<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
Amendment No. 1
FORM 10-Q/A
Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED
DECEMBER 31, 1999
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 April 17, 2000
Common Stock 17,551,076 Shares
<PAGE>
TRANSWORLD HEALTHCARE, INC.
FIRST QUARTER REPORT ON FORM 10-Q/A
In the original filing of the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1999, the Company presented their U.K. subsidiaries
on a consolidated basis. Subsequent to the original filing the Company has
concluded that effective with the new financing, the investment in the U.K.
subsidiaries should be accounted for under the equity method, retroactive to
October 31, 1999. This amended 10-Q reflects this revised accounting.
TABLE OF CONTENTS
-----------------
PART I
Item 1. Financial Statements (Unaudited)..................................3
Condensed Consolidated Balance Sheets - December 31, 1999 and
September 30, 1999...............................................4
Condensed Consolidated Statement of Operations - For the Three
Months Ended December 31, 1999 and December 31, 1998.............5
Condensed Consolidated Statement of Cash Flows - For the Three
Months Ended December 31, 1999 and December 31, 1998.............6
Notes to Condensed Consolidated Financial Statements...............7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................15
Item 3. Quantitative and Qualitative Disclosures about Market Risk........24
PART II
Item 1. Legal Proceedings.................................................25
Item 6. Exhibits and Reports on Form 8-K..................................25
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>
DECEMBER 31, SEPTEMBER 30,
1999 1999
------------------ -----------------
(Restated)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 13,197 $ 5,158
Accounts receivable, less allowance for doubtful
accounts of $18,902 and $19,870, respectively 11,943 30,814
Inventories 1,959 2,929
Deferred income taxes 7,572 6,930
Prepaid expenses and other assets 866 4,735
------------ -------------
Total current assets 35,537 50,566
Property and equipment, net 2,774 9,929
Investment in U.K. subsidiaries 38,304
Intangible assets, net of accumulated amortization of
$3,855 and $9,798, respectively 18,630 103,248
Deferred income taxes 6,173 6,173
Other assets 148 2,205
------------ -------------
Total assets $ 101,566 $ 172,121
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 6 $ 1,364
Accounts payable 3,032 5,058
Accrued expenses 5,083 14,899
Income taxes payable 1,684 3,240
------------ -------------
Total current liabilities 9,805 24,561
Long-term debt 6 54,407
Deferred income taxes and other 1,310 1,879
------------ -------------
Total liabilities 11,121 80,847
------------ -------------
Commitments and contingencies (Note 6)
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 (2,866) (405)
Retained deficit (34,935) (34,023)
------------ -------------
Total stockholders' equity 90,445 91,274
------------ -------------
Total liabilities and stockholders' equity $ 101,566 $ 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
-----------------------------------------
DECEMBER 31, DECEMBER 31,
1999 1998
----------------- ---------------
(Restated)
<S> <C> <C>
Revenues:
Net respiratory, medical equipment and supplies sales $ 8,638 $ 19,726
Net infusion services 2,797 2,423
Net patient services 17,905
---------- ----------
Total revenues 11,435 40,054
---------- ----------
Cost of revenues:
Respiratory, medical equipment and supplies sales 4,096 10,826
Infusion services 2,071 1,817
Patient services 12,465
---------- ----------
Total cost of revenues 6,167 25,108
---------- ----------
Gross profit 5,268 14,946
Selling, general and administrative expenses 6,132 13,603
---------- ----------
Operating (loss) income (864) 1,343
Interest income (41) (69)
Interest expense 1,178 1,401
---------- ----------
(Loss) income before income taxes, equity income
and extraordinary loss (2,001) 11
(Benefit) provision for income taxes (655) 7
Equity in income of and interest income earned
from U.K. subsidiaries 1,193
---------- ----------
(Loss) income before extraordinary loss (153) 4
Extraordinary loss on early extinguishment of debt
(net of income tax benefit of $408) (759)
---------- ----------
Net (loss) income $ (912) $ 4
========== ==========
(Loss) income per share of common stock before
extraordinary loss:
Basic and diluted $ (0.01) $ -
========== ==========
Net (loss) income per share of common stock:
Basic and diluted $ (0.05) $ -
========== ==========
Weighted average number of common shares outstanding:
Basic 17,551 17,536
========== ==========
Diluted 17,551 17,726
========== ==========
</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>
THREE MONTHS ENDED
------------------------------------------
DECEMBER 31, DECEMBER 31,
1999 1998
----------------- ----------------
(Restated)
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (912) $ 4
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities:
Depreciation and amortization 396 1,372
Amortization of debt issuance costs 209 264
Provision for doubtful accounts 1,306 2,027
Deferred income taxes (642)
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 (1,624) (2,041)
Increase in inventories (207) (1,033)
