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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended January 31, 1997
Commission File Number 1-11570
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Transworld Home HealthCare, Inc.
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(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.)
75 Terminal Avenue, Clark, New Jersey 07066
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (908) 340-1144
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 March 11, 1997
- -------------- ------------------------------
Common Stock 10,046,683 Shares
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Transworld Home HealthCare, Inc.
First Quarter Report On Form 10-Q
Table of Contents
<TABLE>
<CAPTION>
Part I. Page
----
<S> <C> <C>
Item 1. Financial Statements (Unaudited)............................................. 3
Condensed Consolidated Balance Sheets
January 31, 1997 and October 31, 1996........................ 4
Condensed Consolidated Statements of Operations
For the Three Months Ended January 31, 1997
and 1996..................................................... 5
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended January 31, 1997
and 1996..................................................... 6
Notes to Condensed Consolidated Financial
Statements................................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................. 13
Part II.
Item 6. Exhibits and Reports on Form 8-K.............................................. 22
</TABLE>
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forwardlooking statements. This Quarterly Report contains certain
forwardlooking 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 forwardlooking 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.
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Part I
Item 1. Financial Statements
The financial statements of Transworld Home HealthCare, Inc.
(the "Company") begin on page 4.
Page 3
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TRANSWORLD HOME HEALTHCARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
January 31, October 31,
1997 1996
-------- --------
ASSETS
<S> <C> <C>
Current assets:
Cash and temporary investments $ 2,249 $ 4,598
Accounts receivable, less allowance for doubtful
accounts of $6,227 and $5,471 27,580 24,414
Inventories 2,104 1,829
Prepaid income taxes 600
Prepaid expenses and other current assets 5,405 5,106
-------- --------
Total current assets 37,338 36,547
Property & equipment, net 4,076 3,934
Advances to and investment in Health Management, Inc. 30,227
Intangible assets, net of accumulated amortization of
$3,803 and $3,385 44,079 44,496
Other assets 6,470 5,750
-------- --------
$122,190 $ 90,727
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, accrued expenses and other current
liabilities $ 9,252 $ 8,544
Acquisitions payable 125 1,802
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Total current liabilities 9,377 10,346
Long-term debt, including obligations under capital leases 43,878 12,505
Deferred income taxes and other 651 651
-------- --------
Total liabilities 53,906 23,502
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Commitments and contingencies
Stockholders' equity
Preferred stock, $.01 par value; authorized
2,000 shares, issued and outstanding - none
Common stock, $.01 par value; authorized
30,000 shares, issued and outstanding
10,017 and 9,940 shares 100 99
Additional paid-in capital 62,156 62,221
Retained earnings 6,028 4,905
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Total stockholders' equity 68,284 67,225
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$122,190 $ 90,727
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
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TRANSWORLD HOME HEALTHCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
January 31,
------------------------
1997 1996
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<S> <C> <C>
Revenues:
Net respiratory, medical equipment and supplies sales $ 12,228 $ 12,434
Net patient services 4,765 4,814
Net infusion services 3,304 2,396
-------- --------
Total revenues 20,297 19,644
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Cost of revenues:
Respiratory, medical equipment and supplies sales 5,013 4,964
Patient services 2,471 2,504
Infusion services 2,005 1,476
-------- --------
Total cost of revenues 9,489 8,944
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Gross profit 10,808 10,700
Selling, general and administrative expenses 8,486 8,151
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Operating income 2,322 2,549
Interest income (682) (17)
Interest expense 998 1,151
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Income before income taxes 2,006 1,415
Provision for income taxes 883 594
-------- --------
Net income $ 1,123 $ 821
======== ========
Net income per share of common stock $ .10 $ .13
======== ========
Weighted average number of common shares outstanding 11,083 6,871
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
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TRANSWORLD HOME HEALTHCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
January 31,
------------------------
1997 1996
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,123 $ 821
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 883 910
Provision for doubtful accounts 1,529 1,617
Changes in assets and liabilities:
Increase in accounts receivable (4,695) (3,665)
Increase in inventories (275) (19)
Increase in prepaid expenses and other assets (117) (354)
Increase (decrease) in accounts payable and other liabilities 556 (1,243)
-------- --------
Net cash used in operating activities: (996) (1,933)
-------- --------
Cash flows used in investing activities:
Capital expenditures (410) (263)
Advances to and investment in Health Management, Inc. (30,227)
Payment on acquisition payable (1,677) (9,999)
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Net cash used in investing activities (32,314) (10,262)
-------- --------
Cash flows provided by (used in) financing activities:
Payments on short-term debt (1,000)
Proceeds from notes payable 10,000
Payments on notes payable (11)
Borrowing under revolving loan 31,347 4,765
Payments on long-term debt (5) (1,134)
Proceeds from long-term debt 47
Payments for financing fees and issuance costs (500) (349)
Stock options and warrants exercised, including tax benefit 83 51
-------- --------
Net cash provided by financing activities 30,961 12,333
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(Decrease) increase in cash (2,349) 138
Cash and temporary investments, beginning of period 4,598 915
-------- --------
Cash and temporary investments, end of period $ 2,249 $ 1,053
======== ========
Supplemental cash flow information:
Cash paid for interest $ 311 $ 932
======== ========
Cash paid for income taxes $ 28 $ 400
======== ========
Supplemental disclosure of non-cash
investing and financing activities:
Common stock issued for payment on acquisition payable $ 3,832
========
</TABLE>
See notes to condensed consolidated financial statements.
