<PAGE>
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 June 30, 1998
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 August 10, 1998
----- ------------------------------
Common Stock 17,536,076 Shares
<PAGE>
Transworld Healthcare, Inc.
Third Quarter Report On Form 10-Q
Table of Contents
Part I. Page
Item 1. Financial Statements (Unaudited).................................. 3
Condensed Consolidated Balance Sheets
June 30, 1998 and September 30, 1997.................... 4
Condensed Consolidated Statements of Operations
For the Three and Nine Months Ended
June 30, 1998 and July 31, 1997......................... 5
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended June 30, 1998
and July 31, 1997....................................... 6
Notes to Condensed Consolidated Financial
Statements.............................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 17
Part II.
Item 1. Legal Proceedings................................................. 28
Item 2. Changes in Securities and Use of Proceeds......................... 28
Item 4. Submission of Matters to a Vote of Security Holders............... 29
Item 6. Exhibits and Reports on Form 8-K.................................. 29
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward looking statements. This Quarterly Report contains certain forward
looking statements and information that are based on the beliefs of management
as well as assumptions made by and information currently available to
management. The statements contained in this Quarterly Report relating to
matters that are not historical facts are forward looking statements that
involve risks and uncertainties, including, but not limited to, future demand
for the company's products and services, general economic conditions,
government regulation, competition and customer strategies, capital deployment,
the impact of pricing and reimbursement and other risks and uncertainties.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those described herein as anticipated, believed, estimated or expected.
Page 2
<PAGE>
PART I
Item 1. Financial Statements (Unaudited)
The financial statements of Transworld Healthcare, Inc. (the
"Company") begin on page 4.
Page 3
<PAGE>
TRANSWORLD HEALTHCARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1998 1997
-------- -------------
ASSETS
<S> <C> <C>
Current assets:
Cash and temporary investments $ 10,574 $ 10,626
Accounts receivable, less allowance for doubtful
accounts of $13,106 and $11,909 34,159 31,475
Inventories 3,789 3,226
Investment in Health Management, Inc. 22,367
Prepaid income taxes 1,933 2,742
Deferred income taxes 6,530 6,530
Prepaid expenses and other current assets 6,656 6,093
-------- --------
Total current assets 63,641 83,059
Property & equipment, net 9,783 8,448
Intangible assets, net of accumulated amortization of
$5,659 and $3,283 104,715 103,385
Deferred income taxes 2,356 2,356
Other assets 3,232 4,033
-------- --------
Total assets $183,727 $201,281
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt, including obligations
under capital leases $ 34 $ 25,051
Accounts payable 6,659 7,844
Accrued expenses, related parties 7,500
Accrued expenses 12,750 13,672
Income taxes payable 2,772 2,387
Acquisitions payable 214 194
-------- --------
Total current liabilities 22,429 56,648
Long-term debt, including obligations under capital leases 61,375 61,400
Deferred income taxes and other 1,397 1,328
-------- --------
Total liabilities 85,201 119,376
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; authorized
2,000 shares, issued and outstanding - none
Common stock, $.01 par value; authorized
40,000 shares, issued and outstanding -
17,536 and 15,300 shares 175 153
Additional paid-in capital 125,121 111,774
Translation adjustment 1,037 (2,192)
Retained deficit (27,807) (27,830)
-------- --------
Total stockholders' equity 98,526 81,905
-------- --------
Total liabilities and stockholders' equity $183,727 $201,281
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
Page 4
<PAGE>
<TABLE>
<CAPTION>
TRANSWORLD HEALTHCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------- ---------------------------
JUNE 30, JULY 31, JUNE 30, JULY 31,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Net respiratory, medical equipment and supplies sales $19,821 $ 14,696 $ 55,497 $ 40,150
Net patient services 17,652 5,736 51,652 15,152
Net infusion services 2,388 3,007 7,840 9,103
------- -------- -------- --------
Total revenues 39,861 23,439 114,989 64,405
------- -------- -------- --------
Cost of revenues:
Respiratory, medical equipment and supplies sales 10,876 7,778 31,116 18,723
Patient services 12,222 2,636 35,832 7,419
Infusion services 1,685 2,160 5,459 6,171
------- -------- -------- --------
Total cost of revenues 24,783 12,574 72,407 32,313
------- -------- -------- --------
Gross profit 15,078 10,865 42,582 32,092
Selling, general and administrative expenses 13,152 12,811 37,662 29,815
Special charges 34,433 554 34,433
Equity in losses of Health Management, Inc., net 296
------- -------- -------- --------
Operating income (loss) 1,926 (36,379) 4,366 (32,452)
Interest income (156) (1,467) (498) (2,575)
Interest expense 1,540 1,603 4,818 3,716
------- -------- -------- --------
Income (loss) before income taxes 542 (36,515) 46 (33,593)
Provision (benefit) for income taxes 271 (6,128) 23 (4,562)
------- -------- -------- --------
Net income (loss) $ 271 $(30,387) $ 23 $(29,031)
======= ======== ======== ========
Net income (loss) per share of common stock:
Basic $ .02 $ (1.97) $ - $ (2.37)
======= ======== ======== ========
Diluted $ .02 $ (1.97) $ - $ (2.37)
======= ======== ======== ========
Weighted average number of common shares outstanding:
Basic 17,535 15,444 17,257 12,228
======= ======== ======== ========
Diluted 17,579 15,444 17,796 12,228
======= ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
Page 5
<PAGE>
TRANSWORLD HEALTHCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------
JUNE 30, JULY 31,
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 23 $ (29,031)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,613 2,941
Provision for doubtful accounts 5,743 7,531
Equity in losses of Health Management, Inc. 637
Deferred income taxes (4,000)
Special charges 34,433
Payments for debt issuance costs (17) (1,539)
Changes in assets and liabilities:
Increase in accounts receivable (8,067) (10,395)
Increase in inventories (526) (63)
Increase in prepaid expenses and other assets (1,011) (5,183)
(Decrease) increase in accounts payable and other liabilities (1,500) 121
-------- ---------
Net cash used in operating activities (742) (4,548)
-------- ---------
Cash flows from investing activities:
Capital expenditures (2,603) (1,437)
Notes receivable issued (70)
Payments received from the sale of Health Management, Inc. 32,328
Advances to and investment in Health Management, Inc. (11,021) (36,684)
Payments received from Health Management, Inc. 2,032
Proceeds from sale of subsidiary, net of cash overdraft when sold 1,204 12,114
Purchase of subsidiaries and assets - net of cash acquired (529) (93,161)
Proceeds from termination of agreement with VIP 500
Payments on acquisition payable (350) (1,734)
-------- ---------
Net cash provided by (used in) investing activities 19,029 (118,440)
-------- ---------
Cash flows from financing activities:
Borrowings under revolving loan 96,847
Payments on revolving loan (25,000) (22,983)
Payments on long-term debt (40) (254)
Proceeds from stock issuance 50,650
Stock options and warrants exercised, including tax benefit 6,512 494
Other, net (19) (99)
-------- ---------
Net cash (used in) provided by financing activities (18,547) 124,655
-------- ---------
Effect of exchange rate on cash 208 900
-------- ---------
(Decrease) increase in cash (52) 2,567
Cash and temporary investments, beginning of period 10,626 4,598
-------- ---------
Cash and temporary investments, end of period $ 10,574 $ 7,165
======== =========
Supplemental cash flow information:
Cash paid for interest $ 4,115 $ 2,540
======== =========
Cash paid for income taxes $ 1,488 $ 2,301
======== =========
Details of businesses acquired in purchase transactions:
Fair value of assets acquired $ 106,066
=========
Liabilities assumed and incurred $ 12,040
=========
Cash paid for acquisitions (including related expenses) 94,026
Cash acquired 865
---------
Net cash paid for acquisitions $ 93,161
=========
</TABLE>
See notes to condensed consolidated financial statements.
Page 6
<PAGE>
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
Note 1: Basis of Presentation
Transworld Healthcare, Inc. (the "Company") is a provider of a broad
range of home health care services and products with operations in the United
States and the United Kingdom. The Company provides the following services and
products to patients in their homes: (i) specialty mail-order pharmaceuticals,
medical supplies, respiratory therapy and home medical equipment; (ii) patient
services, including nursing and para-professional services; and (iii) infusion
therapy.
The 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 Transition Report on Form 10-K
for the eleven months ended September 30, 1997.
The Company changed its fiscal year end from October 31 to September
30 effective for fiscal 1997. Three and nine month information presented for
prior periods is based upon the Company's former fiscal year end and it has
been deemed not practicable to include comparable prior period information
based upon the Company's current fiscal year end of September 30. There were no
factors which affected the comparability of the information or trends
reflected. Although the Company's operations are not highly seasonal, the
results of operations for the three and nine months ended June 30, 1998 and
July 31, 1997 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
Effective December 31, 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share" ("EPS"). SFAS No. 128 replaced primary EPS with basic EPS and fully
diluted EPS with diluted EPS. Basic EPS is computed using the weighted average
number of common shares outstanding, after giving effect to issuable shares per
agreements. Diluted EPS is computed using the weighted average number of common
shares outstanding, after giving effect to issuable shares per
Page 7
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TRANSWORLD HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(In thousands, except per share data)
(Unaudited)
Note 2: Earnings Per Share (cont.)
agreements and dilutive stock options and warrants using the treasury stock
method. The Company had options and warrants to purchase 4,019 shares of common
stock ranging in price from $6.38 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. EPS data presented for the three and
nine months ended July 31, 1997 have been restated to reflect the provisions of
SFAS No. 128. Accordingly, for the three and nine months ended July 31, 1997,
the Company had an incremental weighted average of 620 and 752, respectively,
of options and warrants which are not included in the diluted calculation as
the effect of such inclusion would be antidilutive due to a net loss position.
The earnings per share calculations for the three and nine months
ended June 30, 1998 and July 31, 1997, were computed as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, 1998 JULY 31, 1997 JUNE 30, 1998 JULY 31, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income (loss) $271 $(30,387) $23 $(29,031)
============= ============= ============= =============
Weighted average number of shares outstanding 17,190 15,123 16,369 11,907
Weighted average number of shares
issuable per agreements 345 321 888 321
------------- ------------- ------------- -------------
Weighted average number of shares
used in basic calculation 17,535 15,444 17,257 12,228
Incremental shares, after application of treasury
stock method, of stock options and warrants 44 - 539 -
------------- ------------- ------------- -------------
Weighted average number of shares
used in diluted calculation 17,579 15,444 17,796 12,228
============= ============= ============= =============
Net income (loss) per share of common stock:
Basic $0.02 $(1.97) - $(2.37)
============= ============= ============= =============
Diluted $0.02 $(1.97) - $(2.37)
============= ============= ============= =============
</TABLE>
Page 8
<PAGE>
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(In thousands, except per share data)
(Unaudited)
Note 3: Business Combinations and Disposals
The acquisitions of Omnicare Group, plc ("Omnicare") at the end of
June 1997 and Allied Medicare Limited ("Allied") effective June 23, 1997 have
been accounted for using the purchase method of accounting. The results of
operations for Omnicare and Allied have been included in the financial
statements from their respective dates of acquisition.