Decrease (increase) in prepaid expenses and other assets 141 (1,530)
(Decrease) increase in accounts payable and other liabilities (4) 1,267
-------------- --------------
Net cash (used in) provided by operating activities (581) 330
-------------- --------------
Cash flows from investing activities:
Capital expenditures (79) (844)
Notes receivable - payments received 20
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 (548)
-------------- --------------
Net cash provided by (used in) investing activities 66,990 (1,372)
-------------- --------------
Cash flows from financing activities:
Payments on long-term debt (55,759) (56)
Payments for financing fees and issuance costs (15)
-------------- --------------
Net cash used in financing activities (55,774) (56)
-------------- --------------
Effect of exchange rate on cash 2 (131)
Decrease in cash due to deconsolidation of U.K. subsidiaries (2,598)
-------------- --------------
Increase (decrease) in cash 8,039 (1,229)
Cash and cash equivalents, beginning of period 5,158 10,413
-------------- --------------
Cash and cash equivalents, end of period $ 13,197 $ 9,184
============== ==============
Supplemental cash flow information:
Cash paid for interest $ 1,178 $ 1,140
============== ==============
Cash paid for income taxes, net $ $ 12
============== ==============
</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. RESTATEMENT:
In the original filing of the Transworld Healthcare, Inc.'s (the
"Company") Quarterly Report on Form 10-Q for the quarter ended December
31, 1999, the Company presented their U.K. subsidiaries on a consolidated
basis. Subsequent to the original filing the Company has concluded that
effective with the new financing, the investment in the U.K. subsidiaries
should be accounted for under the equity method, retroactive to October
31, 1999. This amended 10-Q reflects this revised accounting (See Note 5).
The table below contains condensed consolidated financial information as
previously reported in the original 10-Q filing and as restated in this
amendment.
CONDENSED CONSOLIDATED BALANCE SHEET DATA
-----------------------------------------
DECEMBER 31, 1999
Previously
Filed Restated
------------ ------------
Total assets $ 213,533 $ 99,004
Total liabilities 125,650 11,121
Total stockholder's equity 87,883 87,883
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS DATA
---------------------------------------------------
THREE MONTHS ENDED DECEMBER 31, 1999
Previously
Filed Restated
------------ ------------
Net revenues $ 40,282 $ 11,435
Equity in income of and interest income
earned from U.K. subsidiaries 1,193
Net loss (912) (912)
2. 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) specialty mail-order pharmaceuticals,
medical supplies, respiratory therapy and home medical equipment in both
the U.S. and U.K.; (ii) infusion therapy in the U.S.; and (iii) patient
services, including nursing and para-professional services in the U.K.
The Condensed Consolidated Financial Statements presented herein are
unaudited and include all adjustments (consisting of normal recurring
adjustments, except as described in Note 4) 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.
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. At December 31, 1999
and 1998, the Company had outstanding stock options and warrants to
purchase 4,140 and 3,890 shares, respectively, of common stock ranging in
price from $2.65 to $12.45 and $4.38 to $12.45 per share, respectively,
that were not included in the computation of diluted EPS because the
exercise price was greater than the average market price of the common
shares.
The weighted average number of shares used in the basic and diluted
earnings per share computations for the three months ended December 31,
1999 and 1998 are as follows:
THREE MONTHS ENDED
DECEMBER 31,
---------------------
1999 1998
------ ------
Weighted average number of common
shares outstanding as used in computation of
basic EPS of common stock 17,551 17,536
Incremental shares of stock options and warrants,
after application of treasury stock method 190
------ ------
Shares used in computation of diluted EPS
of common stock 17,551 17,726
====== ======
Page 7
<PAGE>
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS,
EXCEPT PER SHARE DATA)
(UNAUDITED)
4. COMPREHENSIVE LOSS:
Components of comprehensive loss include net (loss) income and all other
non-owner changes in equity, such as the change in the cumulative
translation adjustment, unrealized gains and losses on investments
available for sale and minimum pension liability. Currency translation is
the only item of other comprehensive loss impacting the Company. The
following table displays comprehensive loss for the three months ended
December 31, 1999 and 1998:
THREE MONTHS ENDED
DECEMBER 31,
---------------------------
1999 1998
---------- ----------
(Restated)
Net (loss) income $ (912) $ 4
Change in cumulative
translation adjustment (2,461) (2,219)
---------- ----------
Comprehensive loss $ (3,373) $ (2,215)
========== ==========
5. INVESTMENT IN U.K. SUBSIDIARIES:
On December 20, 1999, the Company's UK 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 does 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 is 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
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.
