<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED
MARCH 31, 2000
COMMISSION FILE NUMBER 1-11570
-------------------------------------------------------------
TRANSWORLD HEALTHCARE, INC.
(Exact name of Registrant as specified in its charter)
NEW YORK 13-3098275
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
555 MADISON AVENUE, NEW YORK, NEW YORK 10022
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 750-0064
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 10, 2000
Common Stock 17,551,076 Shares
<PAGE>
TRANSWORLD HEALTHCARE, INC.
SECOND QUARTER REPORT ON FORM 10-Q
TABLE OF CONTENTS
-----------------
PART I
Item 1. Financial Statements (Unaudited).......................................3
Condensed Consolidated Balance Sheets - March 31, 2000 and
September 30, 1999...................................................4
Condensed Consolidated Statement of Operations - For the Three and
Six Months Ended March 31, 2000 and March 31, 1999...................5
Condensed Consolidated Statement of Cash Flows - For the Six Months
Ended March 31, 2000 and March 31, 1999..............................6
Notes to Condensed Consolidated Financial Statements...................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................18
Item 3. Quantitative and Qualitative Disclosures about Market Risk............32
PART II
Item 6. Exhibits and Reports on Form 8-K......................................33
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. This Quarterly 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 Quarterly 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.
Page 2
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED).
The consolidated financial statements of Transworld Healthcare, Inc. (the
"Company") begin on page 4.
Page 3
<PAGE>
TRANSWORLD HEALTHCARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
2000 1999
----------- ----------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 40,551 $ 5,158
Accounts receivable, less allowance for doubtful
accounts of $18,949 and $19,870, respectively 29,251 30,814
Inventories 2,835 2,929
Deferred income taxes 7,883 6,930
Prepaid expenses and other assets 5,359 4,735
----------- ----------
Total current assets 85,879 50,566
Property and equipment, net 9,540 9,929
Intangible assets, net of accumulated amortization of
$11,467 and $9,798, respectively 102,589 103,248
Deferred income taxes 6,173 6,173
Other assets 5,767 2,205
----------- ----------
Total assets $ 209,948 $ 172,121
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 4,157 $ 1,364
Accounts payable 4,885 5,058
Accrued expenses 13,541 14,899
Income taxes payable 4,131 3,240
----------- ----------
Total current liabilities 26,714 24,561
Long-term debt 55,690 54,407
Notes payable 35,568
Deferred income taxes and other 1,904 1,879
----------- ----------
Total liabilities 119,876 80,847
----------- ----------
Commitments and contingencies (Note 7)
Stockholders' equity:
Preferred stock, $.01 par value; authorized
2,000 shares, issued and outstanding - none
Common stock, $.01 par value; authorized
40,000 shares, issued and outstanding 17,551 176 176
Additional paid-in capital 128,070 125,526
Accumulated other comprehensive loss (3,340) (405)
Retained deficit (34,834) (34,023)
----------- ----------
Total stockholders' equity 90,072 91,274
----------- ----------
Total liabilities and stockholders' equity $ 209,948 $ 172,121
=========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
Page 4
<PAGE>
TRANSWORLD HEALTHCARE, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ -----------------------
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Net patient services $23,371 $20,021 $23,371 $37,926
Net respiratory, medical equipment and supplies sales 14,359 16,654 22,997 36,380
Net infusion services 2,978 2,276 5,775 4,699
------- ------- ------- -------
Total revenues 40,708 38,951 52,143 79,005
------- ------- ------- -------
Cost of revenues:
Patient services 15,720 13,541 15,720 26,006
Respiratory, medical equipment and supplies sales 8,434 9,808 12,530 20,634
Infusion services 2,106 1,871 4,177 3,688
------- ------- ------- -------
Total cost of revenues 26,260 25,220 32,427 50,328
------- ------- ------- -------
Gross profit 14,448 13,731 19,716 28,677
Selling, general and administrative expenses 12,960 13,356 19,092 26,959
------- ------- ------- -------
Operating income 1,488 375 624 1,718
Interest income (558) (73) (599) (142)
Interest expense 1,778 1,328 2,956 2,729
------- ------- ------- -------
Income (loss) before income taxes, equity
income and extraordinary loss 268 (880) (1,733) (869)
Provision (benefit) for income taxes 167 74 (488) 81
Equity in income of and interest income earned
from U.K. subsidiaries (Note 2) 1,193
------- ------- ------- -------
Income (loss) before extraordinary loss 101 (954) (52) (950)
Extraordinary loss on early extinguishment of debt
(net of income tax benefit of $408) (759)
------- ------- ------- -------
Net income (loss) $ 101 $ (954) $ (811) $ (950)
======= ======== ======= =======
Income (loss) per share of common stock before extraordinary loss:
Basic $ 0.01 $ (0.05) $ - $ (0.05)
======= ======== ======= =======
Diluted $ 0.01 $ (0.05) $ - $ (0.05)
======= ======== ======= =======
Net income (loss) per share of common stock:
Basic $ 0.01 $ (0.05) $ (0.05) $ (0.05)
======= ======== ======= =======
Diluted $ 0.01 $ (0.05) $ (0.05) $ (0.05)
======= ======== ======= =======
Weighted average number of common shares outstanding:
Basic 17,551 17,549 17,551 17,543
======= ======== ======= =======
Diluted 17,592 17,549 17,551 17,543
======= ======== ======= =======
</TABLE>
See notes to condensed consolidated financial statements.
Page 5
<PAGE>
TRANSWORLD HEALTHCARE, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------
MARCH 31, MARCH 31,
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (811) $ (950)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 1,984 2,857
Amortization of debt discount, financing fees and issuance
costs 416 556
Provision for doubtful accounts 3,156 3,710
Interest in kind 144
Deferred income taxes (953)
Equity in income of U.K. subsidiaries (411)
Extraordinary loss on early extinguishment of debt 1,167
Changes in assets and liabilities excluding the effect of businesses
acquired and sold:
Increase in accounts receivable (2,943) (5,886)
Decrease in inventories 546 432
Decrease (increase) in prepaid expenses and other assets 182 (1,521)
Increase in accounts payable and other liabilities 259 3,519
--------- ---------
Net cash provided by operating activities 2,736 2,717
--------- ---------
Cash flows from investing activities:
Capital expenditures (443) (1,520)
Notes receivable from U.K. subsidiaries - payments received 58,983
Advances to U.K. subsidiaries (304)
Repayment of advances to U.K. subsidiaries 8,390
Payments for acquisitions - net of cash acquired (502) (2,560)
Payments on acquisition payable (132)
Other, net 42
--------- ---------
Net cash provided by (used in) investing activities 66,124 (4,170)
--------- ---------
Cash flows from financing activities:
Proceeds from notes payable 2,083
Payments on long-term debt (55,761) (64)
Borrowing under revolving loan 809
Payments on revolving loan (5,307) (1,500)
Payments for financing fees and issuance costs (2,952) (18)
Stock options exercised 66
--------- ---------
Net cash used in financing activities (61,128) (1,516)
--------- ---------
Effect of exchange rate on cash (335) (394)
Decrease in cash due to deconsolidation of U.K. subsidiaries (2,598)
Increase in cash due to reconsolidation of U.K. subsidiaries 30,594
--------- ---------
Increase (decrease) in cash 35,393 (3,363)
Cash and cash equivalents, beginning of period 5,158 10,413
--------- ---------
Cash and cash equivalents, end of period $ 40,551 $ 7,050
========= =========
Supplemental cash flow information:
Cash paid for interest $ 2,718 $ 2,090
========= =========
Cash paid for income taxes, net $ 394 $ 172
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
Page 6
<PAGE>
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
1. BASIS OF PRESENTATION:
Transworld Healthcare, Inc. (the "Company") is a provider of a broad range
of health care services and products with operations in the United Kingdom
("U.K.") and the United States ("U.S."). The Company provides the following
services and products: (i) patient services, including nursing and
para-professional services; (ii) specialty mail-order pharmaceuticals,
medical supplies, respiratory therapy and home medical equipment; and (iii)
infusion therapy.
The Condensed Consolidated Financial Statements presented herein are
unaudited and include all adjustments (consisting of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of the financial position and results of operations of the
interim period pursuant to the rules and regulations of the Securities and
Exchange Commission (the "Commission"). Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the U.S. have been
condensed or omitted. These condensed financial statements should be read in
conjunction with the Company's Form 10-K for the year ended September 30,
1999.
2. PRINCIPLES OF CONSOLIDATION:
On December 20, 1999, the Company's U.K. subsidiaries obtained new financing
(the "Refinancing") denominated in pounds sterling, which aggregated
approximately $125,700 at December 31, 1999. Concurrent with the
Refinancing, specifically relating to the senior subordinated notes (the
"Notes"), the Company placed 100% of its ownership interest in Transworld
Healthcare (UK) Limited ("TW UK") into a voting trust (the "Voting Trust").
As a result of the establishment of the Voting Trust, the Company would
initially own 100% of the outstanding voting certificates. The term of the
Voting Trust is 20 years. The Voting Trust agreement stipulates that the
composition of the board of directors of TW UK will consist of one person
designated by the Company, one person appointed by the purchasers of the
Notes, one representative of TW UK management (currently the Chairman and
Chief Executive Officer of the Company) and two independent directors. The
board of directors of TW UK will then vote on substantially all matters
regarding its operations. G. Richard Green, a director of the Company, is
the trustee of the Voting Trust.
As a result of the provisions of the Voting Trust discussed above, the
Company controlled only 50% of the board of directors and the holders of the
Notes (the "Investors") have the right to approve or veto the annual budget
and financial forecast of results of operations and sources and uses of cash
and any material deviation from such approved budget. Since the Company did
not hold a majority interest of the board of directors and the Investors
held substantive rights, principally in the form of their ability to approve
the annual budget and financial forecast of results of operations and
sources and uses of cash, it was no longer able to consolidate the U.K.
subsidiaries into its financial statements although it owns 100% of the
outstanding shares of the stock of the parent company, Transworld Holdings
(UK) Limited ("UK Parent"), as of December 31, 1999. Therefore, effective
with the Refinancing, the Company began accounting for the investment in UK
Parent and its subsidiaries under the equity method, retroactive to October
1, 1999. Under the equity method of
Page 7
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TRANSWORLD HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
2. PRINCIPLES OF CONSOLIDATION (CONTINUED):
accounting, the investment is carried at the cost of the acquisition, plus
additional investments made by the Company and the Company's undistributed
income or losses of the investment less any amounts being distributed since
acquisition. Reserves are provided where management determines that the
investment or equity in earnings is not realizable.
