<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 March 31, 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
Transworld HealthCare, Inc.
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 8, 1998
- ------------ --------------------------
Common Stock 17,535,076 Shares
<PAGE>
Transworld Healthcare, Inc.
Second Quarter Report On Form 10-Q
----------------------------------
Table of Contents
-----------------
Part I. Page
----
Item 1. Financial Statements (Unaudited).............................. 3
Condensed Consolidated Balance Sheets
March 31, 1998 and September 30, 1997............ 4
Condensed Consolidated Statements of Operations
For the Three and Six Months Ended
March 31, 1998 and April 30, 1997................ 5
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended March 31, 1998
and April 30, 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............................................. 27
Item 4. Submission of Matters to a Vote of Security Holders........... 27
Item 6. Exhibits and Reports on Form 8-K.............................. 28
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>
MARCH 31, SEPTEMBER 30,
1998 1997
--------- ---------
ASSETS
<S> <C> <C>
Current assets:
Cash and temporary investments $ 14,156 $ 10,626
Accounts receivable, less allowance for doubtful
accounts of $12,680 and $11,909 34,659 31,475
Inventories 3,347 3,226
Investment in Health Management, Inc. 463 22,367
Prepaid income taxes 1,426 2,742
Deferred income taxes 6,530 6,530
Prepaid expenses and other current assets 6,418 6,093
--------- ---------
Total current assets 66,999 83,059
Property & equipment, net 9,248 8,448
Intangible assets, net of accumulated amortization of
$4,876 and $3,283 105,776 103,385
Deferred income taxes 2,356 2,356
Other assets 3,527 4,033
--------- ---------
Total assets $ 187,906 $ 201,281
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt, including obligations
under capital leases $ 1,037 $ 25,051
Accounts payable 7,505 7,844
Accrued expenses, related parties 6,956 7,500
Accrued expenses 15,609 13,672
Income taxes payable 2,018 2,387
Acquisitions payable 251 194
--------- ---------
Total current liabilities 33,376 56,648
Long-term debt, including obligations under capital leases 61,382 61,400
Deferred income taxes and other 1,402 1,328
--------- ---------
Total liabilities 96,160 119,376
--------- ---------
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
16,386 and 15,300 shares 164 153
Additional paid-in capital 118,252 111,774
Translation adjustment 1,408 (2,192)
Retained deficit (28,078) (27,830)
--------- ---------
Total stockholders' equity 91,746 81,905
--------- ---------
Total liabilities and stockholders' equity $ 187,906 $ 201,281
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
Page 4
<PAGE>
TRANSWORLD HEALTHCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- --------------------
MARCH 31, APRIL 30, MARCH 31, APRIL 30,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Net respiratory, medical equipment and supplies sales $ 17,369 $ 13,226 $ 35,676 $ 25,454
Net patient services 17,470 4,651 34,000 9,416
Net infusion services 2,484 2,792 5,452 6,096
-------- -------- -------- --------
Total revenues 37,323 20,669 75,128 40,966
-------- -------- -------- --------
Cost of revenues:
Respiratory, medical equipment and supplies sales 9,984 5,932 20,240 10,945
Patient services 12,189 2,312 23,610 4,783
Infusion services 1,925 2,006 3,774 4,011
-------- -------- -------- --------
Total cost of revenues 24,098 10,250 47,624 19,739
-------- -------- -------- --------
Gross profit 13,225 10,419 27,504 21,227
Selling, general and administrative expenses 12,471 8,518 24,510 17,004
Special charges 554 554
Equity in losses of Health Management, Inc., net 296 296
-------- -------- -------- --------
Operating income 200 1,605 2,440 3,927
Interest income (147) (426) (342) (1,108)
Interest expense 1,537 1,115 3,278 2,113
-------- -------- -------- --------
(Loss) income before income taxes (1,190) 916 (496) 2,922
(Benefit) provision for income taxes (595) 683 (248) 1,566
-------- -------- -------- --------
Net (loss) income $ (595) $ 233 $ (248) $ 1,356
======== ======== ======== ========
Net (loss) income per share of common stock:
Basic $ (.03) $ .02 $ (.01) $ .13
======== ======== ======== ========
Diluted $ (.03) $ .02 $ (.01) $ .12
======== ======== ======== ========
Weighted average number of common shares outstanding:
Basic 17,529 10,881 17,118 10,594
======== ======== ======== ========
Diluted 17,529 11,635 17,118 11,412
======== ======== ======== ========
</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>
SIX MONTHS ENDED
--------------------
MARCH 31, APRIL 30,
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (248) $ 1,356
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,163 1,795