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 will enable the Company to consolidate the U.K.
subsidiaries for the second quarter ended March 31, 2000.
Page 8
<PAGE>
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS,
EXCEPT PER SHARE DATA)
(UNAUDITED)
5. INVESTMENT IN U.K. SUBSIDIARIES (CONTINUED):
The tables below contains condensed consolidated financial information of
UK Parent as of December 31, 1999 for the balance sheet data and for the
three months ended December 31, 1999 for the statement of operations data.
CONDENSED CONSOLIDATED BALANCE SHEET DATA
-----------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1999 (Restated)
<S> <C> <C> <C>
Cash and cash equivalents $ 30,594 Current portion of long term-debt $ 4,204
Accounts receivable, less allowance Other current liabilities 12,662
for doubtful accounts of $1,149 17,921 --------------
Other current assets 6,643 Total current liabilities 16,866
------------- Long-term debt 60,639
Total current assets 55,158 Notes payable 33,934
Property and equipment, net 7,104 Other liabilities 553
Intangible assets, net of accumulated --------------
amortization of $6,880 85,148 Total liabilities 111,992
Other assets 2,886 Stockholder's equity 38,304
------------- --------------
Total assets $ 150,296 Total liabilities and
============= stockholder's equity $ 150,296
==============
</TABLE>
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS DATA
---------------------------------------------------
THREE MONTHS ENDED DECEMBER 31, 1999
Net revenues $ 28,847
Gross profit 8,993
Operating income 2,442
Interest expense, net (including $1,203 of intercompany) 1,359
Tax provision 672
Net income 411
Depreciation and amortization 1,148
<TABLE>
<CAPTION>
The components of the Refinancing at December 31, 1999 are as follows:
FACILITY TOTAL OUTSTANDING INTEREST RATE MATURITY
-------- ----- ----------- ------------- --------
(Restated)
<S> <C> <C> <C> <C>
SENIOR CREDIT FACILITIES:
Term loan $ 45,245 $ 45,245 LIBOR + 2% Dec. 17, 2005
Acquisition loan 20,199 1,511 LIBOR + 2.75% Dec. 17, 2006
Working capital facility 8,079 4,490 LIBOR + 2% Dec. 17, 2005
--------- -----------
Total senior credit facilities 73,523 51,246
MEZZANINE TERM LOAN 16,159 13,597(1) LIBOR + 7% Dec. 17, 2007
SENIOR SUBORDINATED NOTES WITH WARRANTS 36,012 33,934 9.375% Dec. 17, 2008
--------- -----------
TOTAL REFINANCING $ 125,694 98,777
==========
LESS, CURRENT MATURITIES 4,204
------------
$ 94,573
============
</TABLE>
- ----------
(1) Net of unamortized discount of $2,562.
Page 9
<PAGE>
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS,
EXCEPT PER SHARE DATA)
(UNAUDITED)
5. INVESTMENT IN UK SUBSIDIARIES (CONTINUED):
The mezzanine lenders and the Investors were also issued warrants to
purchase approximately 2% and 27%, respectively, of the fully diluted
shares of Transworld Healthcare (UK) Limited ("TW UK"). The exercise price
of the warrants issued to the Investors (the "Note Warrants") shall equal
the entire principal amount of the Notes for all Note Warrants in the
aggregate and must be paid through the tender of Notes to TW UK. The
exercise price of the warrants issued to the mezzanine lenders in
aggregate is approximately $131 and they can be exercised at any time
without condition. The fair value of the 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 Note Warrants or the shares issued
upon exercise of the Note Warrants (the "Warrant Shares") under certain
circumstances and in accordance with the terms of the documents covering
the Notes. The purchase price of the Note 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 Note Warrants and (ii) the exercise price of such Note Warrants.
The purchase price of the Warrant Shares shall be equal to the fair market
value of such Warrant Shares.
