<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended June 30, 1999
Commission File Number 1-11570
-------------------------------------------------------------
Transworld Healthcare, Inc.
-------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
New York 13-3098275
------------------ --------------
(State or other jurisdiction of (I.R.S Employer
incorporation or organization Identification No.)
555 Madison Avenue, New York, New York 10022
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 750-0064
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at August 1, 1999
- ------------ -----------------------------
Common Stock 17,551,076 Shares
<PAGE>
Transworld Healthcare, Inc.
Third Quarter Report On Form 10-Q
Table of Contents
Part I. Page
Item 1. Financial Statements (Unaudited).................................. 3
Condensed Consolidated Balance Sheets
June 30, 1999 and September 30, 1998..................... 4
Condensed Consolidated Statements of Operations
For the Three and Nine Months Ended
June 30, 1999 and June 30, 1998.......................... 5
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended
June 30, 1999 and June 30, 1998.......................... 6
Notes to Condensed Consolidated Financial
Statements............................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................ 15
Part II.
Item 3. Defaults Upon Senior Securities................................... 27
Item 6. Exhibits and Reports on Form 8-K.................................. 27
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward looking statements. This Quarterly Report contains certain forward
looking statements and information that are based on the beliefs of management
as well as assumptions made by and information currently available to
management. The statements contained in this Quarterly Report relating to
matters that are not historical facts are forward looking statements that
involve risks and uncertainties, including, but not limited to, future demand
for the company's products and services, general economic conditions, government
regulation, competition and customer strategies, capital deployment, the impact
of pricing and reimbursement and other risks and uncertainties. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated or expected.
Page 2
<PAGE>
PART I
Item 1. Financial Statements (Unaudited)
The financial statements of Transworld Healthcare, Inc. (the "Company")
begin on page 4.
Page 3
<PAGE>
TRANSWORLD HEALTHCARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1999 1998
------------ ---------------
ASSETS
<S> <C> <C>
Current assets:
Cash and temporary investments $ 6,565 $ 10,413
Accounts receivable, less allowance for doubtful
accounts of $18,367 and $16,437 30,679 32,223
Inventories 3,099 4,188
Deferred income taxes 7,420 6,732
Prepaid expenses and other current assets 5,254 4,382
-------- --------
Total current assets 53,017 57,938
Property & equipment, net 9,720 9,888
Intangible assets, net of accumulated amortization of
$9,173 and $6,408 99,477 105,784
Deferred income taxes 6,078 3,483
Other assets 2,305 2,615
-------- --------
Total assets $170,597 $179,708
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt, including obligations
under capital leases $ 55,767 $ 40
Accounts payable 5,067 2,728
Accrued expenses 15,654 12,901
Income taxes payable 3,727 3,022
Acquisitions payable 99
-------- --------
Total current liabilities 80,215 18,790
Long-term debt, including obligations under capital leases 8 57,307
Deferred income taxes and other 1,666 1,706
-------- --------
Total liabilities 81,889 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 (4,900) 2,946
Retained deficit (32,094) (26,677)
-------- --------
Total stockholders' equity 88,708 101,905
-------- --------
Total liabilities and stockholders' equity $170,597 $179,708
======== ========
</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 NINE MONTHS ENDED
-------------------------- ---------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenues:
Net patient services $20,419 $17,652 $ 58,345 $ 51,652
Net respiratory, medical equipment and supplies sales 14,893 19,821 51,273 55,497
Net infusion services 2,222 2,388 6,921 7,840
------- ------- -------- --------
Total revenues 37,534 39,861 116,539 114,989
------- ------- -------- --------
Cost of revenues:
Patient services 13,827 12,222 39,833 35,832
Respiratory, medical equipment and supplies sales 8,652 10,876 29,286 31,116
Infusion services 1,704 1,685 5,392 5,459
------- ------- -------- --------
Total cost of revenues 24,183 24,783 74,511 72,407
------- ------- -------- --------
Gross profit 13,351 15,078 42,028 42,582
Selling, general and administrative expenses 16,611 13,152 43,570 37,662
Special charges 2,030 2,030 554
------- ------- -------- --------
Operating (loss) income (5,290) 1,926 (3,572) 4,366
Interest income (49) (156) (191) (498)
Interest expense 1,287 1,540 4,016 4,818
------- ------- -------- --------
(Loss) income before income taxes (6,528) 542 (7,397) 46
(Benefit) provision for income taxes (2,061) 271 (1,980) 23
------- ------- -------- --------
Net (loss) income $(4,467) $ 271 $ (5,417) $ 23
======= ======= ========= ========
Net (loss) income per share of common stock:
Basic and diluted $ (.25) $ .02 $ (.31) $ -
------- ------- -------- --------
Weighted average number of common shares outstanding:
Basic 17,551 17,535 17,545 17,257
======= ======= ========= ========
Diluted 17,551 17,579 17,545 17,796
======= ======= ========= ========
</TABLE>
See notes to condensed consolidated financial statements.