During the second quarter of fiscal 2000 UK Parent and TW UK have amended
their Articles of Association to give the Chairman (a Company designee) the
right to resolve any tie votes of the board of directors and certain
documents covering the Notes were amended to eliminate the requirement that
the Investors approve the operating budget. These amendments enabled the
Company to consolidate the U.K. subsidiaries for the second quarter ended
March 31, 2000.
The table below presents pro forma condensed consolidated financial
information of the Company for the six months ended March 31, 2000 for the
statement of operations data as if the U.K. subsidiaries had been
consolidated for the entire six months ended March 31, 2000.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS DATA
-------------------------------------------------------------
SIX MONTHS ENDED MARCH 31, 2000
Net revenues $ 80,990
Gross profit 28,709
Operating income 3,066
Interest income (659)
Interest expense 3,172
Provision for income taxes 605
Net loss (811)
3. EARNINGS PER SHARE:
Basic earnings per share ("EPS") is computed using the weighted average
number of common shares outstanding. Diluted EPS is computed using the
weighted average number of common shares outstanding and dilutive stock
options and warrants using the treasury stock method. For the six months
ended March 31, 2000, the Company had an incremental weighted average of 20
options and warrants which are not included in the diluted calculation as
the effect of such inclusion would be antidilutive due to a net loss
position. For the three and six months ended March 31, 1999, the Company had
an incremental weighted average of 169 and 179, respectively, of options and
warrants which are not included in the diluted calculation as the effect of
such inclusion would be antidilutive due to a net loss position. At March
31, 2000 and 1999, the Company had outstanding stock options and warrants to
purchase 3,667 and 3,816 shares, respectively, of common stock ranging in
price from $4.31 to $12.45 per share, for both periods, 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.
Page 8
<PAGE>
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
3. EARNINGS PER SHARE (CONTINUED):
The weighted average number of shares used in the basic and diluted EPS
computations for the three and six months ended March 31, 2000 and 1999 are
as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
--------------------- ---------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Weighted average number of common shares outstanding
as used in computation of basic EPS of common stock 17,551 17,549 17,551 17,543
Incremental shares of stock options and warrants,
after application of treasury stock method 41
------- ------- ------- -------
Shares used in computation of diluted EPS of common stock 17,592 17,549 17,551 17,543
======= ======= ======= =======
</TABLE>
4. COMPREHENSIVE LOSS:
Components of comprehensive loss include net income (loss) and all other
non-owner changes in equity, such as the change in the cumulative
translation adjustment, unrealized gains and losses on investments available
for sale and minimum pension liability. Currency translation is the only
item of other comprehensive loss impacting the Company. The following table
displays comprehensive loss for the three and six months ended March 31,
2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
---------------------------- -----------------------------
2000 1999 2000 1999
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Net income (loss) $ 101 $ (954) $ (811) $ (950)
Change in cumulative translation
adjustment (474) (3,232) (2,935) (5,451)
------- --------- --------- --------
Comprehensive loss $ (373) $ (4,186) $ (3,746) $ (6,401)
======= ========= ========= ========
</TABLE>
5. DEBT:
On December 20, 1999, the Company's U.K. subsidiaries obtained the
Refinancing denominated in pounds sterling, which aggregates approximately
$124,281 at March 31, 2000 as follows:
<TABLE>
<CAPTION>
FINAL
FACILITY TOTAL OUTSTANDING INTEREST RATE MATURITY
--------- ---------- ------------ ----------------- -------------
<S> <C> <C> <C> <C>
SENIOR CREDIT FACILITIES:
Term loan $ 44,685 $ 44,685 LIBOR + 2% Dec. 17, 2005
Acquisition loan 19,949 1,493 LIBOR + 2.75% Dec. 17, 2006
Working capital facility 7,979 LIBOR + 2% Dec. 17, 2005
---------- ------------
Total senior credit facilities 72,613 46,178
MEZZANINE TERM LOAN 16,101 13,660 (1) LIBOR + 7% Dec. 17, 2007
NOTES WITH WARRANTS 35,567 35,567 9.375% Dec. 17, 2008
------------
==========
TOTAL REFINANCING $ 124,281 95,405
==========
LESS, CURRENT MATURITIES 4,152
------------
$ 91,253
============
</TABLE>
-------------------------------
1) Net of unamortized discount of $2,441.
Page 9
<PAGE>
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
5. DEBT (CONTINUED):
The mezzanine lenders and the Investors were also issued warrants to
purchase approximately 2% and 27%, respectively, of the fully diluted shares
of TW UK. The exercise price of the warrants issued to the Investors (the
"Warrants") shall equal the entire principal amount of the Notes for all
Warrants in the aggregate and must be paid through the tender of Notes to TW
UK. The warrants issued to the mezzanine lenders (the "Mezzanine Warrants")
are detachable and can be exercised at any time without condition for an
aggregate exercise price of approximately $131. The fair value of the
Mezzanine Warrants ($2,562) issued to the mezzanine lenders has been
recorded as a discount to the mezzanine term loan and is being amortized
over the term of the loan using the interest method.
The Investors have the right, at their option, to require UK Parent to
redeem all or any portion of the Notes under certain circumstances and in
accordance with the terms of the documents covering the Notes. The
redemption price of the Notes shall be equal to the principal amount of the
Notes, plus all accrued and unpaid interest.
The Investors will have the right, at their option, to require UK Parent to
purchase all or any portion of the Warrants or the shares issued upon
exercise of the Warrants (the "Warrant Shares") under certain circumstances
and in accordance with the terms of the documents covering the Notes. The
purchase price of the Warrants shall be equal to the difference, if a
positive number, between (i) the fair market value of the Warrant Shares
which the Investors have the right to acquire upon exercise of such Warrants
and (ii) the exercise price of such Warrants. The purchase price of the
Warrant Shares shall be equal to the fair market value of such Warrant
Shares.
Of the $124,281 net proceeds of the Refinancing, $55,755 was used to repay
the Company's existing senior indebtedness (the "Credit Facility"), $11,617
was provided to the Company for general corporate purposes in the U.S., with
the balance to be used for acquisitions and working capital in the U.K.
Repayment of the loans under the senior credit facilities commences on July
30, 2000 and continues until final maturity. The acquisition loan may be
drawn upon through December 17, 2002. As of March 31, 2000, borrowings under
the senior credit facilities bore interest at a rate of 8.08% to 8.83%. The
senior credit facilities contain restrictions, prohibitions and affirmative
and negative financial covenants customarily found in agreements of these
kind.
The loans under the senior credit facilities are collateralized by, among
other things, a lien on substantially all of TW UK's assets, a pledge of TW
UK's ownership interest in its subsidiaries and guaranties by TW UK's
subsidiaries.
With respect to the mezzanine term loan interest, LIBOR + 3.5% will be
payable in cash, with the remaining interest being added to the principal
amount of the loan. The mezzanine term loan contains terms and conditions
substantially similar to those contained in the senior credit facilities. As
of March 31, 2000, borrowings under the mezzanine term loan bore interest at
a rate of 13.08%.
Page 10
<PAGE>
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
5. DEBT (CONTINUED):
Interest payments on the Notes are subject to restrictions contained in the
senior credit facilities which require interest on the Notes to be paid
in-kind through the issuance of additional notes for the first 18 months,
with payment of interest in cash thereafter subject to meeting certain
financial tests. The documents covering the Notes provide for customary
rights for a transaction of this type, including: (i) pre-emptive rights
with respect to new securities; (ii) rights of first refusal with respect to
proposed transfers of shares of TW UK; (iii) drag-along rights; (iv)
tag-along rights; (v) put and call provisions; and (vi) certain corporate
actions which require the consent of the holder of the Notes.
In connection with the repayment of the Credit Facility, the Company
recorded a non-cash, after-tax, extraordinary charge of $759 during the six
months ended March 31, 2000, related to the write-off of the deferred
financing costs associated with the Credit Facility.
6. STOCK INCENTIVE PLAN
In January, 2000, TW UK adopted a management incentive plan (the "UK Plan").
Under the UK Plan, a new class of redeemable shares (having a nominal value
of 0.01p) in the capital of TW UK was created (the "Redeemable Shares").
Pursuant to the UK Plan 9,800 Redeemable Shares are reserved for. Under the
UK Plan the Redeemable shares may be issued at their nominal value and with
an option price set by the board of TW UK (the "Initial Value"). On March 7,
2000, 9,500 Redeemable Shares were issued with an Initial Value of 105p per
share. The redemption rights attached to the Redeemable Shares are
exercisable at any time during the period commencing on the date of a
qualified public offering in the UK and ending 10 years from the date of
issuance. The net effect of the exercise of redemption rights is that the
holder acquires ordinary shares of TW UK at a price per ordinary share equal
to the Initial Value. The Redeemable Shares do not carry any dividend or
income rights and do not carry any right to vote at general meetings of TW
UK. All terms associated with the shares are fixed and the market value of
an ordinary share of TW UK was less than the Initial Value of 105p therefore
no compensation expense is recognized.
7. COMMITMENTS AND CONTINGENCIES:
On August 20, 1999, Transworld Home HealthCare - Nursing Division, Inc.
("TNI") was named a defendant in a suit brought by Teresa Crutcher, in New
Jersey state court, as administrator of the estate of Aaron Pernell, who was
an infant and Teresa Crutcher's son. The claim is for wrongful death of
Aaron Pernell alleged to have been caused by the negligent manner in which a
TNI home care nurse placed him in an infant car seat. The case was settled
on December 27, 1999 for $325 and was paid on December 29, 1999 by the
Company's insurance carrier. Since this settlement was within the policy
limits of the Company's insurance policies it did not have any effect on the
Company's consolidated financial position, cash flows, or results of
operations.