Of the net $125,700 proceeds of the Refinancing, $67,372 was used to pay
down the U.K. subsidiaries existing intercompany loan due to the Company,
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 December 31, 1999,
borrowings under the senior credit facilities bore interest at a rate of
7.72% to 8.47%. Subject to certain exceptions, the senior credit
facilities contain restrictions, prohibitions and affirmative and negative
financial covenants customarily found in agreements of this 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 December 31, 1999, borrowings under the mezzanine term loan bore
interest at a rate of 12.72%.
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.
6. DEBT:
On December 20, 1999, $55,755 of the net proceeds received from the pay
down of the intercompany loan due from the U.K. subsidiaries was used to
repay the Company's existing senior indebtedness (the "Credit Facility").
The remaining $11,617 of proceeds will be used for general corporate
purposes in the U.S. In connection with the repayment of the Credit
Facility, the Company recorded a non-cash, after-tax, extraordinary charge
of $759 during the three months ended December 31, 1999, related to the
write-off of the deferred financing costs associated with the Credit
Facility.
Page 10
<PAGE>
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
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 New York, entitled Kevin
Mak, derivatively and on behalf of Transworld Healthcare, Inc., Plaintiff,
vs. Timothy Aitken, Scott A. Shay, Lewis S. Ranieri, Wayne Palladino and
Hyperion Partners II L.P., Defendants, and Transworld Healthcare, Inc.,
Nominal Defendant, Index No. 98-106401. The suit alleges that certain
officers and directors of the Company, and Hyperion Partners II L.P.
("HPII"), breached fiduciary duties to the Company and its shareholders,
in connection with a transaction, approved by a vote of the Company's
shareholders on March 17, 1998, in which the Company was to issue certain
shares of stock to HPII in exchange for certain 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
Page 11
<PAGE>
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS,
EXCEPT PER SHARE DATA)
(UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED):
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 reimbursement.
The Company believes that it is substantially in compliance, in all
material respects, with the applicable provisions of the Federal statutes,
regulations and laws and applicable state laws. Because of the broad and
sometimes vague nature of these laws, there can be no assurance that an
enforcement action will not be brought against the Company, or that the
Company will not be found to be in violation of one or more of these
provisions. At present, the Company cannot anticipate what impact, if any,
subsequent administrative or judicial interpretation of the applicable
Federal and state laws may have on the Company's consolidated financial
position, cash flows or results of operations.
Effective October 1, 1997, the Company owned 100% of the stock of HMI.
On July 2, 1998, a former shareholder of HMI purporting to sue on behalf
of a class of shareholders of HMI as of June 6, 1997, commenced a suit in
the Delaware Chancery Court, New Castle County, entitled Kathleen S.
O'Reilly v. Transworld HealthCare, Inc., W. James Nicol, Andre C.
Dimitriadis, Dr. Timothy J. Triche and D. Mark Weinberg, Civil Action No.
16507-NC. Plaintiff alleged that the Company, as majority shareholder of
HMI, and the then directors of HMI, breached fiduciary duties to the
minority shareholders of HMI by approving a merger between HMI and a
subsidiary of the Company for inadequate consideration. Plaintiff demands
an accounting, damages, attorney's fees and other payment for other
expenses for unspecified amounts. The defendants filed a motion to dismiss
this action on September 18, 1998. The Court denied defendants' motion in
part and granted the motion in part, leaving intact certain claims.
Plaintiff has propounded discovery requests. The Company's insurer
disclaims coverage as to the Company, however, the insurer for the
Company's HMI subsidiary has accepted coverage for the individual
defendant former HMI directors. The Company believes that it does not have
liability and will vigorously defend this action. As such, the Company
cannot predict whether the outcome of these actions will have a material
adverse effect on the Company's consolidated financial position, cash
flows or results of operations.
By letter dated December 20, 1999, the Company received formal written
notification of the intent of two plaintiffs to file a civil action in the
Court of Common Pleas of Allegheny County, Pennsylvania against Transworld
Healthcare, Inc., Transworld Home Healthcare, Inc., Health Management,
Inc. and HMI Pennsylvania, Inc. The two plaintiffs, Irwin Hirsch and Lloyd
Myers, formerly were employees of HMI Pennsylvania, Inc., a subsidiary of
the Company, and had written employment agreements. Myers also served as
an officer of HMI. Based upon their former status as employees and as
officers, both claim entitlement to contractual indemnification from HMI
and HMI Pennsylvania, Inc. for defense costs and settlement of certain
claims made against them. In 1994, Hirsch and Myers also sold two retail
pharmacies they owned to HMI.
