10-Q 1 file001.txt FORM 10-Q 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 DECEMBER 31, 2001 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 February 4, 2002 Common Stock 17,288,876 Shares TRANSWORLD HEALTHCARE, INC. FIRST QUARTER REPORT ON FORM 10-Q TABLE OF CONTENTS PART I
Item 1. Financial Statements .......................................................................3 Condensed Consolidated Balance Sheets - December 31, 2001 (Unaudited) and September 30, 2001........................................................................4 Condensed Consolidated Statement of Operations (Unaudited) - For the Three Months Ended December 31, 2001 and December 31, 2000......................................5 Condensed Consolidated Statement of Cash Flows (Unaudited) - For the Three Months Ended December 31, 2001 and December 31, 2000......................................6 Notes to Condensed Consolidated Financial Statements (Unaudited)............................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................................13 Item 3. Quantitative and Qualitative Disclosures about Market Risk..................................21 PART II Item 6. Exhibits and Reports on Form 8-K............................................................22
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 PART I ITEM 1. FINANCIAL STATEMENTS (UNAUDITED). The consolidated financial statements of Transworld Healthcare, Inc. (the "Company") begin on page 4. Page 3 TRANSWORLD HEALTHCARE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, SEPTEMBER 30, 2001 2001 (UNAUDITED) ---------------------- --------------------- ASSETS Current assets: Cash and cash equivalents $ 10,713 $ 15,357 Restricted cash 20,146 Accounts receivable, less allowance for doubtful accounts of $24,571 and $24,611, respectively 27,743 29,555 Inventories 949 972 Prepaid expenses and other assets 8,238 7,336 ------------------ ------------------ Total current assets 67,789 53,220 Property and equipment, net 7,825 7,545 Assets limited to use 50,414 71,020 Goodwill, net 108,956 109,426 Deferred financing costs and other assets 9,310 6,862 ------------------ ------------------ Total assets $ 244,294 $ 248,073 ================== ================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable $ 19,116 $ Current portion of long-term debt 5,809 4,868 Accounts payable 2,383 2,160 Accrued expenses 20,098 20,795 Taxes payable 5,034 5,667 ------------------ ------------------ Total current liabilities 52,440 33,490 Long-term debt 152,215 175,913 Deferred income taxes and other long term liabilities 687 702 Minority interest 1,658 1,614 ------------------ ------------------ Total liabilities 207,000 211,719 ------------------ ------------------ Commitments and contingencies (Note 5) Stockholders' equity: Preferred stock, $.01 par value; authorized 2,000 shares, issued and outstanding - none Common stock, $.01 par value; authorized 40,000 shares, issued 17,555 and 17,551 shares, respectively 176 176 Additional paid-in capital 128,077 128,077 Accumulated other comprehensive loss ( 6,117 ) ( 5,600 ) Retained deficit ( 84,122 ) ( 85,579 ) ------------------ ------------------ 38,014 37,074 Less cost of treasury stock (266 shares) ( 720 ) ( 720 ) ------------------ ------------------ Total stockholders' equity 37,294 36,354 ------------------ ------------------ Total liabilities and stockholders' equity $ 244,294 $ 248,073 ================== ==================
See notes to consolidated financial statements. Page 4 TRANSWORLD HEALTHCARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED --------------------------------------- DECEMBER 31, DECEMBER 31, 2001 2000 ----------------- ------------------- Revenues: Net patient services $ 55,415 $ 29,119 Net infusion services 3,310 2,985 Net respiratory, medical equipment and supplies sales 2,311 4,818 --------------- ---------------- Total revenues 61,036 36,922 --------------- ---------------- Cost of revenues: Patient services 40,961 20,234 Infusion services 2,448 2,102 Respiratory, medical equipment and supplies sales 1,292 3,363 --------------- ---------------- Total cost of revenues 44,701 25,699 --------------- ---------------- Gross profit 16,335 11,223 Selling, general and administrative expenses 10,427 8,799 General and administrative expenses related to Mail-Order operations (Note 4) 3,321 Losses due to sale of subsidiary (Note 4) 354 --------------- ---------------- Operating income (loss) 5,908 ( 1,251 ) Interest income ( 838 ) ( 449 ) Interest expense 4,161 2,487 Foreign exchange loss 13 391 --------------- ---------------- Income (loss) before income taxes and minority interest 2,572 ( 3,680 ) Provision (benefit) for income taxes 1,071 ( 878 ) --------------- ---------------- Income (loss) before minority interest 1,501 ( 2,802 ) Minority interest 44 ( 6 ) --------------- ---------------- Net income (loss) $ 1,457 $ ( 2,796 ) =============== ================ Net income (loss) per share of common stock: Basic $ 0.08 $ ( 0.16 ) =============== ================ Diluted $ 0.06 $ ( 0.16 ) =============== ================ Weighted average number of common shares outstanding: Basic 17,289 17,551 =============== ================ Diluted 17,465 17,551 =============== ================