Provision for doubtful accounts 3,659 3,129
Equity in losses of Health Management, Inc. 637
Payments for debt issuance costs (17) (500)
Changes in assets and liabilities:
Increase in accounts receivable (6,448) (11,315)
Increase in inventories (82) (156)
Increase in prepaid expenses and other assets (180) (2,717)
Increase in accounts payable and other liabilities 283 1,261
-------- --------
Net cash provided by (used in) operating activities 130 (6,510)
-------- --------
Cash flows from investing activities:
Capital expenditures (1,688) (683)
Notes receivable issued (70)
Payments received from the sale of Health Management, Inc. 30,794 2,032
Advances to and investment in Health Management, Inc. (8,799) (34,177)
Proceeds from sale of subsidiary 1,204
Purchase of subsidiaries - net of cash acquired (480)
Payments on acquisition payable (330) (1,706)
-------- --------
Net cash provided by (used in) investing activities 20,701 (34,604)
-------- --------
Cash flows from financing activities:
Borrowings under revolving loan 33,847
Payments on revolving loan (24,000) (10,883)
Proceeds from long-term debt 47
Proceeds from stock issuance 50,650
Stock options and warrants exercised, including tax benefit 6,508 293
Other, net (50) (175)
-------- --------
Net cash (used in) provided by financing activities (17,542) 73,779
-------- --------
Effect of exchange rate on cash 241
-------- --------
Increase in cash 3,530 32,665
Cash and temporary investments, beginning of period 10,626 4,598
-------- --------
Cash and temporary investments, end of period $ 14,156 $ 37,263
======== ========
Supplemental cash flow information:
Cash paid for interest $ 2,811 $ 1,308
======== ========
Cash paid for income taxes $ 1,431 $ 1,028
======== ========
</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 six 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 six months ended March 31, 1998 and
April 30, 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
<PAGE>
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. For the three and six months ended March 31, 1998, the Company had an
incremental weighted average of 68 and 536, 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. In addition,
the Company had options and warrants to purchase 4,023 shares of common stock
ranging in price from $7.25 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
six months ended April 30, 1997 has been restated to reflect the provisions of
SFAS No. 128.
The earnings per share calculations for the three and six months ended
March 31, 1998 and April 30, 1997, were computed as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, 1998 APRIL 30, 1997 MARCH 31, 1998 APRIL 30, 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net (loss) income $ (595) $ 233 $ (248) $ 1,356
============== ============== ============== ==============
Weighted average number of shares
outstanding 16,370 10,560 15,959 10,273
Weighted average number of shares
issuable per agreements 1,159 321 1,159 321
-------------- -------------- -------------- --------------
Weighted average number of shares
used in basic calculation 17,529 10,881 17,118 10,594
Incremental shares, after application
of treasury stock method, of stock
options and warrants -- 754 -- 818
-------------- -------------- -------------- --------------
Weighted average number of shares
used in diluted calculation 17,529 11,635 17,118 11,412
============== ============== ============== ==============
Net (loss) income per share of common stock:
Basic $ (0.03) $ 0.02 $(0.01) $ 0.13
============== ============== ============== ==============
Diluted $ (0.03) $ 0.02 $(0.01) $ 0.12
============== ============== ============== ==============
</TABLE>
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.
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 (cont.)
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 six months ended April 30, 1997,
Omnicare for the six months ended June 30, 1997 and Allied for the twenty-four
weeks ended March 31, 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.
Six Months Ended
April 30, 1997
----------------------
Net revenues $58,725
Net income 1,312
Net income per share of common stock:
Basic .12
Diluted .12
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 March 31, 1998 an aggregate of $36,574 was
received, of which $24,000 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 Company also amended its Credit
Facility on October 1, 1997 to accommodate the merger with HMI and the sale to
Counsel. At March 31, 1998 and September 30, 1997 the estimated net realizable
value of the investment in HMI was $463 and $22,367, respectively, and was
included in current assets as HMI was held for sale. At March 31, 1998 the
investment in HMI represents primarily the remaining receivable from the Asset
Sale.