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TRANSWORLD HOME HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
Note 1: Basis of Presentation
Transworld Home HealthCare, Inc. (the "Company") is a regional provider
of a broad range of alternate site health care services and products. The
Company provides the following services and products to patients in their homes
or in an outpatient setting: (i) respiratory therapy, home medical equipment and
specialized mail-order pharmaceuticals and medical supplies, including
respiratory and diabetic medications and supplies, wound care dressings and
ostomy and orthotic products; (ii) patient services, including nursing and
para-professional services and radiation therapy; and (iii) infusion therapy.
The Condensed Consolidated Financial Statements included 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. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles 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
October 31, 1996. Although the Company's operations are not highly seasonal, the
results of operations for the three months ended January 31, 1997 and 1996 are
not necessarily indicative of the operating results for the full year. Prior
year's financial statements have been reclassified to conform with the current
year's presentation.
Note 2: Earnings per Share
Primary and fully diluted earnings per share are computed using the
weighted average number of shares of common stock outstanding, after giving
effect to contingently issuable shares under certain acquisition agreements and
dilutive stock options and warrants using the treasury stock method. Fully
diluted earnings per share has not been presented as the dilutive effect is not
material.
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TRANSWORLD HOME HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(In thousands, except per share data)
(Unaudited)
Note 2: Earnings per Share (cont.)
The earnings per share calculations for the three months ended January
31, 1997 and 1996 were computed as follows:
<TABLE>
<CAPTION>
Three Months Ended January 31,
--------------------------------
1997 1996
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<S> <C> <C>
Net income $ 1,123 $ 821
Add: Interest on long-term debt, net of tax effect,
after application of treasury stock method -- 43
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Net income, as adjusted $ 1,123 $ 864
======= =======
Weighted average number of shares outstanding 9,994 5,074
Weighted average number of shares contingently
issuable per acquisition agreements 210 576
Incremental shares, after application of treasury
stock method, of stock options and warrants 879 1,221
------- -------
Shares used in calculation of net income per
common share 11,083 6,871
======= =======
Net income per common share $ .10 $ .13
======= =======
</TABLE>
Note 3: Business Combinations
RADAMERICA
On August 5, 1994, the Company acquired all of the issued and
outstanding capital stock of Radamerica, Inc., for $8,000 in cash and 250 shares
of the Company's common stock valued at $5,000 based on a $20 per share market
price guarantee. The measurement date for such guarantee will be August 5, 1997,
at which point any deficiency between the market value of the Company's common
stock, as defined in the purchase agreement, and the $20 per share guarantee may
be paid to the selling shareholders either in common stock of the Company, in
cash or a combination of stock and cash. Such payment, if any, is due within 30
days following a selling shareholder's demand, which must be exercised by
February 5, 1998. To the extent amounts owed are not paid when due, interest
will accrue on the unpaid portion at a rate of 12% per annum.
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TRANSWORLD HOME HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(In thousands, except per share data)
(Unaudited)
Note 3: Business Combinations (cont.)
The total cost of the acquisition recorded in the financial statements
will not change as a result of any payments which may be required as a result of
the market price guarantee, however, an adjustment will be made to the amount
previously recorded for the issuance of the 250 shares. For purposes of earnings
per share calculations, contingently issuable shares of the Company's common
stock which arise as a result of the difference between the market price at each
balance sheet date and the $20 guaranteed price are included in both primary and
fully diluted earnings per share calculations.
PENDING ACQUISITIONS
VIP COMPANIES
On June 30, 1994, the Company entered into stock purchase agreements,
as amended, to acquire all of the issued and outstanding capital stock of VIP
Health Services, Inc. and Kwik Care, Ltd. (collectively, the "VIP Companies")
for $11,000, consisting of $10,250 in cash and 146 shares of the Company's
common stock, (valued at $750 after taking into account restrictions on
transfer). The Company placed in escrow $1,500 ($750 in cash and 146 shares of
Company common stock) during July 1994 as a down payment on the acquisition of
the VIP Companies (the "VIP Acquisition"), which amounts are included in "Other
Assets." The cash portion of the contract deposit has, with the Company's
consent, been loaned to the VIP Companies to be used for working capital
purposes.
The VIP Companies provide temporary nursing and related home health
care services in the City of New York and surrounding areas through both a
licensed and a Medicare certified agency. The consummation of the VIP
Acquisition is subject to, among other things, various closing conditions,
including receipt of necessary governmental approvals (including the submission
and approval of a plan of financing), the approval of the lenders under the
Credit Facility (defined and described in Note 4), the accuracy at closing of
various representations and warranties and the compliance by the sellers with
certain covenants and agreements contained in the stock purchase agreements. The
Company cannot predict when or whether all of the requisite consents and
approvals will be obtained or whether the transaction will ultimately be
consummated. For the years ended December 31, 1994 and 1995 and the nine months
ended September 30, 1996 (unaudited), the VIP Companies generated approximately
$33,000, $35,000 and $21,930, respectively, in revenues and, for the same
periods, pro forma net income (loss) (after consideration of pro forma provision
for income taxes) of $850, ($978) and $334, respectively. The 1995 net loss
includes a special one-time bonus of $3,000 (pretax) to one of the VIP
Companies' officers.