On April 13, 1998, a shareholder of the Company, purporting to sue
derivatively on behalf of the Company, commenced a derivative suit in the
Supreme Court of the State of New York, County of
Page 11
<PAGE>
New York, entitled Kevin Mak, derivatively and on behalf of Transworld
Healthcare, Inc., Plaintiff,
Page 12
<PAGE>
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED):
vs. Timothy Aitken, Scott A. Shay, Lewis S. Ranieri, Wayne Palladino and
Hyperion Partners II L.P., Defendants, and Transworld Healthcare, Inc.,
Nominal Defendant, Index No. 98-106401. The suit alleges that certain
officers and directors of the Company, and Hyperion Partners II L.P.
("HPII"), breached fiduciary duties to the Company and its shareholders, in
connection with a transaction, approved by a vote of the Company's
shareholders on March 17, 1998, in which the Company was to issue certain
shares of stock to HPII in exchange for certain receivables due from Health
Management, Inc. ("HMI"). The action seeks injunctive relief against this
transaction, and damages, costs and attorneys' fees in unspecified amounts.
The transaction subsequently closed and the plaintiff has, on numerous
occasions, stipulated to extend the defendants' time to respond to this
suit. The most recent stipulation provides for an extension to July 7, 2000.
On July 11 and July 22, 1997, the Company's RespiFlow, Inc. ("RespiFlow")
and MK Diabetic Support Services, Inc. ("MK") subsidiaries, respectively,
each received a letter (the "Audit Letters") from the U.S. Department of
Health and Human Services' Office of Audit Services, a division of the
Office of Inspector General ("OIG"). The Company was subsequently informed
that the Audit Letters cover its DermaQuest, Inc. subsidiary. The Company
has produced certain documents and provided related information to the OIG
and to the U.S. Attorney for the Eastern District of Texas regarding these
subsidiaries' financial relationships with suppliers of durable medical
equipment and various other practices including the subsidiaries' practices
regarding the collection of coinsurance and deductible amounts due from
Medicare beneficiaries. Additionally, on November 19, 1997, the Company was
notified by the U.S. Attorney for the Eastern District of Texas that the
Company, RespiFlow, MK, and various other non-affiliated entities had been
named defendants in a qui tam action under the Federal False Claims Act. The
qui tam action was recently partially unsealed and a copy of the complaint
was provided to the Company. The relator is a private party who has brought
action on behalf of the Federal government. At present, the Company has
entered into settlement discussions with the Department of Justice ("DOJ")
and the OIG in an effort to bring closure to this matter and to avoid the
expense, disruption and uncertainty of litigation. The counsel for the
relator has been involved in these settlement discussions as well. At
present, the Company is not able to determine when a final settlement will
be reached with the DOJ, the OIG and the relator or whether any proposed
settlement can be concluded on terms acceptable to the Company. Accordingly,
the Company is unable to estimate what the potential loss might be at this
time. In the event that these settlement discussions are unsuccessful, the
Company will defend vigorously its interest in these matters. As such, the
Company cannot predict whether the outcome of these actions will have a
material adverse effect on the Company's consolidated financial position,
cash flows or results of operations.
Some of the Company's subsidiaries are Medicare Part B suppliers who submit
claims to the designated carrier who is the government's claims processing
administrator. From time to time, the carrier may request an audit of
Medicare Part B claims on a prepayment or postpayment basis. Some of the
Company's subsidiaries currently have pending such audits. If the outcome of
any audit results in a denial or a finding of an overpayment, then the
affected subsidiary has appeal rights. Some of the subsidiaries currently
are responding to these audits and pursuing appeal rights in certain
Page 13
<PAGE>
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED):
circumstances. One such audit of a sample of claims, for which appeal rights
are being asserted, has resulted in an overpayment determination of
$418. The Company believes that the submission of additional documentation
on appeal is likely to result in a substantial reversal of this overpayment
determination.
In addition to the above allegations, during the normal course of business,
the Company continues to carefully monitor and review its submission of
Medicare, Medicaid and all other claims for reimbursement. The Company
believes that it is substantially in compliance, in all material respects,
with the applicable provisions of the Federal statutes, regulations and laws
and applicable state laws. Because of the broad and sometimes vague nature
of these laws, there can be no assurance that an enforcement action will not
be brought against the Company, or that the Company will not be found to be
in violation of one or more of these provisions. At present, the Company
cannot anticipate what impact, if any, subsequent administrative or judicial
interpretation of the applicable Federal and state laws may have on the
Company's consolidated financial position, cash flows or results of
operations.
Effective October 1, 1997, the Company owned 100% of the stock of HMI.
On July 2, 1998, a former shareholder of HMI purporting to sue on behalf of
a class of shareholders of HMI as of June 6, 1997, commenced a suit in the
Delaware Chancery Court, New Castle County, entitled Kathleen S. O'Reilly v.
Transworld HealthCare, Inc., W. James Nicol, Andre C. Dimitriadis, Dr.
Timothy J. Triche and D. Mark Weinberg, Civil Action No. 16507-NC. Plaintiff
alleged that the Company, as majority shareholder of HMI, and the then
directors of HMI, breached fiduciary duties to the minority shareholders of
HMI by approving a merger between HMI and a subsidiary of the Company for
inadequate consideration. Plaintiff demands an accounting, damages,
attorneys' fees and other payment for other expenses for unspecified
amounts. The defendants filed a motion to dismiss this action on September
18, 1998. The Court denied defendants' motion in part and granted the motion
in part, leaving intact certain claims. Plaintiff has propounded discovery
requests. The Company's insurer disclaims coverage as to the Company,
however, the insurer for the Company's HMI subsidiary has accepted coverage
for the individual defendant former HMI directors. The Company believes that
it does not have liability and will vigorously defend this action. As such,
the Company cannot predict whether the outcome of these actions will have a
material adverse effect on the Company's consolidated financial position,
cash flows or results of operations.
By letter dated December 20, 1999, the Company received formal written
notification of the intent of two plaintiffs to file a civil action in the
Court of Common Pleas of Allegheny County, Pennsylvania against Transworld
Healthcare, Inc., Transworld Home Healthcare, Inc., Health Management, Inc.
and HMI Pennsylvania, Inc. The two plaintiffs, Irwin Hirsch and Lloyd Myers,
formerly were employees of HMI Pennsylvania, Inc., a subsidiary of the
Company, and had written employment agreements. Myers also served as an
officer of HMI. Based upon their former status as employees and as officers,
both claim entitlement to contractual indemnification from HMI and HMI
Pennsylvania, Inc. for defense costs and settlement of certain claims made
against them. In 1994,
Page 14
<PAGE>
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED):
Hirsch and Myers also sold two retail pharmacies they owned to HMI.
Hirsch and Myers were named as defendants in an action filed in the United
States District Court for the Eastern District of New York entitled In re
Health Management, Inc. Securities Litigation, Master File No. 96 Civ. 0889
(ADS), which was a class action by shareholders of HMI alleging, among other
claims against the defendants, fraud in connection with the valuation of
certain securities. Hirsch and Myers incurred non-reimbursed legal expenses
of $100 in defending that litigation and, ultimately, settled their
liability jointly for $1,325, which was non-reimbursed. They demand that
defendants reimburse to them their non-reimbursed legal fees and the
settlement amount pursuant to the indemnification provisions of their
employee contracts.
In addition to their indemnification claims, Hirsch and Myers also claim
damages in the amount of $7,000 for losses in connection with the pharmacies
sale transaction they entered into with HMI under which they sold their
retail pharmacies to HMI. Hirsch and Myers claim that the pharmacies sale
transaction was based upon fraudulent misrepresentations by HMI.
The Company and HMI entities will vigorously defend against these claims.
The Company believes that Hirsch and Myers' indemnification claims should
not have any real merit because of testimony given by Hirsch and Myers under
oath in connection with a criminal trial against Clifford Hotte, a director
and former officer of HMI. In their testimony, Hirsch and Myers acknowledged
malfeasance and nonfeasance, which should render their contractual
entitlement to indemnification void. Even if they are entitled to
indemnification despite their acknowledgements, they are liable to
defendants for the economic losses and damages suffered by defendants as a
result of the malfeasance and nonfeasance. Therefore if the civil actions
are filed, the Company and HMI entities will aggressively pursue
counterclaims against Hirsch and Myers for damages which, conservatively,
are far in excess of their claims, including the claims associated with the
pharmacies sale transaction.
The enforcement division of the Commission has issued a formal order of
investigation relating to matters arising out of HMI's public announcement
on February 27, 1996 that HMI would have to restate its financial statements
for prior periods as a result of certain accounting irregularities. HMI is
fully cooperating with this investigation and has responded to the requests
of the Commission for documentary evidence.
The outcomes of certain of the foregoing lawsuits and the investigation with
respect to HMI are uncertain and the ultimate outcomes could have a material
adverse affect on the Company.
The Company is involved in various other legal proceedings and claims
incidental to its normal business activities. The Company is vigorously
defending its position in all such proceedings. Management believes these
matters should not have a material adverse impact on the consolidated
financial position, cash flows or results of operations.
Page 15
<PAGE>
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
8. OPERATIONS BY BUSINESS SEGMENTS AND GEOGRAPHIC AREAS:
During the six months ended March 31, 2000 and 1999, the Company operated in
the following reportable business segments: (i) U.K. operations; (ii) U.S.
specialty mail-order pharmaceuticals and medical supplies ("Mail-Order")
operations; and (iii) U.S. hi-tech ("Hi-Tech") operations. The U.K.
operations derive its revenues from nursing and para-professional services,
mail-order of ostomy, continence and wound care products and oxygen
concentrators and cylinders throughout the U.K. The Mail-Order operations
derive its revenues from mail-order of diabetic test strips and glucose
monitors, respiratory, diabetic, maintenance and other commonly prescribed
medications, as well as ostomy and orthotic products. The Mail-Order
operations provide products to patients in their home nationwide and Puerto
Rico. The Hi-Tech operations derive its revenues from infusion and
respiratory therapy services and home medical equipment operations
concentrated in New Jersey and New York.
