======== ======== ========
Basic net income (loss) per
share of common stock(1)(2) $ 0.11 $ 0.02 $ (1.97) $ (0.24) $ (2.56)
======== ======== ======== ======== ========
Diluted net income (loss)
per share of common stock (1)(2) $ 0.10 $ 0.02 $ (1.97) $ (0.24) $ (2.56)
======== ======== ======== ======== ========
(1) The sum of the per share amounts for the quarters does not necessarily
equal that of the year because computations are made independently.
(2) Weighted average shares have been restated for the quarter ended
September 30, 1997 to reflect the provisions of SFAS No. 128. There was
no effect on earnings per share.
F-34
TRANSWORLD HEALTHCARE, INC.
(IN THOUSANDS)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
- ------------------------ ------------ ---------------------- ------------ ------------
Additions Charged to
----------------------
Balance at Balance at
Beginning Cost and Other End of
Description of Period Expenses Accounts Deductions Period
- ------------------------ ------------ ---------- ---------- ------------ ------------
Allowance for doubtful
accounts:
Year ended $11,909 $ 8,318 $ 23(B) $4,883(A) $15,367
September 30, 1998
Eleven months ended 5,471 13,071 155(B) 6,788(A) 11,909
September 30, 1997
Year ended 5,137 6,394 70(B) 6,130(A) 5,471
October 31, 1996
(A) Doubtful accounts written off, net of recoveries, sold and amounts
related to acquisitions.
(B) Assumed in acquisitions and adjustments arising from translation of
foreign financial statements to U.S. dollars.
S-1