Page 5
<PAGE>
TRANSWORLD HEALTHCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------------
JUNE 30, JUNE 30,
1999 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (5,417) $ 23
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 5,270 4,613
Provision for doubtful accounts 9,535 5,743
Deferred income tax (3,283)
Changes in assets and liabilities:
Increase in accounts receivable (9,123) (8,067)
Decrease (increase) in inventories 994 (526)
Increase in prepaid expenses and other assets (1,312) (1,011)
Increase (decrease) in accounts payable and other liabilities 6,654 (1,500)
-------- --------
Net cash provided by (used in) operating activities 3,318 (725)
-------- --------
Cash flows from investing activities:
Capital expenditures (2,007) (2,603)
Payments received from the sale of Health Management, Inc. 32,328
Advances to and investment in Health Management, Inc. (11,021)
Proceeds from sale of Radamerica, Inc. 1,204
Purchase of subsidiaries and assets - net of cash acquired (3,081) (529)
Payments on acquisition payable (131) (350)
Other, net 43
-------- --------
Net cash (used in) provided by investing activities (5,176) 19,029
-------- --------
Cash flows from financing activities:
Payments on revolving loan (1,500) (25,000)
Payments on long-term debt (70) (40)
Payments for debt issuance costs (18) (17)
Stock options and warrants exercised, including tax benefit 66 6,512
Other, net (19)
-------- --------
Net cash used in financing activities (1,522) (18,564)
-------- --------
Effect of exchange rate on cash (468) 208
-------- --------
Decrease in cash (3,848) (52)
Cash and temporary investments, beginning of period 10,413 10,626
-------- --------
Cash and temporary investments, end of period $ 6,565 $ 10,574
======== ========
Supplemental cash flow information:
Cash paid for interest $ 3,142 $ 4,115
======== ========
Cash paid for income taxes, net $ 444 $ 1,488
======== ========
</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 ("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 nine months ended June 30, 1999, the Company had an incremental
weighted average of 118 and 159, 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 June 30, 1999 and June
30, 1998, the Company had options and warrants to purchase 3,731 and 4,019
shares of common stock, respectively, ranging in price from $4.31 to $12.45 and
$6.38 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
<PAGE>
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 nine months ended
June 30, 1999 and 1998, were computed as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1999 JUNE 30, 1998
------------------- ------------------ ------------------ -----------------
<S> <C> <C> <C> <C>
Net (loss) income $(4,467) $271 $(5,417) $23
=================== ================== ================== =================
Weighted average number of shares 17,551 17,190 17,545 16,369
outstanding
Weighted average number of shares
issuable per agreements - 345 - 888
------------------- ------------------ ------------------ -----------------
Weighted average number of shares
used in basic calculation 17,551 17,535 17,545 17,257
Incremental shares, after application of
treasury stock method, of stock
options and warrants - 44 - 539
------------------- ------------------ ------------------ -----------------
Weighted average numbers of shares
used in diluted calculation 17,551 17,579 17,545 17,796
=================== ================== ================== =================
Net (loss) income per share of common
stock:
Basic and diluted $(0.25) 0.02 $(0.31) $ -
=================== ================== ================== =================
</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 nine months ended June 30, 1999 and 1998:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ -----------------------
1999 1998 1999 1998
------------ ----------- ----------- -----------
Net loss (income) $ (4,467) $ 271 $ (5,417) $ 23
Change in cumulative
adjustment (2,395) (371) (7,846) 3,229
------------ ----------- ----------- -----------
Comprehensive (loss) income $ (6,862) $ (100) $(13,263) $ 3,252
============ =========== =========== ===========
Page 8
<PAGE>
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(In thousands, except per share data)
(Unaudited)
Note 4: Significant Risk and Uncertainties
The Company has recorded a net deferred tax asset of $11,989 reflecting
the benefit of $33,634 in loss carryforwards, which expire primarily in 2018.
