<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, 1999
Commission File Number 1-11570
-------------------------------------------------------------
Transworld Healthcare, Inc.
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(Exact name of Registrant as specified in its charter)
New York 13-3098275
----------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
555 Madison Avenue, New York, New York 10022
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(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 May 1, 1999
----- --------------------------
Common Stock 17,551,076 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, 1999 and September 30, 1998............. 4
Condensed Consolidated Statements of Operations
For the Three and Six Months Ended
March 31, 1999 and March 31, 1998................. 5
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended
March 31, 1999 and March 31, 1998................. 6
Notes to Condensed Consolidated Financial
Statements........................................ 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................ 13
Part II.
Item 3. Defaults Upon Senior Securities............................... 24
Item 5. Other Information............................................. 24
Item 6. Exhibits and Reports on Form 8-K.............................. 24
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,
1999 1998
--------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and temporary investments $ 7,050 $ 10,413
Accounts receivable, less allowance for doubtful
accounts of $15,289 and $16,437 33,701 32,223
Inventories 3,693 4,188
Deferred income taxes 6,732 6,732
Prepaid expenses and other current assets 5,911 4,382
-------- --------
Total current assets 57,087 57,938
Property & equipment, net 9,985 9,888
Intangible assets, net of accumulated amortization of
$8,185 and $6,408 101,868 105,784
Deferred income taxes 3,483 3,483
Other assets 2,229 2,615
-------- --------
Total assets $174,652 $179,708
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt, including obligations
under capital leases $ 55,772 $ 40
Accounts payable 4,389 2,728
Accrued expenses 14,378 12,901
Income taxes payable 2,853 3,022
Acquisitions payable 99
-------- --------
Total current liabilities 77,392 18,790
Long-term debt, including obligations under capital leases 10 57,307
Deferred income taxes and other 1,680 1,706
-------- --------
Total liabilities 79,082 77,803
-------- --------
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 -
17,551 and 17,536 shares 176 175
Additional paid-in capital 125,526 125,461
Accumulated other comprehensive (loss) income (2,505) 2,946
Retained deficit (27,627) (26,677)
-------- --------
Total stockholders' equity 95,570 101,905
-------- --------
Total liabilities and stockholders' equity $174,652 $179,708
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
Page 4
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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, MARCH 31, MARCH 31, MARCH 31,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Net patient services $ 20,021 $ 17,470 $ 37,926 $ 34,000
Net respiratory, medical equipment and supplies sales 16,654 17,369 36,380 35,676
Net infusion services 2,276 2,484 4,699 5,452
-------- -------- -------- --------
Total revenues 38,951 37,323 79,005 75,128
-------- -------- -------- --------
Cost of revenues:
Patient services 13,541 12,189 26,006 23,610
Respiratory, medical equipment and supplies sales 9,808 9,984 20,634 20,240
Infusion services 1,871 1,925 3,688 3,774
-------- -------- -------- --------
Total cost of revenues 25,220 24,098 50,328 47,624
-------- -------- -------- --------
Gross profit 13,731 13,225 28,677 27,504
Selling, general and administrative expenses 13,356 12,471 26,959 24,510
Special charges 554 554
-------- -------- -------- --------
Operating income 375 200 1,718 2,440
Interest income (73) (147) (142) (342)
Interest expense 1,328 1,537 2,729 3,278
-------- -------- -------- --------
Loss before income taxes (880) (1,190) (869) (496)
Provision (benefit) for income taxes 74 (595) 81 (248)
-------- -------- -------- --------
Net loss $ (954) $ (595) $ (950) $ (248)
======== ======== ======== ========
Net loss per share of common stock:
Basic and diluted $ (.05) $ (.03) $ (.05) $ (.01)
======== ======== ======== ========
Weighted average number of common shares outstanding:
Basic and diluted 17,549 17,529 17,543 17,118
======== ======== ======== ========
See notes to condensed consolidated financial statements.
</TABLE>
Page 5
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TRANSWORLD HEALTHCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------------
MARCH 31, MARCH 31,
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (950) $ (248)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,857 2,588
Provision for doubtful accounts 3,710 3,659
Amortization of debt issuance costs 556 575
Payments for debt issuance costs (18) (17)
Changes in assets and liabilities:
Increase in accounts receivable (5,886) (6,448)
Decrease (increase) in inventories 432 (82)
Increase in prepaid expenses and other assets (1,521) (180)
Increase in accounts payable and other liabilities 3,519 283
------- -------
Net cash provided by operating activities 2,699 130
------- -------
Cash flows from investing activities:
Capital expenditures (1,520) (1,688)
Proceeds from sale of Health Management, Inc.'s assets 30,794
Advances to and investment in Health Management, Inc. (8,799)
Proceeds from sale of Radamerica 1,204
Payments for acquisitions - net of cash acquired (2,560) (480)
Payments on acquisition payable (132) (330)
Other, net 42
------- -------
Net cash (used in) provided by investing activities (4,170) 20,701
------- -------
Cash flows from financing activities:
Payments on revolving loan (1,500) (24,000)
Stock options and warrants exercised, including tax benefit 66 6,508
Other, net (64) (50)
------- -------
Net cash used in financing activities (1,498) (17,542)
------- -------
Effect of exchange rate on cash (394) 241
------- -------
(Decrease) increase in cash (3,363) 3,530
Cash and temporary investments, beginning of period 10,413 10,626
------- --------
Cash and temporary investments, end of period $ 7,050 $ 14,156
======= ========
Supplemental cash flow information:
Cash paid for interest $ 2,090 $ 2,811
======= ========
Cash paid (refunded) for income taxes, net $ 172 $ (1,164)
======= ========
</TABLE>
See notes to condensed consolidated financial statements.
