<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 December 31, 1998
Commission File Number 1-11570
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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
(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 February 1, 1999
Common Stock 17,551,076 Shares
<PAGE>
Transworld Healthcare, Inc.
First Quarter Report On Form 10-Q
Table of Contents
<TABLE>
<CAPTION>
Part I. Page
<S> <C> <C>
Item 1. Financial Statements (Unaudited)............................................. 3
Condensed Consolidated Balance Sheets
December 31, 1998 and September 30, 1998..................... 4
Condensed Consolidated Statements of Operations
For the Three Months Ended
December 31, 1998 and December 31, 1997...................... 5
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended
December 31, 1998 and December 31, 1997...................... 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 5. Other Information............................................................. 22
Item 6. Exhibits and Reports on Form 8-K............................................. 22
</TABLE>
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
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PART I
Item 1. Financial Statements (Unaudited)
The financial statements of Transworld Healthcare, Inc.
(the "Company") begin on page 4.
Page 3
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TRANSWORLD HEALTHCARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1998
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<S> <C> <C>
ASSETS
Current assets:
Cash and temporary investments $ 9,184 $ 10,413
Accounts receivable, less allowance for doubtful accounts of
$16,017 and $16,437 28,296 28,544
Inventories 5,184 4,188
Deferred income taxes 6,732 6,732
Prepaid expenses and other current assets 9,445 8,061
--------- ---------
Total current assets 58,841 57,938
Property & equipment, net 10,050 9,888
Intangible assets, net of accumulated amortization of $7,168
and $6,408 103,596 105,784
Deferred income taxes 3,483 3,483
Other assets 2,410 2,615
--------- ---------
Total assets $ 178,380 $ 179,708
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt, including obligations under
capital leases $ 24 $ 40
Accounts payable 4,437 2,728
Accrued expenses 12,278 12,901
Income taxes payable 2,988 3,022
Acquisitions payable 99
--------- ---------
Total current liabilities 19,727 18,790
Long-term debt, including obligations under capital leases 57,267 57,307
Deferred income taxes and other 1,696 1,706
--------- ---------
Total liabilities 78,690 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 -- 17,536 shares 175 175
Additional paid-in capital 125,461 125,461
Accumulated other comprehensive income 727 2,946
Retained deficit (26,673) (26,677)
--------- ---------
Total stockholders' equity 99,690 101,905
--------- ---------
Total liabilities and stockholders' equity $ 178,380 $ 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
------------------------------
DECEMBER 31, DECEMBER 31,
1998 1997
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<S> <C> <C>
Revenues:
Net respiratory, medical equipment and supplies sales $19,726 $18,307
Net patient services 17,905 16,530
Net infusion services 2,423 2,968
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Total revenues 40,054 37,805
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Cost of revenues:
Respiratory, medical equipment and supplies sales 10,826 10,256
Patient services 12,465 11,421
Infusion services 1,817 1,849
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Total cost of revenues 25,108 23,526
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Gross profit 14,946 14,279
Selling, general and administrative expenses 13,603 12,039
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Operating income 1,343 2,240
Interest income (69) (195)
Interest expense 1,401 1,741
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Income before income taxes 11 694
Provision for income taxes 7 347
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Net income $ 4 $ 347
======= =======
Net income per share of common stock:
Basic $ -- $ .02
======= =======
Diluted $ -- $ .02
======= =======
Weighted average number of common shares outstanding:
Basic 17,536 16,628
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Diluted 17,726 17,130
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
Page 5
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TRANSWORLD HEALTHCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------
DECEMBER 31, DECEMBER 31,
1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net income ............................................................. $ 4 $ 347
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization ......................................... 1,372 1,272
Provision for doubtful accounts ....................................... 2,027 1,847
Amortization of debt issuance costs ................................... 264 287
Changes in assets and liabilities:
Increase in accounts receivable ....................................... (2,041) (1,581)
Increase in inventories ............................................... (1,033) (1,094)
Increase in prepaid expenses and other assets ......................... (1,530) (723)
Decrease (increase) in accounts payable and other liabilities ......... 1,267 (1,001)
--------- ----------
Net cash provided by (used in) operating activities .................. 330 (646)
--------- ----------
Cash flows from investing activities:
Capital expenditures ................................................... (844) (1,027)
Notes receivable -- payments received .................................. 20
Proceeds from sale of Health Management, Inc.'s assets ................. 24,725
Advances to and investment in Health Management, Inc. .................. (6,319)
Proceeds from sale of Radamerica ....................................... 1,204
Payments for acquisitions -- net of cash acquired ...................... (548) (481)
Payments on acquisition payable ........................................ (79)
--------- ----------
Net cash (used in) provided by investing activities ................... (1,372) 18,023
--------- ----------
Cash flows from financing activities:
Payments on revolving loan ............................................. (23,500)
Payments on long-term debt ............................................. (56) (15)
Stock options and warrants exercised, including tax benefit ............ 6,481
--------- ----------
Net cash used in financing activities ................................. (56) (17,034)
--------- ----------
Effect of exchange rate on cash ......................................... (131) 162
--------- ----------
(Decrease) increase in cash ............................................. (1,229) 505
Cash and temporary investments, beginning of period ..................... 10,413 10,626
--------- ----------
Cash and temporary investments, end of period ........................... $ 9,184 $ 11,131
========= ==========
Supplemental cash flow information:
Cash paid for interest ................................................. $ 1,140 $ 1,519
========= ==========
Cash paid for income taxes, net ........................................ $ 12 $ 1,414
========= ==========
</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. The Company provides the following services and
products to patients in their homes: (i) specialty mail-order pharmaceuticals,
medical supplies, respiratory therapy and home medical equipment; (ii) patient
services, including nursing and para-professional services; and (iii) infusion
therapy.