The Company uses differences in geographic areas, as well as in products and
services to identify the reportable segments. The Company evaluates
performance and allocates resources based on profit and loss from operations
before corporate expenses, interest and income taxes. Inter segment sales
are not material. The following tables present certain financial information
by reportable business segments and geographic areas of operations for the
six months ended March 31, 2000 and 1999.
<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH 31, 2000
----------------------------------------------------------------
U.K. U.S. U.S. U.S.
OPERATIONS MAIL-ORDER HI-TECH TOTAL TOTAL
------------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Revenues to unaffiliated customers $ 29,604 $ 14,766 $ 7,773 $ 22,539 $ 52,143
========== ========= ========= ========= =========
Segment operating profit (loss) $ 2,754 $ (317) $ 290 $ (27) $ 2,727
========== ========= ========= =========
Corporate expenses (2,104)
Interest expense, net (2,356)
---------
Loss before income taxes, equity income
and extraordinary loss $ (1,733)
=========
Identifiable assets, March 31, 2000 $ 148,251 $ 26,571 $ 10,685 $ 37,256 $ 185,507
========== ========= ========= =========
Corporate assets 24,441
---------
Total assets, March 31, 2000 $ 209,948
=========
<CAPTION>
SIX MONTHS ENDED MARCH 31, 1999
----------------------------------------------------------------
U.K. U.S. U.S. U.S.
OPERATIONS MAIL-ORDER HI-TECH TOTAL TOTAL
------------- ----------- ----------- ----------- --------------
Revenues to unaffiliated customers $ 50,368 $ 21,925 $ 6,712 $ 28,637 $ 79,005
========== ========= ========= ========= =========
Segment operating profit (loss) $ 4,614 $ (528) $ (658) $ (1,186) $ 3,428
========== ========= ========= =========
Corporate expenses (1,710)
Interest expense, net (2,587)
---------
Loss before income taxes $ (869)
=========
</TABLE>
Page 16
<PAGE>
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
8. OPERATIONS BY BUSINESS SEGMENTS AND GEOGRAPHIC AREAS (CONTINUED):
The following tables present certain financial information by reportable
business segments and geographic areas of operations pro forma for the six
months ended March 31, 2000 as if the U.K. subsidiaries had been
consolidated for the entire six months ended March 31, 2000.
<TABLE>
<CAPTION>
PRO FORMA SIX MONTHS ENDED MARCH 31, 2000
----------------------------------------------------------------
U.K. U.S. U.S. U.S.
OPERATIONS MAIL-ORDER HI-TECH TOTAL TOTAL
------------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Revenues to unaffiliated customers $ 58,451 $ 14,766 $ 7,773 $ 22,539 $ 80,990
========== ========= ========= ========= =========
Segment operating profit (loss) $ 4,998 $ (317) $ 290 $ (27) $ 4,971
========== ========= ========= =========
Corporate expenses (1,906)
Interest expense, net (2,512)
---------
Income before income taxes and
extraordinary loss $ 553
=========
</TABLE>
9. SUBSEQUENT EVENT:
On April 6, 2000 TW UK acquired all of the issued and outstanding shares
of Nightingale Nursing Bureau Limited, a London based provider of
registered nursing and care staff to National Health Service Trust
Hospitals and the independent sector, with an additional branch in Sydney,
Australia, for approximately $15,442, plus an additional sum of up to
approximately $5,600 in deferred consideration dependent upon 2000 and
2001 Pre-Tax Profits (as defined in the agreement for sale and purchase).
Approximately $13,762 of the purchase price for the acquisition was paid
using cash on hand and funds borrowed under the senior credit facilities
with the approximate remaining $1,680 of consideration being paid in 1,050
shares of 5 pence par value class A1 common shares of TW UK. The purchase
price of the acquisition is being allocated on the basis of the fair value
of the assets acquired (approximately $2,025) with the remaining portion
attributable to intangible assets. The Company is still evaluating the
allocation of these intangibles.
Page 17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company is a provider of a broad range of health care services and
products with operations in the United Kingdom ("U.K.") and the United
States ("U.S."). The Company provides the following services and products:
(i) patient services, including nursing and para-professional services;
(ii) specialty mail-order pharmaceuticals, medical supplies, respiratory
therapy and home medical equipment; and (iii) infusion therapy. The
Company provides these services and products from the following reportable
business segments: (i) U.K. operations; (ii) U.S. specialty mail-order
pharmaceuticals and medical supplies ("Mail-Order") operations; and (iii)
U.S. hi-tech ("Hi-Tech") operations. The Company's U.K. operations include
the U.K.'s second largest commercial provider of nursing and
para-professional care to the community and U.K. healthcare institutions,
the U.K.'s second largest home respiratory supplier as well as a leading
value-added medical supplies distributor, all with operations located
throughout the U.K. The Company's Mail-Order operations provide products
to patients in their home nationwide and in Puerto Rico while its Hi-Tech
operations are concentrated in New Jersey and New York.
On December 20, 1999, the Company's U.K. subsidiaries obtained new
financing (the "Refinancing"). As a result of the provisions of the Voting
Trust (as defined and described in Liquidity and Capital Resources) the
Company was no longer able to consolidate the U.K. subsidiaries into its
financial statements although it owns 100% of the outstanding shares of
the stock of the parent company, Transworld Holdings (UK) Limited ("UK
Parent"), as of December 31, 1999. Therefore, effective with the
Refinancing, the Company began accounting for the investment in UK Parent
and subsidiaries under the equity method, retroactive to October 1, 1999.
During the second quarter of fiscal 2000 UK Parent and Transworld
Healthcare (UK) Limited ("TW UK") have amended their Articles of
Association to give the Chairman (a Company designee) the right to resolve
any tie votes of the board of directors and certain documents covering the
Notes (as defined and described in Liquidity and Capital Resources) have
been amended to eliminate the requirement that the Investors (as defined
and described in Liquidity and Capital Resources) approve the operating
budget. These amendments have enabled the Company to consolidate the U.K.
subsidiaries as of the second quarter ended March 31, 2000.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 VS. THREE MONTHS ENDED MARCH 31, 1999
Revenues. Total revenues increased by $1,757,000 or 4.5% to $40,708,000
for the three months ended March 31, 2000 from $38,951,000 for the three
months ended March 31, 1999. This increase was primarily attributable to
increased revenues in the Company's U.K. nursing operations ($3,349,000)
as a result of continued expansion and an increase in the number of
patients being serviced. Increases were also experienced in both the U.S.
Hi-Tech operations ($705,000) and the U.K. medical supplies distributor
($376,000) due to increases in the number of patients being serviced.
Partly offsetting these increases were declines in revenue experienced by
the Mail-Order operations ($2,673,000) due to a reduction in the number of
patients serviced.
Cost of Revenues. Total cost of revenues increased by $1,040,000 to
$26,260,000 for the three months ended March 31, 2000 from $25,220,000 for
the three months ended March 31, 1999. Total cost of revenues as a
percentage of revenues for the three months ended March 31, 2000 remained
Page 18
<PAGE>
relatively flat at 64.5% as compared to 64.7% for the three months ended
March 31, 1999. Cost of revenues as a percentage of revenues was also
relatively flat for patient services (67.3% for the three months ended
March 31, 2000 versus 67.6% in the prior period) and respiratory, medical
equipment and supplies sales operations (58.7% for the three months ended
March 31, 2000 versus 58.9% for the prior period). The cost of revenues as
a percentage of revenues decreased for infusion services (70.7% for the
three months ended March 31, 2000 versus 82.2% for the prior period) due
to an increase in infusion therapies in the Hi-Tech operations with lower
product costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by $396,000 or 3.0% to $12,960,000 for
the three months ended March 31, 2000 from $13,356,000 for the three
months ended March 31, 1999. This decrease was primarily due to a overhead
reduction programs in the Company's Mail-Order operations ($1,423,000) and
Hi-Tech operations ($66,000). These decreases were offset by higher levels
of overhead in the U.K. operations due to its continued expansion
($1,098,000).
Interest Income. Interest income increased by $485,000 or 664.4% to
$558,000 for the three months ended March 31, 2000 from $73,000 for the
three months ended March 31, 1999. This increase was attributable to
higher interest income earned on a higher level of funds invested.
Interest Expense. Interest expense increased by $450,000 or 33.9% to
$1,778,000 for the three months ended March 31, 2000 from $1,328,000 for
the three months ended March 31, 1999. This variance was primarily
attributable to a higher level of borrowings combined with a higher
borrowing rate.
Provision for Income Taxes. The Company recorded a provision for income
taxes amounting to $167,000 or 62.3% of income before income taxes for the
three months ended March 31, 2000 versus a provision of $74,000 on a loss
before income taxes of $880,000 in the comparable prior period. The
difference between the 62.3% effective tax rate for the three months ended
March 31, 2000 and the statutory tax rate resulted from non-deductible
expenses, primarily amortization of intangible assets.
Management believes that it is more likely than not that the Company will
generate sufficient levels of taxable income in the future to realize the
$12,340,000 of reported net deferred tax assets comprised of the tax
benefit associated with future deductible temporary differences and net
operating loss carryforwards, prior to their expiration (primarily 13
years or more). This belief is based upon, among other factors, changes in
operations over the last few years, management's focus on its business
realignment activities and current business strategies primarily with
respect to its U.K. operations. Failure to achieve sufficient levels of
taxable income might affect the ultimate realization of the net deferred
tax assets. If this were to occur, management is committed to implementing
tax planning strategies, such as the sale of net appreciated assets of the
Company to the extent required (if any) to generate sufficient taxable
income prior to the expiration of these benefits. Should such strategies
be required, they could potentially result in the sale of a portion of the
Company's interest in the U.K. operations and repatriation of such
proceeds to the U.S. Management expects that it is more likely than not
that future levels of income will be sufficient to realize the deferred
tax assets, as recorded. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of
future taxable income during the carryforward period are reduced.