Page 6
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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 ("U.K."). The Company provides the following
services and products to patients in their homes: (i) patient services,
including nursing and para-professional services; (ii) specialty mail-order
pharmaceuticals, medical supplies, respiratory therapy and home medical
equipment; and (iii) infusion therapy.
The Condensed Consolidated Financial Statements included herein are
unaudited and include all adjustments (consisting of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of the financial position and results of operations of the interim
period pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These condensed financial statements
should be read in conjunction with the Company's Form 10-K for the year ended
September 30, 1998. Prior year's financial statements have been reclassified to
conform to the current year's presentation.
Note 2: Earnings Per Share
Basic earnings per share ("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
agreements and dilutive stock options and warrants using the treasury stock
method. For the three and six months ended March 31, 1999, the Company had an
incremental weighted average of 169 and 179, 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. 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, at March 31, 1999 and
March 31, 1998, the Company had options and warrants to purchase 3,816 and
4,023 shares of common stock, respectively, ranging in price from $4.31 to
$12.45 and $6.75 to $12.45 per share, respectively, that were not included in
the computation of diluted EPS because the exercise price was greater than the
average market price of the common shares during these periods.
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.)
The earnings per share calculations for the three and six months ended
March 31, 1999 and 1998, were computed as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998 MARCH 31, 1999 MARCH 31, 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net loss $(954) $(595) $(950) $(248)
============== ============== ============== ==============
Weighted average number of shares
outstanding 17,549 16,370 17,543 15,959
Weighted average number of shares
issuable per agreements - 1,159 - 1,159
-------------- -------------- -------------- --------------
Weighted average number of shares
used in basic and diluted
calculation 17,549 17,529 17,543 17,118
============== ============== ============== ==============
Net loss per share of common stock:
Basic and diluted $(0.05) $(0.03) $(0.05) $(0.01)
============== ============== ============== ==============
</TABLE>
Note 3: Comprehensive Income
Effective October 1, 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income." This statement establishes standards for the reporting and display of
comprehensive income and its components. Components of comprehensive income
include net income and all other non-owner changes in equity, such as the
change in the cumulative translation adjustment. The following table displays
comprehensive income for the three and six months ended March 31, 1999 and
1998:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
------------------ ------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net loss $ (954) $ (595) $ (950) $ (248)
Change in cumulative translation
adjustment (3,232) 1,229 (5,451) 3,600
------- ------- ------- -------
Comprehensive (loss) income $(4,186) $ 634 $(6,401) $ 3,352
======= ======= ======= =======
</TABLE>
Page 8
<PAGE>
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(In thousands, except per share data)
(Unaudited)
Note 4: Debt
At March 31, 1999, the Company was in technical default of its senior
secured revolving credit facility (the "Credit Facility") due to non-compliance
with certain financial covenants (debt to earnings before interest, taxes,
depreciation and amortization ("EBITDA") and minimum EBITDA). As a result of
this default, the Credit Facility was classified as current at March 31, 1999.
The Company is currently seeking alternative financing but there can be no
assurance that any such financing will be available to the Company, or if
available, will be on terms acceptable to the Company. If alternative financing
is unavailable to the Company, the Company will endeavor to obtain any
necessary amendments from the required lenders that would waive the defaults
described above. If alternative financing is not available and the Company
is unable to secure necessary amendments to waive the defaults described above
it could have a material adverse effect on the cash flows and financial position
of the Company. Excluding any repayment of the Credit Facility, the Company
believes it has adequate capital resources to conduct its operations
for the next twelve months.
During the six months ended March 31, 1999, the Company amended the
Credit Facility to allow for further expansion of its U.K. operations. In
addition, the Company reduced its borrowings under the Credit Facility by
$1,500.
Note 5: 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 Hyperion Partners II L.P. ("HPII"), breached
fiduciary duties to the Company and its shareholders, in connection with a
transaction, approved by a vote of the Company's shareholders on March 17,
1998, in which the Company was to issue certain shares of stock to HPII in
exchange for certain of Health Management, Inc.'s ("HMI") trade payables. The
action seeks injunctive relief against this transaction, and damages, costs and
attorneys' fees in unspecified amounts. The transaction subsequently closed and
the plaintiff has, on numerous occasions, stipulated to extend the defendants'
time to respond to this suit. The most recent stipulation provides for an
extension to May 19, 1999.
On July 11 and July 22, 1997, the Company's RespiFlow, Inc.
("RespiFlow") and MK Diabetic Support Services, Inc. ("MK") subsidiaries,
respectively, each received a letter (the "Audit Letters") from the 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
Page 9
<PAGE>
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(In thousands, except per share data)
(Unaudited)
Note 5: Commitments and Contingencies (cont.)
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, 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.
During the normal course of business the Company continues to
carefully monitor and review its submission of Medicare, Medicaid and all other
claims for reimbursement. The Company believes that it is substantially in
compliance, in all material respects, with the applicable provisions of the
Federal statutes, regulations and laws and applicable state laws. Because of
the broad and sometimes vague nature of these laws, there can be no assurance
that an enforcement action will not be brought against the Company, or that the
Company will not be found to be in violation of one or more of these
provisions. At present, the Company cannot anticipate what impact, if any,
subsequent administrative or judicial interpretation of the applicable Federal
and state laws may have on the Company's consolidated financial position,
results of operations or cash flows.
Effective October 1, 1997, HMI became a wholly-owned subsidiary of the
Company.
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
Page 10
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TRANSWORLD HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(In thousands, except per share data)
(Unaudited)
Note 5: Commitments and Contingencies (cont.)
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 Company is being sued as an
alleged control person of HMI, based upon its acquisition of 49% of HMI's
outstanding common stock on January 13, 1997. 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.