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TRANSWORLD HOME HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(In thousands, except per share data)
(Unaudited)
Note 3: Business Combinations (cont.)
HMI
On November 13, 1996, the Company entered into a number of agreements
including a stock purchase agreement (the "Stock Purchase Agreement") and a
merger agreement (the "Merger Agreement") to acquire 100% of the issued and
outstanding stock of Health Management, Inc. ("HMI") in a series of
transactions. HMI is a Buffalo Grove, Illinois based provider of integrated
pharmacy management services to patients with chronic medical conditions and to
health care professionals, drug manufacturers and third-party payors involved in
such patients' care.
For the year ended April 30, 1996 and the six months ended October 31,
1996 (unaudited), HMI reported $158,860 and $80,263 of net sales, respectively
and net loss of $10,927 and $10,190, respectively. The Company has been advised
by HMI that HMI will restate its results of operations for the six months ended
October 31, 1996 to correct certain errors relating to costs of goods sold,
which were previously understated by approximately $2,600. Included in the
amounts reported above in the year ended April 30, 1996 net loss are charges of
$16,840, related to (i) a write-off of medical device inventory ($2,840); (ii)
an additional provision reflecting a change in the estimation of the allowance
for doubtful accounts ($8,400); (iii) costs associated with organizational
consolidation and other cost reduction programs ($3,600); and (iv) professional
fees related to HMI's litigation and restatement of fiscal 1995 financial
statements ($2,000). Included in the net loss for the six months ended October
31, 1996 are estimated costs related to the settlement of a stockholder class
action litigation ($7,200) and estimated costs associated with overpayments from
New York State Medicaid ($1,400).
Also on November 13, 1996, the Company acquired HMI's senior secured
indebtedness under the credit agreement between HMI and its senior lenders (the
"HMI Credit Agreement") for $21,263 directly from such lenders. HMI is currently
in default under the HMI Credit Agreement and the Company had agreed to forbear
from exercising any remedies until March 7, 1997. Borrowings under the HMI
Credit Agreement bear interest at a rate (9.75% at January 31, 1997) which
floats with the Company's senior lending rate.
On January 14, 1997, the Stock Purchase Agreement was completed,
pursuant to which the Company acquired 8,964 newly issued shares of HMI common
stock, representing approximately 49% of HMI's outstanding common stock for $1
per share or $8,964. The
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TRANSWORLD HOME HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(In thousands, except per share data)
(Unaudited)
Note 3: Business Combinations (cont.)
Company also entered into a registration rights agreement providing for the
registration of the aforementioned shares, which commences on the earlier of
June 30, 1997 or the date on which the Merger Agreement, described below, is
terminated. The Company also received an option to purchase shares representing
up to an additional 2% of HMI's then outstanding common stock for $1 per share,
which expires on January 14, 1998.
The acquisition of 49% of the outstanding shares of HMI common stock is
being accounted for by the Company under the equity method of accounting
(effective January 31, 1997) until such time as the Company gains control of HMI
(greater than 50% ownership of the outstanding common stock of HMI), at which
point HMI will be consolidated with the Company.
The Company has been advised by HMI that HMI will restate its results
of operations for the first and second fiscal quarters ended July 31, 1996 and
October 31, 1996, respectively, and take charges of approximately $13,000 during
its third fiscal quarter (approximately $10,000 of which is related to accounts
receivable) and report substantial operating losses for the quarter ended
January 31, 1997. Consequently, the Company and HMI are in discussions with
regard to a renegotiated transaction.
Consummation of the Merger Agreement is subject to completion of such
discussions and various closing conditions, including settlement of certain
shareholder litigation, approval of the lenders under the Credit Facility,
receipt of certain regulatory approvals and approval by HMI's shareholders. If
the Merger Agreement is not consummated, it is likely that HMI would seek
protection under the Federal Bankruptcy laws.
The aggregate cost of the acquisition is uncertain and will be
dependent upon the consideration included in a renegotiated transaction. The
Company has invested approximately $31,000 in the HMI transaction as of March
17, 1997. The Company expects that any remaining cost of the acquisition will be
provided through additional debt or equity financing including the sale of the
Additional Shares (as defined and described in Note 5).
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TRANSWORLD HOME HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(In thousands, except per share data)
(Unaudited)
Note 4: Debt
On January 13, 1997, the Company amended its $100,000 senior secured
revolving credit facility (the "Credit Facility") with its senior lenders in
order to accommodate the purchase of the senior secured indebtedness of HMI and
the 8,964 shares of HMI common stock purchased by the Company pursuant to the
Stock Purchase Agreement. The principal changes include temporary adjustments to
certain financial covenants until April 30, 1997, by which time the Company
believes it will have either consummated the acquisition pursuant to the Merger
Agreement and/or have obtained additional capital, such that it will be in
compliance with the terms of the Credit Facility. The Company also agreed that,
until the acquisition of HMI has been consummated, any additional acquisitions
would be subject to the specific approval of its senior lenders.