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 March 31, 1998, the Company was in technical default of its $100,000
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). The Company is in discussion with the agent bank regarding
amendments to the Credit Facility that would waive the defaults described above
as well as address other items in the Credit Facility. Based upon these
discussions, the Company does not believe that the outstanding loans will be
called by the bank and consequently, the Company has continued to classify
the debt as long-term.
As of March 31, 1998, $1,000 of the Credit Facility was classified as
current.
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 subsequently during April 1998, HPII
was issued 1,159 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 and at March 31, 1998
was recorded in accrued expenses, related parties on the accompanying balance
sheet.
Accordingly, for purposes of earnings per share calculations, the issuable
shares of the Company's common stock under this transaction have been included
in both basic and diluted earnings per share calculations for the three and six
months ended March 31, 1998 (See Note 2).
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 Note 7).
Note 6: Special Charges
For the three and six months ended March 31, 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.
Note 7: 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., Plainfiff, 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 majority
vote of the Company's shareholders on March 17, 1998, in which the Company was
to issue certain shares of stock to HPII in
Page 11
<PAGE>
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(In thousands, except per share data)
(Unaudited)
Note 7: Commitments and Contingencies (cont.)
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 has subequently closed and the plaintiff has
stipulated to extend the defendants' time to respond to this suit until June 5,
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 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 was 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 seeks compensatory damages of $3,275 and punitive damages of $5,000.
Although it is too early to predict the ultimate outcome, the Company intends
to vigorously defend this proceeding and currently does not expect that there
will be a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows.
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.
Page 12
<PAGE>
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(In thousands, except per share data)
(Unaudited)
Note 7: Commitments and Contingencies (cont.)
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 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.
Page 13
<PAGE>
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(In thousands, except per share data)
(Unaudited)
Note 7: Commitments and Contingencies (cont.)
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 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 not yet scheduled an oral
agrument on this motion.
Page 14
<PAGE>
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(In thousands, except per share data)
(Unaudited)
Note 7: Commitments and Contingencies (cont.)
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 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 within 30 days
unless another dissenting shareholder assumed the prosecution of the action.
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.
Page 15
<PAGE>
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(In thousands, except per share data)
(Unaudited)
Note 7: Commitments and Contingencies (cont.)
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 six months ended March 31, 1998 being compared
with prior period quarterly information for the three and six months ended
April 30, 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 MARCH 31, 1998 vs. THREE MONTHS ENDED APRIL 30, 1997
Revenues. Total revenues increased by $16,654,000 or 80.6% to $37,323,000
for the three months ended March 31, 1998 from $20,669,000 for the three months
ended April 30, 1997. This increase was primarily attributable to the inclusion
of results for Allied Medicare Limited ("Allied") ($15,040,000) and Omnicare
Group, plc ("Omnicare") ($5,667,000) (sometimes collectively referred to herein
as the "U.K. Operations") for the three months ended March 31, 1998. This
increase was partly offset by decreases in patient service revenues primarily
attributable to the sale in July 1997 of the Company's Radamerica, Inc.
("Radamerica") subsidiary ($1,927,000). The Company's specialty mail-order
pharmacy and medical supplies operation also decreased ($1,440,000) primarily
due to lower respiratory sales as a result of a decline in number of patients
as well as a $627,000 impact due to the Balanced Budget Act (see below).
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.
This reduction 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 $13,848,000 to $24,098,000
for the three months ended March 31, 1998 from $10,250,000 for the three months
ended April 30, 1997. As a percentage of total revenues, cost of revenues
increased to 64.6% from 49.6% for the three months ended March 31, 1998 and
April 30, 1997, respectively. Cost of revenues as a percentage of revenues
increased for respiratory, medical equipment and supplies sales (57.5% for the
three months ended March 31, 1998 versus 44.9% for the three months ended April
Page 17
<PAGE>
Results of Operations (cont.)