Oral argument on this motion was held on November 13, 1998. The court denied
defendants' motion to dismiss on November 13, 1998 and directed the parties to
mediate in an attempt to settle the action. Defendants served their answer to
the amended complaint on January 13, 1999. Following mediation, a memorandum of
understanding, dated March 16, 1999, setting forth the terms of the settlement
of this action, was executed by the plaintiffs, the Company, W. James Nicol,
Paul S. Jurewicz and James Mieszala, HMI and National Union Fire Insurance
Company of Pittsburgh, Pennsylvania ("National"). The action will continue as
to BDO Seidman LLP. The total settlement amount is $2,375. It has been agreed
that $275 of the settlement amount will be paid directly by the Company, with
the remainder to be covered by National and the Company's directors' and
officers' insurance policy carrier. The terms of the proposed settlement is
subject to court approval.
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 defendants
filed a motion to dismiss this action on September 18, 1998. The
Page 11
<PAGE>
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(In thousands, except per share data)
(Unaudited)
Note 5: Commitments and Contingencies (cont.)
plaintiffs filed a response to this motion on November 6, 1998. The defendants
filed a reply brief on December 23, 1998. Oral argument on the motion occurred
on April 6, 1999 and, to date, the court has not issued a decision.
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, 1998 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.
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 12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
THREE MONTHS ENDED MARCH 31, 1999 VS. THREE MONTHS ENDED MARCH 31, 1998
Revenues. Total revenues increased by $1,628,000 or 4.4% to
$38,951,000 for the three months ended March 31, 1999 from $37,323,000 for the
three months ended March 31, 1998. This increase was primarily attributable to
the Company's United Kingdom (U.K.) nursing operations ($4,981,000) and
respiratory, medical equipment and supplies sales operations ($191,000)
(sometimes collectively referred to herein as the "U.K. Operations"). The
favorable variance from the U.K. Operations was principally the result of
continued expansion, increased billing rates and core business growth. Partly
offsetting the increase from the U.K. Operations was the loss of patient
service revenue attributable to the sale in July 1998 of the Company's
Transworld Home HealthCare - Nursing Division, Inc. ("TNI") subsidiary
($2,430,000). In addition, declines in revenue were experienced by both the
U.S. respiratory, medical equipment and supplies sales operations ($906,000)
and infusion services ($208,000) which were primarily attributable to a
reduction in the number of patients serviced.
Cost of Revenues. Cost of revenues increased by $1,122,000 to
$25,220,000 for the three months ended March 31, 1999 from $24,098,000 for the
three months ended March 31, 1998. As a percentage of total revenues, cost of
revenues for the three months ended March 31, 1999 remained relatively flat at
64.7% in comparison to 64.6% for the three months ended March 31, 1998. Cost of
revenues as a percentage of revenues increased for infusion services (82.2% for
the three months ended March 31, 1999 versus 77.5% for the prior period),
increased slightly for respiratory, medical equipment and supplies sales
operations (58.9% for the three months ended March 31, 1999 versus 57.5% for
the prior period) and decreased for patient services (67.6% for the three
months ended March 31, 1999 versus 69.8% in the prior period). The increase in
infusion services is due to an increase in therapies with higher product costs.
The decline in patient services primarily results from the sale of TNI.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $885,000 or 7.1% to $13,356,000 for the
three months ended March 31, 1999 from $12,471,000 for the three months ended
March 31, 1998. This increase was primarily due to the additional costs
incurred for overhead related to sales and collection efforts in the Company's
U.S. operations and a higher level of overhead in the U.K. Operations due to
its continued expansion. These increases were partly offset by the sale of TNI.
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.
Page 13
<PAGE>
Results of Operations (cont.)
Interest Income. Interest income decreased by $74,000 to $73,000 for
the three months ended March 31, 1999 from $147,000 for the three months ended
March 31, 1998. This decrease was attributable to lower interest income earned
on a lower level of funds invested.
Interest Expense. Interest expense decreased by $209,000 to $1,328,000
for the three months ended March 31, 1999 from $1,537,000 for the three months
ended March 31, 1998. This favorable variance was primarily attributable to a
lower level of borrowings under the Company's senior secured revolving credit
facility (the "Credit Facility") combined with a reduced borrowing rate.
Provision (Benefit) for Income Taxes. The Company recorded a provision
for income taxes amounting to $74,000 for the three months ended March 31, 1999
in comparison to a benefit of $595,000 in the comparable prior period. The
change from the prior year is attributable to 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. As a result of the foregoing, the Company incurred a net
loss of $954,000 for the three months ended March 31, 1999 compared to net loss
of $595,000 for the three months ended March 31, 1998.
SIX MONTHS ENDED MARCH 31, 1999 VS. SIX MONTHS ENDED MARCH 31, 1998
Revenues. Total revenues increased by $3,877,000 or 5.2% to
$79,005,000 for the six months ended March 31, 1999 from $75,128,000 for the
six months ended March 31, 1998. This increase was primarily attributable to
the Company's U.K. Operations, specifically, nursing ($8,843,000) and
respiratory, medical equipment and supplies sales ($544,000). The U.K.
Operations increased principally due to continued expansion, increased billing
rates and core business growth. In addition, the Company's U.S. respiratory,
medical equipment and supplies sales operations displayed a slight revenue
increase ($160,000) resulting from higher ostomy and respiratory sales due to a
higher level of patients serviced within the Company's specialty mail-order
pharmacy operation. This increase reflects the incremental impact of the
Balanced Budget Act of 1997 ("the Balanced Budget Act"), which reduced revenue
$529,000. These increases were partly offset by the loss of U.S. patient
service revenues attributable to the sale of TNI ($4,917,000) and lower U.S.
infusion services revenue due to a decline in the number of patients serviced
($753,000).
Pursuant to the 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).
Page 14
<PAGE>
Results of Operations (cont.)