The following represents the unaudited pro forma results of operations
and related per share information assuming the Company acquired Omnicare and
Allied on November 1, 1996. The pro forma results are based on the historical
financial statements of the Company for the nine months ended July 31, 1997,
Omnicare for the eight months ended June 30, 1997 and Allied for the thirty-six
weeks ended June 22, 1997.
The unaudited pro forma information is not necessarily indicative
either of the results of operations that would have occurred had the
acquisitions been made on November 1, 1996 or that may occur in the future.
<TABLE>
<CAPTION>
Nine Months Ended
July 31, 1997
=============
<S> <C>
Net revenues $89,361
Net loss (28,354)
Net loss per share of common stock:
Basic $(2.18)
Diluted $(2.18)
</TABLE>
HMI
On November 13, 1996, the Company entered into a number of agreements
including a 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.
Page 9
<PAGE>
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(In thousands, except per share data)
(Unaudited)
Note 3: Business Combinations and Disposals (cont.)
On October 1, 1997, the Company, through a wholly-owned subsidiary,
completed the merger with HMI. Under the terms of the Merger Agreement, HMI
stockholders received $.30 in cash for each outstanding share of HMI common
stock not already owned by the Company. Concurrently with the closing of the
merger, the Company sold substantially all of the businesses and operations of
HMI in an asset sale (the "Asset Sale") to Counsel Corporation ("Counsel") for
$40,000. Of the $40,000 proceeds, $30,000 was received in cash at closing with
$7,500 being paid to the Company as HMI's accounts receivable, existing at date
of sale, are collected, with the remaining $2,500 held in escrow for
post-closing adjustments. As of June 30, 1998 an aggregate (including interest
earned on such escrow funds) of $37,648 was received (including the release of
the $7,500 escrow that was held for accounts receivable collection), of which
$25,000 was used to reduce the senior secured debt owed by the Company under
the Credit Facility (as defined in Note 4), $2,800 was used to complete the
merger and the remainder was used for costs, fees and other expenses to
complete the Asset Sale, as well as to satisfy liabilities and wind-down costs
not assumed by Counsel. The $2,500 escrow was utilized for post-closing
adjustments. Accordingly, at June 30, 1998 the Company had no investment in
HMI. The Company also amended its Credit Facility on October 1, 1997 to
accommodate the merger with HMI and the sale to Counsel.
Pursuant to the Asset Sale, Counsel did not assume any liabilities of
HMI other than certain liabilities arising after the closing under assumed
contracts and certain employee-related liabilities.
Note 4: Debt
At June 30, 1998, the Company was in technical default of its senior
secured revolving credit facility (the "Credit Facility") due to non-compliance
with certain financial covenants (interest coverage, debt to earnings before
interest, taxes, depreciation and amortization ("EBITDA") and minimum EBITDA).
Subsequently, the Company received approval from the required banks under
the Credit Facility for modifications to the Credit Agreement amending
covenants bringing the Company into compliance with the Credit Facility. (Also
see Note 7 for Subsequent Event).
Page 10
<PAGE>
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(In thousands, except per share data)
(Unaudited)
Note 5: Stockholders' Equity
In the first quarter of fiscal 1998, 960 public warrants (total 1,100)
were exercised for aggregate proceeds of $6,041. The remaining warrants expired
on December 8, 1997. In addition, other warrants (69) were exercised for
aggregate proceeds of $440.
Hyperion Partners II L.P. ("HPII") had purchased certain of HMI's
trade payables (the "HMI Payables") aggregating approximately $18,300 at
various discounts. On March 26, 1997, the Company entered into a stock purchase
agreement (the "AP Stock Purchase Agreement"), with HPII, as amended, pursuant
to which HPII and the Company agreed, that subject to the conditions stated in
the AP Stock Purchase Agreement, the Company would issue such number of shares
(the "AP Shares") determined by a formula geared to the net cash proceeds
ultimately realized by the Company upon sale of the HMI assets. The value per
share of the AP Shares would be the lesser of $7.625 and the closing price of
the Company's common stock on the last trading day prior to the date of
issuance. This transaction was approved at a special meeting of the
shareholders held on March 17, 1998 and during April 1998, HPII was issued
1,159 shares of the Company's common stock with a value per share of $6.00,
aggregating a value of $6,956.
On April 13, 1998, a shareholder derivative action was filed against
certain officers and directors of the Company, alleging that consummation of
the AP Stock Purchase Agreement was against the best interests of the Company's
shareholders (See Note 8).
Note 6: Special Charges
For the nine months ended June 30, 1998, the Company incurred $554 of
pre-tax special charges primarily relating to costs incurred from its attempted
acquisitions of Healthcall Group plc and Apria Healthcare Group, Inc.
For the three and nine months ended July 31, 1997, the Company
incurred $34,433 of pre-tax special charges primarily due to the write-down of
the Company's investment in HMI and the write-off of goodwill and other
intangibles associated with exiting substantially all of the Company's domestic
wound care and orthotics businesses.
Page 11
<PAGE>
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(In thousands, except per share data)
(Unaudited)
Note 6: Special Charges (cont.)
In addition to the pre-tax special charges incurred for the three and
nine months ended July 31, 1997, the Company recognized additional bad debt
expense of $3,323 principally related to its DermaQuest product lines ($2,360)
and pulmonary rehabilitation center ($663), which is reflected in selling,
general and administrative expenses.
Note 7: Subsequent Event
On July 15, 1998, the Company sold substantially all of the assets of
its domestic home nursing subsidiary, Transworld Home HealthCare - Nursing
Division, Inc. ("TNI") to Pediatric Services of America, Inc. ("PSA") pursuant
to an Asset Purchase Agreement (the "Agreement") dated as of June 5, 1998
between the Company, TNI and PSA.
The aggregate purchase price for the assets was $5,300 which was paid
in cash at closing. Subject to the terms of the Agreement, $300 of such amount
was placed into escrow for a period of one year following the closing to secure
TNI's obligations under the Agreement. Proceeds from the sale were used to
reduce borrowings under the Company's Credit Facility ($4,100) as defined in
Note 4 and to satisfy transaction costs and liabilities that were retained by
the Company.
Note 8: Commitments and Contingencies
On April 13, 1998, a shareholder of the Company, purporting to sue
derivatively on behalf of the Company, commenced a derivative suit in the
Supreme Court of the State of New York, County of New York, entitled Kevin Mak,
derivatively and on behalf of Transworld Healthcare, Inc., Plaintiff, vs.
Timothy Aitken, Scott A. Shay, Lewis S. Ranieri, Wayne Palladino and Hyperion
Partners II L.P., Defendants, and Transworld Healthcare, Inc., Nominal
Defendant, Index No. 98-106401. The suit alleges that certain officers and
directors of the Company, and HPII, breached fiduciary duties to the Company
and its shareholders, in connection with a transaction, approved by a vote of
the Company's shareholders on March 17, 1998, in which the Company was to issue
certain shares of stock to HPII in exchange for the HMI Payables (See Note 5).
The action seeks injunctive relief against this transaction, and damages, costs
and attorneys' fees in unspecified amounts. The transaction subsequently closed
and the plaintiff has stipulated to extend the defendants' time to respond to
this suit until August 14, 1998.
The Company was served with a complaint (the "Complaint") on February
12, 1998, in an action (the "Action") entitled Primary Health Services, Inc.,
Chuck Davis and Gregory Gaiser v. Transworld Acquisition Corp., Transworld
Healthcare, Inc., The PromptCare
Page 12
<PAGE>
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(In thousands, except per share data)
(Unaudited)
Note 8: Commitments and Contingencies (cont.)
Companies, Inc. and Hyperion Partners II LP, Index No. 606/95/97, Supreme Court
of the State of New York, County of New York. The Action commenced on December
4, 1997, with the filing of a Summons with Notice of Complaint against the
Company, Transworld Acquisition Corp. ("Acquisition") and Hyperion Partners
L.P. The Complaint contains, among other claims, a claim of breach of contract
against the Company, Acquisition and The PromptCare Companies, Inc. for breach
of an asset purchase agreement among Acquisition and the plaintiffs, breach of
a management agreement against the Company, interference with prospective
business relations and fraud. The Action sought compensatory damages of $3,275
and punitive damages of $5,000. On July 6, 1998, the Company settled the
lawsuit for payment of $93 in exchange for a full release of all claims from
the plaintiffs and the action has been dismissed with prejudice.
On July 11 and July 22, 1997, the Company's Respiflow, Inc.
("Respiflow") and MK Diabetic Support Services, Inc. ("MK Diabetic")
subsidiaries, respectively, each received a letter (the "Audit Letters") from
the Office of Audit Services (a division of the U.S. Department of Health and
Human Services, Office of Inspector General) ("OIG"). The Audit Letters
indicates, among other things, that the OIG is conducting an industry-wide
audit of marketing fees and commissions paid from pharmacies to home medical
equipment companies. The Company has been informed that the audit has been
extended to cover the Company's DermaQuest, Inc. subsidiary. The Company is
cooperating fully with the OIG and has produced documentation which it believes
is responsive to the requests set forth in the Audit Letters. While the Company
believes that its former arrangements with home medical equipment suppliers do
not violate any Federal or state laws, it cannot predict whether the audit will
ultimately result in any liability to the government and in such event, the
amount thereof. There can be no assurance that such amount, if any, will not
have a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows.
On November 19, 1997, the Company was notified by the Office of the
United States Attorney for the Eastern District of Texas that it, Respiflow and
MK Diabetic (subsidiaries of the Company), and other non-affiliated entities
had been named defendants in a qui tam action under the Federal False Claims
Act. The qui tam action was filed under seal in the United States District
Court, and it will remain under seal while the government evaluates the merits
of the lawsuit and decides whether to intervene and take over the conduct of
the litigation. The government has not made a copy of the sealed complaint
available to the Company; however, the Company has been informed that no
individuals associated with it or its affiliates have been named as defendants.
The Company further understands that the issues raised in the lawsuit involve
payments to durable medical equipment dealers who acted as the Company's
marketing
Page 13
<PAGE>
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(In thousands, except per share data)
(Unaudited)
Note 8: Commitments and Contingencies (cont.)
representatives. The Company cannot predict whether the Federal government will
intervene in this action or whether the outcome of this action will have a
material adverse effect on the Company's consolidated financial position,
results of operations or cash flows.
Effective October 1, 1997, the Company owned 100% of the common stock
of HMI.