The Condensed Consolidated Financial Statements included herein are
unaudited and include all adjustments (consisting of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of the financial position and results of operations of the interim
period pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These condensed financial statements
should be read in conjunction with the Company's 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 months ended December 31, 1998 and December 31, 1997, the Company had
options and warrants to purchase 3,890 and 3,013 shares of common stock,
respectively, ranging in price from $4.38 to $12.45 and $8.75 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.
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 months ended
December 31, 1998 and 1997, were computed as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
---------------------- ----------------------
<S> <C> <C>
Net income $4 $347
====================== ======================
Weighted average number of shares outstanding 17,536 15,557
Weighted average number of shares
Issuable per agreements 1,071
---------------------- ----------------------
Weighted average number of shares
used in basic calculation 17,536 16,628
Incremental shares, after application of treasury
stock method, of stock options and warrants 190 502
---------------------- ----------------------
Weighted average number of shares
used in diluted calculation 17,726 17,130
====================== ======================
Net income per share of common stock:
Basic - $0.02
====================== ======================
Diluted - $0.02
====================== ======================
</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 months ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended December 31,
1998 1997
----------- -----------
<S> <C> <C>
Net income $ 4 $ 347
Change in cumulative translation adjustment (2,219) 2,371
----------- -----------
Comprehensive (loss) income $ (2,215) $ 2,718
=========== ===========
</TABLE>
Page 8
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TRANSWORLD HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(In thousands, except per share data)
(Unaudited)
Note 4: 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 March 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
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
Page 9
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TRANSWORLD HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(In thousands, except per share data)
(Unaudited)
Note 4: Commitments and Contingencies (cont.)
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 Eastern District of New York formerly
entitled Nicholas Volonnino et al. v. Health Management, Inc., W. James Nicol,
Paul S. Jurewicz and James Mieszala, 97 Civ. 1646. The action was amended on
September 12, 1997, and is now entitled Dennis Baker et al. v. Health
Management, Inc., BDO Seidman, LLP, Transworld HealthCare, Inc., W. James Nicol,
Paul S. Jurewicz and James Mieszala. This action alleges claims under Sections
10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder, arising out of misrepresentations and omissions by HMI
in connection with certain of its previous securities filings and press
releases. The action now purports to represent a class of persons who purchased
shares of HMI common stock between April 26, 1996 and March 17, 1997, the date
HMI announced that it would have to restate certain of its financial statements
and that it was renegotiating its deal with the Company. The action seeks
unspecified compensatory damages for the harm sustained as a result of the
alleged wrongdoing. On November 19, 1997, HMI and the individual defendants
filed a motion to dismiss the claims against them for failure to state proper
claims for relief. The Company made a similar motion on November 24, 1997. The
plaintiffs responded to this motion
Page 10
<PAGE>
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(In thousands, except per share data)
(Unaudited)
Note 4: Commitments and Contingencies (cont.)
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. The court has appointed a mediator
who is scheduled to meet with the parties on February 22, 1999.
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 is scheduled for April 6, 1999.
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
Page 11
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TRANSWORLD HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
(In thousands, except per share data)
(Unaudited)
Note 4: Commitments and Contingencies (cont.)
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 DECEMBER 31, 1998 VS. THREE MONTHS ENDED DECEMBER 31, 1997
Revenues. Total revenues increased by $2,249,000 or 5.9% to
$40,054,000 for the three months ended December 31, 1998 from $37,805,000 for
the three months ended December 31, 1997. This increase was primarily
attributable to the Company's United Kingdom (U.K.) nursing ($3,862,000) and
respiratory, medical equipment and supplies sales operations ($353,000)
(sometimes collectively referred to herein as the "U.K. Operations"). The U.K.