30, 1997), increased for patient services (69.8% for the three months ended
March 31, 1998 versus 49.7% for the three months ended April 30, 1997) and
increased for infusion services (77.5% for the three months ended March 31,
1998 versus 71.8% for the three months ended April 30, 1997). The increase in
the respiratory, medical equipment and supplies sales are principally
attributable to the inclusion of Omnicare's results in the three months ended
March 31, 1998 which carry a higher cost of revenues (72.2%) than the United
States respiratory, medical equipment and supplies sales operations (50.3%), an
increase in the mix of higher cost products at the Company's specialty
mail-order pharmacy and medical supplies operations and the impact of the
recent Balance Budget Act, which increased cost of revenues for diabetic
testing strips and respiratory drugs by 3.0%. The increase in patient services
costs are the result of the sale of Radamerica in July 1997 which carried a
lower cost of revenue (24.8%) and the inclusion of Allied's results in the
three months ended March 31, 1998 which carry cost of revenues of 70.0%. 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 ("S,G&A") increased by $3,953,000 to $12,471,000
(46.4%) for the three months ended March 31, 1998 from $8,518,000 for the three
months ended April 30, 1997. This increase was primarily due to the inclusion
of the U.K. Operations ($4,505,000) partially offset by the sale of Radamerica
($971,000). Included in S,G&A for the three months ended March 31, 1998 is
$637,000 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. During the three months ended March 31, 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.
Interest Income. Interest income decreased by $279,000 to $147,000 for the
three months ended March 31, 1998 from $426,000 for the three months ended
April 30, 1997. This decrease was attributable to interest income earned under
a credit agreement with HMI (the "HMI Credit Agreement") of $354,000 in the
second quarter of fiscal 1997 partly offset by increased interest earned in the
second quarter of fiscal 1998 on a higher level of funds invested than in the
second quarter of fiscal 1997.
Interest Expense. Interest expense increased by $422,000 to $1,537,000 for
the three months ended March 31, 1998 from $1,115,000 for the three months
ended April 30, 1997. This increase was primarily due to the increase in
borrowings under the Company's Credit Facility (as defined herein).
(Benefit) Provision for Income Taxes. (Benefit) provision for income taxes
as a percentage of income before income taxes was 50% for the three months
ended March 31, 1998 and 74.6% for the three months ended April 30, 1997. The
decrease from the prior year
Page 18
<PAGE>
Results of Operations (cont.)
is attributable to the recognition of equity in losses of HMI in the three
months ended April 30, 1997 partly offset by a higher level of non-deductible
expenses, primarily amortization of intangibles. 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 (Loss) Income. As a result of the foregoing, the Company had a net
loss of $595,000 for the three months ended March 31, 1998 compared to net
income of $233,000 for the three months ended April 30, 1997.
SIX MONTHS ENDED MARCH 31, 1998 VS. SIX MONTHS ENDED APRIL 30, 1997
Revenues. Total revenues increased by $34,162,000 or 83.4% to $75,128,000
for the six months ended March 31, 1998 from $40,966,000 for the six months
ended April 30, 1997. This increase was primarily attributable to the inclusion
of results for Allied ($29,083,000) and Omnicare ($11,898,000) for the six
months ended March 31, 1998. This increase was partly offset by decreases in
patient services revenue primarily attributable to the sale of Radamerica
($3,767,000) and a $627,000 impact due to the Balanced Budget Act (see below).
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 for respiratory drugs became effective January 1, 1998.
This reduction 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 $27,885,000 or 141.3% to
$47,624,000 for the six months ended March 31, 1998 from $19,739,000 for the
six months ended April 30, 1997. As a percentage of total revenues, cost of
revenues increased to 63.4% from 48.2% for the six months ended March 31, 1998
and April 30, 1997, respectively. Cost of revenues as a percentage of sales
increased for patient services (69.4% for the six months ended March 31, 1998
versus 50.8% for the six months ended April 30, 1997), increased for
respiratory, medical equipment and supplies sales (56.7% for the six months
ended March 31, 1998 versus 43.0% for the six months ended April 30, 1997) and
increased for infusion services (69.2% for the six months ended March 31, 1998
versus 65.8% for the six months ended April 30, 1997). The increase in patient
services costs are due to the inclusion of Allied's results for the six months
ended March 31, 1998 which carry a cost of revenues of 69.6% and the sale of
Radamerica in July 1997 which carried a lower cost of service (25.5%). The
increases in cost of revenues of respiratory, medical equipment and supplies
sales are primarily attributable to an increase in the mix of higher cost
product lines and therapies in the United States operations, the impact of the
recent Balanced Budget Act, which increased cost of revenues for diabetic
testing strips and respiratory drugs by 1.8%, and the inclusion of Omnicare's
results which carry a higher cost of revenues (71.7%) than the U.S.
respiratory, medical equipment and supplies sales operations (49.2%). 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.
Page 19
<PAGE>
Results of Operations (cont.)