Net Income (Loss). As a result of the foregoing, the Company recorded net
income of $101,000 for the three months ended March 31, 2000 compared to a
net loss of $954,000 for the three months
Page 19
<PAGE>
ended March 31, 1999.
SIX MONTHS ENDED MARCH 31, 2000 VS. SIX MONTHS ENDED MARCH 31, 1999
Revenues. Total reported revenues for the six months ended March 31, 2000
and 1999 was $52,143,000 and $79,005,000, respectively. This represents a
decrease of $26,862,000 or 34.5% when comparing the six months ended March
31, 2000 to 1999. This decrease relates primarily to the change in
accounting for the U.K. subsidiaries from consolidation to the equity
method during the first quarter of fiscal 2000 ($24,489,000). The
remaining decrease was primarily attributable to declines in revenue
experienced by the Mail-Order operations ($7,159,000) due to a reduction
in the number of patients serviced. Partly offsetting the decreases were
increased revenues in the Company's U.K. nursing operations during the
second quarter of fiscal 2000 ($3,349,000) as a result of continued
expansion and an increase in the number of patients being serviced. The
Hi-Tech operations also experienced an increase in revenues ($1,076,000)
due to an increase in the number of patients being serviced.
Cost of Revenues. Total reported cost of revenues for the six months ended
March 31, 2000 and 1999 was $32,427,000 and $50,328,000, respectively.
This represents a decrease of $17,901,000 when comparing the six months
ended March 31, 2000 to 1999. As a percentage of total revenue, cost of
revenues for the six months ended March 31, 2000 decreased to 62.2% in
comparison to 63.7% for the prior period. Cost of revenues as a percentage
of revenues decreased for patient services (67.3% for the six months ended
March 31, 2000 versus 68.6% for the prior period), for respiratory,
medical equipment and supplies sales operations (54.5% for the six months
ended March 31, 2000 versus 56.7% for the prior period) and for infusion
services (72.3% for the six months ended March 31, 2000 versus 78.5% for
the prior period). The decline in patient services is primarily due to
increased billing rates in the U.K. nursing operations as of January 1999.
The decrease in respiratory, medical equipment and supplies sales
operations is principally attributable to the change in accounting for the
U.K. subsidiaries from consolidation to the equity method during the first
quarter of fiscal 2000. The decrease in infusion services is due to an
increase in infusion therapies in the Hi-Tech operations with lower
product costs.
Selling, General and Administrative Expenses. Reported selling, general
and administrative expenses for the six months ended March 31, 2000 and
1999 was $19,092,000 and $26,959,000, respectively. This represents a
decrease of $7,867,000 or 29.2% when comparing the six months ended March
31, 2000 to 1999. This decrease relates primarily to the change in
accounting for the U.K. subsidiaries from consolidation to the equity
method during the first quarter of fiscal 2000 ($5,070,000). The remaining
decrease was primarily due to overhead reduction programs in the Company's
Mail-Order operations ($3,487,000) and Hi-Tech operations ($201,000).
These decreases were offset by higher levels of overhead in the U.K.
operations during the second quarter of fiscal 2000 ($1,098,000) due to
its continued expansion.
Interest Income. Reported interest income for the six months ended March
31, 2000 and 1999 was $599,000 and $142,000, respectively. This represents
an increase of $457,000 or 321.8% when comparing the six months ended
March 31, 2000 to 1999. This increase was attributable to higher interest
income earned on a higher level of funds invested ($495,000) offset by to
the change in accounting for the U.K. subsidiaries from consolidation to
the equity method during the first quarter of fiscal 2000 ($38,000).
Interest Expense. Reported interest expense for the six months ended March
31, 2000 and 1999 was
Page 20
<PAGE>
$2,956,000 and $2,729,000, respectively. This represents an increase of
$227,000 or 8.3% when comparing the six months ended March 31, 2000 to
1999. This variance was primarily attributable to a higher level of
borrowings combined with a higher borrowing rate during the second fiscal
quarter when compared to the comparable prior period ($450,000) offset by
to the change in accounting for the U.K. subsidiaries from consolidation
to the equity method during the first quarter of fiscal 2000 ($215,000).
(Benefit) Provision for Income Taxes. The Company recorded a benefit for
income taxes amounting to $488,000 or 28.2% of loss before income taxes
for the six months ended March 31, 2000 versus a provision of $81,000 on a
loss before income taxes and extraordinary loss of $869,000 in the
comparable prior period. The difference between the 28.2% effective tax
rate for the six months ended March 31, 2000 and the statutory tax rate
resulted from non-deductible expenses, primarily amortization of
intangible assets.
Management believes that it is more likely than not that the Company will
generate sufficient levels of taxable income in the future to realize the
$12,340,000 of reported net deferred tax assets comprised of the tax
benefit associated with future deductible temporary differences and net
operating loss carryforwards, prior to their expiration (primarily 13
years or more). This belief is based upon, among other factors, changes in
operations over the last few years, management's focus on its business
realignment activities and current business strategies primarily with
respect to its U.K. operations. Failure to achieve sufficient levels of
taxable income might affect the ultimate realization of the net deferred
tax assets. If this were to occur, management is committed to implementing
tax planning strategies, such as the sale of net appreciated assets of the
Company to the extent required (if any) to generate sufficient taxable
income prior to the expiration of these benefits. Should such strategies
be required, they could potentially result in the sale of a portion of the
Company's interest in the U.K. operations and repatriation of such
proceeds to the U.S. Management expects that it is more likely than not
that future levels of income will be sufficient to realize the deferred
tax assets, as recorded. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of
future taxable income during the carryforward period are reduced.
Equity in Income of and Interest Income Earned from U.K. Subsidiaries.
Equity in income of U.K. subsidiaries for the six months ended March 31,
2000 was $411,000, which represents 100% of the net income of the
Company's U.K. subsidiaries for the first quarter of fiscal 2000. Interest
income earned from U.K. subsidiaries for the six months ended March 31,
2000 was $782,000 (net of tax provision of $421,000), which represents
interest income on an intercompany loan, which was repaid on December 20,
2000, concurrent with the Refinancing. There was no equity in income of
and interest income earned from U.K. subsidiaries in the six months ended
March 31, 1999 as the accounting method for the U.K. subsidiaries in
fiscal 1999 was consolidation.
Extraordinary Loss on Early Extinguishment of Debt. An extraordinary loss
(net of tax benefit of $408,000) of $759,000 was recorded in the six
months ended March 31, 2000, as a result of the write-off of the deferred
financing costs associated with the early extinguishment of borrowings
under the Company's existing senior indebtedness (the "Credit Facility").
Net Loss (Income). As a result of the foregoing, the Company recorded a
net loss of $811,000 for the six months ended March 31, 2000 compared to
net loss of $950,000 for the six months ended March 31, 1999.
Page 21
<PAGE>
PRO FORMA SIX MONTHS ENDED MARCH 31, 2000 VS. HISTORICAL SIX MONTHS ENDED
MARCH 31, 1999
The following comparisons of pro forma six months ended March 31, 2000 as
compared to March 31, 1999 present the pro forma statement of operations
data as if the U.K. subsidiaries had been consolidated for the entire six
months ended March 31, 2000.
Revenues. Total pro forma revenues for the six months ended March 31, 2000
was $80,990,000 as compared to $79,005,000 for the six months ended March
31, 1999, which represents an increase of $1,985,000 or 2.5%. This
increase was primarily attributable to increased revenues in the Company's
U.K. nursing operations ($7,536,000) as a result of continued expansion,
increased billing rates beginning January 1, 1999 and an increase in the
number of patients being serviced. Partly offsetting the increase from the
U.K. operations were declines in revenue experienced by the Mail-Order
operations ($7,159,000) due to a reduction in the number of patients
serviced.
Cost of Revenues. Pro forma cost of goods sold for the six months ended
March 31, 2000 was $52,281,000 as compared to $50,328,000 for the six
months ended March 31, 1999, which represents an increase of $1,953,000.
On a pro forma basis total cost of revenues as a percentage of revenues
for the six months ended March 31, 2000 increased to 64.6% from 63.7% for
the six months ended March 31, 1999. On a pro forma basis cost of revenues
as a percentage of revenues increased for respiratory, medical equipment
and supplies sales operations (58.7% for the six months ended March 31,
2000 versus 56.7% for the prior period), decreased for infusion services
(72.3% for the six months ended March 31, 2000 versus 78.5% for the prior
period) and decreased for patient services (67.4% for the six months ended
March 31, 2000 versus 68.6% in the prior period). The increase in
respiratory, medical equipment and supplies sales operations is
attributable to the decrease in revenues in the Mail-Order operations
which carry a lower cost of revenues as a percentage of revenues (45.9%)
than the U.K. respiratory, medical equipment and supplies sales operations
(73.7%). The decrease in infusion services is due to an increase in
infusion therapies in the Hi-Tech operations with lower product costs. The
decline in patient services is primarily due to increased billing rates in
the U.K. nursing operations as of January 1999.
Selling, General and Administrative Expenses. Pro forma selling, general
and administrative expenses for the six months ended March 31, 2000 was
$25,643,000 as compared to $26,959,000 for the six months ended March 31,
1999, which represents a decrease of $1,316,000 or 4.9%. This decrease was
primarily due to a overhead reduction programs in the Company's Mail-Order
operations ($3,487,000) and Hi-Tech operations ($201,000). These decreases
were offset by higher levels of overhead in the U.K. operations due to its
continued expansion ($2,375,000).
Interest Income. Pro forma interest income for the six months ended March
31, 2000 was $659,000 as compared to $142,000 for the six months ended
March 31, 1999, which represents an increase of $517,000 or 364.1%. This
increase was attributable to higher interest income earned on a higher
level of funds invested.
Interest Expense. Pro forma interest expense for the six months ended
March 31, 2000 was $3,172,000 as compared to $2,729,000 for the six months
ended March 31, 1999, which represents an increase of $443,000 or 16.2%.
This variance was primarily attributable to a higher level of borrowings
combined with a higher borrowing rate.