Hirsch and Myers were named as defendants in an action filed in the United
States District Court for
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TRANSWORLD HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS,
EXCEPT PER SHARE DATA)
(UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED):
the Eastern District of New York entitled In re Health Management, Inc.
Securities Litigation, Master File No. 96 Civ. 0889 (ADS), which was a
class action by shareholders of HMI alleging, among other claims against
the defendants, fraud in connection with the valuation of certain
securities. Hirsch and Myers incurred non-reimbursed legal expenses of
$100 in defending that litigation and, ultimately, settled their liability
jointly for $1,325, which was non-reimbursed. They demand that defendants
reimburse to them their non-reimbursed legal fees and the settlement
amount pursuant to the indemnification provisions of their employee
contracts.
In addition to their indemnification claims, Hirsch and Myers also claim
damages in the amount of $7,000 for losses in connection with the
pharmacies sale transaction they entered into with HMI under which they
sold their retail pharmacies to HMI. Hirsch and Myers claim that the
pharmacies sale transaction was based upon fraudulent misrepresentations
by HMI.
The Company and HMI entities will vigorously defend against these claims.
The Company believes that Hirsch and Myers' indemnification claims should
not have any real merit because of testimony given by Hirsch and Myers
under oath in connection with a criminal trial against Clifford Hotte, a
director and former officer of HMI. In their testimony, Hirsch and Myers
acknowledged malfeasance and nonfeasance, which should render their
contractual entitlement to indemnification void. Even if they are entitled
to indemnification despite their acknowledgements, they are liable to
defendants for the economic losses and damages suffered by defendants as a
result of the malfeasance and nonfeasance. Therefore if the civil actions
are filed, the Company and HMI entities will aggressively pursue
counterclaims against Hirsch and Myers for damages which, conservatively,
are far in excess of their claims, including the claims associated with
the pharmacies sale transaction.
The enforcement division of the 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.
8. OPERATIONS BY BUSINESS SEGMENTS AND GEOGRAPHIC AREAS:
During the three months ended December 31, 1999, the Company operated in
the following reportable business segments: (i) U.S. specialty mail-order
pharmaceuticals and medical supplies
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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):
("Mail-Order") operations; and (ii) U.S. hi-tech ("Hi-Tech") operations.
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.
During the three months ended December 31, 1998, the Company also
consolidated its U.K. operations, which derived 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.
Retroactive to October 1, 1999, the U.K. operations are being accounted
for under the equity method of accounting.
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 three months ended December 31, 1999 and 1998.
THREE MONTHS ENDED DECEMBER 31,
1999
=====================================
(Restated)
U.S. U.S.
MAIL-ORDER HI-TECH TOTAL
---------- ----------- ----------
Revenues to unaffiliated customers $ 7,632 $ 3,803 $ 11,435
========= ========= ==========
Segment operating profit $ 29 $ 88 $ 117
========= =========
Corporate expenses (981)
Interest expense, net (1,137)
----------
Loss before income taxes, equity
income and extraordinary loss $ (2,001)
==========
Identifiable assets, December
31, 1999 $ 26,721 $ 11,188 $ 37,909
========= =========
Investment in U.K. subsidiaries 38,304
Corporate assets 25,353
----------
Total assets, December 31, 1999 $ 101,566
==========
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31, 1998
-------------------------------------------------------------
U.K. U.S. U.S. U.S.
OPERATIONS MAIL-ORDER HI-TECH TOTAL TOTAL
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues to unaffiliated $ 24,489 $ 12,117 $ 3,448 $ 15,565 $ 40,054
========= ======== ======== ======== =========
Segment operating profit (loss) $ 2,467 $ 308 $ (249 ) $ 59 $ 2,526
========= ======== ======== ========
Corporate expenses (1,183)
Interest expense, net (1,332)
---------
Income before income taxes $ 11
=========
</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.