Certain of HMI's current and former officers and directors were named
as defendants, and HMI was named as a nominal defendant, in a consolidated
derivative action filed on March 15, 1996 in the United States District Court
for the Eastern District of New York entitled In re Health Management, Inc.
Stockholders' Derivative Litigation, Master File No. 96 Civ. 1208 (ADS). The
consolidated action alleged claims for breach of fiduciary duty and
contribution against the individual director defendants arising out of alleged
misrepresentations and omissions contained in certain of HMI's previous
securities filings. A Stipulation and Order of Voluntary Dismissal with
Prejudice of this action was filed on February 7, 1998.
BDO Seidman, LLP was named as a defendant, and HMI was named as a
nominal defendant, in a derivative lawsuit filed on June 12, 1996 in the
Supreme Court for the State of New York, County of New York entitled Howard
Vogel, et al. v. BDO Seidman, LLP, et al., Index No. 96-603064. The complaint
alleged claims for breach of contract, professional malpractice, negligent
misrepresentation, contribution and indemnification against BDO Seidman, LLP
arising out of alleged misrepresentations and omissions contained in certain of
HMI's previous securities filings. BDO Seidman, LLP was HMI's auditor at the
time those filings were made. A stipulation providing for the discontinuation
of this action with prejudice was entered into between the parties on November
24, 1997.
HMI and certain of its current and former officers have been named as
defendants in an alleged class action lawsuit filed on April 3, 1997 in the
United States District court for the Eastern District of New York formerly
entitled Nicholas Volonnino et al. v. Health Management, Inc., W. James Nicol,
Paul S. Jurewicz and James Mieszala, 97 Civ. 1646. The action was amended on
September 12, 1997, and is now entitled Dennis Baker et al. v. Health
Management, Inc., BDO Seidman, LLP, Transworld Healthcare, Inc., W. James
Nicol, Paul S. Jurewicz and James Mieszala. This action alleges claims under
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder, arising out of misrepresentations and omissions by HMI
in connection with certain of its previous securities filings and press
releases. The action now purports to represent a class of persons who purchased
shares of HMI common stock between April 26, 1996 and March 17, 1997, the date
HMI announced that it would have to restate certain of its financial statements
and that it was renegotiating its deal with
Page 14
<PAGE>
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(In thousands, except per share data)
(Unaudited)
Note 8: Commitments and Contingencies (cont.)
the Company. The action seeks unspecified compensatory damages for the harm
sustained as a result of the alleged wrongdoing. On November 19, 1997, HMI and
the individual defendants filed a motion to dismiss the claims against them for
failure to state proper claims for relief. The Company made a similar motion on
November 24, 1997. The plaintiffs responded to this motion on February 20, 1998
and the defendants served a reply brief on March 30, 1998. The court has
scheduled an oral argument on this motion for September 25, 1998.
On July 2, 1998, a former shareholder of HMI purporting to sue on
behalf of a class of shareholders of HMI as of June 6, 1997, commenced a suit
in the Delaware Chancery Court, New Castle County, entitled Kathleen S.
O'Reilly v. Transworld HealthCare, Inc., W. James Nicol, Andre C. Dimitriadis,
Dr. Timothy J. Triche and D. Mark Weinberg, Civil Action No. 16507-NC. The suit
alleges that the Company, as majority shareholder of HMI, and the
then-directors of HMI, breached fiduciary duties to the minority shareholders
of HMI by approving a merger between HMI and a subsidiary of the Company for
allegedly inadequate consideration. The suit seeks an accounting, damages,
attorney's fees and other expenses, all in unspecified amounts. The plaintiff
has stipulated to extend defendants' time to respond to this suit until
September 4, 1998.
Under HMI's Certificate of Incorporation and Bylaws, certain officers
and directors may be entitled to indemnification, or advancement of expenses
for legal fees in connection with the above lawsuits. HMI may be required to
make payments in respect thereof in the future. HMI has been named as a
defendant in a lawsuit filed on November 25, 1997 in the Chancery Court of the
State of Delaware for New Castle County entitled Clifford E. Hotte v. Health
Management, Inc., CA No. 16060NC. The plaintiff in that action is seeking
reimbursement and advancement of legal fees and expenses in the amount of
$1,000. HMI filed its answer to that suit on December 23, 1997. The plaintiff
in the suit subsequently moved for partial summary judgment seeking
advancements of fees in the amount of $824; the court granted that motion on
March 18, 1998, and granted a preliminary injunction directing HMI to make that
payment by March 20, 1998. On March 20, HMI informed the court that it had no
unencumbered assets from which to make such a payment. On April 3, 1998, the
court appointed a receiver for HMI to determine if HMI is capable of complying
with that order. In addition, a former director of HMI through her attorneys
had demanded advancement of legal fees and expenses in the amount of $150.
On January 29, 1998, certain shareholders of HMI, who alleged that
they had dissented from the merger of HMI with a subsidiary of the Company,
commenced an action in the Chancery Court of the State of Delaware for New
Castle County, entitled Lawrence E. Steinberg et al. V. Health Management,
Inc., C.A. No. 16166, seeking appraisal of the value of their HMI
Page 15
<PAGE>
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(In thousands, except per share data)
(Unaudited)
Note 8: Commitments and Contingencies (cont.)
shares. HMI filed an answer in that action, contending, among other things,
that certain of the named plaintiffs had failed to timely demand such appraisal
rights. Those plaintiffs subsequently requested that the court dismiss the
action as to them and instead order that their shares of HMI be converted into
the right to receive the $.30 per share merger consideration. The court granted
that order on May 5, 1998, dismissing the appraisal action as to those
plaintiffs, and directing that the action would be dismissed in its entirety on
August 6, 1998 unless another dissenting shareholder assumed the prosecution of
the action. Subsequently, no shareholder assumed such prosecution and the case
has been dismissed pursuant to the court's May 5, 1998 order.
The enforcement division of the Securities and Exchange Commission
(the "Commission") has issued a formal order of investigation relating to
matters arising out of HMI's public announcement on February 27, 1996 that HMI
would have to restate its financial statements for prior periods as a result of
certain accounting irregularities. HMI is fully cooperating with this
investigation and has responded to the requests of the Commission for
documentary evidence.
The outcomes of certain of the foregoing lawsuits and the
investigation with respect to HMI are uncertain and the ultimate outcomes could
have a material adverse affect on the Company.
The Company is involved in various other legal proceedings and claims
incidental to its normal business activities. The Company is vigorously
defending its position in all such proceedings. Management believes these
matters should not have a material adverse impact on the financial condition,
cash flows or results of operations of the Company.
Page 16
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The Company changed its fiscal year to end on September 30 from
October 31, the Company's prior fiscal year end. This has resulted in the
quarterly information for the three and nine months ended June 30, 1998 being
compared with prior period quarterly information for the three and nine months
ended July 31, 1997. The Company has determined that it is not practicable to
include financial statements for corresponding periods of the prior year. There
were no factors which affected the comparability of the information or trends
reflected.
Results of Operations
THREE MONTHS ENDED JUNE 30, 1998 VS. THREE MONTHS ENDED JULY 31, 1997
Revenues. Total revenues increased by $16,422,000 or 70.1% to
$39,861,000 for the three months ended June 30, 1998 from $23,439,000 for the
three months ended July 31, 1997. This increase was primarily attributable to
the inclusion of results for Allied Medicare Limited ("Allied") ($14,059,000)
and Omnicare Group, plc ("Omnicare") ($4,156,000) (sometimes collectively
referred to herein as the "U.K. Operations") for the three months ended June
30, 1998 (vs. one month in the comparable prior period). The Company's
specialty mail-order pharmacy and medical supplies operation also increased
($1,126,000) primarily due to higher diabetic sales as a result of an increase
in number of patients due to the addition of a new managed care account. These
increases were partly offset by a decrease in patient service revenues
primarily attributable to the sale in July 1997 of the Company's Radamerica,
Inc. ("Radamerica") subsidiary ($1,868,000) as well as a $670,000 revenue
reduction due to the Balanced Budget Act.
Pursuant to the recent passage of the Balanced Budget Act, a 10%
reduction in Medicare reimbursement of diabetic testing strips and a 5%
reduction in Medicare reimbursement of respiratory drugs became effective
January 1, 1998. These reductions reduced revenue, increased cost of revenues
as a percentage of revenues and decreased gross profit for respiratory, medical
equipment and supplies sales effective with the reimbursement reduction (as
discussed herein).
Cost of Revenues. Cost of revenues increased by $12,209,000 to
$24,783,000 for the three months ended June 30, 1998 from $12,574,000 for the
three months ended July 31, 1997. As a percentage of total revenues, cost of
revenues increased to 62.2% from 53.6% for the three months ended June 30, 1998
and July 31, 1997, respectively. Cost of revenues as a percentage of revenues
increased for respiratory, medical equipment and supplies sales (54.9% for the
three months ended June 30, 1998 versus 52.9% for the three months ended July
31, 1997), increased for patient services (69.2% for the three months ended
June 30, 1998 versus 46.0% for the three months ended July 31, 1997) and
decreased for infusion services (70.6% for the three months ended June 30, 1998
versus 71.8% for the three months ended July 31, 1997). The increase in the
Page 17
<PAGE>
Results of Operations (cont.)
respiratory, medical equipment and supplies sales are principally attributable
to the inclusion of Omnicare's results in the three months ended June 30, 1998
(vs. one month for the comparable prior period) which carry a higher cost of
revenues (69.9%) than the United States respiratory, medical equipment and
supplies sales operations (48.1%) and the impact of the recent Balanced Budget
Act, which increased cost of revenues for diabetic testing strips and
respiratory drugs by 2.8%. The increase in patient services costs is primarily
the result of the inclusion of Allied's results in the three months ended June
30, 1998 (vs. one month in the comparable prior period) which carry cost of
revenues of 69.3%.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("S,G&A") increased by $341,000 (2.7%) to $13,152,000
for the three months ended June 30, 1998 from $12,811,000 for the three months
ended July 31, 1997. This increase was primarily due to the inclusion of three
months (vs. one month in the comparable prior period) of the U.K. Operations
($3,694,000) and additional costs incurred for overhead related to sales
efforts, collections and additional bad debt expense based upon a higher level
of revenue partially offset by the recording of $3,323,000 of additional bad
debt expense recorded in the three months ended July 31, 1997 primarily related
to the Company's DermaQuest product lines ($2,360,000) and pulmonary
rehabilitation center ($663,000) and a reduction due to the sale in July 1997
of Radamerica ($1,015,000). Included in S,G&A for the three months ended June
30, 1998 is an incremental $443,000 of intangible amortization (primarily
goodwill) related to the acquisition of the U.K. Operations which was not
included in the comparable prior year period.
Special Charges. For the three months ended July 31, 1997 the Company
incurred pre-tax special charges of $34,433,000 primarily due to the write-down
of the Company's investment in HMI and the write-off of goodwill and other
intangibles associated with exiting substantially all of the Company's domestic
wound care and orthotics businesses.