Cost of Revenues. Cost of revenues increased by $2,704,000 to
$50,328,000 for the six months ended March 31, 1999 from $47,624,000 for the
six months ended March 31, 1998. As a percentage of total revenues, cost of
revenues for the six months ended March 31, 1999 remained relatively flat at
63.7% in comparison to 63.4% for the six months ended March 31, 1998. Cost of
revenues as a percentage of revenues increased for infusion services (78.5% for
the six months ended March 31, 1999 versus 69.2% for the six months ended March
31, 1998), remained flat at 56.7% for respiratory, medical equipment and
supplies sales operations and declined slightly for patient services (68.6% for
the six months ended March 31, 1999 versus 69.4% for the six months ended March
31, 1998). The increase in infusion services is due to an increase in therapies
with higher product costs. Effective cost control in the Company's U.K.
respiratory, medical equipment and supplies sales operations were offset in the
Company's U.S. specialty mail-order pharmacy and supplies operations due to the
impact of the Balanced Budget Act, which increased cost of revenues as a
percentage of revenues for diabetic testing strips and respiratory drugs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $2,449,000 or 10.0% to $26,959,000 for the
six months ended March 31, 1999 from $24,510,000 for the six months ended March
31, 1998. This increase was primarily due to the additional costs incurred for
overhead related to sales and collection efforts in the Company's U.S.
operations and a higher level of overhead in the U.K. Operations due to its
continued expansion. These increases were partly offset by the sale of TNI.
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 $200,000 to $142,000 for
the six months ended March 31, 1999 from $342,000 for the six months ended
March 31, 1998. This decrease was attributable to lower interest income earned
on a lower level of funds invested.
Interest Expense. Interest expense decreased by $549,000 to $2,729,000
for the six months ended March 31, 1999 from $3,278,000 for the six months
ended March 31, 1998. This favorable variance was primarily attributable to a
lower level of borrowings under the Company's Credit Facility combined with a
reduced borrowing rate.
Provision (Benefit) for Income Taxes. The Company recorded a provision
for income taxes amounting to $81,000 for the six months ended March 31, 1999
in comparison to a benefit of $248,000 in the comparable prior period. The
change from the prior year is attributable to non-deductible expenses,
primarily amortization of intangible assets. 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. As a result of the foregoing, the Company incurred a net
loss of $950,000 for the six months ended March 31, 1999 compared to net loss
of $248,000 for the six months ended March 31, 1998.
Page 15
<PAGE>
Liquidity and Capital Resources
During the six months ended March 31, 1999 the Company generated
$2,699,000 from its operating activities. Cash flow from operating activities,
combined with the use of existing cash, funded a $1,500,000 payment to further
reduce the Company's Credit Facility and the following investing activities:
$2,692,000 for further expansion of the Company's U. K. Operations and
$1,520,000 for capital expenditures.
Healthcare Reimbursement. Political, economic and regulatory
influences are resulting in fundamental changes in the healthcare industry in
the U.S. The Company anticipates that Congress and state legislatures will
continue to review and assess alternative healthcare delivery systems and
payment methods. Sales of a large portion of the Company's products depend to a
significant extent on the availability of reimbursement to the Company's
customers by government and private insurance plans.
Effective October 1, 1998, new Medicare reimbursement guidelines
generally provide that quarterly orders of diabetic supplies to existing
customers must be administratively verified before shipment and that all
doctors orders for diabetic supplies are valid for a period of six months. In
addition, the new regulations require that Type I Medicare diabetic customers
who test more frequently than three times per day or Type II Medicare diabetic
customers who test more frequently than one time per day visit their physician
every six months and maintain a thirty day log book for compliance.
Management believes that the increased administrative burden created
by these new regulations has resulted in increased operating expenses at its
U.S. specialty mail-order pharmacy operations. Management is also evaluating
the impact of these new regulations on the timing and quantity of product
shipments.
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, 1999 and
September 30, 1998, $33,701,000 (19.3%) and $32,223,000 (17.9%), respectively,
of the Company's total assets consisted of accounts receivable. The accounts
receivable are substantially due from third-party payors which generally
require substantial documentation in order to process claims. The collection
time for accounts receivable is typically the longest for services that relate
to new patients or additional services requiring medical review for existing
patients.
Management's goal is to maintain accounts receivable levels equal to
or less than industry average, which would tend to mitigate the risk of
recurrence of negative cash flows from operations by reducing the required
investment in accounts receivable and thereby increasing cash flows from
operations. Days sales outstanding ("DSOs") is a measure of the average number
of days taken by the Company to collect its accounts receivable, calculated
from the date
Page 16
<PAGE>
Liquidity and Capital Resources (cont.)
services are rendered. At March 31, 1999 and September 30, 1998, the Company's
average DSOs were 78 and 72, respectively.
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 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,
1999 and May 1, 1999, Eurodollar Rate borrowings bore interest at a rate of
6.9375%. During the six months ended March 31, 1999, the Company reduced its
borrowings under the Credit Facility by $1,500,000 and amended the Credit
Facility to allow for further expansions of its U.K. Operations. As of May 1,
1999, the Company had $55,755,000 outstanding under the Credit Facility and the
unused portion of the Credit Facility was $28,645,000. Additional loans to the
Company will require the approval of the required lenders ("Agent Bank") in
accordance with the terms of the Credit Facility.
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.
As of March 31, 1999 the Company was in technical default of the
Credit Facility due to non-compliance with certain financial covenants (debt to
EBITDA and minimum EBITDA). As a result of this default the Credit Facility has
been reclassified as current as of March 31, 1999. The Company is currently
seeking alternative financing but there can be no assurance that any such
financing will be available to the Company, or if available, will be on terms
acceptable to the Company. If alternative financing is unavailable to the
Company, the Company will endeavor to obtain any necessary amendments from the
Agent Bank that would waive the defaults described above. If alternative
financing is not available and the Company is unable to secure necessary
amendments to waive the defaults described above it could have a material
adverse effect on the cash flows and financial position of the Company.