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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 U.K. and the 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 United Kingdom ("U.K.") subsidiaries
obtained an aggregate of $125,700,000 in 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 is
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
is accounting for the investment in UK Parent and subsidiaries under the
equity method, retroactive to October 1, 1999.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1999 (RESTATED) VS. THREE MONTHS ENDED
DECEMBER 31, 1998
Revenues. Total reported revenues for the three months ended December 31,
1999 and 1998 was $11,435,000 and $40,054,000, respectively. This
represents a decrease of $28,619,000 or 71.5% when comparing the three
months ended December 31, 1999 to 1998. This decrease relates primarily to
the change in accounting for the U.K. subsidiaries from consolidation to
the equity method ($24,489,000). The remaining decrease was primarily
attributable to declines in revenue experienced by the Mail-Order
operations ($4,486,000) due to a reduction in the number of patients
serviced.
Cost of Revenues. Total reported cost of revenues for the three months
ended December 31, 1999 and 1998 was $6,167,000 and $25,108,000,
respectively. This represents a decrease of $18,941,000 when comparing the
three months ended December 31, 1999 to 1998. As a percentage of total
revenue, cost of revenues for the three months ended December 31, 1999
decreased to 53.9% in comparison to 62.7% for the prior period. Cost of
revenues as a percentage of revenues decreased for respiratory, medical
equipment and supplies sales operations (47.4% for the three months ended
December 31, 1999 versus 54.9% for the prior period) and decreased for
infusion services (74.1% for the three months ended December 31, 1999
versus 75.0% for the prior period). 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. The decrease in infusion services is due to an increase in
infusion therapies in the Hi-Tech operations with lower product costs.
Cost of revenues as a percentage of revenues for patient services was
69.6% for the three months ended December 31, 1998. There was no revenue
from patient services in the three months ended December 31, 1999 due to
the change in accounting for the U.K. subsidiaries.
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<PAGE>
Selling, General and Administrative Expenses. Reported selling, general
and administrative expenses for the three months ended December 31, 1999
and 1998 was $6,132,000 and $13,603,000, respectively. This represents a
decrease of $7,471,000 or 54.9% when comparing the three months ended
December 31, 1999 to 1998. This decrease relates primarily to the change
in accounting for the U.K. subsidiaries from consolidation to the equity
method ($5,070,000). The remaining decrease was primarily due to an
overhead reduction program in the Company's Mail-Order operations
($2,064,000) and Hi-Tech operations ($135,000).
Interest Income. Reported interest income for the three months ended
December 31, 1999 and 1998 was $41,000 and $69,000, respectively. This
represents a decrease of $28,000 or 40.6% when comparing the three months
ended December 31, 1999 to 1998. This decrease was primarily attributable
to the change in accounting for the U.K. subsidiaries from consolidation
to the equity method ($38,000).
Interest Expense. Reported interest expense for the three months ended
December 31, 1999 and 1998 was $1,178,000 and $1,401,000, respectively.
This represents a decrease of $223,000 or 15.9% when comparing the three
months ended December 31, 1999 to 1998. This favorable variance was
primarily attributable to a lower level of borrowings under the Company's
senior secured revolving credit facility (the "Credit Facility") combined
with a reduced borrowing rate.
(Benefit) Provision for Income Taxes. The Company recorded a benefit for
income taxes amounting to $655,000 or 32.7% of loss before income taxes
for the three months ended December 31, 1999 versus a provision of $7,000
or 63.6% of income before income taxes in the comparable prior period. The
difference between the 32.7% effective tax rate for the three months ended
December 31, 1999 and the statutory tax rate resulted from non-deductible
expenses, primarily amortization of intangible assets.
Management believes that it is more likely than not that the Company will
generate sufficient levels of taxable income in the future to realize the
$12,575,000 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.
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<PAGE>
Equity in Income of and Interest Income Earned from U.K. Subsidiaries.
Equity in income of U.K. subsidiaries for the three months ended December
31, 1999 was $411,000, which represents 100% of the net income of the
Company's U.K. subsidiaries. Interest income earned from U.K. subsidiaries
for the three months ended December 31, 1999 was $782,000 (net of tax
provision of $421,000), which represents interest income on an
intercompany loan, which was repaid on December 20, 1999, concurrent with
the Refinancing. There was no equity in income of and interest income
earned from U.K. subsidiaries in the three months ended December 31, 1998
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 three
months ended December 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 (Income). As a result of the foregoing, the Company recorded a
net loss of $912,000 for the three months ended December 31, 1999 compared
to net income of $4,000 for the three months ended December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL.
During the three months ended December 31, 1999, the Company utilized
$581,000 (restated) in operating activities. Cash requirements during the
three months ended December 31, 1999 for operating activities and capital
expenditures ($79,000 (restated)), 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
(restated)).