Interest Income. Interest income decreased by $1,311,000 to $156,000
for the three months ended June 30, 1998 from $1,467,000 for the three months
ended July 31, 1997. This decrease was attributable to interest income earned
under a credit agreement with HMI (the "HMI Credit Agreement") of $773,000 in
the third quarter of fiscal 1997 and lower interest income earned on a lower
level of funds invested in the third quarter of fiscal 1998, as compared to the
comparable period of fiscal 1997.
Interest Expense. Interest expense decreased by $63,000 to $1,540,000
for the three months ended June 30, 1998 from $1,603,000 for the three months
ended July 31, 1997.
Page 18
<PAGE>
Results of Operations (cont.)
Provision (Benefit) for Income Taxes. Provision (benefit) for income
taxes as a percentage of income before income taxes was 50% for the three
months ended June 30, 1998 and (16.8)% for the three months ended July 31,
1997. The increase from the prior year is due to the Company being in a taxable
position as opposed to the comparable prior year period. Management expects
that it is more likely than not that future levels of income will be sufficient
to realize the deferred tax assets, as recorded.
Net Income (Loss) . As a result of the foregoing, the Company produced
net income of $271,000 for the three months ended June 30, 1998 compared to a
net loss of $30,387,000 for the three months ended July 31, 1997.
NINE MONTHS ENDED JUNE 30, 1998 VS. NINE MONTHS ENDED JULY 31, 1997
Revenues. Total revenues increased by $50,584,000 or 78.5% to
$114,989,000 for the nine months ended June 30, 1998 from $64,405,000 for the
nine months ended July 31, 1997. This increase was primarily attributable to
the inclusion of nine months of results for Allied ($43,142,000) and Omnicare
($16,054,000) for the nine months ended June 30, 1998 (vs. one month in the
comparable prior period). This increase was partly offset by a $5,633,000
decrease in patient services revenue attributable to the sale of Radamerica,
lower infusion services revenue ($1,244,000) due to a decline in number of
patients serviced as well as a $1,297,000 revenue reduction due to the Balanced
Budget Act.
Pursuant to the recent passage of the Balanced Budget Act, a 10%
reduction in Medicare reimbursement of diabetic testing strips and a 5%
reduction in Medicare reimbursement of respiratory drugs became effective
January 1, 1998. These reductions reduced revenue, increased cost of revenues
as a percentage of revenues and decreased gross profit for respiratory, medical
equipment and supplies sales effective with the reimbursement reduction (as
discussed herein).
Cost of Revenues. Cost of revenues increased by $40,094,000 to
$72,407,000 for the nine months ended June 30, 1998 from $32,313,000 for the
nine months ended July 31, 1997. As a percentage of total revenues, cost of
revenues increased to 63.0% from 50.2% for the nine months ended June 30, 1998
and July 31, 1997, respectively. Cost of revenues as a percentage of sales
increased for patient services (69.4% for the nine months ended June 30, 1998
versus 49.0% for the nine months ended July 31, 1997), increased for
respiratory, medical equipment and supplies sales (56.1% for the nine months
ended June 30, 1998 versus 46.6% for the nine months ended July 31, 1997) and
increased for infusion services (69.6% for the nine months ended June 30, 1998
versus 67.8% for the nine months ended July 31, 1997). The increase in patient
services costs are due to the inclusion of Allied's results for the nine months
ended June 30, 1998 (vs. one month in the comparable prior period) which carry
a cost of revenues of 69.5% and the sale of Radamerica in July 1997 which
carried a lower cost of service (26.4%). The
Page 19
<PAGE>
Results of Operations (cont.)
increase in cost of revenues of respiratory, medical equipment and supplies
sales are primarily attributable to the impact of the recent Balanced Budget
Act, which increased cost of revenues for diabetic testing strips and
respiratory drugs by 2.0% and the inclusion of nine months of Omnicare's
results (vs. one month in the comparable period) which carry a higher cost of
revenues (71.1%) than the U.S. respiratory, medical equipment and supplies
sales operations (48.8%). The increase in infusion services is a result of an
increase in therapies with higher product costs as well as the effects of
reduced reimbursement rates for certain payors.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $7,847,000 or 26.3% to $37,662,000 for the
nine months ended June 30, 1998 from $29,815,000 for the nine months ended July
31, 1997. This increase was primarily attributable to the inclusion of the U.K.
Operations ($12,579,000) for the nine months ended June 30, 1998 (vs. one month
in the comparable prior period) and additional costs incurred for overhead
related to sales efforts, collections and additional bad debt expense based
upon a higher level of revenue partly offset by the recording of $3,323,000 of
additional bad debt expense recorded in the nine months ended July 31, 1997
primarily related to the Company's DermaQuest product lines ($2,360,000) and
pulmonary rehabilitation center ($663,000) and the sale in July 1997 of
Radamerica ($2,923,000).
Special Charges. For the nine months ended June 30, 1998, the Company
incurred $554,000 of special charges primarily relating to costs incurred from
its attempted acquisitions of Healthcall Group plc and Apria Healthcare Group,
Inc. vs. $34,433,000 for the nine months ended July 31, 1997 primarily due to
the write-down of the Company's investment in HMI and the write-off of goodwill
and other intangibles associated with exiting substantially all of the
Company's domestic wound care and orthotics businesses.
Equity in Losses of Health Management, Inc. ("HMI"). Equity in losses
of HMI was $296,000 for the nine months ended July 31, 1997 which represented
49% of HMI's losses for the six months ended July 31, 1997.
Interest Income. Interest income decreased by $2,077,000 to $498,000
for the nine months ended June 30, 1998 from $2,575,000 for the nine months
ended July 31, 1997. This decrease was primarily attributable to interest
income earned (after elimination of intercompany interest) under the HMI Credit
Agreement ($1,796,000) for the nine months of 1997 and lower interest income
earned on a lower level of funds invested in the nine months of fiscal 1998, as
compared to the comparable period of 1997.
Interest Expense. Interest expense, increased by $1,102,000 to
$4,818,000 for the nine months ended June 30, 1998 from $3,716,000 for the nine
months ended July 31, 1997. This increase was primarily attributable to an
increased level of borrowings under the Credit Facility in the early part of
fiscal 1998.
Provision (Benefit) for Income Taxes. Provision (benefit) for income
taxes as a percentage of income before income taxes was 50.0% for the nine
months ended June 30, 1998
Page 20
<PAGE>
Results of Operations (cont.)
and (13.6)% for the nine months ended July 31, 1997. The increase in the
effective tax rate from the 1997 period to the 1998 period is due to the
Company being in a taxable position as opposed to the comparable prior year
period. Management expects that it is more likely than not that future levels
of income will be sufficient to realize the deferred tax assets, as recorded.
Net Income (Loss). As a result of the foregoing, the Company produced
net income of $23,000 for the nine months ended June 30, 1998 compared to net
loss of $29,031,000 for the nine months ended July 31, 1997.
Page 21
<PAGE>
Liquidity and Capital Resources
During the nine months ended June 30, 1998 the Company recognized
$19,029,000 from investing activities as follows: $32,328,000 received from the
Asset Sale (as defined herein) partly offset by $11,021,000 paid to complete
the merger with HMI as well as for fees and expenses in connection with the
merger and to satisfy existing HMI obligations which were retained by the
Company; $1,204,000 received in connection with the sale of Radamerica; net of
utilization of $2,603,000 for capital expenditures and $879,000 for
acquisitions. Funds generated by investing activities along with net proceeds
of $6,481,000 from the exercise of the Company's warrants were used to reduce
the Company's borrowings under the Credit Facility by $25,000,000 and to fund
operating activities.
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 June 30, 1998 and
September 30, 1997, $34,159,000 (18.6%) and $31,475,000 (15.6%), respectively,
of the Company's total assets consisted of accounts receivable all of which are
substantially due 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.
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 June 30, 1998 and September 30, 1997,
the Company's average DSOs were relatively constant at 77 and 80, respectively.
Sale of TNI. On July 15, 1998, the Company sold substantially all of
the assets of its domestic home nursing subsidiary, Transworld Home HealthCare
- - Nursing Division, Inc. ("TNI") to Pediatric Services of America, Inc. ("PSA")
pursuant to an Asset Purchase Agreement (the "Agreement") dated as of June 5,
1998 between the Company, TNI and PSA.
The aggregate purchase price for the assets was $5,300,000 which was
paid in cash at closing. Subject to the terms of the Agreement, $300,000 of
such amount was placed into escrow for a period of one year following the
closing to secure TNI's obligations under the Agreement. Proceeds from the sale
were used to reduce borrowings under the Company's senior secured revolving
credit facility (the "Credit Facility") ($4,100,000) and to satisfy transaction
costs and liabilities that were retained by the Company.
Credit Facility. Loans under the Company's senior secured revolving
Credit Facility are collateralized by, among other things, a lien on
substantially all of the Company's and its
Page 22
<PAGE>
Liquidity and Capital Resources (cont.)
subsidiaries' assets, a pledge of the Company's ownership interest in its
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, plus 2%. As of June 30, 1998 and August 10, 1998, Eurodollar
Rate borrowings bore interest at rates of 7.63% to 7.69% and 7.63%,
respectively. The Company reduced its outstanding borrowings under the Credit
Facility by $25,000,000 during the nine months ended June 30, 1998 and by an
additional $4,100,000 on July 15, 1998. As of August 10, 1998, the Company had
$57,255,000 outstanding under the Credit Facility. As a result of a scheduled
commitment reduction and the sale of TNI, the unused portion of the Credit
Facility was $36,145,000 as of August 10, 1998.
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.
The Company amended the Credit Facility during the nine months ended June 30,
1998 to accommodate, among other things, the merger with HMI and the Asset Sale
and to adjust certain covenants for fiscal 1997 and for fiscal periods
beginning October 1, 1997. During July 1998, the Company also amended the
Credit Facility to accommodate the sale of TNI.
As of June 30, 1998 the Company was in technical default of the Credit
Facility due to non-compliance with certain financial covenants (interest
coverage, debt to EBITDA and minimum EBITDA). Subsequently, the Company
received approval from the required banks under the Credit Facility for
modifications to the Credit Agreement amending covenants bringing the Company
into compliance with the Credit Facility.
Sale of Radamerica. The Company finalized the sale of its Radamerica
subsidiary resulting in additional proceeds of $1,204,000, which was received
during November 1997.