Realization is dependent on generating sufficient taxable income prior to
expiration of the loss carryforwards. Although realization is not assured,
management believes it is more likely than not that all of the deferred tax
asset will be realized. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced.
Note 5: Debt
At June 30, 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"), interest coverage and minimum EBITDA).
As a result of this default, the Credit Facility was classified as current at
June 30, 1999. The Company is in active discussions with the bank group
regarding waiver of the existing default, which the bank group has expressed a
desire to accommodate.
In addition, 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 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 nine months ended June 30, 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 6: Commitments and Contingencies
On February 4, 1997, Patient Care Systems, Inc. ("PCS") filed a lawsuit
against Dermaquest Surgical Supply, Inc. ("Dermaquest") and Transworld
HealthCare, Inc. in the Court of Common Pleas of Chester County, Pennsylvania,
for breach of contract, conversion, unjust enrichment and misrepresentation.
Subsequently, PCS withdrew all claims except
Page 9
<PAGE>
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(In thousands, except per share data)
(Unaudited)
Note 6: Commitments and Contingencies (cont.)
for its breach of contract claim. On April 22, 1997, Dermaquest filed a
counterclaim against PCS for breach of contract. The action related to a
contract initially entered into between Dermaquest and PCS to market alternating
pressure mattresses. A jury trial in this matter began on June 28, 1999. On July
2, 1999, the jury reached their verdict finding in favor of PCS on its breach of
contract claim in the amount of $825 and finding in favor of Dermaquest on its
breach of contract counterclaim in the amount of $58. Dermaquest and the Company
have filed post-trial motions seeking a new trial or a reduction in the verdict
from $825 to $168. Under Pennsylvania law, PCS cannot execute on a jury verdict
until it is reduced to a judgement. Further, in Pennsylvania, no judgement will
be entered on a jury's verdict until the disposition of any post-trial motions.
Oral argument on Dermaquest and the Company's post-trial motions is scheduled
for October 6, 1999. Management of the Company intends to continue to defend the
proceedings vigorously and believes the ultimate outcome will not have a
material adverse effect on the Company's results of operations or financial
position.
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 September 30, 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
Page 10
<PAGE>
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(In thousands, except per share data)
(Unaudited)
Note 6: Commitments and Contingencies (cont.)
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.
Page 11
<PAGE>
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(In thousands, except per share data)
(Unaudited)
Note 6: Commitments and Contingencies (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 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, and the Company, W. James Nicol, Paul S. Jurewicz and James
Mieszala, and HMI (the "HMI Defendants") and National Union Fire Insurance
Company of Pittsburgh, Pennsylvania ("National"). On June 23, 1999, an Agreement
of Partial Settlement was executed that implemented the terms of the memorandum
of understanding. The total settlement amount to be paid by the HMI Defendants
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. On July 26, 1999,
the plaintiffs and BDO Siedman LLP entered into a preliminary agreement to
settle the claims against BDO Siedman LLP for $100. All parties will enter into
an amended stipulation of settlement that will be presented to the court. The
terms of the proposed settlement is subject to court approval. On July 16, 1999,
all parties appeared before the court to discuss the proposed settlement. At
that time, the court certified the class of plaintiffs to include all persons or
entities who purchased or otherwise acquired the common stock of HMI between
April 26, 1996 and March 17, 1997 inclusive, except the defendants and related
parties.