See notes to consolidated financial statements. Page 5 TRANSWORLD HEALTHCARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED ------------------------------------- DECEMBER 31, DECEMBER 31, 2001 2000 ---------------- -------------- Cash flows from operating activities: Net income (loss) $ 1,457 $( 2,796 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 590 1,376 Amortization of debt issuance costs 510 287 Provision for doubtful accounts 570 2,274 Losses due to sale of subsidiary 354 Interest in kind 1,028 909 Minority interest 44 ( 6 ) Deferred income taxes ( 1,354 ) Changes in assets and liabilities, excluding the effect of businesses acquired and sold: Decrease (increase) in accounts receivable 802 ( 1,163 ) Decrease (increase) in inventories 18 ( 480 ) Increase in prepaid expenses and other assets ( 3,887 ) ( 118 ) Increase (decrease) in accounts payable and other liabilities ( 789 ) 422 ------------- ------------ Net cash provided by (used in) operating activities 343 ( 295 ) ------------- ------------ Cash flows from investing activities: Capital expenditures ( 974 ) ( 616 ) Proceeds from sale of property and equipment 14 22 Payments for acquisitions - net of cash acquired ( 37 ) ( 593 ) Proceeds limited to future acquisitions ( 640 ) ( 12,406 ) Proceeds from sale of business 15,126 Payments on acquisitions payable ( 1,125 ) ------------- ------------ Net cash (used in) provided by investing activities ( 2,762 ) 1,533 ------------- ------------ Cash flows from financing activities: Principal payments on long-term debt ( 2,021 ) ( 2,027 ) ------------- ------------ Net cash used in financing activities ( 2,021 ) ( 2,027 ) ------------- ------------ Effect of exchange rate on cash ( 204 ) 440 ------------- ------------ Decrease in cash ( 4,644 ) ( 349 ) Cash and cash equivalents, beginning of period 15,357 7,867 ------------- ------------ Cash and cash equivalents, end of period $ 10,713 $ 7,518 ============= ============ Supplemental cash flow information: Cash paid for interest $ 2,488 $ 1,287 ============= ============ Cash paid for income taxes $ 1,649 =============
See notes to consolidated financial statements. Page 6 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) 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, 2001. Although the Company's operations are not highly seasonal, the results of operations for the three months ended December 31, 2001 are not necessarily indicative of the operating results for the full year. 2. 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 three months ended December 31, 2001, diluted EPS of $0.06 reflects the diluted effect of common stock equivalents issued by the Company's U.K. subsidiary of approximately $0.02 per share. At December 31, 2000, the Company had outstanding stock options and warrants to purchase 4,424 shares of common stock ranging in price from $1.75 to $12.45 per share 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 EPS computations for the three months ended December 31, 2001 and 2000 are as follows:
THREE MONTHS ENDED DECEMBER 31, ------------------------- 2001 2000 ------------ ----------- Weighted average number of common shares outstanding as used in computation of basic EPS of common stock 17,289 17,551 Effect of dilutive securities - stock options 176 treasury stock method ------------ ----------- Shares used in computation of diluted EPS of common stock 17,465 17,551 ============ ===========
Page 7 TRANSWORLD HEALTHCARE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) 3. COMPREHENSIVE INCOME (LOSS): Components of comprehensive income (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 income (loss) impacting the Company. The following table displays comprehensive income (loss) for the three months ended December 31, 2001 and 2000: THREE MONTHS ENDED DECEMBER 31, ---------------------------------- 2001 2000 ----------------- --------------- Net income (loss) $ 1,457 $( 2,796 ) Change in cumulative translation adjustment ( 517 ) 1,069 ----------- ----------- Comprehensive income (loss) $ 940 $( 1,727 ) =========== =========== 4. BUSINESS COMBINATIONS AND DISPOSALS: COMBINATIONS: On September 27, 2001 Transworld Healthcare (UK) Limited ("TW UK") acquired all of the issued and outstanding shares of Staffing Enterprise Limited and Staffing Enterprise (PSV) Limited (collectively "Staffing Enterprise"), a London-based provider of flexible staffing of specialist nurses and other healthcare professionals to London National Health Service ("NHS") Trust and independent hospitals. The acquisition was accounted for as a purchase business combination. The results of operations for Staffing Enterprise have been included in the financial statements as of the beginning of the current fiscal year ended September 30, 2002. The following table displays the unaudited pro forma results of operations and related per share information as if the acquisition of Staffing Enterprise was completed as of October 1, 2000. The pro forma results are based on the historical financial statements of the Company and Staffing Enterprise for the three months ended December 31, 2000. THREE MONTHS ENDED DECEMBER 31, 2000 Net revenues $48,746 Net loss (2,309) Loss per share of common stock: Basic and Diluted (0.13) The transactions related to the acquisition of Staffing Enterprise and other previous acquisitions of flexible staffing agencies include provisions to pay additional amounts, payable in cash, of up to $43,400 in contingent consideration dependent upon future earnings of the acquired entities. Page 8 TRANSWORLD HEALTHCARE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) 4. BUSINESS COMBINATIONS AND DISPOSALS (CONTINUED): DISPOSITIONS: U.S. MAIL-ORDER In September 2000, the Company approved a plan to exit its U.S. Mail-Order operations and effective October 3, 2000 sold certain assets of the U.S. Mail-Order operations located in Jacksonville, Florida. In addition, the Company recorded a $1,288 restructuring charge in the fourth quarter of fiscal 2000 representing the estimated costs related to exiting and closing its U.S. Mail-Order operations. Based upon additional information and revised cost benefit estimates by management, the Company recorded an additional charge of $1,900, in the first quarter of fiscal 2001, to reflect the write-down of the remaining accounts receivable to their estimated net realizable value. In addition to the write-down, the Company incurred operating expenses of $1,421 during the three months ended December 31, 2000 in connection with closing its U.S. Mail-Order operations. The following table illustrates the restructuring accrual balance for lease commitments at December 31, 2001. Beginning balance $499 Payments made through December 31, 2001 (174 ) -------- Ending balance $325 ======== AMCARE LTD. On November 22, 2000, the Company sold Amcare Ltd ("Amcare"), a U.K. subsidiary for approximately $13,826 in cash. As a result of the completion of the transaction, the Company recorded an additional loss of $354 and realized a foreign exchange loss of $391 for the three months ended December 31, 2000. 