Acquisition of HMI/Sale to Counsel. On October 1, 1997, the Company,
through a wholly-owned subsidiary, completed the previously announced merger
with HMI. Under the terms of the merger agreement, HMI stockholders received
$.30 in cash for each outstanding share of HMI common stock not already owned
by the Company. Concurrently with the closing of the merger, the Company
completed the sale of substantially all of the businesses and operations of HMI
(the "Asset Sale") to Counsel Corporation ("Counsel") for $40,000,000. Of the
$40,000,000 proceeds, $30,000,000 was received in cash with $7,500,000 to be
paid to the Company as HMI's accounts receivable, existing at date of sale, are
collected, with the remaining $2,500,000 held in escrow for post-closing
adjustments. As of June 30, 1998 an aggregate (including interest earned on
such escrow funds) of $37,648,000 was received (including the $7,500,000 escrow
that was held for accounts receivable collection) of which $25,000,000 was used
to reduce the senior secured debt owed by the Company under the
Page 23
<PAGE>
Liquidity and Capital Resources (cont.)
Credit Facility, $2,800,000 was used to complete the merger and the remainder
was used for costs, fees and other expenses to complete the Asset Sale as well
as to satisfy liabilities not assumed by Counsel. The remaining $2,500,000
escrow was fully utilized for post-closing adjustments.
Pursuant to the Asset Sale, Counsel did not assume any liabilities of
HMI other than certain liabilities arising after the closing under assumed
contracts and certain employee-related liabilities. Satisfaction of liabilities
not assumed by Counsel, as well as certain wind-down and contingent obligations
of HMI (including litigation - see "Litigation" with respect to certain legal
proceedings concerning HMI), have been considered in determining the Company's
consolidated financial position.
HMI Payables. Hyperion Partners II L.P. ("HPII") had purchased certain
of HMI's trade payables (the "HMI Payables") aggregating approximately
$18,300,000 at various discounts. On March 26, 1997, the Company entered into a
stock purchase agreement (the "AP Stock Purchase Agreement"), with HPII, as
amended, pursuant to which HPII and the Company agreed, that subject to the
conditions stated in the AP Stock Purchase Agreement, the Company would issue
such number of shares of the Company's common stock (the "AP Shares")
determined by a formula geared to the net cash proceeds ultimately realized by
the Company upon sale of the HMI assets. The value per share of the AP Shares
would be the lower of $7.625 or the market value of the Company's common stock
at the close of the last trading day before the closing of the AP Stock
Purchase Agreement. This transaction was approved at a special meeting of the
shareholders held on March 17, 1998 and subsequently during April 1998, HPII
was issued 1,159,000 shares of the Company's common stock with a value per
share of $6.00. The aggregate value of the AP Shares was $6,956,000.
On April 13, 1998, a shareholder derivative action was filed against
certain officers and directors of the Company, alleging that consummation of
the AP Stock Purchase Agreement was against best interests of the Company's
shareholders (See "Litigation").
Litigation. On April 13, 1998, a shareholder of the Company,
purporting to sue derivatively on behalf of the Company, commenced a derivative
suit in the Supreme Court of the State of New York, County of New York,
entitled Kevin Mak, derivatively and on behalf of Transworld Healthcare, Inc.,
Plaintiff, vs. Timothy Aitken, Scott A. Shay, Lewis S. Ranieri, Wayne Palladino
and Hyperion Partners II L.P., Defendants, and Transworld Healthcare, Inc.,
Nominal Defendant, Index No. 98-106401. The suit alleges that certain officers
and directors of the Company, and HPII, breached fiduciary duties to the
Company and its shareholders, in connection with a transaction, approved by a
vote of the Company's shareholders on March 17, 1998, in which the Company was
to issue certain shares of stock to HPII in exchange for the HMI Payables. The
action seeks injunctive relief against this transaction, and damages, costs and
attorneys' fees in unspecified amounts. The transaction subsequently closed and
Page 24
<PAGE>
Liquidity and Capital Resources (cont.)
the plaintiff has stipulated to extend the defendants' time to respond to this
suit until August 14, 1998.
On July 11 and July 22, 1997, the Company's Respiflow, Inc.
("Respiflow") and MK Diabetic Support Services, Inc. ("MK Diabetic")
subsidiaries, respectively, each received a letter (the "Audit Letters") from
the Office of Audit Services (a division of the U.S. Department of Health and
Human Services, Office of Inspector General) ("OIG"). The Audit Letters
indicate, among other things, that the OIG is conducting an industry-wide audit
of marketing fees and commissions paid from pharmacies to home medical
equipment companies. The Company has been informed that the audit has been
extended to cover the Company's DermaQuest, Inc. subsidiary. The Company is
cooperating fully with the OIG and has produced documentation which it believes
is responsive to the requests set forth in the Audit Letters. While the Company
believes that its former arrangements with home medical equipment suppliers do
not violate any Federal or state laws, it cannot predict whether the audit will
ultimately result in any liability to the government and in such event, the
amount thereof. There can be no assurance that such amount, if any, will not
have a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows.
On November 19, 1997, the Company was notified by the Office of the
United States Attorney for the Eastern District of Texas that it, Respiflow, MK
Diabetic (subsidiaries of the Company), and other non-affiliated entities had
been named defendants in a qui tam action under the Federal False Claims Act.
The qui tam action was filed under seal in the United States District Court,
and it will remain under seal while the government evaluates the merits of the
lawsuit and decides whether to intervene in and take over the conduct of the
litigation. The government has not made a copy of the sealed complaint
available to the Company; however, the Company has been informed that no
individuals associated with it or its affiliates have been named as defendants.
The Company further understands that the issues raised in the lawsuit involve
payments to durable medical equipment dealers who acted as the Company's
marketing representatives. The Company cannot predict whether the Federal
government will intervene in this action or whether the outcome of this action
will have a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows.
Effective October 1, 1997, the Company owned 100% of the common stock
of HMI.
HMI and certain of its current and former officers have been named as
defendants in an alleged class action lawsuit filed on April 3, 1997 in the
United States District court for the Eastern District of New York formerly
entitled Nicholas Volonnino et al. v. Health Management, Inc., W. James Nicol,
Paul S. Jurewicz and James Mieszala, 97 Civ. 1646. The action was amended on
September 12, 1997, and is now entitled Dennis Baker et al. v. Health
Management, Inc., BDO Seidman, LLP, Transworld Healthcare, Inc., W. James
Nicol, Paul S. Jurewicz and James Mieszala. This action alleges claims under
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder, arising out of misrepresentations and omissions by HMI
in connection with certain of its previous securities filings and press
Page 25
<PAGE>
Liquidity and Capital Resources (cont.)
releases. The action now purports to represent a class of persons who purchased
shares of HMI common stock between April 26, 1996 and March 17, 1997, the date
HMI announced that it would have to restate certain of its financial statements
and that it was renegotiating its deal with the Company. The action seeks
unspecified compensatory damages for the harm sustained as a result of the
alleged wrongdoing. On November 19, 1997, HMI and the individual defendants
filed a motion to dismiss the claims against them for failure to state proper
claims for relief. The Company made a similar motion on November 24, 1997. The
plaintiffs responded to this motion on February 20, 1998 and the defendants
served a reply brief on March 30, 1998. The court has scheduled an oral
argument on this motion for September 25, 1998.
On July 2, 1998, a former shareholder of HMI purporting to sue on
behalf of a class of shareholders of HMI as of June 6, 1997, commenced a suit
in the Delaware Chancery Court, New Castle County, entitled Kathleen S.
O'Reilly v. Transworld HealthCare, Inc., W. James Nicol, Andre C. Dimitriadis,
Dr. Timothy J. Triche and D. Mark Weinberg, Civil Action No. 16507-NC. The suit
alleges that the Company, as majority shareholder of HMI, and the
then-directors of HMI, breached fiduciary duties to the minority shareholders
of HMI by approving a merger between HMI and a subsidiary of the Company for
allegedly inadequate consideration. The suit seeks an accounting, damages,
attorney's fees and other expenses, all in unspecified amounts. The plaintiff
has stipulated to extend defendants' time to respond to this suit until
September 4, 1998.
Under HMI's Certificate of Incorporation and Bylaws, certain officers
and directors may be entitled to indemnification, or advancement of expenses
for legal fees in connection with the above lawsuits. HMI may be required to
make payments in respect thereof in the future. HMI has been named as a
defendant in a lawsuit filed on November 25, 1997 in the Chancery Court of the
State of Delaware for New Castle County entitled Clifford E. Hotte v. Health
Management, Inc., CA No. 16060NC. The plaintiff in that action is seeking
reimbursement and advancement of legal fees and expenses in the amount of
$1,000,000. HMI filed its answer to that suit on December 23, 1997. The
plaintiff in the suit subsequently moved for partial summary judgment seeking
advancements of fees in the amount of $824,000; the court granted that motion
on March 18, 1998, and granted a preliminary injunction directing HMI to make
that payment by March 20, 1998. On March 20, HMI informed the court that it had
no unencumbered assets from which to make such a payment. On April 3, 1998, the
court appointed a receiver for HMI to determine if HMI is capable of complying
with that order. In addition, a former director of HMI through her attorneys
had demanded advancement of legal fees and expenses in the amount of $150,000.
Page 26
<PAGE>
Liquidity and Capital Resources (cont.)
The enforcement division of the Securities and Exchange Commission
(the "Commission") has issued a formal order of investigation relating to
matters arising out of HMI's public announcement on February 27, 1996 that HMI
would have to restate its financial statements for prior periods as a result of
certain accounting irregularities. HMI is fully cooperating with this
investigation and has responded to the requests of the Commission for
documentary evidence.
The outcomes of certain of the foregoing lawsuits and the
investigation with respect to HMI are uncertain and the ultimate outcomes could
have a material adverse affect on the Company.
The Company is involved in various other legal proceedings and claims
incidental to its normal business activities. The Company is vigorously
defending its position in all such proceedings. Management believes these
matters should not have a material adverse impact on the financial condition,
cash flows or results of operations of the Company.
Page 27
<PAGE>
PART II
Item 1. Legal Proceedings
On July 2, 1998, a former shareholder of HMI purporting to sue on
behalf of a class of shareholders of HMI as of June 6, 1997, commenced a suit
in the Delaware Chancery Court, New Castle County, entitled Kathleen S.
O'Reilly v. Transworld HealthCare, Inc., W. James Nicol, Andre C. Dimitriadis,
Dr. Timothy J. Triche and D. Mark Weinberg, Civil Action No. 16507-NC. The suit
alleges that the Company, as majority shareholder of HMI, and the
then-directors of HMI, breached fiduciary duties to the minority shareholders
of HMI by approving a merger between HMI and a subsidiary of the Company for
allegedly inadequate consideration. The suit seeks an accounting, damages,
attorney's fees and other expenses, all in unspecified amounts. The plaintiff
has stipulated to extend defendants' time to respond to this suit until
September 4, 1998.