Page 12
<PAGE>
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(In thousands, except per share data)
(Unaudited)
Note 6: Commitments and Contingencies (cont.)
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. 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, and two officers of HMI also have demanded an
advancement of an unspecified amount of additional legal fees and expenses.
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 13
<PAGE>
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(In thousands, except per share data)
(Unaudited)
Note 6: 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 14
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
THREE MONTHS ENDED JUNE 30, 1999 VS. THREE MONTHS ENDED JUNE 30, 1998
Revenues. Total revenues decreased by $2,327,000 or 5.8% to $37,534,000
for the three months ended June 30, 1999 from $39,861,000 for the three months
ended June 30, 1998. This decrease was primarily attributable to declines in
revenue experienced by the U.S. specialty mail-order pharmacy operation
($4,646,000) and the sale in July 1998 of the Company's Transworld Home
Healthcare Nursing Division, Inc. ("TNI") subsidiary ($2,433,000). Partly
offsetting the decrease from the U.S. Operations was a favorable variance
($5,200,000) from the Company's United Kingdom (U.K.) nursing operations as a
result of continued expansion, increased billing rates and core business growth.
Cost of Revenues. Cost of revenues decreased by $600,000 to $24,183,000
for the three months ended June 30, 1999 from $24,783,000 for the three months
ended June 30, 1998. As a percentage of total revenues, cost of revenues for the
three months ended June 30, 1999 increased to 64.4% in comparison to 62.2% for
the three months ended June 30, 1998. Cost of revenues as a percentage of
revenues increased for infusion services (76.7% for the three months ended June
30, 1999 versus 70.6% for the prior period), increased for respiratory, medical
equipment and supplies sales operations (58.1% for the three months ended June
30, 1999 versus 54.9% for the prior period) and decreased for patient services
(67.7% for the three months ended June 30, 1999 versus 69.2% in the prior
period). The increase in respiratory, medical equipment and sales operations is
attributable to patients selecting higher cost products rather than generically
equivalent products in the Company's specialty mail-order pharmacy operation.
The increase in infusion services is due to an increase in therapies with higher
product costs. The decline in patient services resulted primarily from increased
billing rates.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $3,459,000 or 26.3% to $16,611,000 for the
three months ended June 30, 1999 from $13,152,000 for the three months ended
June 30, 1998. This increase was due to additional bad debt expense ($3,655,000)
principally as a result of fully reserving for DermaQuest, Inc.'s accounts
receivables based on more current information. In addition, there was higher
levels of overhead in the U.K. Operations due to its continued expansion
($1,289,000), offset by reductions of $1,034,000 resulting from a restructuring
of the Company's U.S. specialty mail-order pharmacy operations. The sale of TNI
also reduced selling, general and administrative expenses by $578,000.
Special Charges. During the three months ended June 30, 1999, the
Company incurred $2,030,000 of special charges primarily as a result of
attempted acquisitions and additional legal reserves.
Page 15
<PAGE>
Results of Operations (cont.)
Operating (Loss) Income. The Company incurred an operating loss of
$5,290,000 for the three months ended June 30, 1999 compared to operating income
of $1,926,000 for the three months ended June 30, 1998. Excluding the $2,030,000
of special charges and $3,655,000 of additional bad debt expenses, the Company
would have recorded operating income of $395,000.
Interest Income. Interest income decreased by $107,000 to $49,000 for
the three months ended June 30, 1999 from $156,000 for the three months ended
June 30, 1998. This decrease was attributable to lower interest income earned on
a lower level of funds invested.