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 growth in accounts receivable has been the main
operating use of cash historically. At December 31, 1999 and September 30,
1999, $11,943,000 (restated) (11.8% (restated)) and $30,814,000 (17.9%),
respectively, of the Company's total assets consisted of accounts
receivable. This represents a decrease of $18,871,000 (restated) or 61.2%
(restated) when comparing December 31, 1999 to September 30, 1999. This
decrease relates primarily to the change in accounting for the U.K.
subsidiaries from consolidation to the equity method ($17,921,000). The
accounts receivable are substantially due from third-party
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<PAGE>
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. As reported, at December
31, 1999 and September 30, 1999, the Company's average DSOs were 94
(restated) and 73, respectively. This decrease from December 31, 1999 to
September 30, 1999 relates primarily to the change in accounting for the
U.K. subsidiaries from consolidation to the equity method.
REFINANCING.
General. As described more fully below, on December 20, 1999, the
Company's U.K. subsidiaries, UK Parent and its subsidiary Transworld
Healthcare (UK) Limited ("TW UK") obtained the Refinancing, denominated in
pounds sterling, which aggregates approximately $125,700,000 at December
31, 1999. The Refinancing consists of a $73,523,000 senior collateralized
term and revolving credit facility (the "Senior Credit Facility"),
$16,159,000 in mezzanine indebtedness (the "Mezzanine Loan") and
$36,012,000 principal amount of senior subordinated notes (the "Notes").
Through a pay down of an existing intercompany loan due to the Company
from its U.K. subsidiaries, $55,755,000 of the net proceeds of the
Refinancing was used to repay the Company's existing Credit Facility and
$11,617,000 was provided to the Company for general corporate purposes in
the U.S. The balance of the proceeds of Refinancing is 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)
$45,245,000 term loan A, maturing December 17, 2005, (ii) $20,199,000
acquisition term loan B, maturing December 17, 2006 which may be drawn
upon during the first three years following closing, and (iii) $8,079,000
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 equal to LIBOR plus 2% to 2.75% per annum. As of
May 1, 2000, TW UK had outstanding borrowings of $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
Page 18
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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
$36,012,000 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.
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
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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.
Following an initial public offering and upon exchange of the Warrants,
the Investors shall be entitled to two demand rights and unlimited
piggyback registrations with respect to the Warrant Shares. The Warrant
Shares shall be listed for trading on any securities exchange on which the
ordinary shares of TW UK are listed for trading.
All ordinary shares of UK Parent owned by the Company and all ordinary
shares of TW UK owned by UK Parent will be held in a voting trust for the
benefit of the holders of ordinary shares of TW UK and the holders of the
Warrants, with the trustee of the trust being obligated to vote the shares
held in trust as follows: (i) to elect to the board of directors of TW UK
individuals designated in accordance with the Securities Purchase
Documents and on any other matter, pursuant to instructions approved by
the required majority of the board of directors of TW UK as contemplated
by the Securities Purchase Documents; and (ii) following the breach by UK
Parent and TW UK of their obligations to honor an Investor put of Notes,
an Investor put of Warrants or an Investor put of Warrant Shares, the
Investors have the right to exercise drag-along rights directly without
any action of the board of directors of TW UK on a transaction to which
such drag-along rights apply pursuant to instructions from the Investors.
G. Richard Green, a Director of the Company, is the trustee of the voting
trust. The voting trust includes provisions to the effect that under
certain circumstances the shares held in trust shall thereafter be voted
on all matters, including the election of directors, pursuant to
instructions from a majority of those members of the board of directors of
TW UK who
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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.
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 National Health Service ("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.
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There can be no assurance that unanticipated events still will not occur
or that the Company was able to identify all Year 2000 issues before
problems arise. In addition, the Company has no assurance that third party
payors and vendors have or had the ability to identify and solve all or
substantially all their Year 2000 issues. Therefore, there can be no
assurance that the Year 2000 issue still will not have a material adverse
effect on the Company's consolidated financial position, cash flows or
results of operations.
LITIGATION.
On August 20, 1999, Transworld Home HealthCare - Nursing Division, Inc.
("TNI") was named a defendant in a suit brought by Teresa Crutcher, in New
Jersey state court, as administrator of the estate of Aaron Pernell, who
was an infant and Teresa Crutcher's son. The claim is for wrongful death
of Aaron Pernell alleged to have been caused by the negligent manner in
which a TNI home care nurse placed him in an infant car seat. The case was
settled on December 27, 1999 for $325,000, and was paid on December 29,
1999 by the Company's insurance carrier. Since this settlement was within
the policy limits of the Company's insurance policies it did not have any
effect on the Company's financial position, cash flows, or results of
operations.