Excluding any repayment of the Credit Facility, the Company believes it has
adequate capital resources to conduct its operations for the next twelve
months.
Year 2000. The Year 2000 computer issue refers to potential conditions
in computer programs whereby a two-digit field rather than a four-digit field
is used to define the applicable year. Unless corrected, some computer programs
may be unable to appropriately function on January 1, 2000 because these
programs will read the "00" in the year 2000 as
Page 17
<PAGE>
Liquidity and Capital Resources (cont.)
January 1, 1900. If uncorrected, the problem could result in computer system
failures or equipment and medical device malfunctions (affecting patient
diagnosis and treatment) thereby disrupting the Company's business operations
and subjecting the Company to potentially significant legal liabilities.
During the early part of 1998, the Company formed a task force
consisting of members of senior management, in-house legal counsel,
representatives from each of the Company's operating subsidiaries (in both the
U.S. and the U.K.), and other Company personnel. The task force also consults
with the Company's insurance carrier and risk management advisors. The task
force developed an action plan to address the potential problems of the Year
2000, which considered the following critical phases: (i) the Company's state
of readiness; (ii) risks of the Company's Year 2000 issues; (iii) costs to
address Year 2000 compliance; and (iv) the Company's contingency plans.
Company's State of Readiness. The information technology ("IT") and IT
infrastructure portions of the Company's Year 2000 project, address the
inventory, assessment, necessary corrective actions, testing and implementation
of external vendor products, mission critical third-party software and
internally developed software. In that regard, the Company believes it has
identified (in both the U.S. and the U.K.), the various software applications
that may be potentially impacted. The Company's assessment of all IT related
components is substantially complete and the Company anticipates, in most
respects, remediation of external vendor products, mission critical third-party
software and internally developed software to be completed by June 30, 1999.
The Company believes that by September 30, 1999, implementation and testing of
all remediation will be completed.
With respect to the non-IT portion of the Company's Year 2000 project,
the Company has undertaken a program to inventory, assess and correct or
replace (where necessary) impacted mission critical as well as non-mission
critical vendor and supplier products (including but not limited to drugs,
medical supplies and specialty mail-order pharmaceutical products), medical
equipment, telephone systems, postage machines and other related equipment with
Year 2000 risk. These types of supplies and equipment play a vital role in the
day to day operations of the Company. The Company is in the process (in both
the U.S. and the U.K.) of contacting vendors and suppliers, analyzing and
acting upon information provided to replace or otherwise amend any devices or
equipment that pose a Year 2000 impact. The Company is prioritizing its non-IT
efforts by allocating resources to equipment and medical devices that will have
a direct impact on patient safety and health with a goal of minimizing and/or
eliminating the associated risks. The Company recognizes, to a certain degree,
that it is relying upon information that is being provided by equipment and
medical device manufacturers regarding the Year 2000 status of their respective
products. While the Company is attempting to evaluate information provided by
its present vendors and suppliers, there can be no assurance that in all
instances accurate information is being provided. The Company's assessment of
potentially non-IT affected components is substantially complete and the
Company anticipates completing, in most respects, any required corrective
actions by June
Page 18
<PAGE>
Liquidity and Capital Resources (cont.)
30, 1999. The Company expects that by September 30, 1999 implementation and
testing of all remediation will be completed.
Risks of the Company's Year 2000 Issues. Failure from any of the aforementioned
IT and/or non-IT equipment and components, including the support from third
parties, could have a material adverse impact on the Company's operations (in
both the U.S. and the U.K.) resulting in the potential inability to provide
health care services to its patients. This inability could result in the loss
of revenue (which at the present time is unable to be quantified) and give rise
to litigation.
In addition, the Company relies heavily upon third-party payors,
including to a large extent governmental payors such as Medicare and Medicaid
in the U.S. and the National Health Service in the U.K. for accurate and timely
reimbursement of claims, often through the use of electronic data interfaces.
Although much has been published publicly stating that the government is
working to solve its own Year 2000 issues in a timely manner, the Company has
received no assurance that their systems and interfaces will be converted
timely. Failure of any of the Company's third-party payors, especially
governmental payors, to solve their Year 2000 issues could have a material
adverse effect on the Company's financial condition, cash flows, and results of
operations.
Costs to Address Year 2000 Compliance. As of May 1, 1999 costs
incurred for all efforts of the Company's Year 2000 action plan amount to
$23,000 and have not been material to the Company. These costs have been
expensed as incurred and have been funded by operating cash flows. The
remaining cost of the Year 2000 project is expected to be approximately
$165,000 and is based upon the best estimates from the Company's management and
the Year 2000 task force. This cost will also be expensed as incurred and be
funded by operating cash flows. These estimates as well as anticipated
completion dates were derived by consideration of availability of resources,
utilizing assumptions and relying upon third party representations. However,
there can be no assurances that these estimates will be achieved and actual
results could be materially different.
The Company's Contingency Plans. Each operating subsidiary (both in
the U.S. and the U.K.) has been asked to develop a contingency plan to restore
the material functions of each of its systems or activities in the case of a
Year 2000 failure. The respective subsidiaries are in the process of defining
these plans and will make them more comprehensive, as additional information
becomes available through testing and external sources.
There can be no assurance that the Company will be able to complete
all of the modifications in the required time frame, that unanticipated events
will not occur or that the Company will be able to identify all Year 2000
issues before problems arise. In addition, the Company has no assurance that
third-party payors and vendors will have the ability to identify and solve all
or substantially all their Year 2000 issues. Therefore, there can be no
assurance that the Year 2000 issue will not have a material adverse effect on
the Company's financial
Page 19
<PAGE>
Liquidity and Capital Resources (cont.)
position, cash flows and results of operations.