Operations increased due primarily to increased billing rates, continued
expansion and core business growth. The Company's United States (U.S.)
specialty mail-order pharmacy and medical supplies operation also increased
($1,400,000) primarily due to higher diabetic and ostomy sales as a result of
an increase in number of patients serviced. This increase reflects the impact
of the Balanced Budget Act of 1997 (the "Balanced Budget Act"), which reduced
revenue $611,000. These increases were partly offset by a decline in U.S.
patient service revenues attributable to the sale in July 1998 of the Company's
Transworld Home HealthCare - Nursing Division, Inc. subsidiary ($2,487,000) and
lower U.S. infusion and respiratory services revenue due to a decline in the
number of patients serviced ($879,000).
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).
Cost of Revenues. Cost of revenues increased by $1,582,000 to
$25,108,000 for the three months ended December 31, 1998 from $23,526,000 for
the three months ended December 31, 1997. As a percentage of total revenues,
cost of revenues increased to 62.7% from 62.2% for the three months ended
December 31, 1998 and December 31, 1997, respectively. Cost of revenues as a
percentage of revenues increased for infusion services (75.0% for the three
months ended December 31, 1998 versus 62.3% for the three months ended
December 31, 1997), increased slightly for patient services (69.6% for the
three months ended December 31, 1998 versus 69.1% for the three months ended
December 31, 1997) and decreased for respiratory, medical equipment and
supplies sales operations (54.9% for the three months ended December 31, 1998
versus 56.0% for the three months ended December 31, 1997). The increase in
infusion services is due to an increase in therapies with higher product costs.
The decrease in costs as a percentage of revenues for respiratory, medical
equipment and supplies sales is principally attributable to effective cost
control in the Company's U.K. respiratory, medical equipment and supplies sales
operations and U.S. specialty mail-order pharmacy and supplies operations partly
offset by the impact of the Balanced Budget Act, which increased cost of
revenues for diabetic testing strips
Page 13
<PAGE>
Results of Operations (cont.)
and respiratory drugs by 2.2%.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $1,564,000 (13.0%) to $13,603,000 for the
three months ended December 31, 1998 from $12,039,000 for the three months ended
December 31, 1997. 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.
Interest Income. Interest income decreased by $126,000 to $69,000 for
the three months ended December 31, 1998 from $195,000 for the three months
ended December 31, 1997. This decrease was attributable to lower interest income
earned on a lower level of funds invested.
Interest Expense. Interest expense decreased by $340,000 to $1,401,000
for the three months ended December 31, 1998 from $1,741,000 for the three
months ended December 31, 1997. 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 for Income Taxes. Provision for income taxes as a percentage
of income before income taxes was 60% for the three months ended December 31,
1998 compared to 50% for the three months ended December 31, 1997. The increase
from the prior year is due to a higher level of 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 Income. As a result of the foregoing, the Company produced net
income of $4,000 for the three months ended December 31, 1998 compared to net
income of $347,000 for the three months ended December 31, 1997.
Page 14
<PAGE>
Liquidity and Capital Resources
During the three months ended December 31, 1998 the Company generated
$330,000 from its operating activities. Cash flow from operating activities,
combined with the use of existing cash, funded the following investing
activities: $844,000 for capital expenditures and $548,000 for further expansion
of the Company's U. K. Operations.
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 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 December 31, 1998 and
September 30, 1998, $28,296,000 (15.9%) and $28,544,000 (15.9%), respectively,
of the Company's total assets consisted of accounts receivable all of which are
substantially due from third-party payors. Such payors generally require
substantial documentation in order to process claims. The collection time for
accounts receivable is typically the longest for services that relate to new
patients or additional services requiring medical review for existing patients.
Management's goal is to maintain accounts receivable levels equal to or
less than industry average, which would tend to mitigate the risk of recurrence
of negative cash flows from operations by reducing the required investment in
accounts receivable and thereby increasing cash flows from operations. Days
sales outstanding ("DSOs") is a measure of the average number of days taken by
the Company to collect its accounts receivable, calculated from the date
services are rendered. At December 31, 1998 and September 30, 1998, the
Company's average DSOs remained consistent at 64.
Page 15
<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 December 31,
1998 and February 1, 1999, Eurodollar Rate borrowings bore interest at rates of
7.56% to 7.69% and 6.94%, respectively. As of February 1, 1999, the Company had
$57,255,000 outstanding under the Credit Facility and the unused portion of the
Credit Facility was $31,145,000.