5. COMMITMENTS AND CONTINGENCIES: During the normal course of business, the Company continues to carefully monitor and review its submission of Medicare, Medicaid and all other claims for reimbursement and the Company uses its best efforts to ensure that such claims are not false or fraudulent. At the present time, the Company is not aware of any on-going investigation relating to its submission of claims for reimbursement. However, to the extent the Company is investigated in the future and/or found to have violated these laws, it could have a material adverse effect on the Company. The Company believes that it is in substantial compliance in all material respects with applicable provisions of the Federal statutes, regulations and laws and applicable state laws. Due to 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. Page 9 TRANSWORLD HEALTHCARE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) 5. COMMITMENTS AND CONTINGENCIES (CONTINUED): The Company is involved in various other legal proceedings and claims incidental to its normal business activities. The Company is vigorously defending its position in all such proceedings. Management believes these matters should not have a material adverse impact on the consolidated financial position, cash flows, or results of operations of the Company. 6. OPERATIONS BY BUSINESS SEGMENTS AND GEOGRAPHIC AREAS: During the three months ended December 31, 2001 and 2000, the Company operated in two reportable business segments: (i) U.K. operations and (ii) U.S. Home Healthcare ("Home Healthcare") operations. The U.K. operations derive its revenues from nursing and para-professional services, and delivery of oxygen concentrators and cylinders throughout the U.K. The Home Healthcare operations derive its revenues from infusion and respiratory therapy services and the sale and lease of home medical equipment principally in New Jersey and New York. The Company uses differences in geographic areas, as well as differences 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 segment and geographic area of operations for the three months ended December 31, 2001 and 2000.
THREE MONTHS ENDED DECEMBER 31, 2001 --------------------------------------------- U.K. HOME OPERATIONS HEALTHCARE TOTAL ------------ --------------- -------------- Revenues to unaffiliated customers $ 56,582 $ 4,454 $ 61,036 =========== ============ =========== Segment operating profit $ 6,368 $ 203 $ 6,571 =========== ============ Corporate expenses (663 ) Interest expense, net (3,323 ) Foreign exchange loss (13 ) ----------- Income before income taxes and minority $ 2,572 interest =========== Depreciation $ 411 $ 175 $ 586 =========== ============ Corporate depreciation 4 ----------- Total depreciation $ 590 =========== Identifiable assets, December 31, 2001 $ 234,100 $ 9,434 $ 243,534 =========== ============ Corporate assets 760 ----------- Total assets, December 31, 2001 $ 244,294 =========== Capital expenditures $ 856 $ 109 $ 965 =========== ============ Corporate capital expenditures 9 ----------- Total capital expenditures $ 974 ===========
Page 10 TRANSWORLD HEALTHCARE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) 6. OPERATIONS BY BUSINESS SEGMENTS AND GEOGRAPHIC AREAS (CONTINUED):
THREE MONTHS ENDED DECEMBER 31, 2000 ---------------------------------------------- U.K. HOME OPERATIONS HEALTHCARE TOTAL ------------- --------------- -------------- Revenues to unaffiliated customers $ 33,065 $ 3,857 $ 36,922 =========== ============= =========== Segment operating profit $ 2,705 $ 139 $ 2,844 =========== ============= Corporate expenses (774 ) U.S. Mail-Order (Note 4) (3,321 ) Interest expense, net (2,038 ) Foreign exchange loss (Note 4) (391 ) ----------- Loss before income taxes and minority interest $ (3,680 ) =========== Depreciation and amortization $ 1,187 $ 178 $ 1,365 =========== ============= Corporate depreciation and amortization 11 ----------- Total depreciation and amortization $ 1,376 =========== Identifiable assets, December 31, 2000 $ 143,459 $ 10,882 $ 154,341 =========== ============= U.S. Mail-Order 919 Corporate assets 27,832 ----------- Total assets, December 31, 2000 $ 183,092 =========== Capital expenditures $ 476 $ 137 $ 613 =========== ============= Corporate capital expenditures 3 ----------- Total capital expenditures $ 616 ===========
7. IMPACT OF RECENT ACCOUNTING STANDARDS: In July 2001, the Financial Accounting Standards Board issued FAS 142, "Goodwill and Other Intangible Assets". The provisions of FAS 142 are effective for fiscal years beginning after December 15, 2001. Under FAS 142, all existing and newly acquired goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests. Effective October 1, 2001, the Company adopted FAS 142 and suspended the amortization of goodwill. In accordance with the transitional provisions of FAS 142, previously recognized goodwill was tested for impairment. Based on the Company's fair-value analysis of goodwill, the carrying amount of goodwill did not exceed its fair value. Therefore, no impairment to goodwill was recognized. The following table presents the changes in the carrying amount of goodwill for the three months ended December 31, 2001:
THREE MONTHS ENDED DECEMBER 31, 2001 ------------------------------------------------------- U.K. HOME OPERATIONS HEALTHCARE TOTAL ------------------- -------------- ----------------- Balance at September 30, 2001 $ 105,542 $ 3,884 $ 109,426 Goodwill acquired during year $ 1,169 $ - $ 1,169 Foreign exchange difference $ (1,639) $ - $ (1,639) ------------- ------------ ---------------- Balance at December 31, 2001 $ 105,072 $ 3,884 $ 108,956 ============= ============ ================
Page 11 TRANSWORLD HEALTHCARE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) 7. IMPACT OF RECENT ACCOUNTING STANDARDS (CONTINUED): The amortization expense, net income (loss) and net income (loss) per share of the Company for the three months ended December 31, 2001, the period of initial application of FAS 142, and for the three months ended December 31, 2000 are as follows:
THREE MONTHS ENDED DECEMBER 31, ---------------------------------- 2001 2000 ----------------- -------------- Reported net income (loss) $ 1,457 $ (2,796 ) Add back: Goodwill amortization $ - $ 900 ----------- ----------- Adjusted net income (loss) $ 1,457 $ (1,896 ) =========== =========== Basic net income (loss) per share $ 0.08 $ (0.16 ) Add back: Goodwill amortization per share $ - $ 0.05 ----------- ----------- Adjusted basic net income (loss) per share $ 0.08 $ (0.11 ) =========== =========== Diluted net income (loss) per share $ 0.06 $ (0.16 ) Add back: Goodwill amortization per share $ - $ 0.05 ----------- ----------- Adjusted diluted net income (loss) per share $ 0.06 $ (0.11 ) =========== ===========
Page 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Transworld Healthcare, Inc. (the "Company") is a provider of a broad range of health care services and products with operations in the United Kingdom ("U.K.") and the United States ("U.S."). The Company provides the following services and products: (i) patient services, including nursing and para-professional services; (ii) respiratory therapy and home medical equipment; and (iii) infusion therapy. The Company provides these services and products from the following reportable business segments: (i) U.K. operations ("U.K. Operations"); and (ii) U.S. home healthcare operations ("Home Healthcare Operations"). The Company's U.K. Operations supply nursing and para-professional care to the community and U.K. healthcare institutions and medical grade oxygen to the U.K. pharmacy market and private patients in Northern Ireland. The Company's Home Healthcare Operations are concentrated in New Jersey and New York. The Company was a provider of specialty pharmaceutical and medical supplies in the U.K. On November 22, 2000, the Company sold Amcare, Ltd. ("Amcare"), a U.K. subsidiary. RESULTS OF OPERATIONS THREE MONTHS ENDED DECEMBER 31, 2001 VS. THREE MONTHS ENDED DECEMBER 31, 2000 Revenues. Total revenues for the three months ended December 31, 2001 and 2000 were $61,036,000 and $36,922,000, respectively, an increase of $24,114,000 or 65%. This increase relates primarily to the growth of the Company's U.K. flexible staffing operations as a result of acquisitions, principally Staffing Enterprise Limited and Staffing (PSV) Limited (collectively "Staffing Enterprise") ($15,344,000), Crystalglen Limited (operating under the trade name "Nurses Direct") ($3,605,000), and Balfor Medical ($1,328,000) and internal growth ($6,019,000). In addition, revenues for the Home Healthcare Operations increased by $598,000 largely due to the increase in the number of patients serviced. Partly offsetting these increases, was a decline in revenue due to the sale of Amcare ($2,861,000). Gross Profit. Total gross profit increased by $5,112,000 to $16,335,000 for the three months ended December 31, 2001 from $11,223,000 for the three months ended December 31, 2000. As a percentage of total revenue, gross profit for the three months ended December 31, 2001 decreased to 26.8% from 30.4% for the comparable prior period. Gross margins for patient services decreased (26.1% for the three months ended December 31, 2001 versus 30.5% for the comparable prior period) principally due to an increase in the percentage of revenues derived from the staffing of nurses and other more highly paid professionals, which have lower margins than the historical career business. In addition, recent U.K. regulatory changes, which extends the entitlement of holiday pay to temporary workers, served to reduce gross margins in the period. Gross margins in the respiratory, medical equipment and supplies sales increased (44.1% for the three months ended December 31, 2001 versus 30.2% for the comparable prior period) principally due to the sale of Amcare in November 2000 and decreased for infusion services (26.0% for the three months ended December 31, 2001 versus 29.6% for the comparable prior period) principally due to increased product costs. Selling, General and Administrative Expenses. Total selling, general and administrative expenses for the three months ended December 31, 2001 and 2000 was $ 10,427,000 and $12,120,000, respectively, a decrease of $1,693,000 or 14.0%. This decrease reflects the closing of the U.S. Mail-Order business ($3,321,000), the sale of Amcare on November 22, 2000 ($419,000) and reduced corporate overhead and professional costs ($111,000). In addition, the decrease is attributable to the application of Financial Accounting Standards Board FAS 142, "Goodwill and Other Intangible Assets" ("FAS 142"), effective October 1, 2001, whereby goodwill is no longer being amortized ($900,000). These Page 