Interest Expense. Interest expense decreased by $253,000 to $1,287,000
for the three months ended June 30, 1999 from $1,540,000 for the three months
ended June 30, 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.
(Benefit)Provision for Income Taxes. The Company recorded a benefit
from income taxes amounting to $2,061,000 for the three months ended June 30,
1999 versus a provision of $271,000 in the comparable prior period. The change
from the prior year is attributable to the Company being in a taxable income
position last year versus a taxable loss position in the current year.
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. The amount
of the deferred tax asset considered realizable, however, could be reduced in
the near term if estimates of future taxable income during the carryforward
period are reduced.
Net Loss (Income). As a result of the foregoing, the Company incurred a
net loss of $4,467,000 for the three months ended June 30, 1999 compared to net
income of $271,000 for the three months ended June 30, 1998.
NINE MONTHS ENDED JUNE 30, 1999 VS. NINE MONTHS ENDED JUNE 30, 1998
Revenues. Total revenues increased by $1,550,000 or 1.3% to
$116,539,000 for the nine months ended June 30, 1999 from $114,989,000 for the
nine months ended June 30, 1998. This increase was primarily attributable to the
Company's U.K. Operations, specifically, nursing ($14,043,000) and respiratory,
medical equipment and supplies sales ($264,000). The U.K. Operations increased
principally due to continued expansion, increased billing rates and core
business growth. These increases were partly offset by decreases in the
Company's U.S. respiratory, medical equipment and supplies sales operations
($4,481,000) and infusion services ($919,000) primarily attributable to a
reduction in the number of patients serviced and the incremental impact of the
Balanced Budget Act of 1997 ("the Balanced Budget Act"), which reduced revenue
$611,000. In addition, the increase in revenue was also offset by the sale of
TNI ($7,350,000).
Page 16
<PAGE>
Results of Operations (cont.)
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).
Cost of Revenues. Cost of revenues increased by $2,104,000 to
$74,511,000 for the nine months ended June 30, 1999 from $72,407,000 for the
nine months ended June 30, 1998. As a percentage of total revenues, cost of
revenues for the nine months ended June 30, 1999 increased to 63.9% in
comparison to 63.0% for the nine months ended June 30, 1998. Cost of revenues as
a percentage of revenues increased for infusion services (77.9% for the nine
months ended June 30, 1999 versus 69.6% for the nine months ended June 30, 1998)
increased for respiratory, medical equipment and supplies sales operations
(57.1% for the nine months ended June 30, 1999 versus 56.1% for the nine months
ended June 30, 1998) and declined for patient services (68.3% for the nine
months ended June 30, 1999 versus 69.4% for the nine months ended June 30,
1998). The increase in infusion services and respiratory, medical equipment and
supplies sales operations is due to an increase in therapies and respiratory
sales in the U.S. Operations with higher product costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $5,908,000 or 15.7% to $43,570,000 for the
nine months ended June 30, 1999 from $37,662,000 for the nine months ended June
30, 1998. This increase was due to additional bad debt expense ($3,655,000)
principally as a result of fully reserving for DermaQuest, Inc.'s accounts
receivables based on more current information. In addition, there was higher
levels of overhead in the U.K. Operations ($2,865,000) due to its continued
expansion and the U.S. specialty mail-order pharmacy operations incurred
additional costs for overhead related to sales and collection efforts in the
U.S. operations during the first half of fiscal 1999 ($1,942,000). These
increases were offset by an overhead reduction program in the specialty
mail-order pharmacy operations ($1,297,000). The sale of TNI accounted for an
additional cost savings of $1,797,000.
Special Charges. During the three months ended June 30, 1999, the
Company incurred $2,030,000 of special charges primarily as a result of
attempted acquisitions and additional legal reserves. During the nine months
ended June 30, 1998, the Company incurred $554,000 of special charges primarily
relating to costs incurred from its attempted acquisitions of Healthcall Group
plc and Apria Healthcare Group, Inc.