Note 5: Stock Purchase Agreement
On January 8, 1997, Hyperion Partners II L.P. agreed to purchase an
additional 899 shares of the Company's common stock (the "Additional Shares") at
a purchase price of $11.125 per share for an aggregate purchase price of $10,000
(subject to, among other things, receipt of applicable regulatory approvals).
The Company anticipates completing this transaction during the Company's second
fiscal quarter of 1997.
Note 6: Commitments and Contingencies
On November 2, 1994, an action was filed in the Supreme Court of the
State of New York, County of Westchester against the Company, alleging that one
of its drivers negligently caused the death of the plaintiff's husband while
operating his motor vehicle during a delivery for the Company. The plaintiffs
are seeking $12,580 in damages for wrongful death, pain and suffering, loss of
consortium and related claims. The Company has tendered defense of this action
to its insurance carrier and management of the Company and counsel to the
insurance carrier intend to vigorously defend this lawsuit. A pretrial hearing
is scheduled for March 19, 1997. The Company is not able to estimate any
potential exposure or range of exposure and has not recorded any amounts in its
financial statements. It is reasonably possible that irrespective of insurance
coverage, the ultimate outcome of this action may be materially unfavorable to
the Company's consolidated results of operations, financial position or cash
flows. However, the Company believes that the ultimate liability, if any, will
be within the policy limits of its insurance policies, and will not have a
material adverse effect on the Company's consolidated financial position,
results of operations or cash flows.
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
THREE MONTHS ENDED JANUARY 31, 1997 VS. THREE MONTHS ENDED JANUARY 31, 1996
Revenues. Total revenues increased by $653,000 or 3.3% to $20,297,000
for the three months ended January 31, 1997 from $19,644,000 for the three
months ended January 31, 1996. This increase was primarily attributable to the
inclusion of U.S. HomeCare Infusion Therapy Services Corporation of New Jersey
("USNJ") for the three months ended January 31, 1997.
Cost of Revenues. Cost of revenues increased by $545,000 or 6.1% to
$9,489,000 for the three months ended January 31, 1997 from $8,944,000 for the
three months ended January 31, 1996. As a percentage of total revenues, cost of
revenues increased to 46.8% from 45.5% for the three months ended January 31,
1997 and 1996, respectively. Cost of revenues as a percentage of sales remained
relatively constant for patient services (51.9% for the three months ended
January 31, 1997 versus 52.0% for the corresponding 1996 period), decreased for
infusion services (60.7% for the three months ended January 31, 1997 versus
61.6% for the corresponding 1996 period) and increased for respiratory and
medical equipment and supplies sales (41.0% for the three months ended January
31, 1997 versus 39.9% for the corresponding 1996 period).
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $335,000 or 4.1% to $8,486,000 for the
three months ended January 31, 1997 from $8,151,000 for the comparable 1996
period. This increase was principally due to an increase in selling, general and
administrative expenses at the Company's specialty mail-order pharmacy and
medical supplies operations ($156,000) and the Company's infusion therapy
operations primarily due to the inclusion of USNJ for the three months ended
January 31, 1997 ($152,000).
Interest Income. Interest income increased by $665,000 to $682,000 for
the three months ended January 31, 1997 from $17,000 for the comparable 1996
period. This increase was primarily attributable to interest income earned under
the HMI Credit Agreement (as herein defined) ($668,000) in the first quarter of
1997.
Interest Expense. Interest expense decreased by $153,000 to $998,000
for the three months ended January 31, 1997 from $1,151,000 for the comparable
1996 period. This decrease in interest expense was principally due to interest
expense in the first quarter of 1996 on acquisitions payable ($118,000) and the
$10,000,000 subordinated loan ($122,000).
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Results of Operations (cont.)
Provision for Income Taxes. Provision for income taxes as a percentage
of income before income taxes was 44.0% for the three months ended January 31,
1997 and 42.0% for the three months ended January 31, 1996. The increase in the
effective tax rate from the 1996 period to the 1997 period was attributable to
higher levels of non-deductible expenses, primarily goodwill amortization.
Net Income. As a result of the foregoing, net income increased by
$302,000 or 36.8% to $1,123,000 for the three months ended January 31, 1997 from
net income of $821,000 for the three months ended January 31, 1996.
Liquidity and Capital Resources
During the three months ended January 31, 1997, the Company generated
negative cash flow from operations of ($996,000) primarily as a result of an
increase in accounts receivable of $3,166,000 (net of increases in allowance for
doubtful accounts) (see Accounts Receivable below). The Company utilized
$32,314,000 in investing activities, including $21,263,000 for the acquisition
of the senior secured indebtedness of Health Management, Inc. ("HMI"),
$8,964,000 for the acquisition of 8,964,000 shares of HMI common stock,
$1,677,000 for payments on acquisitions payable (primarily for USNJ) and
$410,000 for capital expenditures. Cash requirements during the three months
ended January 31, 1997 for operating and investing activities were met through
borrowings under the Credit Facility.