On April 13, 1998, a shareholder of the Company, purporting to sue
derivatively on behalf of the Company, commenced a derivative suit in the
Supreme Court of the State of New York, County of New York, entitled Kevin
Mak, derivatively and on behalf of Transworld Healthcare, Inc., Plaintiff,
vs. Timothy Aitken, Scott A. Shay, Lewis S. Ranieri, Wayne Palladino and
Hyperion Partners II L.P., Defendants, and Transworld Healthcare, Inc.,
Nominal Defendant, Index No. 98-106401. The suit alleges that certain
officers and directors of the Company, and HPII, breached fiduciary duties
to the 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
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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 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
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<PAGE>
securities. Hirsch and Myers incurred non-reimbursed legal expenses of
$100,000 in defending that litigation and, ultimately, settled their
liability jointly for $1,325,000 which was non-reimbursed. They demand
that defendants reimburse to them their non-reimbursed legal fees and the
settlement amount pursuant to the indemnification provisions of their
employee contracts.
In addition to their indemnification claims, Hirsch and Myers also claim
damages in the amount of $7,000,000 for losses in connection with the
pharmacies sale transaction they entered into with HMI under which they
sold their retail pharmacies to HMI. Hirsch and Myers claim that the
pharmacies sale transaction was based upon fraudulent misrepresentations
by HMI.
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.
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. subsidiaries 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 and its U.K. subsidiaries are 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's U.K.
subsidiaries 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 U.K. subsidiaries' Senior Subordinated Notes ($33,934,000 at December
31, 1999) mature on December 31, 2008 and bear interest at a fixed rate of
9.375%. The table below represents the expected maturity of the U.K.
subsidiaries' variable rate debt and their weighted average interest rates
at December 31, 1999.
WEIGHTED
EXPECTED AVERAGE
FISCAL MATURITY RATE
------ -------------------------
2000 $ 2,262,000 LIBOR +2%
2001 4,525,000 LIBOR +2%
2002 5,656,000 LIBOR +2%
2003 6,787,000 LIBOR +2%
2004 9,351,000 LIBOR +2.02%
thereafter 36,263,000 LIBOR +3.9%
-----------
$64,844,000 LIBOR +3.07%
===========
The aggregate fair value of the U.K. subsidiaries' debt was approximately
$101,139,000 at December 31, 1999.
Page 24
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
On August 20, 1999, Transworld Home HealthCare - Nursing Division, Inc.
("TNI") was named a defendant in a suit brought by Teresa Crutcher, in New
Jersey state court, as administrator of the estate of Aaron Pernell, who
was an infant and Teresa Crutcher's son. The claim is for wrongful death
of Aaron Pernell alleged to have been caused by the negligent manner in
which a TNI home care nurse placed him in an infant car seat. The case was
settled on December 27, 1999 for $325,000, and was paid on December 29,
1999 by the Company's insurance carrier. Since this settlement was within
the policy limits of the Company's insurance policies it did not have any
effect on the Company's financial position, cash flows, or results of
operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27 Financial Data Schedule
(b) Reports on Form 8-K.
None.
Page 25
<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 26
<PAGE>
EXHIBIT INDEX
Exhibit Description
27 Financial Data Schedule
Page 27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 13,197
<SECURITIES> 0
<RECEIVABLES> 11,943
<ALLOWANCES> 18,902
<INVENTORY> 1,959
<CURRENT-ASSETS> 35,537
<PP&E> 8,666
<DEPRECIATION> 5,892
<TOTAL-ASSETS> 101,566
<CURRENT-LIABILITIES> 9,805
<BONDS> 0
0
0
<COMMON> 176
<OTHER-SE> 90,269
<TOTAL-LIABILITY-AND-EQUITY> 101,566
<SALES> 11,435
<TOTAL-REVENUES> 11,435
<CGS> 6,167
<TOTAL-COSTS> 6,167
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,137
<INCOME-PRETAX> 285
<INCOME-TAX> 438
<INCOME-CONTINUING> (153)
<DISCONTINUED> 0
<EXTRAORDINARY> (759)
<CHANGES> 0
<NET-INCOME> (912)
<EPS-BASIC> (0.05)
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