Operating (Loss) Income. The Company incurred an operating loss of
$3,572,000 for the nine months ended June 30, 1999 compared to operating income
of $4,366,000 for the nine months ended June 30, 1998. Excluding the $2,030,000
of special charges and $3,655,000 of additional bad debt expenses, the Company
would have recorded operating income of $2,113,000.
Page 17
<PAGE>
Results of Operations (cont.)
Interest Income. Interest income decreased by $307,000 to $191,000 for
the nine months ended June 30, 1999 from $498,000 for the nine months ended June
30, 1998. This decrease was attributable to lower interest income earned on a
lower level of funds invested.
Interest Expense. Interest expense decreased by $802,000 to $4,016,000
for the nine months ended June 30, 1999 from $4,818,000 for the nine months
ended June 30, 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.
(Benefit) Provision for Income Taxes. The Company recorded a benefit
for income taxes amounting to $1,980,000 for the nine months ended June 30, 1999
versus a tax provision of $23,000 in the comparable prior period. The change
from the prior year is attributable to the Company being in a taxable income
position last year versus a taxable loss position in the current year.
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. The amount
of the deferred tax asset considered realizable, however, could be reduced in
the near term if estimates of future taxable income during the carryforward
period are reduced.
Net Loss (Income). As a result of the foregoing, the Company incurred a
net loss of $5,417,000 for the nine months ended June 30, 1999 compared to net
income of $23,000 for the nine months ended June 30, 1998.
Page 18
<PAGE>
Liquidity and Capital Resources
During the nine months ended June 30, 1999 the Company generated
$3,318,000 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:
$3,212,000 for further expansion of the Company's U. K. Operations and
$2,007,000 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 nine 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 nine
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.
Accounts Receivable. The Company maintains a cash management program
that focuses on the reimbursement function, as growth in accounts receivable has
been the main operating use of cash historically. At June 30, 1999 and September
30, 1998, $30,679,000 (18.0%) 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
services are rendered. At June 30, 1999 and September 30, 1998, the Company's
average DSOs were 74 and 72, respectively.
Page 19
<PAGE>
Liquidity and Capital Resources (cont.)
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 June 30, 1999
and August 1, 1999, Eurodollar Rate borrowings bore interest at rates of 6.94%
to 7.06% and 7.19% to 7.25%, respectively. During the nine months ended June 30,
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 August 1, 1999, the Company had $55,755,000 outstanding under
the Credit Facility and the unused portion of the Credit Facility was
$23,645,000. Additional loans to the Company will require the approval of the
required lenders 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 June 30, 1999 the Company was in technical default of the Credit
Facility due to non-compliance with certain financial covenants (debt to EBITDA,
interest coverage and minimum EBITDA). As a result of this default the Credit
Facility has been reclassified as current as of June 30, 1999. The Company is in
active discussions with the bank group regarding waiver of the existing default,
which the bank group has expressed its interest in accommodating.
In addition, 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 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 20
<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 has completed an assessment of all
IT related components 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 September 30, 1999. The Company
also 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 has completed an assessment of
potentially non-IT affected components and the Company
Page 21
<PAGE>
Liquidity and Capital Resources (cont.)
anticipates completing, in most respects, any required corrective actions by
September 30, 1999. The Company also 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 August 1, 1999 costs
incurred for all efforts of the Company's Year 2000 action plan amount to
$159,000 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 $64,000 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 completing 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
Page 22
<PAGE>
Liquidity and Capital Resources (cont.)
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 position, cash flows and results of operations.