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 Hyperion Partners II L.P. ("HPII"), breached
fiduciary duties to the Company and its shareholders, in connection with a
transaction, approved by a vote of the Company's shareholders on March 17,
1998, in which the Company was to issue certain shares of stock to HPII in
exchange for certain of HMI's trade payables. The action seeks injunctive
relief against this transaction, and damages, costs and attorneys' fees in
unspecified amounts. The transaction subsequently closed and the plaintiff has,
on numerous occasions, stipulated to extend the defendants' time to respond to
this suit. The most recent stipulation provides for an extension to May 19,
1999.
On July 11 and July 22, 1997, the Company's RespiFlow, Inc.
("RespiFlow") and MK Diabetic Support Services, Inc. ("MK") subsidiaries,
respectively, each received a letter (the "Audit Letters") from the 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, 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
Page 20
<PAGE>
Liquidity and Capital Resources (cont.)
this action will have a material adverse effect on the Company's consolidated
financial position, results of operations or cash flows.
During the normal course of business the Company continues to
carefully monitor and review its submission of Medicare, Medicaid and all other
claims for reimbursement. The Company believes that it is substantially in
compliance, in all material respects, with the applicable provisions of the
Federal statutes, regulations and laws and applicable state laws. Because of
the broad and sometimes vague nature of these laws, there can be no assurance
that an enforcement action will not be brought against the Company, or that the
Company will not be found to be in violation of one or more of these
provisions. At present, the Company cannot anticipate what impact, if any,
subsequent administrative or judicial interpretation of the applicable Federal
and state laws may have on the Company's consolidated financial position,
results of operations or cash flows.
Effective October 1, 1997, HMI became a wholly-owned subsidiary of the
Company.
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 Company is being sued as an alleged control person of HMI, based
upon its acquisition of 49% of HMI's outstanding common stock on January 13,
1997. 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. Oral argument on this motion was held
on November 13, 1998. The court denied defendant's motion to dismiss on
November 13, 1998 and directed the parties to mediate in an attempt to settle
the action. Defendants served their answer to the amended complaint on January
13, 1999. Following mediation, a memorandum of understanding, dated March 16,
1999, setting forth the terms of the settlement of this action, was executed by
the plaintiffs, the Company, W. James Nicol, Paul S. Jurewicz and James
Mieszala, HMI and National Union Fire Insurance Company of Pittsburgh,
Pennsylvania ("National"). The action will continue as to BDO Seidman LLP. The
total settlement amount is $2,375,000. It has been agreed that $275,000 of the
settlement amount will be paid directly by
Page 21
<PAGE>
Liquidity and Capital Resources (cont.)
the Company, with the remainder to be covered by National and the Company's
directors' and officers' insurance policy carrier. The terms of the proposed
settlement is subject to court approval.
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 defendants
filed a motion to dismiss this action on September 18, 1998. The plaintiffs
filed a response to this motion on November 6, 1998. The defendants filed a
reply brief on December 23, 1998. Oral argument on the motion occurred on April
6, 1999 and, to date, the court has not issued a decision.
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, 1998 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.
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 22
<PAGE>
Liquidity and Capital Resources (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 23
<PAGE>
PART II
Item 3. Defaults Upon Senior Securities
At March 31, 1999, the Company was in technical default of its Credit
Facility due to non-compliance with certain financial covenants. As a result of
this default, the Credit Facility was classified as current at March 31, 1999.
The Company is currently seeking alternative financing but there can be no
assurance that any such financing will be available to the Company, or if
available, will be on terms acceptable to the Company. If alternative financing
is unavailable to the Company, the Company will endeavor to obtain any
necessary amendments from the required lenders that would waive the defaults
described above.
Item 5. Other Information
Effective as of the close of business on April 29, 1999, the Company
ceased listing its common stock on the Nasdaq National Market as a result of
not meeting the $5.00 per share minimum bid price requirement. Effective April
30, 1999, the Company's common stock began trading on the American Stock
Exchange (symbol TWH).
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
10.1 Fourteenth Amendment to Credit Agreement dated as of
January 8, 1999 between the Company and Bankers
Trust Company
10.2 Fifteenth Amendment to Credit Agreement dated as of
March 1, 1999 between the Company and Bankers Trust Company
27 Financial Data Schedule
(b) Reports on Form 8-K.
None.
Page 24
<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 17, 1999
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 25
<PAGE>
EXHIBIT INDEX
Exhibit Description
10.1 Fourteenth Amendment to Credit Agreement dated as of January 8, 1999
between the Company and Bankers Trust Company
10.2 Fifteenth Amendment to Credit Agreement dated as of March 1, 1999
between the Company and Bankers Trust Company
27 Financial Data Schedule
Page 26
<PAGE>
FOURTEENTH AMENDMENT TO CREDIT AGREEMENT
----------------------------------------
FOURTEENTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), dated as of
January 8, 1999, 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 9.02 of the Credit Agreement is hereby amended by (i) deleting
the word "and" appearing at the end of clause (o) thereof, (ii) deleting the
period appearing at the end of clause (p) thereof and inserting a semicolon in
lieu thereof and (iii) inserting the following new clauses immediately following
existing clause (p) thereof:
"(q) the Claremont Acquisition shall be permitted so long as (i) no
Default or Event of Default is in existence at the time of the consummation
thereof or immediately after giving effect thereto, (ii) the aggregate
consideration paid in connection therewith shall not exceed (pound)450,000
consisting of an initial payment of (pound)250,000 upon closing and a
deferred earnout payment of up to (pound)200,000 and (iii) such acquisition
is consummated in accordance with the terms and provisions of the Claremont
Asset Purchase Documents and all applicable laws, rules and regulations
relating thereto; and
(r) the Carelink Acquisition shall be permitted so long as (i) no
Default or Event of Default is in existence at the time of the consummation
thereof or immediately after giving effect thereto, (ii) the aggregate
consideration paid in connection therewith shall not exceed (pound)650,000
consisting of an initial payment of (pound)300,000 upon closing and a
deferred earnout payment of up to (pound)350,000 and (iii) such acquisition
is consummated in accordance with the terms and provisions of the Carelink
Asset Purchase Documents and all applicable laws, rules and regulations
relating thereto."