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 December 31, 1998 the Company was in compliance with the
covenants and terms of the Credit Facility.
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 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
Page 16
<PAGE>
Liquidity and Capital Resources (cont.)
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 currently underway and the Company anticipates
completing, in most respects, any remediation of external vendor products,
mission critical third-party software and internally developed software by March
31, 1999. The Company also expects that by June 30, 1999, implementation and
testing of all remediation will be complete.
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 implementing (in both the U.S. and the
U.K.), a program 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 currently underway and the Company anticipates
completing, in most respects, any required corrective actions by March 31, 1999.
The Company expects that by June 30, 1999, implementation and testing of all
remediation will be complete.
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
Page 17
<PAGE>
Liquidity and Capital Resources (cont.)
flows, and results of operations.
Costs to Address Year 2000 Compliance. As of February 1, 1999 costs
incurred for all efforts of the Company's Year 2000 action plan amount to
$20,000 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 $139,000 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 guarantees 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 preliminary stages 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 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 March 19, 1999.
Page 18
<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.
HMI and certain of its current and former officers have been named as
defendants in an
Page 19
<PAGE>
Liquidity and Capital Resources (cont.)
alleged class action lawsuit filed on April 3, 1997 in the United States
District court for the Eastern District of New York formerly entitled Nicholas
Volonnino et al. v. Health Management, Inc., W. James Nicol, Paul S. Jurewicz
and James Mieszala, 97 Civ. 1646. The action was amended on September 12, 1997,
and is now entitled Dennis Baker et al. v. Health Management, Inc., BDO Seidman,
LLP, Transworld Healthcare, Inc., W. James Nicol, Paul S. Jurewicz and James
Mieszala. This action alleges claims under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, arising
out of misrepresentations and omissions by HMI in connection with certain of its
previous securities filings and press releases. The action now purports to
represent a class of persons who purchased shares of HMI common stock between
April 26, 1996 and March 17, 1997, the date HMI announced that it would have to
restate certain of its financial statements and that it was renegotiating its
deal with the Company. The action seeks unspecified compensatory damages for the
harm sustained as a result of the alleged wrongdoing. On November 19, 1997, HMI
and the individual defendants filed a motion to dismiss the claims against them
for failure to state proper claims for relief. The Company made a similar motion
on November 24, 1997. The plaintiffs responded to this motion on February 20,
1998 and the defendants served a reply brief on March 30, 1998. 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. The court has appointed a mediator who is
scheduled to meet with the parties on February 22, 1999.
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 is scheduled for April 6, 1999.
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
Page 20
<PAGE>
Liquidity and Capital Resources (cont.)
20, 1998. On March 20, HMI informed the court that it had no unencumbered assets
from which to make such a payment. On April 3, 1998, the court appointed a
receiver for HMI to determine if HMI is capable of complying with that order. In
addition, a former director of HMI through her attorneys had demanded
advancement of legal fees and expenses in the amount of $150,000.
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 21
<PAGE>
PART II
Item 5. Other Information
The Company is not in compliance with the $5.00 per share
minimum bid price requirement for continued listing on the Nasdaq National
Market. While the Company has taken steps to obtain an exception from the Nasdaq
National Market from this requirement, there can be no assurance that the
Company will receive the requested relief. The Company believes it is eligible
for listing on either the American Stock Exchange or the Nasdaq SmallCap Market.
The Company is fully exploring all such options in the event that it is
determined that the common stock is no longer eligible for listing on the Nasdaq
National Market.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27 Financial Data Schedule
(b) Reports on Form 8-K.
None.
Page 22
<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: February 12, 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 23
<PAGE>
EXHIBIT INDEX
Exhibit Description
27 Financial Data Schedule
Page 24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-1-1998
<PERIOD-END> DEC-31-1998
<CASH> 9,184
<SECURITIES> 0
<RECEIVABLES> 44,313
<ALLOWANCES> 16,017
<INVENTORY> 5,184
<CURRENT-ASSETS> 58,841
<PP&E> 19,394
<DEPRECIATION> 9,344
<TOTAL-ASSETS> 178,380
<CURRENT-LIABILITIES> 19,727
<BONDS> 0
0
0
<COMMON> 175
<OTHER-SE> 99,515
<TOTAL-LIABILITY-AND-EQUITY> 178,380
<SALES> 40,054
<TOTAL-REVENUES> 40,054
<CGS> 25,108
<TOTAL-COSTS> 25,108
<OTHER-EXPENSES> 13,603
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,332
<INCOME-PRETAX> 11
<INCOME-TAX> 7
<INCOME-CONTINUING> 4
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