Litigation. On February 4, 1997, Patient Care Systems, Inc. ("PCS")
filed a lawsuit against DermaQuest Surgical Supply, Inc. ("Dermaquest") and
Transworld HealthCare, Inc. in the Court of Common Pleas of Chester County,
Pennsylvania, for breach of contract, conversion, unjust enrichment and
misrepresentation. Subsequently, PCS withdrew all claims except for its breach
of contract claim. On April 22, 1997, Dermaquest filed a counterclaim against
PCS for breach of contract. The action related to a contract initially entered
into between Dermaquest and PCS to market alternating pressure mattresses. A
jury trial in this matter began on June 28, 1999. On July 2, 1999, the jury
reached their verdict finding in favor of PCS on its breach of contract claim in
the amount of $825,000 and finding in favor of Dermaquest on its breach of
contract counterclaim in the amount of $58,000. Dermaquest and the Company have
filed post-trial motions seeking a new trial or a reduction in the verdict from
$825,000 to $168,000. Under Pennsylvania law, PCS cannot execute on a jury
verdict until it is reduced to a judgement. Further, in Pennsylvania, no
judgement will be entered on a jury's verdict until the disposition of any
post-trial motions. Oral argument on Dermaquest and the Company's post-trial
motions is scheduled for October 6, 1999. Management of the Company intends to
continue to defend the proceedings vigorously and believes the ultimate outcome
will not have a material adverse effect on the Company's results of operations
or financial position.
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 September 30, 1999.
Page 23
<PAGE>
Liquidity and Capital Resources (cont.)
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 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.
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 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, and the Company, W. James Nicol, Paul S. Jurewicz and James
Mieszala, and HMI (the "HMI Defendants") and National Union Fire Insurance
Company of Pittsburgh, Pennsylvania ("National"). On June 23, 1999, an Agreement
of Partial Settlement was executed that implemented the terms of the memorandum
of understanding. The total settlement amount to be paid by the HMI Defendants
is $2,375,000. It has been agreed that $275,000 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. On July 26,
1999, the plaintiffs and BDO Siedman LLP entered into a preliminary agreement to
settle the claims against BDO Siedman LLP for $100,000. All parties will enter
into an amended stipulation of settlement that will be presented to the court.
The terms of the proposed settlement is subject to court approval. On July 16,
1999, all parties appeared before the court to discuss the proposed settlement.
At that time, the court certified the class of plaintiffs to include all persons
or entities who purchased or otherwise acquired the common stock of HMI between
April 26, 1996 and March 17, 1997 inclusive, except the defendants and related
parties.
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
Page 25
<PAGE>
Liquidity and Capital Resources (cont.)
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, and two
officers of HMI also have demanded an advancement of an unspecified amount of
additional legal fees and expenses.
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 3. Defaults Upon Senior Securities
At June 30, 1999, the Company was in technical default of its Credit
Facility due to non-compliance with certain financial covenants. The Company is
in active discussions with the bank group regarding waiver of the existing
default, which the bank group has expressed its interest in accommodating. As a
result of this default, the Credit Facility was classified as current at June
30, 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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27 Financial Data Schedule
(b) Reports on Form 8-K.
None.
Page 27
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 13, 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 28
<PAGE>
EXHIBIT INDEX
Exhibit Description
27 Financial Data Schedule
Page 29
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 6,565
<SECURITIES> 0
<RECEIVABLES> 49,046
<ALLOWANCES> 18,367
<INVENTORY> 3,099
<CURRENT-ASSETS> 53,017
<PP&E> 19,905
<DEPRECIATION> 10,185
<TOTAL-ASSETS> 170,597
<CURRENT-LIABILITIES> 80,215
<BONDS> 0
0
0
<COMMON> 176
<OTHER-SE> 88,532
<TOTAL-LIABILITY-AND-EQUITY> 170,597
<SALES> 37,534
<TOTAL-REVENUES> 37,534
<CGS> 24,183
<TOTAL-COSTS> 24,183
<OTHER-EXPENSES> 18,641
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,238
<INCOME-PRETAX> (6,528)
<INCOME-TAX> (2,061)
<INCOME-CONTINUING> (4,467)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,467)
<EPS-BASIC> (.25)
<EPS-DILUTED> (.25)
</TABLE>