<PAGE>
2. Section 9.12(c) of the Credit Agreement is hereby amended by inserting
the words "the Carelink Asset Purchase Documents, the Claremont Asset Purchase
Documents," immediately before the words "the Liverpool Asset Purchase
Documents" appearing therein.
3. Section 11 of the Credit Agreement is hereby further amended by inserting
in appropriate alphabetical order the following definitions:
"Carelink" shall mean the nursing and care agency business operated by
Claudia Cooke in England under the name Carelink Homecare Services.
"Carelink Acquisition" shall mean the purchase by Allied of certain of
the assets, property and rights used in connection with Carelink.
"Carelink Asset Purchase Agreement" shall mean the asset purchase
agreement between Allied and Claudia Cooke in substantially the form
delivered to the Agent on Fourteenth Amendment Effective Date.
"Carelink Asset Purchase Documents" shall mean the Carelink Asset
Purchase Agreement and any other agreement entered into in connection with
the Carelink Acquisition, together with any annexes, exhibits or schedules
thereto, as the same may be amended, modified or supplemented from time to
time in accordance with the terms hereof and thereof.
"Claremont" shall mean the nursing and care agency business operated by
Mr. and Mrs. Willis in England under the name Claremont Care Services.
"Claremont Acquisition" shall mean the purchase by Allied of certain of
the assets, property and rights used in connection with Claremont.
"Claremont Asset Purchase Agreement" shall mean the asset purchase
agreement between Allied and Mr. and Mrs. Willis in substantially the form
delivered to the Agent on the Fourteenth Amendment Effective Date.
"Claremont Asset Purchase Documents" shall mean the Claremont Asset
Purchase Agreement and any other agreement entered into in connection with
the Claremont Acquisition, together with any annexes, exhibits or schedules
thereto, as the same may be amended, modified or supplemented from time to
time in accordance with the terms hereof and thereof.
"Fourteenth Amendment Effective Date" shall have the meaning provided in
the Fourteenth Amendment, dated as of January 8, 1999, to this Agreement.
2
<PAGE>
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 Fourteenth Amendment
Effective Date (as defined below), after giving effect to this 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 Fourteenth 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
Fourteenth 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).
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 "Fourteenth
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 Fourteenth
Amendment Effective Date.
6. From and after the Fourteenth 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 this Amendment as of the date first above
written.
TRANSWORLD HEALTHCARE, INC.,
as Borrower
By /s/ Wayne A. Palladino
---------------------------------
Title: Vice President
BANKERS TRUST COMPANY,
Individually and as Agent
By /s/ Patricia Hogan
---------------------------------
Title: Principal
THE BANK OF NEW YORK
By /s/ Michael B. Scaduto
---------------------------------
Title: Vice President
BANQUE PARIBAS
By
---------------------------------
Title:
By
---------------------------------
Title:
<PAGE>
UBS AG, STAMFORD BRANCH
By /s/ Renata Jacobson
---------------------------------
Title: Director
By /s/ Lawrence M. Charleson
---------------------------------
Title: Executive Director
FLEET BANK, N.A.
By /s/ Christian Covello
---------------------------------
Title: Vice President
<PAGE>
Each of the undersigned, each being a Subsidiary Guarantor pursuant to the
Credit Agreement referenced in the foregoing Fourteenth Amendment and a party to
various Security Documents, hereby acknowledges and agrees to the foregoing
provisions of the Fourteenth Amendment.
Acknowledged and
Agreed this _____ day
of January, 1999.
DERMAQUEST, INC.,
as a Pledgor
By /s/ Wayne A. Palladino
------------------------------
Title:
MK DIABETIC SUPPORT SERVICES, INC.,
as a Pledgor
By /s/ Wayne A. Palladino
------------------------------
Title:
THE PROMPTCARE COMPANIES, INC.,
as a Pledgor
By /s/ Wayne A. Palladino
------------------------------
Title:
<PAGE>
THE PROMPTCARE LUNG CENTER, INC.,
as a Pledgor
By /s/ Wayne A. Palladino
------------------------------
Title:
STERI-PHARM, INC.,
as a Pledgor
By /s/ Wayne A. Palladino
------------------------------
Title:
TRANSWORLD HOME HEALTHCARE
NURSING DIVISION, INC., as a Pledgor
By /s/ Wayne A. Palladino
------------------------------
Title:
RESPIFLOW, INC.,
as a Pledgor
By /s/ Wayne A. Palladino
------------------------------
Title:
TRANSWORLD ACQUISITION CORP.,
as a Pledgor
By /s/ Wayne A. Palladino
------------------------------
Title:
<PAGE>
FIFTEENTH AMENDMENT TO CREDIT AGREEMENT
---------------------------------------
FIFTEENTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment"), dated as of
March 1, 1999, 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 3.03 of the Credit Agreement is hereby amended by (i) relettering
clauses (h) and (i) as clauses (i) and (j), respectively, and (ii) inserting
immediately prior to relettered clause (i) the following new clause:
"(h) in addition to any other mandatory commitment reductions pursuant
to this Section 3.03, the Total Revolving Loan Commitment shall be
permanently reduced by an amount equal to the amount applied to repay
outstanding Revolving Loans pursuant to Section 9.02(s)(iv). "
2. Section 9.02 of the Credit Agreement is hereby amended by (i) deleting
the word "and" appearing at the end of clause (q) thereof, (ii) deleting the
period appearing at the end of clause (r) thereof and inserting "; and" in lieu
thereof and (iii) inserting the following new clause immediately following
existing clause (r) thereof:
"(s) the CareCall Acquisition shall be permitted so long as (i) no
Default or Event of Default is in existence at the time of the consummation
thereof or immediately after giving effect thereto, (ii) the aggregate
consideration paid in connection therewith shall not exceed (pound)600,000
consisting of an initial payment of (pound)250,000 upon closing and a
deferred earnout payment of up to (pound)350,000, (iii) such acquisition is
consummated in accordance with the terms and provisions of the CareCall
Asset Purchase Documents and all applicable laws, rules and regulations
relating thereto and (iv) on or after the Fifteenth Amendment Effective Date
and prior to Borrower's execution of the CareCall Asset
<PAGE>
Purchase Agreement, the Borrower shall have repaid $1,500,000 in principal
amount of Revolving Loans."