Provision for Income Taxes. Pro forma provision for income taxes for the
six months ended March 31, 2000 was $605,000 or 109.4% of income before
income taxes for the six months ended
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March 31, 2000 versus a provision of $81,000 on a loss before income taxes
and extraordinary loss of $869,000 in the comparable prior period. The
difference between the 109.4% effective tax rate for the six months ended
March 31, 2000 and the statutory tax rate resulted from non-deductible
expenses, primarily amortization of intangible assets.
Management believes that it is more likely than not that the Company will
generate sufficient levels of taxable income in the future to realize the
$12,340,000 of reported net deferred tax assets comprised of the tax
benefit associated with future deductible temporary differences and net
operating loss carryforwards, prior to their expiration (primarily 13
years or more). This belief is based upon, among other factors, changes in
operations over the last few years, management's focus on its business
realignment activities and current business strategies primarily with
respect to its U.K. operations. Failure to achieve sufficient levels of
taxable income might affect the ultimate realization of the net deferred
tax assets. If this were to occur, management is committed to implementing
tax planning strategies, such as the sale of net appreciated assets of the
Company to the extent required (if any) to generate sufficient taxable
income prior to the expiration of these benefits. Should such strategies
be required, they could potentially result in the sale of a portion of the
Company's interest in the U.K. operations and repatriation of such
proceeds to the U.S. Management expects that it is more likely than not
that future levels of income will be sufficient to realize the deferred
tax assets, as recorded. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of
future taxable income during the carryforward period are reduced.
Extraordinary Loss on Early Extinguishment of Debt. On a pro forma basis,
the Company still would have reported an extraordinary loss (net of tax
benefit of $408,000) of $759,000 in the six months ended March 31, 1999,
as a result of the write-off of the deferred financing costs associated
with the early extinguishment of borrowings under the Credit Facility.
Net Loss. As a result of the foregoing, on a pro forma basis, the Company
still would have reported a net loss of $811,000 for the six months ended
March 31, 2000 compared to $950,000 for the six months ended March 31,
1999.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL.
Cash requirements during the six months ended March 31, 2000 for capital
expenditures ($443,000), payments for acquisitions ($502,000) and
financing fees and issuance costs ($2,952,000), payments on revolving loan
($5,307,000), as well as the $55,755,000 repayment of the Credit Facility
were met through funds generated from payments received from, net of
advances to the U.K. subsidiaries ($67,069,000), proceeds from notes
payable ($2,083,000) and funds generated from operating activities
($2,736,000).
The Company believes it has adequate capital resources to conduct its
operations for the next twelve months. The Refinancing has provided funds
for additional acquisitions in the U.K., subject to the terms of the
Refinancing agreements. Future acquisitions, if completed could have an
impact on future cash flow. See "- Refinancing."
ACCOUNTS RECEIVABLE.
The Company maintains a cash management program that focuses on the
reimbursement function, as
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growth in accounts receivable has been the main operating use of cash
historically. At March 31, 2000 and September 30, 1999, $29,251,000
(13.9%) and $30,814,000 (17.9%), respectively, of the Company's total
assets consisted of accounts receivable. The decrease in the accounts
receivable from fiscal year end is principally due to a reclass of
$875,000 of accounts receivable resulting from a settlement agreement with
a payor, as well as the improved collections in the Company's U.K. nursing
operations and Hi-Tech operations. Of the $875,000 reclassed, $487,000 and
$388,000, respectively, are included in prepaid expenses and other assets
and other assets on the balance sheet at March 31, 2000. The accounts
receivable are substantially due from third-party payors which generally
require substantial documentation in order to process claims. The
collection time for accounts receivable is typically the longest for
services that relate to new patients or additional services requiring
medical review for existing patients.
Management's goal is to maintain accounts receivable levels equal to or
less than industry average, which would 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. At March 31, 2000 and
September 30, 1999, the Company's average DSOs were 65 and 73,
respectively.
Amcare Limited and Novacare (UK) Limited (subsidiaries of TW UK), have
claims against Health Authorities to recover outstanding sums which they
allege are due in respect of services performed as National Health Service
("NHS") dispensing appliance contractors from their respective licensed
premises across England and Wales. There are two elements, first overdue
payments and secondly, underpaid on-cost allowances. The sums in dispute
are approximately $392,000 and $162,000, respectively, for a total of
approximately $554,000.
It is believed that it arises out of a wider national dispute between
Health Authorities and many dispensing appliance contractors over the
correct interpretation of the statutory-based contractual reimbursement
provisions in the context of modern distribution and dispensing practices.
The Health Authorities have clearly indicated a wish to reach commercial
settlements of their various disputes.
REFINANCING.
General. As described more fully below, on December 20, 1999, the
Company's U.K. subsidiaries, UK Parent and its subsidiary TW UK obtained
new financing denominated in pounds sterling, which aggregates
approximately $124,281,000 at March 31, 2000. The new financing consists
of a $72,613,000 senior collateralized term and revolving credit facility
(the "Senior Credit Facility"), $16,101,000 in mezzanine indebtedness (the
"Mezzanine Loan") and $35,567,000 principal amount of senior subordinated
notes (the "Notes") (each of the foregoing are sometimes referred to
collectively herein as the "Refinancing"). Of the $124,281,000 net
proceeds of the Refinancing, $55,755,000 was used to repay the Company's
existing Credit Facility, $11,617,000 was provided to the Company for
general corporate purposes, with the balance to be used for acquisitions
and working capital in the U.K., subject to the terms of the documents
governing the Refinancing. In connection with the repayment of the
Company's existing Credit Facility, the Company recorded a non-cash,
after-tax, extraordinary charge of approximately $759,000 in its first
quarter of fiscal 2000 relating to the write-off of the deferred financing
costs associated with the Credit Facility.
Senior Credit Facility. The Senior Credit Facility consists of a (i)
$44,685,000 term loan A, maturing December 17, 2005, (ii) $19,949,000
acquisition term loan B, maturing December 17, 2006 which may be drawn
upon during the first six years following closing, and (iii) $7,979,000
revolving facility, maturing December 17, 2005. Repayment of the loans
commences on July 30, 2000 and continues until final maturity. The loans
bear interest at rates
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equal to LIBOR plus 2% to 2.75% per annum. As of May 1, 2000, TW UK had
outstanding borrowings of approximately $49,619,000 under the Senior
Credit Facility. As of May 1, 2000, borrowings under the Senior Credit
Facility bore interest at a rate of 8.19% to 8.94%.
Subject to certain exceptions, the Senior Credit Facility prohibits or
restricts, among other things, the incurrence of liens, the incurrence of
indebtedness, certain fundamental corporate changes, dividends (including
distributions to the Company), the making of specified investments and
certain transactions with affiliates. In addition, the Senior Credit
Facility contains affirmative and negative financial covenants customarily
found in agreements of this kind, including the maintenance of certain
financial ratios, such as senior interest coverage, debt to earnings
before interest, taxes, depreciation and amortization, fixed charge
coverage and minimum net worth.
The loans under the Senior Credit Facility are collateralized by, among
other things, a lien on substantially all of TW UK's and its subsidiaries'
assets, a pledge of TW UK's ownership interest in its subsidiaries and
guaranties by TW UK's subsidiaries.
Mezzanine Loan and Mezzanine Warrants. Mezzanine Loan. The Mezzanine Loan
is a term loan maturing December 17, 2007 and bears interest at the
rate of LIBOR plus 7% per annum, where LIBOR plus 3.5% will be payable
in cash, with the remaining interest being added to the principal
amount of the loan. The Mezzanine Loan contains other terms and
conditions substantially similar to those contained in the Senior
Credit Facility. The lenders of the Mezzanine Loan also received
warrants to purchase 2% of the fully diluted ordinary shares of TW UK.
As of May 1, 2000, borrowings under the Mezzanine Loan bore interest
at a rate of 13.08%.
Mezzanine Warrants. The warrants issued to the mezzanine lenders (the
"Mezzanine Warrants") are detachable and can be exercised at any time
without condition for an aggregate exercise price of approximately
$131,000. The fair value of the Mezzanine Warrants ($2,562,000) issued to
the mezzanine lenders has been recorded as a discount to the mezzanine
loan and is being amortized over the term of the loan using the interest
method.
Senior Subordinated Notes and Warrants. Notes. The Notes consist of
$35,567,000 principal amount of senior subordinated notes of UK Parent
purchased by several institutional investors and certain members of
management (collectively, the "Investors"), plus equity warrants issued by
TW UK concurrently with the sale of the Notes (the "Warrants") exercisable
for ordinary shares of TW UK ("Warrant Shares") representing in the
aggregate 27% of the fully diluted ordinary shares of TW UK.
The Notes bear interest at the rate of 9.375% per annum payable quarterly
in cash subject to restrictions contained in the Senior Credit Facility
requiring UK Parent to pay interest in-kind through the issuance of
additional notes ("PIK Notes") for the first 18 months, with payment of
interest in cash thereafter subject to a fixed charge coverage test
(provided that whenever interest cannot be paid in cash, additional PIK
Notes shall be issued as payment in-kind of such interest). The Notes
mature nine years from issuance.
UK Parent will not have the right to redeem the Notes and the PIK Notes
except as provided in, and in accordance with the documents governing the
issuance of the Notes and Warrants (herein the "Securities Purchase
Documents"). The redemption price of the Notes and the PIK Notes will
equal the principal amount of the Notes and the PIK Notes plus all accrued
and unpaid interest on each.
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The Investors have the right, at their option, to require UK Parent to
redeem all or any portion of the Notes and the PIK Notes under certain
circumstances and in accordance with the terms of the Securities Purchase
Documents. The redemption price of the Notes and the PIK Notes shall be
equal to the principal amount of the Notes and the PIK Notes, plus all
accrued and unpaid interest on each.
UK Parent's redemption obligation of the Notes and the PIK Notes is
guaranteed by TW UK, which guarantee is subordinated to the existing
senior indebtedness of TW UK to the same extent as the Notes and the PIK
Notes are subordinated to senior indebtedness of UK Parent. If UK Parent
fails to perform in full its obligations following exercise of the
Investors put of Notes and TW UK fails to perform its obligations as a
guarantor of such obligations, the Investors shall have the right to among
other things exercise directly (through the voting trust described below)
the drag-along rights described without the requirement that the board of
directors of TW UK first take any action.