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 January 31, 1997 and
October 31, 1996, $27,580,000 (22.6%) and $24,414,000 (26.9%), respectively, of
the Company's total assets consisted of accounts receivable substantially from
third-party payors. Such payors generally 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.
Accounts receivable increased by $3,166,000 from October 31, 1996 to
January 31, 1997 primarily due to an increase in accounts receivable at the
Company's specialty mail-order pharmacy and medical supply operations
($2,032,000) and the infusion therapy operations ($1,293,000) primarily
attributable to the acquisition of USNJ.
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Liquidity and Capital Resources (cont.)
During fiscal 1996 and first quarter 1997 the Company experienced a
significant increase in accounts receivable at its DermaQuest, Inc.
("DermaQuest") operation whose main product lines include wound care and
orthotic products. The Medicare program, to whom substantially all DermaQuest
claims are initially submitted for payment, has subjected these claims to an
extensive review process and, in many cases, has required DermaQuest to pursue
payment through the fair hearing process of the applicable Medicare
intermediary. This has created significant delays in payments, in many cases
extending beyond twelve months, leading to the significant buildup in accounts
receivable with the corresponding negative impact on cash flow. The Company
believes that this trend will continue through the 1997 fiscal year. In
establishing the net realizable value of its accounts receivable for DermaQuest,
the Company has relied on its historical payment experience which includes its
highly favorable outcomes in the fair hearing process. The Company believes that
based on such prior favorable payment experience, current regulations and its
billing and related documentation practices, there is no current basis to
indicate that DermaQuest would be any less successful in the collection of its
accounts receivable as reported.
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 January 31, 1997, and October 31, 1996, the Company's
average DSOs were 122 and 109, respectively, with the increase in DSOs
principally due to the factors previously discussed. As the proportion of
third-party payors' claims related to alternate site health care increases, the
Company believes that third-party payors are likely to increase their review of
such claims, the effect of which would be to generally increase DSOs.
Credit Facility. On July 31, 1996, the Company completed a $100,000,000
senior secured revolving credit facility, underwritten by Bankers Trust Company
who is also acting as Agent Bank (the "Credit Facility"). The loans under the
Credit Facility are secured by, among other things, a lien on substantially all
of the Company's and its subsidiaries' assets, a pledge of the Company's
ownership interest in subsidiaries and guaranties by the Company's subsidiaries.
The Credit Facility provides that subject to the terms thereof, the Company may
make borrowings either at the Base Rate (as defined in the Credit Facility),
plus 1% or the Eurodollar Rate (5.5% at January 31, 1997), plus 2%. As of March
14, 1997, the Company had outstanding $46,338,857 under the Credit Facility.
Availability under the Credit Facility was $53,661,143 as of March 14, 1997.
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Liquidity and Capital Resources (cont.)
Subject to certain exceptions, the Credit Facility prohibits or
restricts, among other things, the incurrence of liens, the incurrence of
indebtedness, certain fundamental corporate changes, dividends, the making of
specified investments and certain transactions with affiliates. In addition, the
Credit Facility contains affirmative and negative financial covenants
customarily found in agreements of this kind, including the maintenance of
certain financial ratios, such as interest coverage, debt to earnings before
interest, taxes, depreciation and amortization ("EBITDA") and minimum EBITDA. On
January 13, 1997, the Company amended the Credit Facility in order to
accommodate the purchase of HMI's senior secured indebtedness and the 8,964
shares of HMI common stock purchased by the Company pursuant to the Stock
Purchase Agreement (as defined herein). The principal changes include temporary
adjustments to certain financial covenants until April 30, 1997, by which time
the Company believes it will have either consummated the acquisition pursuant to
the Merger Agreement (as defined herein) and/or have obtained additional
capital, such that it will be in compliance with the terms of the Credit
Facility. The Company also agreed that, until the acquisition of HMI has been
consummated, any additional acquisitions would be subject to the specific
approval of its senior lenders. At January 31, 1997, the Company was in
compliance with all financial covenants contained in the Credit Facility.
Radamerica Price Support Payment. In connection with the Company's
acquisition of Radamerica, Inc. ("Radamerica"), the Company agreed that in the
event the market value of its common stock on August 5, 1997 is less than $20
per share, the Company will pay to each Radamerica seller, for each share of
common stock held by them at such time, an amount equal to the difference
between the market value on such date and $20 (the "Radamerica Price Support
Payment"). Based upon the closing price of the common stock on January 31, 1997,
the Company's obligation under the Radamerica Price Support Payment would have
been $2,281,250. The Company may pay the Radamerica Price Support Payment in
whole or in part in shares of common stock or in cash within 30 days following a
seller's demand therefor, which demand must be exercised by February 5, 1998.
Any portion of the Radamerica Price Support Payment not paid when due will bear
interest at the rate of 12% per annum.
Page 16
<PAGE> 17
Liquidity and Capital Resources (cont.)