3. Section 9.12(c) of the Credit Agreement is hereby amended by inserting
the words "the CareCall Asset Purchase Documents" immediately before the words
"the Carelink Asset Purchase Documents" appearing therein.
4. Section 11 of the Credit Agreement is hereby amended by inserting in
appropriate alphabetical order the following definitions:
"CareCall" shall mean the nursing and care agency business operated by
Mr. Ivor Adler and Mrs. Jacqueline Adler in England under the name CareCall
Home Services.
"CareCall Acquisition" shall mean the purchase by Allied of certain of
the assets, property and rights used in connection with CareCall.
"CareCall Asset Purchase Agreement" shall mean the asset purchase
agreement among Allied, Mr. Ivor Adler and Mrs. Jacqueline Adler in
substantially the form delivered to the Agent on the Fifteenth Amendment
Effective Date.
"CareCall Asset Purchase Documents" shall mean the CareCall Asset
Purchase Agreement and any other agreement entered into in connection with
the CareCall Acquisition, together with any annexes, exhibits or schedules
thereto, as the same may be amended, modified or supplemented from time to
time in accordance with the terms hereof and thereof.
"Fifteenth Amendment Effective Date" shall have the meaning provided in
the Fifteenth Amendment, dated as of March 1, 1999, to this Agreement.
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 Fifteenth Amendment
Effective Date (as defined below), after giving effect to this 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 Fifteenth 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 Fifteenth
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).
2
<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 "Fifteenth
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 Fifteenth Amendment
Effective Date.
6. From and after the Fifteenth 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 this Amendment as of the date first above
written.
TRANSWORLD HEALTHCARE, INC.,
as Borrower
By /s/ Wayne A. Palladino
-----------------------------
Title: Chief Financial Officer
BANKERS TRUST COMPANY,
Individually and as Agent
By /s/ Patricia Hogan
-----------------------------
Title: Principal
THE BANK OF NEW YORK
By /s/ Michael B. Scaduto
-----------------------------
Title: Vice President
BANQUE PARIBAS
By
-----------------------------
Title:
By
-----------------------------
Title:
<PAGE>
UBS AG, STAMFORD BRANCH
By /s/ Renata Jacobson
-----------------------------
Title: Director
By /s/ Lawrence M. Charleson
-----------------------------
Title: Executive Director
FLEET BANK, N.A.
By /s/ Christian Covello
-----------------------------
Title: Vice President
<PAGE>
Each of the undersigned, each being a Subsidiary Guarantor pursuant to the
Credit Agreement referenced in the foregoing Fifteenth Amendment and a party to
various Security Documents, hereby acknowledges and agrees to the foregoing
provisions of the Fifteenth Amendment.
Acknowledged and
Agreed this _____ day
of February, 1999.
DERMAQUEST, INC.,
as a Pledgor
By /s/ Wayne A. Palladino
---------------------------
Title: Vice President
MK DIABETIC SUPPORT SERVICES, INC.,
as a Pledgor
By /s/ Wayne A. Palladino
---------------------------
Title: Vice President
THE PROMPTCARE COMPANIES, INC.,
as a Pledgor
By /s/ Wayne A. Palladino
----------------------------
Title: Vice President
<PAGE>
THE PROMPTCARE LUNG CENTER, INC.,
as a Pledgor
By /s/ Wayne A. Palladino
------------------------------
Title: Vice President
STERI-PHARM, INC.,
as a Pledgor
By /s/ Wayne A. Palladino
------------------------------
Title: Vice President
TRANSWORLD HOME HEALTHCARE
NURSING DIVISION, INC., as a Pledgor
By /s/ Wayne A. Palladino
------------------------------
Title: Vice President
RESPIFLOW, INC.,
as a Pledgor
By /s/ Wayne A. Palladino
-------------------------------
Title: Vice President
TRANSWORLD ACQUISITION CORP.,
as a Pledgor
By /s/ Wayne A. Palladino
-------------------------------
Title: Vice President
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> MAR-31-1999
<CASH> 7,050
<SECURITIES> 0
<RECEIVABLES> 48,990
<ALLOWANCES> 15,289
<INVENTORY> 3,693
<CURRENT-ASSETS> 57,087
<PP&E> 19,713
<DEPRECIATION> 9,728
<TOTAL-ASSETS> 174,652
<CURRENT-LIABILITIES> 77,392
<BONDS> 0
0
0
<COMMON> 176
<OTHER-SE> 95,394
<TOTAL-LIABILITY-AND-EQUITY> 174,652
<SALES> 38,951
<TOTAL-REVENUES> 38,951
<CGS> 25,220
<TOTAL-COSTS> 25,220
<OTHER-EXPENSES> 13,356
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,255
<INCOME-PRETAX> (880)
<INCOME-TAX> 74
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<NET-INCOME> (954)
<EPS-PRIMARY> (.05)
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</TABLE>