Warrants. The Warrants may be exercised, in whole or in part, at any time,
unless previously purchased or cancelled upon a redemption of the Notes,
at the option of the holders prior to the time of maturity of the Notes
for Warrant Shares representing approximately 27% of TW UK's fully diluted
ordinary share capital, subject to antidilution adjustment as contained in
the Securities Purchase Documents.
The exercise price of the Warrants shall equal the entire principal amount
of the Notes (other than PIK Notes and excluding any accrued unpaid
interest) for all Warrants in the aggregate and must be paid through the
tender of Notes (other than PIK Notes) to TW UK, whereby TW UK shall issue
to the Investors the appropriate number of Warrant Shares and pay to the
Investors in cash an amount equal to the principal amount of the PIK Notes
and all accrued unpaid interest on the Notes and the PIK Notes.
The Warrants will automatically be exercised for Warrant Shares in the
event that TW UK consummates a public offering of shares valuing the
Investors' ordinary shares of TW UK issuable upon a voluntary exercise of
the Warrants at or above 2.5x the initial investment.
The Investors will have the right, at their option, to require UK Parent
to purchase all or any portion of the Warrants or the Warrant Shares under
certain circumstances and in accordance with the terms of the Securities
Purchase Documents. The purchase price of the Warrants shall be equal to
the difference, if a positive number, between (i) the fair market value of
the Warrant Shares which the Investors have the right to acquire upon
exercise of such Warrants and (ii) the exercise price of such Warrants.
The purchase price of the Warrant Shares shall be equal to the fair market
value of such Warrant Shares.
UK Parent's purchase obligation of the Warrants is guaranteed by TW UK,
which guarantee is subordinated to existing senior indebtedness of TW UK.
If UK Parent fails to perform in full its obligations following exercise
of the Investors put of Warrants and TW UK fails to perform its
obligations as a guarantor of such obligations, the Investors shall have
the right to among other things exercise directly through the voting trust
the drag-along rights without the requirement that the board of directors
of TW UK first take any action.
If UK Parent fails to perform in full its obligations following exercise
of the Investors put of Warrant Shares, the Investor shall have the right
to among other things exercise directly through the voting trust the
drag-along rights without the requirement that the board of directors of
TW UK first take any action.
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Following an initial public offering and upon exchange of the Warrants,
the Investors shall be entitled to two demand rights and unlimited
piggyback registrations with respect to the Warrant Shares. The Warrant
Shares shall be listed for trading on any securities exchange on which the
ordinary shares of TW UK are listed for trading.
All ordinary shares of UK Parent owned by the Company and all ordinary
shares of TW UK owned by UK Parent will be held in a voting trust (the
"Voting Trust") for the benefit of the holders of ordinary shares of TW UK
and the holders of the Warrants, with the trustee of the trust being
obligated to vote the shares held in trust as follows: (i) to elect to the
board of directors of TW UK individuals designated in accordance with the
Securities Purchase Documents and on any other matter, pursuant to
instructions approved by the required majority of the board of directors
of TW UK as contemplated by the Securities Purchase Documents; and (ii)
following the breach by UK Parent and TW UK of their obligations to honor
an Investor put of Notes, an Investor put of Warrants or an Investor put
of Warrant Shares, the Investors have the right to exercise drag-along
rights directly without any action of the board of directors of TW UK on a
transaction to which such drag-along rights apply pursuant to instructions
from the Investors. G. Richard Green, a Director of the Company, is the
trustee of the Voting Trust. The Voting Trust includes provisions to the
effect that under certain circumstances the shares held in trust shall
thereafter be voted on all matters, including the election of directors,
pursuant to instructions from a majority of those members of the board of
directors of TW UK who are not affiliated or associated with the Company,
Hyperion Partners II L.P. ("HPII"), or any of their successors.
The Articles of Association of TW UK and the Securities Purchase Documents
provide that neither UK Parent nor TW UK will enter into any transaction
with or make contributions to the Company or UK Parent (except as required
by the terms of the Notes, the Warrants or the Warrant Shares) in the form
of dividends, fees, re-charges, loans, guarantees or any other benefit, in
any form, unless they have been previously agreed upon by all
shareholders.
The Securities Purchase Documents also provide that the Investors will
have the benefit of customary shareholder rights for a transaction of this
type including, without limitation: (i) pre-emptive rights with respect to
new securities; (ii) rights of first refusal with respect to proposed
transfers of ordinary shares of TW UK; (iii) drag-along rights; (iv)
tag-along rights; and (v) the exercise of voting rights by the holders of
the Warrants as therein described including the right to elect one
director to the TW UK board of directors. The Securities Purchase
Documents also include limitations on TW UK's ability to do the following,
among others, without the consent of the Investors: (i) issue additional
equity securities of TW UK; (ii) pay dividends or make other restricted
payments, except as required by the terms of the Notes, the Warrants or
the Warrant Shares; (iii) sell, lease or otherwise dispose of assets
exceeding specified values; (iv) enter into any transactions with
affiliates; (v) amend the Memorandum or Articles of Association; or (vi)
merge or consolidate with another entity.
CONTINGENCIES.
Some of the Company's subsidiaries are Medicare Part B suppliers who
submit claims to the designated carrier who is the government's claims
processing administrator. From time to time, the carrier may request an
audit of Medicare Part B claims on a prepayment or postpayment basis. Some
of the Company's subsidiaries currently have pending such audits. If the
outcome of any audit results in a denial or a finding of an overpayment,
then the affected subsidiary has appeal rights. Some of the subsidiaries
currently are responding to these audits and pursuing appeal rights in
certain
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circumstances. One such audit of a sample of claims, for which appeal
rights are being asserted, has resulted in an overpayment determination of
$418,000. The Company believes that the submission of additional
documentation on appeal is likely to result in a substantial reversal of
this overpayment determination.
ACQUISITION OF NIGHTINGALE.
On April 6, 2000 TW UK acquired all of the issued and outstanding shares
of Nightingale Nursing Bureau Limited, a London based provider of
registered nursing and care staff to NHS Trust Hospitals and the
independent sector, with an additional branch in Sydney, Australia,
for approximately $15,442,000, plus an additional sum of up to
approximately $5,600,000 in deferred consideration dependent upon 2000
and 2001 Pre-Tax Profits (as defined in the agreement for sale and
purchase). Approximately $13,762,000 of the purchase price for the
acquisition was paid using cash on hand and funds borrowed under the
senior credit facilities with the approximate remaining $1,680,000 of
consideration being paid in 1,050,000 shares of 5 pence par value
class A1 common shares of TW UK. The purchase price of the acquisition
is being allocated on the basis of the fair value of the assets
acquired (approximately $2,025,000) with the remaining portion
attributable to intangible assets. The Company is still evaluating the
allocation of these intangibles.
YEAR 2000.
The Year 2000 computer issue refers to potential conditions in computer
programs whereby a two-digit field rather than a four-digit field is used
to define the applicable year. Unless corrected, some computer programs
may not appropriately function as of January 1, 2000 because these
programs will read the "00" in the year 2000 as January 1, 1900. If
uncorrected, the problem could have resulted in computer system failures
or equipment and medical device malfunctions (affecting patient diagnosis
and treatment) thereby disrupting the Company's business operations and
subjecting the Company to potentially significant legal liabilities. To
date, there have been no material malfunctions of the Company's systems or
activities due to Year 2000 issues. However, there can be no assurance
that unanticipated events still will not occur or that the Company was
able to identify all Year 2000 issues before problems arise.
As of May 1, 2000, costs incurred for all efforts of the Company's Year
2000 action plan amounted to $245,000 and have not been material to the
Company. These costs have been expensed as incurred and have been funded
by operating cash flows. Based upon the best estimate by the Company's
management and the Year 2000 task force, the Company does not expect any
additional costs associated with the Company's Year 2000 action plan. If
additional costs are incurred they will also be expensed as incurred and
be funded by operating cash flow.
In addition, the Company relies heavily upon third party payors, including
to a large extent governmental payors such as the NHS in the U.K. and
Medicare and Medicaid in the U.S. for accurate and timely reimbursement of
claims, often through the use of electronic data interfaces. Although much
has been published publicly stating that the government was working to
solve its own Year 2000 issues in a timely manner, the Company has
received no assurance that their systems and interfaces were converted
timely. Failure of any of the Company's third party payors, especially
governmental payors, to solve their Year 2000 issues could have a material
adverse effect on the Company's consolidated financial position, cash
flows, or results of operations.
There can be no assurance that unanticipated events still will not occur
or that the Company was
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able to identify all Year 2000 issues before problems arise. In addition,
the Company has no assurance that third party payors and vendors have or
had the ability to identify and solve all or substantially all their Year
2000 issues. Therefore, there can be no assurance that the Year 2000 issue
still will not have a material adverse effect on the Company's
consolidated financial position, cash flows or results of operations.
LITIGATION.
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 certain receivables due from Health Management, Inc. ("HMI"). The
action seeks injunctive relief against this transaction, and damages,
costs and attorneys' fees in unspecified amounts. The transaction
subsequently closed and the plaintiff has, on numerous occasions,
stipulated to extend the defendants' time to respond to this suit. The
most recent stipulation provides for an extension to July 7, 2000.
On July 11 and July 22, 1997, the Company's RespiFlow, Inc. ("RespiFlow")
and MK Diabetic Support Services, Inc. ("MK") subsidiaries, respectively,
each received a letter (the "Audit Letters") from the U.S. Department of
Health and Human Services' Office of Audit Services, a division of the
Office of Inspector General ("OIG"). The Company was subsequently informed
that the Audit Letters cover its DermaQuest, Inc. subsidiary. The Company
has produced certain documents and provided related information to the OIG
and to the U.S. Attorney for the Eastern District of Texas regarding these
subsidiaries' financial relationships with suppliers of durable medical
equipment and various other practices including the subsidiaries'
practices regarding the collection of coinsurance and deductible amounts
due from Medicare beneficiaries. Additionally, on November 19, 1997, the
Company was notified by the U.S. Attorney for the Eastern District of
Texas that the Company, RespiFlow, MK, and various other non-affiliated
entities had been named defendants in a qui tam action under the Federal
False Claims Act. The qui tam action was recently partially unsealed and a
copy of the complaint was provided to the Company. The relator is a
private party who has brought action on behalf of the Federal government.