Pending VIP Acquisition. Pursuant to the stock purchase agreements, the
Company is required to pay to the sellers of VIP Health Services, Inc. and Kwik
Care, Ltd. (collectively, (the "VIP Companies") at the closing of the
acquisition of the VIP Companies (the "VIP Closing"), $10,250,000 in cash (of
which $750,000 and 145,455 shares of common stock valued at $750,000 has been
posted as a contract deposit). The cash portion of the contract deposit has,
with the Company's consent, been loaned to the VIP Companies to be used for
working capital purposes. In addition, at the VIP Closing the Company will
assume all stated liabilities of the VIP Companies as of the VIP Closing
($8,434,000 at September 30, 1996, which includes approximately $3,000,000 due
to officers/shareholders). The Company expects that some portion of such
liabilities will be repaid with cash flows generated through operating
activities of the VIP Companies. However, to the extent such cash flows are not
sufficient, it may be necessary for the Company to use its own funds or obtain
additional financing to repay the balance of such assumed liabilities,
principally amounts due to the former officers/shareholders.
The Company has not received approval from its lenders under the Credit
Facility to consummate the acquisition of the VIP Companies (the "VIP
Acquisition") and there can be no assurance that such approval will be obtained
or, if obtained, will be on terms satisfactory to the Company. In addition, the
consummation of the VIP Acquisition is subject to, among other things, various
closing conditions, including the receipt of necessary governmental approvals
(including the submission and approval of a plan of financing), the accuracy at
closing of various representations and warranties and the compliance by the
sellers with certain covenants and agreements contained in the stock purchase
agreements. The Company cannot predict when or whether all of the requisite
consents and approvals will be obtained or whether the transaction will
ultimately be consummated.
If the Company defaulted under the VIP acquisition agreements, it could
suffer a loss of its contract deposit which has been posted as liquidated
damages. In the event that the transaction is not consummated for reasons other
than a Company default, the deposit is refundable to the Company. In any event
the Company's liquidity will not be materially adversely impacted because the
cash portion of the deposit was paid by the Company in the 1994 fiscal year.
Page 17
<PAGE> 18
Liquidity and Capital Resources (cont.)
Pending HMI Acquisition. On November 13, 1996, the Company acquired the
senior secured indebtedness of HMI under the credit agreement (the "HMI Credit
Agreement") from HMI's senior lenders for $21,263,000. In addition, subject to
the terms and conditions of an agreement between the Company and HMI dated
November 13, 1996, as amended (the "Supplemental Agreement"), the Company also
had agreed to lend to HMI from time to time, but only until completion of the
Stock Purchase Agreement (as defined below), up to $5,000,000 for working
capital purposes. HMI is currently in default under the HMI Credit Agreement and
the Company had agreed to forebear from exercising any remedies until March 7,
1997. As of January 13, 1997, the Company had advanced $4,649,285 to HMI for
working capital purposes. On November 13, 1996, the Company and HMI also entered
into a stock purchase agreement, as amended (the "Stock Purchase Agreement"),
pursuant to which on January 14, 1997, the Company acquired 8,964,292 shares of
HMI common stock, representing approximately 49% of HMI's outstanding common
stock for a cash purchase price of $8,964,292, which actual cash outlay was
reduced by the $4,649,285 advanced for working capital purposes pursuant to the
Supplemental Agreement. At the closing of the Stock Purchase Agreement, the
Company and HMI also entered into a registration rights agreement (the "HMI
Registration Agreement") providing for the registration under the Securities Act
of 1933, commencing on the earlier of June 30, 1997 or the date on which the
Merger Agreement (as defined and described below) is terminated, of the shares
of HMI common stock acquired by the Company pursuant to the Stock Purchase
Agreement and issuable upon the exercise of the Option (as defined and described
below). On November 13, 1996, HMI also issued to the Company an option (the
"Option"), until January 14, 1998, to purchase newly issued shares representing
up to an additional 2% of HMI's then outstanding common stock for a purchase
price of $1.00 per share less amounts advanced pursuant to the Supplemental
Agreement and not deducted under the Stock Purchase Agreement. On November 13,
1996, the Company and HMI also entered into an agreement and plan of merger, as
amended (the "Merger Agreement"), whereby each outstanding share of HMI common
stock not already owned by the Company will be acquired.
The Company has been advised by HMI that HMI will restate its results
of operations for the first and second fiscal quarters ending July 31, 1996 and
October 31, 1996, respectively, and take charges of approximately $13,000,000
during its third fiscal quarter (approximately $10,000,000 of which is related
to accounts receivable) and report substantial operating losses for the quarter
ended January 31, 1997. Consequently, the Company and HMI are in discussions
with regard to a renegotiated transaction.
Consummation of the Merger Agreement is subject to completion of such
discussions and various closing conditions, including settlement of certain
shareholder litigation, approval of the lenders under the Credit Facility,
receipt of certain regulatory approvals and approval by HMI's shareholders. If
the Merger Agreement is not consummated, it is likely that HMI would seek
protection under the Federal Bankruptcy laws.
Page 18
<PAGE> 19
Liquidity and Capital Resources (cont.)
If HMI incurs additional or unusual costs, payment on its receivables
slows, and/or it does not receive ordinary credit terms for the purchase of
pharmaceutical product, as anticipated, it may require additional cash to fund
operations, and there can be no assurance that such funds will be available to
the Company, or if available, will be on terms acceptable to the Company. If HMI
does not continue satisfactory relationships with its suppliers or payments on
its receivables slows materially and such funds are not made available to HMI,
it is likely that HMI would seek protection under the Federal Bankruptcy laws.