The Company was served with a complaint on February 12, 1998, in an
action (the "Action") entitled Primary Health Services, Inc., Chuck Davis and
Gregory Gaiser v. Transworld Acquisition Corp., Transworld Healthcare, Inc.,
The PromptCare Companies, Inc. and Hyperion Partners II LP, Index No. 6
06/95/97. The Action commenced on December 4, 1997 and sought compensatory
damages of $3,275,000 and punitive damages of $5,000,000. On July 6, 1998, the
Company settled the lawsuit for payment of $93,000 in exchange for a full
release of claims from the plaintiffs and the action was dismissed with
prejudice.
On January 29, 1998, certain shareholders of HMI, who alleged that
they had dissented from the merger of HMI with a subsidiary of the Company,
commenced an action in the Chancery Court of the State of Delaware for New
Castle County, entitled Lawrence E. Steinberg et al. V. Health Management,
Inc., C.A. No. 16166, seeking appraisal of the value of their HMI shares. HMI
filed an answer in that action, contending, among other things, that certain of
the named plaintiffs had failed to timely demand such appraisal rights. Those
plaintiffs subsequently requested that the court dismiss the action as to them
and instead order that their shares of HMI be converted into the right to
receive the $.30 per share merger consideration. The court granted that order
on May 5, 1998, dismissing the appraisal action as to those plaintiffs, and
directing that the action would be dismissed in its entirety on August 6, 1998
unless another dissenting shareholder assumed the prosecution of the action.
Subsequently, no shareholder assumed such prosecution and the case has been
dismissed pursuant to the court's May 5, 1998 order.
Item 2. Changes in Securities and Use of Proceeds
On April 28, 1998, the Company issued 1,159,000 shares of common stock
valued at $6.00 per share to HPII in connection with the consummation of the AP
Stock Purchase Agreement in a transaction not involving a public offering
pursuant to section 4(2) of the Securities Act of 1933, as amended.
Page 28
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of shareholders on May 14, 1998
(the "Annual Meeting"). The proposals voted upon at the Annual Meeting and the
results with respect to each proposal are set forth below:
1. To elect five directors to serve for a term of one year and until
their respective successors are duly elected and qualified.
2. To ratify and approve an amendment to the Company's 1992 Stock
Option Plan to increase the number of shares of the Company's common stock, par
value $0.01 per share (the "Common Stock") for which options may be granted
under such Plan by one percent of the number of shares of Common Stock
outstanding as of the first day of each fiscal year.
3. To ratify the appointment by the Company's Board of Directors of
PricewaterhouseCoopers LLP (formerly Coopers & Lybrand, L.L.P.), as independent
accountants of the Company for the fiscal year ending September 30, 1998.
<TABLE>
<CAPTION>
Voting Results
--------------
ABSTAIN/
PROPOSAL FOR AGAINST NON-VOTING
-------- --- ------- ----------
<S> <C> <C> <C>
No. 1 (election of Directors)
Messrs. Timothy Aitken 14,932,053 - 227,267
Lewis Ranieri 14,956,013 - 203,307
Scott Shay 14,956,013 - 203,307
Michael Scorey 14,956,013 - 203,307
Jeffrey Peris 14,956,013 - 203,307
No. 2 14,424,299 709,035 25,986
No. 3 15,089,390 61,657 8,273
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
10.1 Tenth Amendment to Credit Agreement dated as of April 7,
1998 between the Company and Bankers Trust Company
10.2 Eleventh Amendment to Credit Agreement dated as of July 15,
1998 between the Company and Bankers Trust Company
10.3 Amendment dated March 17, 1998 to the Company's 1992 Stock
Option Plan
27 Financial Data Schedule
(b) Reports on Form 8-K.
None.
Page 29
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 13, 1998
TRANSWORLD HEALTHCARE, INC.
By: /s/ Wayne A. Palladino
-----------------------------------
Wayne A. Palladino
Senior Vice President and Chief
Financial Officer (Principal
Financial Officer and Duly
Authorized to Sign on Behalf of
Registrant)
Page 30
<PAGE>
EXHIBIT INDEX
Exhibit Description
10.1 Tenth Amendment to Credit Agreement dated as of April 7, 1998 between
the Company and Bankers Trust Company
10.2 Eleventh Amendment to Credit Agreement dated as of July 15, 1998
between the Company and Bankers Trust Company
10.3 Amendment dated March 17, 1998 to the Company's 1992 Stock Option
Plan
27 Financial Data Schedule
Page 31
<PAGE>
TENTH AMENDMENT TO CREDIT AGREEMENT
TENTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), dated as of
April 7, 1998, among TRANSWORLD HEALTHCARE, INC. (the "Borrower"), the
lenders party to the Credit Agreement referred to below (each a "Bank" and,
collectively, the "Banks"), and BANKERS TRUST COMPANY, as Agent (in such
capacity, the "Agent"). All capitalized terms used herein and not otherwise
defined shall have the respective meanings provided such terms in the Credit
Agreement.
W I T N E S S E T H:
WHEREAS, the Borrower, the Banks and the Agent are parties to a Credit
Agreement, dated as of July 31, 1996 (as in effect on the date hereof, the
"Credit Agreement"); and
WHEREAS, the parties hereto wish to amend the Credit Agreement as
provided herein;
NOW, THEREFORE, it is agreed:
I. Amendments and Modifications to Credit Agreement.
1. Section 10.09 of the Credit Agreement is hereby amended by inserting
immediately before the semi-colon at the end thereof the following proviso:
"; provided, that on or prior to June 30, 1998 this Section 10.09 shall
not apply to a judgment of less than or equal to $1,000,000 entered
against HMI in connection with the case of Hotte vs. HMI".
II. Miscellaneous Provisions.
1. In order to induce the Banks to enter into this Amendment, the Borrower
hereby represents and warrants that:
(a) no Default or Event of Default exists as of the Tenth Amendment
Effective Date (as defined below), both before and after giving effect to
the Amendment; and
(b) all of the representations and warranties contained in the Credit
Agreement and the other Credit Documents are true and correct in all
material respects as of the Tenth Amendment Effective Date, both before
and after giving effect to this Amendment, with the same effect as though
such representations and warranties had been made on and as of the Tenth
Amendment Effective Date (it being understood that any representation or
warranty made as of a specific date shall be true and correct in all
material respects as of such specific date).
<PAGE>
2. This Amendment is limited as specified and shall not constitute a
modification, acceptance or waiver of any other provision of the Credit
Agreement or any other Credit Document.
3. This Amendment may be executed in any number of counterparts and by the
different parties hereto on separate counterparts, each of which counterparts
when executed and delivered shall be an original, but all of which shall
together constitute one and the same instrument. A complete set of
counterparts shall be lodged with the Borrower and the Agent.
4. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER
SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF
NEW YORK.
5. This Amendment shall become effective as of the date (the "Tenth
Amendment Effective Date") when the Borrower, each other Credit Party and the
Required Banks shall have signed a counterpart hereof (whether the same or
different counterparts) and shall have delivered (including by way of facsimile
transmission) the same to the Agent at its Notice Office. The Agent shall
promptly notify the Borrower and the Banks in writing of the Tenth Amendment
Effective Date.
6. From and after the Tenth Amendment Effective Date, all references in
the Credit Agreement and each of the other Credit Documents to the Credit
Agreement shall be deemed to be references to the Credit Agreement as modified
hereby.
* * *
- 2 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused their duly authorized
officers to execute and deliver this Amendment as of the date first above
written.
TRANSWORLD HEALTHCARE, INC.,
as Borrower
By /s/ Wayne Palladino
----------------------------
Title: CFO
BANKERS TRUST COMPANY,
Individually and as Agent
By
----------------------------
Title:
THE BANK OF NEW YORK
By
----------------------------
Title:
BANQUE PARIBAS
By
----------------------------
Title:
By
----------------------------
Title:
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused their duly authorized
officers to execute and deliver this Amendment as of the date first above
written.
TRANSWORLD HEALTHCARE, INC.,
as Borrower
By
----------------------------
Title:
BANKERS TRUST COMPANY,
Individually and as Agent
By /s/ Patricia Hogan
----------------------------
Title: Principal
THE BANK OF NEW YORK
By
----------------------------
Title:
BANQUE PARIBAS
By
----------------------------
Title:
By
----------------------------
Title:
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused their duly authorized
officers to execute and deliver this Amendment as of the date first above
written.
TRANSWORLD HEALTHCARE, INC.,
as Borrower
By
----------------------------
Title:
BANKERS TRUST COMPANY,
Individually and as Agent
By
----------------------------
Title:
THE BANK OF NEW YORK
By /s/ Vincent P. O'Leary
----------------------------
Title: Senior Vice President
BANQUE PARIBAS
By
----------------------------
Title:
By
----------------------------
Title:
<PAGE>
UNION BANK OF SWITZERLAND,
NEW YORK BRANCH
By /s/ Leo L. Baltz
----------------------------
Title: Director
By /s/ Robert L. Wells
----------------------------
Title: Director
FLEET BANK
By
----------------------------
Title:
<PAGE>
Each of the undersigned, each being a Subsidiary Guarantor pursuant to the
Credit Agreement refinanced in the foregoing Tenth Amendment and a party to
various Security Documents, hereby acknowledges and agrees to the foregoing
provisions of the Tenth Amendment.
Acknowledged and
Agreed this __th day
of April, 1998.
DERMAQUEST, INC.
as a Pledgor
By /s/ Wayne Palladino
-----------------------
Title: VP
MK DIABETIC SUPPORT
SERVICES, INC.,
as a Pledgor
By /s/ Wayne Palladino
-----------------------
Title: VP
THE PROMPTCARE COMPANIES, INC.
as a Pledgor
By /s/ Wayne Palladino
-----------------------
Title: VP
<PAGE>
THE PROMPTCARE LUNG CENTER, INC.,
as a Pledgor
By /s/ Wayne Palladino
-----------------------
Title: VP
STERI-PHARM, INC.,
as a Pledgor
By /s/ Wayne Palladino
-----------------------
Title: VP
TRANSWORLD HOME HEALTHCARE NURSING DIVISION, INC.,
as a Pledgor
By /s/ Wayne Palladino
-----------------------
Title: VP
RESPIFLOW, INC.,
as a Pledgor
By /s/ Wayne Palladino
-----------------------
Title: VP
<PAGE>
TRANSWORLD ACQUISITION CORP.,
as a Pledgor
By /s/ Wayne Palladino
-----------------------
Title: VP
<PAGE>
ELEVENTH AMENDMENT TO CREDIT AGREEMENT
ELEVENTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), dated as of
July 15, 1998, among TRANSWORLD HEALTHCARE INC. (the "Borrower"), the lenders
party to the Credit Agreement referred to below (each a "Bank" and,
collectively, the "Banks"), and BANKERS TRUST COMPANY, as Agent (in such
capacity, the "Agent"). All capitalized terms used herein and not otherwise
defined shall have the respective meanings provided such terms in the Credit
Agreement.