13 decreases were partially offset by higher levels of overhead costs in the U.K. operations due principally to acquisitions and internal growth ($2,924,000). Losses due to Sale of Subsidiary. For the three months ended December 31, 2000, the Company recorded losses of $354,000 due to the sale of Amcare. Interest Income. Total interest income for the three months ended December 31, 2001 was $838,000 compared to $449,000 for the three months ended December 31, 2000, which represents an increase of $389,000. This increase was principally attributable to a higher level of funds invested. Interest Expense. Total interest expense for the three months ended December 31, 2001 was $4,161,000 compared to $2,487,000 for the three months ended December 31, 2000, which represents an increase of $1,674,000. This increase was principally attributable to the higher level of borrowings. Foreign Exchange Loss. For the three months ended December 31, 2001, the Company realized a foreign exchange loss of $13,000 compared to $391,000 for the three months ended December 31, 2000 which was principally related to the sale of Amcare. Provision (Benefit) Income Taxes. The Company recorded a provision for income taxes amounting to $1,071,000 or 41.6% of income before income taxes for the three months ended December 31, 2001 versus a benefit of $878,000 or 23.9% of loss before income taxes for the three month ended December 31, 2000. The difference between the 40.2% effective tax rate for the three months ended December 31, 2001 and the statutory tax rate is due to the Company recording an additional valuation allowance for the tax benefit associated with the current year U.S. operating loss. Management had been previously committed to implementing tax strategies that provided for the sale of appreciated assets, including a portion of the Company's ownership interest in its U.K. subsidiary, to generate sufficient taxable income to realize the tax net operating losses prior to their expiration. While the Company believes it will eventually realize the value of its tax losses, current developments, including the continued expansion of the U.K. operations has increased the uncertainty as to both the execution of the original strategy and the appropriateness of a tax strategy which may not align with the Company's current business strategy. These uncertainties have impaired the Company's ability to determine whether it is more likely than not that its deferred tax assets will be realized. Accordingly, in the fourth quarter of fiscal 2001, a full valuation allowance for all remaining deferred tax assets was provided. Minority Interest. The Company recorded a charge for minority interest of $44,000 for the three months ended December 31, 2001 versus a benefit from minority interest of $6,000 for the three months ended December 31, 2000. The minority interest represents the 1,050,000 shares of class A1 common stock of Transworld Healthcare (UK) Limited ("TW UK") issued as part of the Nightingale Nursing Bureau Limited ("Nightingale") consideration. Net Income (Loss). As a result of the foregoing, the Company recorded net income of $1,457,000 for the three months ended December 31, 2001 versus a net loss of $2,796,000 for the three months ended December 31, 2000. LIQUIDITY AND CAPITAL RESOURCES GENERAL. For the three months ended December 31, 2001, the Company generated $343,000 from operating activities. Cash requirements for the first quarter ended December 31, 2001 for capital expenditures ($974,000) and payment on long-term debt ($2,021,000), were met through operating cash flows and cash on hand. Page 14 In January 2001, the Company initiated a stock repurchase program, whereby the Company may purchase up to approximately $1,000,000 of its outstanding common stock in open market transactions or in privately negotiated transactions. As of December 31, 2001, the Company had acquired 266,200 shares for an aggregate purchase price of $720,000 which are reflected as treasury stock in the consolidated balance sheet at December 31, 2001. The Company intends to continue with its stock repurchase program during fiscal 2002. The Company believes its existing capital resources and those generated from operating activities and available under existing borrowing arrangements will be adequate to conduct its operations for the next twelve months. As of December 31, 2001, the Company has capitalized approximately $2,900,000 in connection with evaluating options to maximize the value of its ownership interest in the U.K. Operations. 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, 2001 and September 30, 2001, $27,743,000 (11.4%) and $29,555,000 (11.9%), respectively, of the Company's total assets consisted of accounts receivable. The decrease in the accounts receivable from fiscal year end is mainly due to timing of cash collections. 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 December 31, 2001 and September 30, 2001, the Company's average DSOs were 41 and 60, respectively. Excluding the impact of the acquisition of Staffing Enterprise as of September 27, 2001, DSOs as of September 30, 2001 were 44. The decrease in the DSOs was mainly due to timing of cash collections. BORROWINGS. General. As described more fully below, on December 20, 1999, as amended on September 27, 2001, the Company's U.K. subsidiaries, Transworld Holdings (UK) Limited ("UK Parent") and its subsidiary TW UK obtained new financing denominated in pounds sterling, which aggregates approximately $193,270,000 at December 31, 2001. The new financing consists of a $138,618,000 senior collateralized term and revolving credit facility (the "Senior Credit Facility"), $15,566,000 in mezzanine indebtedness (the "Mezzanine Loan") and $39,086,000 of senior subordinated notes (the "Notes") (each of the foregoing are sometimes referred to collectively herein as the "Refinancing"). Senior Credit Facility. The Senior Credit Facility consists of a (i) $40,642,000 term loan A, maturing December 17, 2005, (ii) $18,144,000 acquisition term loan B, maturing December 17, 2006 which may be drawn upon during the first nine years following closing, (iii) per the September 27, 2001 amendment, $72,575,000 term loan C, maturing June 30, 2007, and (iv) $7,257,000 revolving facility, maturing December 17, 2005. Repayment of the loans commenced on July 30, 2000 and continues until final maturity. The loans bear interest at rates equal to LIBOR plus 2.25% to 3.50% per annum. As of December 31, 2001, TW UK had outstanding borrowings of $105,089,000 under the Senior Credit Facility that bore interest at a rate of 6.41% to 7.66%. Page 15 Subject to certain exceptions, the Senior Credit Facility prohibits or restricts, among other things, the incurrence of liens, the incurrence of indebtedness, certain fundamental corporate changes, dividends (including distributions to the Company), the making of specified investments and certain transactions with affiliates. In addition, the Senior Credit Facility contains affirmative and negative financial covenants customarily found in agreements of this kind, including the maintenance of certain financial ratios, such as senior interest coverage, debt to earnings before interest, taxes, depreciation and amortization, fixed charge coverage and minimum net worth. The loans under the Senior Credit Facility are collateralized by, among other things, a lien on substantially all of TW UK's and its subsidiaries' assets, a pledge of TW UK's ownership interest in its subsidiaries and guaranties by TW UK's subsidiaries. Mezzanine Loan and Mezzanine Warrants. Mezzanine Loan. The Mezzanine Loan is a term loan maturing December 17, 2007 and bears interest at the rate of LIBOR plus 7% per annum, where LIBOR plus 3.5% will be payable in cash, with the remaining interest being added to the principal amount of the loan. The Mezzanine Loan contains other terms and conditions substantially similar to those contained in the Senior Credit Facility. The lenders of the Mezzanine Loan also received warrants to purchase 2% of the fully diluted ordinary shares of TW UK. As of December 31, 2001, TW UK had outstanding borrowings under the Mezzanine Loan of $13,849,000 that bore interest at a rate of 11.08%. 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 $119,000. The fair value of the Mezzanine Warrants ($2,301,000) issued to the mezzanine lenders has been recorded as a discount to the mezzanine loan and is being amortized over the term of the loan using the interest method. Senior Subordinated Notes and Warrants. Notes. The Notes consist of $32,349,000 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). As of December 31, 2001, $6,737,000 of PIK Notes has been recorded as additional principal due in the Company's Consolidated Balance Sheet. The Notes and related PIK notes mature nine years from issuance. UK Parent will not have the right to redeem the Notes and the PIK Notes except as provided in, and in accordance with the documents governing the issuance of the Notes and Warrants (herein the "Securities Purchase Documents"). The redemption price of the Notes and the PIK Notes will equal the principal amount of the Notes and the PIK Notes plus all accrued and unpaid interest on each. 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. Page 16 UK Parent's redemption obligation of the Notes and the PIK Notes is guaranteed by TW UK, which guarantee is subordinated to the existing senior indebtedness of TW UK to the same extent as the Notes and the PIK Notes are subordinated to senior indebtedness of UK Parent. If UK Parent fails to perform in full its obligations following exercise of the Investors put of Notes and TW UK fails to perform its obligations as a guarantor of such obligations, the Investors shall have the right to among other things exercise directly (through the voting trust described below) the drag-along rights described without the requirement that the Board of Directors of TW UK first take any action. Warrants. The Warrants may be exercised, in whole or in part, at any time, unless previously purchased or cancelled upon a redemption of the Notes, at the option of the holders prior to the time of maturity of the Notes for Warrant Shares representing approximately 27% of TW UK's fully diluted ordinary share capital, subject to antidilution adjustment as contained in the Securities Purchase Documents. The exercise price of the Warrants shall equal the entire principal amount of the Notes (other than PIK Notes and excluding any accrued unpaid interest) for all Warrants in the aggregate and can be exercised for cash or through the tender of Notes (other than PIK Notes) to TW UK, whereby TW UK shall issue to the Investors the appropriate number of Warrant Shares and pay to the Investors in cash an amount equal to the principal amount of the PIK Notes and all accrued unpaid interest on the Notes and the PIK Notes. In the event that any warrants are exercised by tendering cash, the UK Parent shall have the right, at its option (which it intends to exercise), to redeem the aggregate principal amount of Notes equal to the number of warrants so exercised multiplied by the warrant exercise price. The Warrants will automatically be exercised for Warrant Shares in the event that TW UK consummates a public offering of shares valuing the Investors' ordinary shares of TW UK issuable upon a voluntary exercise of the Warrants at or above 2.5x the initial investment. The Investors will have the right, at their option, to require UK Parent to purchase all or any portion of the