The aggregate cost of the acquisition is uncertain and will be
dependent upon the consideration included in a renegotiated transaction. The
Company has invested approximately $31,000,000 in the HMI transaction as of
March 17, 1997. The Company expects that any remaining cost of the acquisition
will be provided through additional debt or equity financing including the sale
of the Additional Shares (as defined and described below).
Hyperion Transaction. On January 8, 1997, the Company entered into a
stock purchase agreement with Hyperion Partners II L.P. ("HPII") pursuant to
which HPII agreed, subject to the conditions stated therein, to purchase 898,877
shares of the Company's common stock (the "Additional Shares") at a purchase
price of $11.125 per share for an aggregate purchase price of $10,000,000.
Consummation of this transaction is subject to, among other things, receipt of
applicable regulatory approvals and may be completed at the Company's request.
The Company anticipates completing this transaction during the Company's second
fiscal quarter of 1997.
Litigation. On November 2, 1994, an action was filed in the Supreme
Court of the State of New York, County of Westchester by Celia M. Consiglio,
individually and as administratrix of her husband's estate against the Company,
alleging that one of its drivers negligently caused the death of the plaintiff's
husband while operating his motor vehicle during a delivery for the Company. The
plaintiffs are seeking $12,580,000 in damages for wrongful death, pain and
suffering, loss of consortium and related claims. The Company has tendered a
defense of this action to its insurance carrier and management of the Company
and counsel to the insurance carrier intend to vigorously defend this lawsuit. A
pretrial hearing is scheduled for March 19, 1997. The Company is not able to
estimate any potential exposure or range of exposure and has not recorded any
amounts in its financial statements. It is reasonably possible that irrespective
of insurance coverage, the ultimate outcome of this action may be materially
unfavorable to the Company's consolidated results of operations, financial
position or cash flows. However, the Company believes that the ultimate
liability, if any, will be within the policy limits of its insurance and will
not have a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows.
Page 19
<PAGE> 20
Liquidity and Capital Resources (cont.)
The following information relating to certain legal proceedings
concerning HMI is derived from information contained in the HMI 10-K, filed with
the Securities and Exchange Commission (the "Commission") on or about July 29,
1996 and the HMI 10-Q, filed with the Commission on or about December 20, 1996.
The information contained herein is qualified in its entirety by reference to
the HMI 10-K and the HMI 10-Q.
HMI and certain of its past and current directors and officers have
been named as defendants in a consolidated securities fraud lawsuit 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). This lawsuit alleges claims under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, as amended, arising out of alleged
misrepresentations and omissions by HMI in connection with certain of its
securities filings. HMI entered into a stipulation of partial settlement with
the plaintiffs' counsel and, on September 18, 1996, such stipulation received
preliminary court approval (the "Original Settlement"). The Original Settlement
was subsequently amended to, among other things, reduce the consideration being
paid by HMI to the plaintiff class to $7,200,000 (the "Amended Settlement"). An
amended stipulation of partial settlement to this effect was executed on
December 19, 1996, preliminary approval by the U.S. District Court for the
Eastern District of New York thereof was granted on December 20, 1996, and a
hearing for final approval has been stayed until April 11, 1997. An additional
reduction to the Amended Settlement is currently being sought pursuant to the
renegotiated transaction with HMI.
Certain of HMI's current and former officers and directors have been
named as defendants, and HMI has been named as a nominal defendant, in a
consolidated derivative action filed in the United States District Court for the
Eastern District of New York entitled In re Health Management, Inc.
Stockholders' Derivative Litigation, Master File No. 96 Civ. 1208 (TCP). The
consolidated action alleges claims for breach of fiduciary duty and contribution
against the individual director defendants arising out of alleged
misrepresentations and omissions contained in certain of HMI's securities
filings as more fully alleged in the lawsuit described above. The consolidated
action seeks unspecified monetary damages on behalf of HMI, as well as
declaratory and injunctive relief. An amended consolidated complaint was served
on HMI on August 12, 1996. HMI has not yet filed its response to the amended
consolidated complaint. Under HMI's Certificate of Incorporation and Bylaws,
certain officers and directors may be entitled to indemnification, or
advancement of expenses for legal fees in connection with the above suits from
HMI.
Page 20
<PAGE> 21
Liquidity and Capital Resources (cont.)
BDO Seidman, LLP has been named as a defendant, and HMI has been named
as a nominal defendant, in a derivative lawsuit filed in the Supreme Court for
the State of New York, County of New York entitled Howard Vogel, et al. v. BDO
Seidman, LLP, et al., Index No. 96-603064. The complaint alleges claims for
breach of contract, professional malpractice, negligent misrepresentation,
contribution and indemnification against BDO Seidman, LLP arising out of alleged
misrepresentations and omissions contained in certain of HMI's securities
filings. BDO Seidman, LLP was HMI's auditor at the time those filings were made
and has continued to serve as such. The complaint seeks unspecified monetary
damages on behalf of HMI, as well as declaratory and injunctive relief. Pursuant
to stipulation, HMI's time to answer or otherwise move against the complaint in
this action has been adjourned without date.