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $7,506,000 or 44.1% to $24,510,000 for the
six months ended March 31, 1998 from $17,004,000 for the six months ended April
30, 1997. This increase was primarily attributable to the inclusion of the U.K.
Operations ($8,885,000) for the six months ended March 31, 1998 partly offset
by the sale of Radamerica ($1,908,000).
Special Charges. During the six months ended March 31, 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.
Interest Income. Interest income decreased by $766,000 to $342,000 for the
six months ended March 31, 1998 from $1,108,000 for the six months ended April
30, 1997. This decrease was primarily attributable to interest income earned
under the HMI Credit Agreement ($1,022,000) for the six months of 1997 partly
offset by interest earned in the six months of 1998 on a higher level of
invested funds.
Interest Expense. Interest expense, increased by $1,165,000 to $3,278,000
for the six months ended March 31, 1998 from $2,113,000 for the six months
ended April 30, 1997. This increase was primarily attributable to increased
borrowings under the Credit Facility.
(Benefit) Provision for Income Taxes. (Benefit) provision for income taxes
as a percentage of income before income taxes was 50.0% for the six months
ended March 31, 1998 and 53.6% for the six months ended April 30, 1997. The
decrease in the effective tax rate from the 1997 period to the 1998 period was
principally attributable to the recognition of equity in losses in HMI in the
six months ended April 30, 1997 partly offset by a higher level of non-
deductible expenses, primarily amortization of intangibles. Management expects
that is more likely than not that future levels of income will be sufficient
to realize the deferred tax assets, as recorded.
Net (Loss) Income. As a result of the foregoing, the Company incurred a
net loss of $248,000 for the six months ended March 31, 1998 compared to net
income of $1,356,000 for the six months ended April 30, 1997.
Page 20
<PAGE>
Liquidity and Capital Resources
During the six months ended March 31, 1998 the Company recognized cash
flows of $130,000 from its operating activities and $20,701,000 from investing
activities as follows: $30,794,000 received from the Asset Sale (as defined
herein) partly offset by $8,799,000 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 the utilization of
$1,688,000 for capital expenditures and $810,000 for acquisitions. Funds
generated by investing activities along with net proceeds of $6,481,000 from
the exercise of the Company's warrants were mainly used to reduce the Company's
borrowings under the Credit Facility by $24,000,000.
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 March 31, 1998 and
September 30, 1997, $34,659,000 (18.4%) 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 March 31, 1998 and September 30, 1997, the Company's
average DSOs were 84 and 80, respectively.
Credit Facility. Loans under the Company's $100,000,000 senior secured
revolving credit facility (the "Credit Facility") are collateralized by, among
other things, a lien on substantially all of the Company's and its
subsidiaries' assets, a pledge of the Company's ownership interest in 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 March 31, 1998 and May 8, 1998, Eurodollar Rate
borrowings bore interest at rates of 7.69% and 7.63% to 7.69%, respectively.
The Company reduced its outstanding borrowings under the Credit Facility by
$24,000,000 during the six months ended March 31, 1998. As of March 31, 1998,
the Company had $62,355,000 outstanding under the Credit Facility, of which
$1,000,000 was classified as current. The unused portion of the Credit Facility
was $37,645,000 as of March 31, 1998.
Page 21
<PAGE>
Liquidity and Capital Resources (cont.)
Subject to certain exceptions, the Credit Facility prohibits or restricts,
among other things, the incurrence of liens, the incurrence of indebtedness,
certain fundamental corporate changes, dividends, the making of specified
investments and certain transactions with affiliates. In addition, the Credit
Facility contains affirmative and negative financial covenants customarily
found in agreements of this kind, including the maintenance of certain
financial ratios, such as interest coverage, debt to earnings before interest,
taxes, depreciation and amortization ("EBITDA") and minimum EBITDA. The Company
amended the Credit Facility during the six months ended March 31, 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. At March 31, 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). The Company is in
discussion with the agent bank regarding amendments to the Credit Facility that
would waive the defaults described above as well as address other items in the
Credit Facility. Based upon these discussions, the Company does not believe
that the outstanding loans will be called by the bank and consequently, the
Company has continued to classify the debt as long-term.
Sale of Radamerica. The Company finalized the sale of its Radamerica
subsidiary resulting in additional proceeds of $1,204,000, which were 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. Of the $30,000,000 proceeds received at closing, $24,000,000 was
used to reduce the senior secured debt owed by the Company under the 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. As of May 8, 1998, the Company
received $6,574,000 of the $7,500,000 to be paid in connection with the
collection of HMI's account receivable, existing at the date of sale.