At present, the Company has entered into settlement discussions with the
Department of Justice ("DOJ") and the OIG in an effort to bring closure to
this matter and to avoid the expense, disruption and uncertainty of
litigation. The counsel for the relator has been involved in these
settlement discussions as well. At present, the Company is not able to
determine when a final settlement will be reached with the DOJ, the OIG
and the relator or whether any proposed settlement can be concluded on
terms acceptable to the Company. Accordingly, the Company is unable to
estimate what the potential loss might be at this time. In the event that
these settlement discussions are unsuccessful, the Company will defend
vigorously its interest in these matters. As such, the Company cannot
predict whether the outcome of these actions will have a material adverse
effect on the Company's consolidated financial position, cash flows or
results of operations.
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
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reimbursement. The Company believes that it is substantially in
compliance, in all material respects, with the applicable provisions of
the Federal statutes, regulations and laws and applicable state laws.
Because of the broad and sometimes vague nature of these laws, there can
be no assurance that an enforcement action will not be brought against the
Company, or that the Company will not be found to be in violation of one
or more of these provisions. At present, the Company cannot anticipate
what impact, if any, subsequent administrative or judicial interpretation
of the applicable Federal and state laws may have on the Company's
consolidated financial position, cash flows or results of operations.
Effective October 1, 1997, the Company owned 100% of the stock of HMI.
On July 2, 1998, a former shareholder of HMI purporting to sue on behalf
of a class of shareholders of HMI as of June 6, 1997, commenced a suit in
the Delaware Chancery Court, New Castle County, entitled Kathleen S.
O'Reilly v. Transworld HealthCare, Inc., W. James Nicol, Andre C.
Dimitriadis, Dr. Timothy J. Triche and D. Mark Weinberg, Civil Action No.
16507-NC. Plaintiff alleged that the Company, as majority shareholder of
HMI, and the then directors of HMI, breached fiduciary duties to the
minority shareholders of HMI by approving a merger between HMI and a
subsidiary of the Company for inadequate consideration. Plaintiff demands
an accounting, damages, attorneys' fees and other payment for other
expenses for unspecified amounts. The defendants filed a motion to dismiss
this action on September 18, 1998. The Court denied defendants' motion in
part and granted the motion in part, leaving intact certain claims.
Plaintiff has propounded discovery requests. The Company's insurer
disclaims coverage as to the Company, however, the insurer for the
Company's HMI subsidiary has accepted coverage for the individual
defendant former HMI directors. The Company believes that it does not have
liability and will vigorously defend this action. As such, the Company
cannot predict whether the outcome of these actions will have a material
adverse effect on the Company's consolidated financial position, cash
flows or results of operations.
By letter dated December 20, 1999, the Company received formal written
notification of the intent of two plaintiffs to file a civil action in the
Court of Common Pleas of Allegheny County, Pennsylvania against Transworld
Healthcare, Inc., Transworld Home Healthcare, Inc., Health Management,
Inc. and HMI Pennsylvania, Inc. The two plaintiffs, Irwin Hirsch and Lloyd
Myers, formerly were employees of HMI Pennsylvania, Inc., a subsidiary of
the Company, and had written employment agreements. Myers also served as
an officer of HMI. Based upon their former status as employees and as
officers, both claim entitlement to contractual indemnification from HMI
and HMI Pennsylvania, Inc. for defense costs and settlement of certain
claims made against them. In 1994, Hirsch and Myers also sold two retail
pharmacies they owned to HMI.
Hirsch and Myers were named as defendants in an action filed in the United
States District Court for the Eastern District of New York entitled In re
Health Management, Inc. Securities Litigation, Master File No. 96 Civ.
0889 (ADS), which was a class action by shareholders of HMI alleging,
among other claims against the defendants, fraud in connection with the
valuation of certain securities. Hirsch and Myers incurred non-reimbursed
legal expenses of $100,000 in defending that litigation and, ultimately,
settled their liability jointly for $1,325,000 which was non-reimbursed.
They demand that defendants reimburse to them their non-reimbursed legal
fees and the settlement amount pursuant to the indemnification provisions
of their employee contracts.
In addition to their indemnification claims, Hirsch and Myers also claim
damages in the amount of $7,000,000 for losses in connection with the
pharmacies sale transaction they entered into with HMI under which they
sold their retail pharmacies to HMI. Hirsch and Myers claim that the
pharmacies
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sale transaction was based upon fraudulent misrepresentations by HMI.
The Company and HMI entities will vigorously defend against these claims.
The Company believes that Hirsch and Myers' indemnification claims should
not have any real merit because of testimony given by Hirsch and Myers
under oath in connection with a criminal trial against Clifford Hotte, a
director and former officer of HMI. In their testimony, Hirsch and Myers
acknowledged malfeasance and nonfeasance, which should render their
contractual entitlement to indemnification void. Even if they are entitled
to indemnification despite their acknowledgements, they are liable to
defendants for the economic losses and damages suffered by defendants as a
result of the malfeasance and nonfeasance. Therefore if the civil actions
are filed, the Company and HMI entities will aggressively pursue
counterclaims against Hirsch and Myers for damages which, conservatively,
are far in excess of their claims, including the claims associated with
the pharmacies sale transaction.
The enforcement division of the Securities and Exchange Commission (the
"Commission") has issued a formal order of investigation relating to
matters arising out of HMI's public announcement on February 27, 1996 that
HMI would have to restate its financial statements for prior periods as a
result of certain accounting irregularities. HMI is fully cooperating with
this investigation and has responded to the requests of the Commission for
documentary evidence.
The outcomes of certain of the foregoing lawsuits and the investigation
with respect to HMI are uncertain and the ultimate outcomes could have a
material adverse affect on the Company.
The Company is involved in various other legal proceedings and claims
incidental to its normal business activities. The Company is vigorously
defending its position in all such proceedings. Management believes these
matters should not have a material adverse impact on the consolidated
financial position, cash flows or results of operations.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY EXCHANGE
The Company faces exposure to adverse movements in foreign currency
exchange rates. These exposures may change over time as business practices
evolve and could have a material adverse impact on the Company's
consolidated financial results. The Company's primary exposure relates to
non-U.S. dollar denominated sales in the U.K. where the principal currency
is Pounds Sterling. Currently, the Company does not hedge foreign currency
exchange rate exposures.
INTEREST RATE RISK
The Company's exposure to market risk for changes in interest rates relate
primarily to the Company's cash equivalents and the U.K. subsidiaries'
December 20, 1999 Refinancing which includes the Senior Credit Facility
and Mezzanine Loan. The Company's cash equivalents include highly liquid
short-term investments purchased with initial maturities of 90 days or
less. The Company is subject to fluctuating interest rates that may
impact, adversely or otherwise, its consolidated results of operations or
cash flows for its variable rate Senior Credit Facility, Mezzanine Loan
and cash equivalents. In accordance with provisions of the Refinancing, on
January 25, 2000, the Company hedged the interest rate (LIBOR cap of 9%)
on approximately $40,775,000 of its floating rate debt in a contract which
expires June 30, 2003. The approximate notional amount of the contract
adjusts down (consistent with debt maturity) as follows:
July 30, 2000 $39,170,000
December 31, 2000 37,565,000
June 30, 2001 35,960,000
December 31, 2001 34,355,000
June 30, 2002 31,945,000
December 31, 2002 29,540,000
The Company's Notes ($35,567,000 at March 31, 2000) mature on December 31,
2008 and bear interest at a fixed rate of 9.375%. The table below
represents the expected maturity of the Company's variable rate debt and
their weighted average interest rates at March 31, 2000.
EXPECTED WEIGHTED AVERAGE
FISCAL MATURITY RATE
--------------------------------
2000 $ 2,234,000 LIBOR +2%
2001 4,468,000 LIBOR +2%
2002 5,586,000 LIBOR +2%
2003 6,703,000 LIBOR +2%
2004 9,236,000 LIBOR +2.02%
Thereafter 31,611,000 LIBOR +4.19%
------------
$ 59,838,000 LIBOR +3.16%
============
The aggregate fair value of the Company's debt was approximately
$98,630,000 at March 31, 2000.
Page 32
<PAGE>
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27 Financial Data Schedule
(b) Reports on Form 8-K.
None.
Page 33
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
Dated: May 15, 2000
TRANSWORLD HEALTHCARE, INC.
By: /s/ Wayne A. Palladino
-------------------------------------
Wayne A. Palladino
Senior Vice President and Chief
Financial Officer (Principal
Financial Officer and Duly
Authorized to Sign on Behalf of
Registrant)
Page 34
<PAGE>
EXHIBIT INDEX
Exhibit Description
- ------- -----------
27 Financial Data Schedule
Page 35
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 40,551
<SECURITIES> 0
<RECEIVABLES> 48,200
<ALLOWANCES> 18,949
<INVENTORY> 2,835
<CURRENT-ASSETS> 85,879
<PP&E> 20,990
<DEPRECIATION> 11,450
<TOTAL-ASSETS> 209,948
<CURRENT-LIABILITIES> 26,714
<BONDS> 0
0
0
<COMMON> 176
<OTHER-SE> 89,896
<TOTAL-LIABILITY-AND-EQUITY> 209,948
<SALES> 40,708
<TOTAL-REVENUES> 40,708
<CGS> 26,260
<TOTAL-COSTS> 26,260
<OTHER-EXPENSES> 12,960
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,220
<INCOME-PRETAX> 268
<INCOME-TAX> 167
<INCOME-CONTINUING> 101
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 101
<EPS-BASIC> 0.01
<EPS-DILUTED> 0.01
</TABLE>