The parties to the above described derivative actions have reached
settlement in principle of all claims against all defendants. The parties are
still in the process of negotiating the terms of the settlement agreement.
The enforcement division of the Commission has 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
cooperating fully with this investigation and has responded to the Commission's
requests for documentary evidence.
On April 3, 1995, American Preferred Prescription, Inc. ("APP") filed a
complaint against HMI, Preferred Rx, Inc., Community Prescription Services and
Sean Strub in the New York Supreme Court for tortious interference with existing
and prospective contractual relationships, for lost customers and business
opportunities resulting from allegedly slanderous statements and for allegedly
false advertising and promotions. Four separate causes of action are alleged,
each for up to $10,000,000 in damages. By motion dated March 12, 1996, APP
moved, in the Supreme Court of the State of New York, to amend its complaint to
add, among other things, a cause of action against HMI alleging that a proposed
plan of reorganization presented by HMI to the Bankruptcy Court in APP's
bankruptcy case was based on fraudulent financial statements. Management of HMI
believes APP's suit against it to be without merit, intends to defend the
proceeding vigorously and believes the outcome will not have a material adverse
effect on HMI's results of operations or financial position.
As a result of a New York State Medicaid audit, HMI has reached a
settlement agreement in the amount of $1,400,000 with the New York
State Department of Social Services regarding certain overpayments to HMI. HMI
has established a reserve in an equal amount in respect thereof.
According to HMI, the outcome of certain of these lawsuits and the
investigation are uncertain and the ultimate outcomes could have a material
adverse effect on HMI.
Page 21
<PAGE> 22
PART II
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
11 Statements Re Computation of Per Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K.
The Company filed a Form 8-K dated October 28, 1996 on or
about November 12, 1996.
The Company filed a Form 8-K dated November 13, 1996 on or
about November 26, 1996.
The Company filed a Form 8-K dated January 13,1997 on or
about January 22, 1997.
Page 22
<PAGE> 23
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: March 17, 1997
TRANSWORLD HOME HEALTHCARE, INC.
By: /s/ Wayne A. Palladino
-----------------------
Wayne A. Palladino
Senior Vice President and Chief Financial
Officer (Principal Financial Officer and
Officer Duly Authorized to Sign on Behalf
of Registrant)
Page 23
<PAGE> 24
EXHIBIT INDEX
-------------
Exhibit Description
------- -----------
11 Statements Re Computation of Per Share
Earnings
27 Financial Data Schedule
<PAGE> 1
Exhibit 11
Transworld Home HealthCare, Inc.
Statement Re Computation of Earnings Per Share
(In thousands, except per share data)
<TABLE>
<CAPTION>
Primary Computation
For the Three Months
Ended January 31,
---------------------
1996 1995
------- -------
<S> <C> <C>
Net income $ 1,123 $ 821
Add: Interest on long-term debt, net of tax effect, after
application of treasury stock method 43
------- -------
$ 1,123 $ 864
======= =======
Net income, as adjusted
Weighted average number of shares outstanding 9,994 5,074
Weighted average number of shares
contingently issuable per acquisition agreements 210 576
Incremental shares, after application of treasury
stock method, of stock options and warrants 879 1,221
------- -------
Shares used in calculation of net income per common share 11,083 6,871
======= =======
Primary net income per share $ .10 $ .13
======= =======
</TABLE>
<TABLE>
<CAPTION>
Fully Diluted Computation
For the Three Months
Ended January 31,
---------------------
1996 1995
------- -------
<S> <C> <C>
Net income $ 1,123 $ 821
Add: Interest on long-term debt, net of tax effect, after
application of treasury stock method 43
------- -------
$ 1,123 $ 864
Net income, as adjusted
======= =======
Weighted average number of shares outstanding 9,994 5,074
Weighted average number of shares
contingently issuable per acquisition agreements 210 576
Incremental shares, after application of treasury
stock method, of stock options and warrants 881 1,221
------- -------
Shares used in calculation of fully diluted income per common share 11,085 6,871
======= =======
Fully diluted net income per share $ .10 $ .13
======= =======
</TABLE>
Page 25
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> JAN-31-1997
<EXCHANGE-RATE> 1
<CASH> 2,249
<SECURITIES> 0
<RECEIVABLES> 27,580
<ALLOWANCES> 6,227
<INVENTORY> 2,104
<CURRENT-ASSETS> 37,338
<PP&E> 8,966
<DEPRECIATION> 4,890
<TOTAL-ASSETS> 122,190
<CURRENT-LIABILITIES> 9,377
<BONDS> 0
0
0
<COMMON> 100
<OTHER-SE> 68,181
<TOTAL-LIABILITY-AND-EQUITY> 122,190
<SALES> 20,297
<TOTAL-REVENUES> 20,297
<CGS> 9,489
<TOTAL-COSTS> 9,489
<OTHER-EXPENSES> 8,486
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 316
<INCOME-PRETAX> 2,006
<INCOME-TAX> 883
<INCOME-CONTINUING> 1,123
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,123
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