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, the Borrower, the Banks and the Agent are parties to a Credit
Agreement, dated as of July 31, 1996 (as in effect on the date hereof, the
"Credit Agreement"); and
WHEREAS, the parties hereto wish to amend the Credit Agreement as
provided herein;
NOW, THEREFORE, it is agreed:
1. Amendments and Modifications to Credit Agreement
1. Notwithstanding the provisions of the Credit Agreement or any other
Credit Document, it is acknowledged and agreed that Transworld Home Healthcare
Nursing Division, Inc. ("Nursing") may sell (the "Nursing Sale") substantially
all of its assets so long as the following conditions are satisfied: (I) the
Nursing Sale is consummated in accordance with the Asset Purchase Agreement,
dated as of June 5, 1998, among Transworld Home Healthcare Nursing Division,
Inc., Transworld HealthCare, Inc., Pediatric Services of America, Inc., a
Georgia corporation and Pediatric Services of America, Inc., a Delaware
corporation and the schedules, exhibits and/or annexes hereto, (II) the
aggregate gross consideration received upon consummation of the Nursing Sale
is not less than $5,300,000, (III) not more than $300,000 received in
satisfaction of clause (II) is placed into escrow (the "Escrow"), which amounts
shall be held in escrow pursuant to the Escrow Agreement, dated as of June 5,
1998, between Nursing and SunTrust Bank, Atlanta, as Escrow Agent (the "Escrow
Agreement"), (IV) on the Eleventh Amendment Effective Date (as defined below)
$5,000,000, less amounts used to repay liabilities of Nursing which amounts
shall not exceed $900,000 in the aggregate, shall be applied by the Borrower to
repay outstanding Loans, (V) upon release of amounts from Escrow to Nursing
pursuant to the Escrow Agreement such amounts shall be applied by the Borrower
to repay outstanding Loans and (VI) the Total Revolving Loan Commitment shall
be reduced by an amount equal to the amounts applied to repay outstanding Loans
pursuant to clauses (IV) and (V).
<PAGE>
2. Section 9.12 of the Credit Agreement is hereby amended by inserting
immediately prior to the phrase "the Existing Indebtedness" appearing in
clauses (i) thereof the phrase "the Nursing Asset Purchase Agreement,"
3. Section 11 of the Credit Agreement is hereby amended by inserting in
appropriate alphabetical order the following new definition:
"Nursing Asset Purchase Agreement" shall mean the Asset Purchase
Agreement, dated as of June 5, 1998, by and among Transworld Home
Healthcare Nursing Division, Inc., the Borrower, Pediatric Services of
America, Inc., a Georgia corporation, and Pediatric Services of America,
Inc., a Delaware corporation.
II. Miscellaneous Provisions
1. In order to induce the Banks to enter into the Amendment, the Borrower
hereby represents and warrants that all of the representatives and warranties
contained in the Credit Agreement and the other Credit Documents are true and
correct in all material respects as of the Eleventh Amendment Effective Date,
both before and after giving effect to this Amendment, with the same effect as
though such representations and warranties that any representation or warranty
made as of a specific date shall be true and correct in all material respects
as of such specific date).
2. This Amendment is limited as specified and shall not constitute a
modification, acceptance or waiver of any other provision of the Credit
Agreement or any other Credit Document. Without in any way limiting the
foregoing, by executing this Amendment, the Banks do not waive (and the
Borrower acknowledges and agrees that the Banks have not waived) any Default or
Event of Default which may exist as of the Eleventh Amendment Effective Date,
both before and after giving effect to this Amendment.
3. This Amendment may be executed in any number of counterparts and by the
different parties hereto on separate counterparts, each of which counterparts
when executed and delivered shall be an original, but all of which shall
together constitute one and the same instrument. A complete set of counterparts
shall be lodged with the Borrower and the Agent.
4. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER
SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF
NEW YORK.
5. This Amendment shall become effective as of the date (the "Eleventh
Amendment Effective Date") when the Borrower, each other Credit Party and the
Required Banks shall have signed a counterpart hereof (whether the same or
different counterparts) and shall have delivered (including by way of facsimile
transmission) the same to the Agent at its Notice Office. The Agent shall
promptly notify the Borrower and the Banks in writing of the Eleventh Amendment
Effective Date.
-2-
<PAGE>
6. From and after the Eleventh Amendment Effective Date, all references in
the Credit Agreement and each of the other Credit Documents to the Credit
Agreement shall be deemed to be references to the Credit Agreement as modified
hereby.
* * *
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused their duly authorized
officers to execute and deliver the Amendment as of the date first above
written.
TRANSWORLD HEALTHCARE, INC.,
as Borrower
By
--------------------------
Title
BANKERS TRUST COMPANY,
Individually and as Agent
By
--------------------------
Title
THE BANK OF NEW YORK
By
--------------------------
Title
BANQUE PARIBAS
By
--------------------------
Title
By
--------------------------
Title
<PAGE>
UNION BANK OF SWITZERLAND,
NEW YORK BRANCH
By
--------------------------
Title
By
--------------------------
Title
FLEET BANK, N.A.
By
--------------------------
Title
<PAGE>
Each of the undersigned, each being a Subsidiary Guarantor pursuant to the
Credit Agreement referenced in the foregoing Eleventh Amendment and a party to
various Security Documents, hereby acknowledges and agrees to the foregoing
provisions of the Tenth Amendment.
Acknowledged and
Agreed this 15th day
of July, 1998.
DERMAQUEST, INC.,
as a Pledgor
By
---------------------------
Title:
MK DIABETIC SUPPORT
SERVICES, INC.,
as a Pledgor
By
---------------------------
Title
THE PROMPTCARE COMPANIES, INC.,
as a Pledgor
By
---------------------------
Title
<PAGE>
THE PROMPTCARE LUNG CENTER, INC.,
as a Pledgor
By
---------------------------
Title
STERI-PHARM, INC.,
as a Pledgor
By
---------------------------
Title
TRANSWORLD HOME HEALTHCARE NURSING DIVISION, INC.,
as a Pledgor
By
---------------------------
Title
RESPIFLOW, INC.,
as a Pledgor
By
---------------------------
Title
<PAGE>
TRANSWORLD ACQUISITION CORP.,
as a Pledgor
By
---------------------------
Title
<PAGE>
TRANSWORLD HEALTHCARE, INC.
1992 STOCK OPTION PLAN
AS AMENDED AS OF MARCH 17, 1998
1. PURPOSE. The 1992 Stock Option Plan (the "Plan") is
intended to provide an incentive to selected key employees (including directors
and officers) of Transworld Healthcare, Inc. (the "Company") to acquire a
proprietary interest in the Company, to continue as employees, and to increase
their efforts on behalf of the Company. In addition, non-employee independent
contractors and non-employee directors may participate in the Plan. Options
granted pursuant to the Plan may consist of incentive stock options ("ISOs")
(within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code")) and non-qualified options.
2. ADMINISTRATION. A committee (the "Committee") appointed by
the Company's Board of Directors shall administer the Plan. The Board of
Directors may from time to time appoint members of the Committee in
substitution for or in addition to members previously appointed and may fill
any vacancies on the Committee.
Subject to the consent of the Board of Directors and the
provisions of the Plan, the Committee shall determine the purchase price of the
shares covered by each option, the employees, non-employee independent
contractors, and non-employee directors to whom, and the time or times at
which, options shall be granted, the number of shares to be covered by each
option, and the term of each option. Subject to the consent of the Board of
Directors, the Committee also shall have the authority to interpret the Plan,
to prescribe, amend, and rescind rules and regulations relating to the Plan, to
determine the provisions of the
<PAGE>
respective option agreements (which need not be identical), and to make all
other determinations considered necessary or advisable for the administration
of the Plan.
The Board of Directors shall designate one Committee member
as chairperson and the Committee shall hold meetings at such times and places
as it shall consider advisable. A majority of the Committee members shall
constitute a quorum. All determinations of the Committee shall be made by a
majority of its members. Any decision or determination reduced to writing and
signed by all the Committee members shall be fully as effective as if it had
been made by a vote at a meeting duly called and held. The Committee shall keep
minutes of its meetings and shall make such rules and regulations for the
conduct of its business as it shall consider advisable.
If the Committee is not appointed, the Board of Directors
shall administer the Plan.
3. GRANTEES. Options may be granted to such key employees
(including officers and directors), non-employee independent contractors, and
non-employee directors of the Company and any parent or subsidiary corporation
(within the meaning of Code Section 424(e) and (f) ("Affiliates")) as the
Committee determines (each such individual a "Grantee"); provided, however,
ISOs shall only be granted to employees (including directors and officers).
4. EFFECTIVENESS AND TERMINATION OF PLAN. This Plan shall
become effective as of the date of its adoption by the Company's Board of
Directors, or its approval by the Company's shareholders, whichever is earlier.
The Plan shall be subject to approval by the Company's shareholders within one
year from the date on which it was adopted.
-2-
<PAGE>
Before shareholder approval of the Plan, options may be granted under the Plan,
but any such option shall not be exercisable before shareholder approval of the
Plan. If the Plan is not approved by the Company's shareholders, the Plan shall
terminate and all options theretofore granted under the Plan shall terminate
and become void.
This Plan shall terminate on the earliest of:
(a) the tenth anniversary of the effective
date as determined under this Section 4;
(b) the date when all common shares of the
Company, par value $.01 per share (the "Shares"), reserved
for issuance under the Plan shall have been acquired through exercise of
options granted under the Plan; or
(c) such earlier date as the Board of Directors may
determine. Any option outstanding under the Plan at the time of the Plan's
termination shall remain in effect in accordance with its terms and those of
the Plan.
5. THE SHARES. Subject to Section 7, the aggregate
number of Shares which may be issued under the Plan shall not exceed (i)
3,000,000 (the "Base Amount") plus (ii) an annual increase to the Base Amount
equal to one percent of the number of Shares outstanding as of the first day of
each fiscal year beginning in fiscal October, 1998 and ending on July 21, 2002.
Such number of Shares may be set aside out of the authorized but unissued
Shares not reserved for any other purpose or out of Shares held in or acquired
for the treasury of the Company. If all or part of an option is unexercised,
the Shares which were not exercised may again be available for grant under the
Plan.
-3-
<PAGE>
6. GRANT AND TERMS OF OPTIONS. The Committee may grant
options at any time and from time to time before the termination of the Plan.
Except as provided below, options granted under the Plan shall be subject to
the following terms:
(a) Price. The purchase price of Shares upon
exercise of an ISO shall be no less than the fair market value of the Shares at
the time of grant; provided, however, if an ISO is granted to a person owning
shares of the Company possessing more than 10% of the total combined voting
power of all classes of shares of the Company as defined in Code Section 422
("10% Shareholder"), the exercise price shall equal 110% of the fair market
value of the Shares at the time of grant. The fair market value of the Shares
shall be determined by and in accordance with procedures established by the
Committee whose determination shall be final.
The exercise price of Shares subject to a non-qualified
option shall be determined by the Committee.