Warrants or the Warrant Shares under certain circumstances and in accordance with the terms of the Securities Purchase Documents. The purchase price of the Warrants shall be equal to the difference, if a positive number, between (i) the fair market value of the Warrant Shares which the Investors have the right to acquire upon exercise of such Warrants and (ii) the exercise price of such Warrants. The purchase price of the Warrant Shares shall be equal to the fair market value of such Warrant Shares. UK Parent's purchase obligation of the Warrants is guaranteed by TW UK, which guarantee is subordinated to existing senior indebtedness of TW UK. If UK Parent fails to perform in full its obligations following exercise of the Investors put of Warrants and TW UK fails to perform its obligations as a guarantor of such obligations, the Investors shall have the right to among other things exercise directly through the Voting Trust the drag-along rights without the requirement that the Board of Directors of TW UK first take any action. If UK Parent fails to perform in full its obligations following exercise of the Investors put of Warrant Shares, the Investor shall have the right to among other things exercise directly through the Voting Trust the drag-along rights without the requirement that the Board of Directors of TW UK first take any action. 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. Page 17 All ordinary shares of UK Parent owned by the Company and all ordinary shares of TW UK owned by UK Parent will be held in a voting trust for the benefit of the holders of ordinary shares of TW UK and the holders of the Warrants, with the trustee of the trust being obligated to vote the shares held in trust as follows: (i) to elect to the Board of Directors of TW UK individuals designated in accordance with the Securities Purchase Documents and on any other matter, pursuant to instructions approved by the required majority of the Board of Directors of TW UK as contemplated by the Securities Purchase Documents; and (ii) following the breach by UK Parent and TW UK of their obligations to honor an Investor put of Notes, an Investor put of Warrants or an Investor put of Warrant Shares, the Investors have the right to exercise drag-along rights directly without any action of the Board of Directors of TW UK on a transaction to which such drag-along rights apply pursuant to instructions from the Investors. G. Richard Green, a Director of the Company, is the trustee of the Voting Trust. The Voting Trust includes provisions to the effect that under certain circumstances the shares held in trust shall thereafter be voted on all matters, including the election of directors, pursuant to instructions from a majority of those members of the Board of Directors of TW UK who are not affiliated or associated with the Company, HPII, or any of their successors. The Articles of Association of TW UK and the Securities Purchase Documents provide that neither UK Parent nor TW UK will enter into any transaction with or make contributions to the Company or UK Parent (except as required by the terms of the Notes, the Warrants or the Warrant Shares) in the form of dividends, fees, re-charges, loans, guarantees or any other benefit, in any form, unless they have been previously agreed upon by all shareholders. The Securities Purchase Documents also provide that the Investors will have the benefit of customary shareholder rights for a transaction of this type including, without limitation: (i) pre-emptive rights with respect to new securities; (ii) rights of first refusal with respect to proposed transfers of ordinary shares of TW UK; (iii) drag-along rights; (iv) tag-along rights; and (v) the exercise of voting rights by the holders of the Warrants as therein described including the right to elect one director to the TW UK Board of Directors. The Securities Purchase Documents also include limitations on TW UK's ability to do the following, among others, without the consent of the Investors: (i) issue additional equity securities of TW UK; (ii) pay dividends or make other restricted payments, except as required by the terms of the Notes, the Warrants or the Warrant Shares; (iii) sell, lease or otherwise dispose of assets exceeding specified values; (iv) enter into any transactions with affiliates; (v) amend the Memorandum or Articles of Association; or (vi) merge or consolidate with another entity. At December 31, 2001, the Company had outstanding notes payable of $19,116,000, net of $1,030,000 of unamortized discount, issued in connection with the acquisition of certain U.K. flexible staffing agencies. The notes payable are secured by the Company's senior credit lender which requires the Company to keep an amount on deposit for the sole purpose of repaying the notes payable. These notes bear interest at rates ranging from 4.00% to 5.50%. In general, the Company may not redeem the notes on or before three years after the date of issuance; however, such notes may be redeemed by the holder within one year from the first interest payment due date (as defined) upon giving not less than sixty days written notice. Accordingly, the notes and related cash restricted to the payment of such notes have been classified as current in the accompanying Condensed Consolidated Balance Sheet. U.S. MAIL-ORDER OPERATIONS In September 2000, the Company approved a plan to exit its U.S. Mail-Order operations and effective October 3, 2000 sold certain assets of the U.S. Mail-Order operations located in Jacksonville, Florida. In addition, the Company recorded a $1,288,000 restructuring charge in the fourth quarter of fiscal 2000 representing the estimated costs related to exiting and closing its U.S. Mail-Order operations. Based upon additional information and