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-
Page 22
<PAGE>
Liquidity and Capital Resources (cont.)
down and contingent obligations of HMI (including litigation - see "Litigation"
with respect to certain legal proceedings concerning HMI), have been considered
in determining the net realizable value of the HMI investment at March 31,
1998.
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 is $6,956,000 and at March 31, 1998 has been recorded in
accrued expenses, related parties on the accompanying balance sheet.
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., Plainfiff, 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 majority
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 has subsequently closed
and the plaintiff has stipulated to extend the defendants' time to respond to
this suit until June 5, 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 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 was commenced on December 4, 1997,
Page 23
<PAGE>
Liquidity and Capital Resources (cont.)
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 seeks compensatory damages of
$3,275,000 and punitive damages of $5,000,000. Although it is too early to
predict the ultimate outcome, the Company intends to vigorously defend this
proceeding and currently does not expect that there will be a material adverse
effect on the Company's consolidated financial position, results of operations
or cash flows.
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.
Page 24
<PAGE>
Liquidity and Capital Resources (cont.)
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 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 not yet scheduled an oral
argument on this motion.
Page 25
<PAGE>
Liquidity and Capital Resources (cont.)
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.
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 within 30 days
unless another dissenting shareholder assumed the prosecution of the action.
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 26
<PAGE>
PART II
Item 1. Legal Proceedings
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). 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. A stipulation providing for the
discontinuation of this action with prejudice was entered into between the
parties on November 24, 1997.
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., Plainfiff, 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 majority
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 has
subequently closed and the plaintiff has stipulated to extend the defendants'
time to respond to this suit until June 5, 1998.
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 within 30 days
unless another dissenting shareholder assumed the prosecution of the action.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held a special meeting of shareholders on March 17, 1998 (the
"Special Meeting"). The proposals voted upon at the Special Meeting and the
results with respect to each proposal are set forth below:
1. To vote upon and approve and adopt the AP Stock Purchase Agreement.
2. To vote upon the approval of an amendment to Article Fourth of the
Company's Restated Certificate of Incorporation, as amended, to increase the
number of authorized shares of capital stock from 32,000,000 to 42,000,000.
3. To vote upon the approval of an amendment to Article First of the
Company's Restated Certificate of Incorporation, as amended, changing the name
of the Company to "Transworld Healthcare, Inc."
4. To vote upon the approval of an amendment to Article Second of the
Company's Restated Certificate of Incorporation, as amended, to correct a
typographical error in such Article.
Page 27
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders (cont.)
Voting Results
--------------
ABSTAIN/
PROPOSAL FOR AGAINST NON-VOTING
-------- --- ------- ----------
No. 1 10,390,272 1,026,987 28,909
No. 2 10,447,781 962,966 35,421
No. 3 10,881,989 540,370 23,809
No. 4 10,844,219 564,970 36,979
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27 Financial Data Schedule
(b) Reports on Form 8-K.
None.
Page 28
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 13, 1998
TRANSWORLD HEALTHCARE, INC.
By: /s/ Wayne A. Palladino
-----------------------
Wayne A. Palladino
Senior Vice President and
Chief Financial Officer (Principal
Financial Officer and Officer Duly
Authorized to Sign on Behalf of
Registrant)
Page 29
<PAGE>
EXHIBIT INDEX
Exhibit Description
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 14,156
<SECURITIES> 0
<RECEIVABLES> 47,339
<ALLOWANCES> 12,680
<INVENTORY> 3,347
<CURRENT-ASSETS> 66,999
<PP&E> 17,484
<DEPRECIATION> 8,236
<TOTAL-ASSETS> 187,906
<CURRENT-LIABILITIES> 33,376
<BONDS> 0
0
0
<COMMON> 164
<OTHER-SE> 91,582
<TOTAL-LIABILITY-AND-EQUITY> 187,906
<SALES> 37,323
<TOTAL-REVENUES> 37,323
<CGS> 24,098
<TOTAL-COSTS> 24,098
<OTHER-EXPENSES> 13,025
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,390
<INCOME-PRETAX> (1,190)
<INCOME-TAX> (595)
<INCOME-CONTINUING> (595)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (595)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