The exercise price shall be paid in full in United States
dollars in cash or by check at the time of exercise. The Grantee shall pay any
required withholding tax in full in United States dollars in cash or by check
at the time of exercise of the option. The exercise price and any required
withholding tax also may be paid with (i) Shares already owned by, and in the
possession of, the Grantee or (ii) any combination of United States dollars or
Shares. Shares used to satisfy the exercise price and any required withholding
tax shall be valued by the Committee in its sole discretion at their fair
market value as of the close of business on the day immediately before the date
of exercise. The exercise price shall be subject to adjustment, but only as
provided in Section 7 hereof.
-4-
<PAGE>
(b) Limit on Incentive Stock Option Amount.
Notwithstanding any provision contained herein to the contrary, to the extent
that the aggregate fair market value of the Shares covered by ISOs granted to a
Grantee are exercisable for the first time during any calendar year (under all
plans of the Company or Affiliates) exceeds $100,000, the options shall be
treated as non-qualified options.
(c) Duration and Exercise of Options. An
option may be granted for a term not exceeding ten years from the date of
grant; provided, however, an ISO granted to a 10% Shareholder may have a term
not exceeding five years from the date of grant. Options shall be exercisable
at such time and in such amounts (up to the full amount thereof) as the
Committee may determine at the time of grant. If an option is exercisable in
installments, the Committee shall determine what events, if any, will
accelerate the exercise of the option.
(d) Termination of Employment. Except as
otherwise determined by the Committee, upon the termination of the Grantee's
employment (or service as a non-employee independent contractor or non-employee
director), the Grantee's rights to exercise an option shall be as follows:
(i) If the Grantee's
employment (or service as a non-employee independent
contractor or non-employee director) is terminated on
account of permanent and total disability (as defined
in Code Section 22(e)(3)), the Grantee or the
Grantee's legal representative (or the Grantee's estate if
the Grantee dies after termination of employment or service)
may exercise the option, to the extent exercisable on the
date of the Grantee's
-5-
<PAGE>
termination of employment or service, at any time within one
year after termination of employment or service but in no
event after the expiration of the term of the option.
(ii) If the Grantee's employment (or
service as a non-employee independent contractor or
non-employee director) is terminated by death, the Grantee's
estate may exercise the option, to the extent exercisable
on the date of the Grantee's death, at any time within one
year after the Grantee's death, but in no event after the
expiration of the term of the option.
(iii) If the Grantee's employment is
terminated involuntarily for "Cause" or if a Grantee who has
an employment agreement with the Company voluntarily
terminates his or her employment (other than upon or after
the expiration of the employment agreement), the Grantee's
option shall expire as of the date of termination of
employment. "Cause" under this Plan means (1) material
misconduct by the Grantee, (2) any act by the Grantee that is
materially adverse to the Company, or (3) the Grantee's
breach of any employment or non-competition agreement with
the Company. "Cause" also has the meaning given to that term,
or any similar term, under any employment agreement with the
Company.
(iv) If the Grantee's employment (or
service as a non-employee independent contractor or
non-employee director) is terminated for any reason other
than as described in clauses (i), (ii), and (iii), the
Grantee
-6-
<PAGE>
(or the Grantee's estate if the Grantee dies after the
termination) may exercise the option, to the extent
exercisable before the termination, within three months after
the termination but in no event after the expiration of the
term of the option.
(v) A Grantee-s "estate" means the
Grantee's legal representative or any person who acquires the
right to exercise an option by reason of the Grantee's death.
The Committee may require the transferee of a Grantee to
supply it with written notice of the Grantee's death or
disability and to supply it with a copy of the will (in the
case of the Grantee's death) or such other evidence as the
Committee considers necessary to establish the validity of
the transfer of an option. The Committee may also require the
agreement of the transferee to be bound by all the terms of
the Plan.
(e) Transferability of Option. Options shall
be transferable only by will or the laws of descent and distribution and shall
be exercisable during the Grantee's lifetime only by the Grantee or the
Grantee's legal representative.
(f) Modification, Extension, and Renewal of
Options. Subject to the terms and within the limitations of the Plan, the
Committee may modify, extend, or renew outstanding options granted under the
Plan, or accept the surrender of outstanding options (up to the extent not
previously exercised) and authorize the granting of new options in substitution
therefor (to the extent not previously exercised). Notwithstanding the
foregoing, however, no modification of an option may, without the consent of
the Grantee, alter or impair any rights or obligations under any option
theretofore granted under the Plan
-7-
<PAGE>
nor may any modification be made which would adversely affect the status of an
ISO as an incentive stock option under Code Section 422.
(g) Form of Option Agreements. Options for
both ISO's and non-qualified options shall be evidenced by such form of
agreement as the Committee approves.
(h) Other Terms and Conditions. Options may
contain such other provisions, which shall not be inconsistent with the terms
of the Plan, as the Committee considers appropriate.
7. ADJUSTMENTS IN THE SHARES. If the Shares, as presently
constituted, shall be changed into or exchanged for a different number or kind
of share or other securities of the Company or of another corporation (whether
by merger, consolidation, recapitalization, reclassification, split, reverse
split, combination of shares, or otherwise) or if the number of Shares shall be
increased through the payment of a share dividend, there shall be substituted
for or added to each Share theretofore appropriated or thereafter subject or
which may become subject to an option under this Plan, the number and kind of
shares or other securities into which each outstanding Share shall be so
changed, or for which each Share shall be exchanged, or to which each Share
shall be entitled, as the case may be. The price and other terms of outstanding
options shall also be appropriately amended as may be necessary to reflect the
foregoing events. If there shall be any other change in the number or kind of
the outstanding Shares, or of any share or other securities into which the
Shares shall have been changed, or for which the Shares shall have been
exchanged, then, if the Board of Directors shall, in its sole discretion,
determine that such change equitably requires an
-8-
<PAGE>
adjustment in any option theretofore granted or which may be granted under the
Plan, such adjustments shall be made in accordance with that determination.
Fractional Shares resulting from any adjustment in options
pursuant to Section 7 may be settled in cash or otherwise as the Committee
shall determine. The Committee shall give notice of any adjustment to each
Grantee whose option has been adjusted and such adjustment (whether or not
notice is given) shall be effective and binding for all purposes of the Plan.
In the event of the disposition of all or substantially all
the assets of the Company, or the dissolution of the Company, or the merger or
consolidation of the Company with or into any other corporation, or the merger
or consolidation of any other corporation into the Company, or the making of a
tender offer to purchase all or a substantial portion of the Shares of the
Company, the Committee may amend all outstanding options (upon such conditions
as it shall consider fit) to permit the exercise of all such options before the
effective date of any such transaction and to terminate such options as of such
effective date. If the Committee shall exercise this power, all options then
outstanding and subject to such requirement shall be deemed to have been
amended to permit the exercise thereof in whole or in part by the Grantee at
any time or from time to time as determined by the Committee before the
effective date of the transaction and the options shall be deemed to terminate
upon such effective date.
8. SECURITIES LAW REQUIREMENTS. No option granted under this
Plan shall be exercisable in whole or in part, nor shall the Company be
obligated to sell any Shares subject to any such option if such exercise, sale,
or settlement would, in the opinion
-9-
<PAGE>
of counsel for the Company, violate the Securities Act of 1933 (or other
Federal or State statutes having similar requirements), as may be in effect at
that time. Each option shall be subject to the further requirement that, if at
any time the Board of Directors determines that the listing or qualification of
the Shares subject to the option under any securities exchange requirements or
under any applicable law, or the consent or approval of any governmental
regulatory body, is necessary as a condition of, or in connection with, the
granting of the option or the issuance of Shares under the option, the option
may not be exercised in whole or in part unless the listing, qualification,
consent, or approval shall have been effected or obtained free of any
conditions unacceptable to the Board of Directors.
9. AMENDMENT OF THE PLAN. The Board of Directors may amend
the Plan, correct any defect, supply any omission, or reconcile any
inconsistency in the Plan or in any option in the manner and to the extent it
shall consider desirable; provided, however, except as provided in Section 7
and this Section 9, unless the shareholders of the Company shall have first
approved thereof: (i) no option shall be exercisable more than ten years after
the date it is granted; (ii) the expiration date of the Plan shall not be
extended; and (iii) no amendment shall be of any force and effect if the
amendment increases the number of Shares available for the granting of options
under the Plan, decreases the price at which options may be granted, materially
increases the benefits accruing to Grantees, or materially modifies the
eligibility or participation requirements in the Plan. In addition, no
amendment of the Plan may, without the consent of a Grantee, adversely affect
the Grantee's rights under any option.
-10-
<PAGE>
The Board of Directors also may amend or terminate the Plan
in such respect as the Board of Directors shall consider advisable to ensure
favorable Federal income tax treatment for the Company.
The Board of Directors shall have all the powers granted to
the Committee under the Plan.
10. APPLICATION OF FUNDS. The proceeds received by the
Company from the sale of Shares will be used for general corporate purposes.
11. NO OBLIGATION TO EXERCISE OPTION. The granting of an
option shall impose no obligation upon the Grantee (or upon a transferee of a
Grantee) to exercise the option.
12. PLAN NOT A CONTRACT OF EMPLOYMENT. The Plan is not a
contract of employment, and the terms of employment of any Grantee,, or the
relationship of any non-employee independent contractor with the Company shall
not be affected in any way by the Plan or related instruments except as
specifically provided therein. The establishment of the Plan shall not be
construed as conferring any legal rights upon any Grantee for a continuation of
employment, nor shall it interfere with the right of the Company or any
subsidiary to discharge any Grantee and to treat the Grantee without regard to
the effect which that treatment might have upon him or her as a Grantee.
13. EXPENSES OF THE PLAN. The Company shall pay all
expenses of the Plan.
14. COMPLIANCE WITH APPLICABLE LAW. Notwithstanding anything
herein to the contrary, the Company shall not be obligated to cause to be
issued or delivered any
-11-
<PAGE>
certificates for Shares pursuant to the exercise of an option, unless and until
the Company is advised by its counsel that the issuance and delivery of those
certificates is in compliance with all applicable laws, regulations of
governmental authority, and the requirements of any exchange upon which Shares
are traded. The Company shall in no event be obligated to register any
securities pursuant to the Securities Act of 1933 (as now in effect or as
hereafter amended) or to take any other action in order to cause the issuance
and delivery of such certificates to comply with any such law, regulation, or
requirement. The Board of Directors may require, as a condition of the issuance
and delivery of the certificates and to ensure compliance with such laws,
regulations, and requirements, that the Grantee make such covenants,
agreements, and representations as the Board of Directors considers necessary
or desirable.
15. GOVERNING LAW. Except to the extent preempted by Federal
law, the Plan shall be construed and enforced in accordance with, and governed
by, New York law other than its conflicts of law provisions.
-12-
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