revised cost benefit estimates by management, the Company recorded an additional charge of $1,900,000, in the first quarter of fiscal 2001, to reflect the write- Page 18 down of the remaining accounts receivable to their estimated net realizable value. In addition to the write-down, the Company incurred operating expenses of $1,421,000 in connection with closing its U.S. Mail-Order operations. The following table illustrates the restructuring accrual balance for lease commitments at December 31, 2001. Beginning balance $499,000 Payments made through December 31, 2001 (174,000 ) ------------- Ending balance $325,000 ============= DISPOSITION OF AMCARE LTD. On November 22, 2000, the Company sold Amcare for approximately $13,826,000 in cash. As a result of the completion of the transaction, the Company recorded an additional loss of $354,000 and realized a foreign exchange loss of $391,000 for the three months ended December 31, 2000. CONTINGENCIES. Some of the Company's subsidiaries are Medicare Part B suppliers who submit claims to the designated carrier who is the government's claims processing administrator. From time to time, the carrier may request an audit of Medicare Part B claims on a prepayment or postpayment basis. Some of the Company's subsidiaries currently have pending such audits. If the outcome of any audit results in a denial or a finding of an overpayment, then the affected subsidiary has appeal rights. Some of the subsidiaries currently are responding to these audits and pursuing appeal rights in certain circumstances. LITIGATION. During the normal course of business, the Company continues to carefully monitor and review its submission of Medicare, Medicaid and all other claims for reimbursement and the Company uses its best efforts to ensure that such claims are not false or fraudulent. At the present time, the Company is not aware of any on-going investigation relating to its submission of claims for reimbursement. However, to the extent the Company is investigated in the future and/or found to have violated these laws, it could have a material adverse effect on the Company. The Company believes that it is in substantial compliance in all material respects with applicable provisions of the Federal statutes, regulations and laws and applicable state laws. Because of the broad and sometimes vague nature of these laws, there can be no assurance that an enforcement action will not be brought against the Company, or that the Company will not be found to be in violation of one or more of these provisions. At present, the Company cannot anticipate what impact, if any, subsequent administrative or judicial interpretation of the applicable Federal and state laws may have on the Company's consolidated financial position, cash flows or results of operations. The Company is involved in various other legal proceedings and claims incidental to its normal business activities. The Company is vigorously defending its position in all such proceedings. Management believes these matters should not have a material adverse impact on the consolidated financial position, cash flows, or results of operations of the Company. IMPACT OF RECENT ACCOUNTING STANDARDS. In July 2001, the Financial Accounting Standards Board issued FAS 142. The provisions of FAS 142 are effective for fiscal years beginning after December 15, 2001. Under FAS 142, all existing and newly acquired goodwill and intangible assets deemed to have indefinite lives will no longer be Page 19 amortized but will be subject to annual impairment tests. Effective October 1, 2001, the Company adopted FAS 142 and suspended the amortization of goodwill. In accordance with the transitional provisions of FAS 142, previously recognized goodwill was tested for impairment. Based on the Company's fair-value analysis of goodwill, the carrying amount of goodwill did not exceed its fair value. Therefore, no impairment to goodwill was recognized. Page 20 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 $41,935,000 of its floating rate debt in a contract which expires December 31, 2003. The approximate notional amount of the contract adjusts down (consistent with debt maturity) as follows: June 30, 2002 32,855,000 December 31, 2002 30,378,000 As of December 31, 2001, the Company's Notes ($39,086,000) mature on December 31, 2008 and bear interest at a fixed rate of 9.375%. In addition, the Company had notes payable of $19,116,000, net of $1,030,000 debt discount, which were issued in connection with the acquisition of several U.K. flexible staffing agencies. The notes payable are redeemable, at the holder's option, in fiscal 2003 and bear interest ranging from 4.0% to 5.5% at December 31, 2001. The table below represents the expected maturity of the Company's variable rate debt and their weighted average interest rates at December 31, 2001. EXPECTED WEIGHTED AVERAGE FISCAL MATURITY RATE ------ -------------------------------------------------- 2002 $ 2,760,000 LIBOR +1.59% 2003 6,096,000 LIBOR +2.25% 2004 8,128,000 LIBOR +2.25% 2005 10,161,000 LIBOR +2.25% 2006 26,853,000 LIBOR +3.26% Thereafter 64,940,000 LIBOR +4.26% -------------------- $ 118,938,000 LIBOR +3.57% ==================== The aggregate fair value of the Company's debt was estimated based on quoted market prices for the same or similar issues and approximated $175,849,000 at December 31, 2001. Page 21 PART II ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. None (b) Reports on Form 8-K. None Page 22 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: February 14, 2002 TRANSWORLD HEALTHCARE, INC. By: /s/ John B. Wynne Jr. ----------------------- John B. Wynne Jr. Vice President and Chief Financial Officer (Principal Financial Officer and Duly Authorized to Sign on Behalf of Registrant) Page 23