<PAGE>
UNITED STATES
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, 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 February 1, 2000
Common Stock 17,551,076 Shares
<PAGE>
TRANSWORLD HEALTHCARE, INC.
FIRST QUARTER REPORT ON FORM 10-Q
TABLE OF CONTENTS
PART I
Item 1. Financial Statements (Unaudited)....................................3
Condensed Consolidated Balance Sheets - December 31, 1999 and
September 30, 1999................................................4
Condensed Consolidated Statement of Operations - For the Three
Months Ended December 31, 1999 and December 31, 1998..............5
Condensed Consolidated Statement of Cash Flows - For the Three
Months Ended December 31, 1999 and December 31, 1998..............6
Notes to Condensed Consolidated Financial Statements ...............7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................14
PART II
Item 1. Legal Proceedings...................................................24
Item 6. Exhibits and Reports on Form 8-K....................................24
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. This Quarterly Report contains certain
forward-looking statements and information that are based on the beliefs of
management as well as assumptions made by and information currently available to
management. The statements contained in this Quarterly Report relating to
matters that are not historical facts are forward-looking statements that
involve risks and uncertainties, including, but not limited to, future demand
for the company's products and services, general economic conditions, government
regulation, competition and customer strategies, capital deployment, the impact
of pricing and reimbursement and other risks and uncertainties. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated or expected.
Page 2
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED).
The consolidated 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>
DECEMBER 31, SEPTEMBER 30,
1999 1999
----------- ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 43,791 $ 5,158
Accounts receivable, less allowance for doubtful
accounts of $20,051 and $19,870, respectively 29,864 30,814
Inventories 3,601 2,929
Deferred income taxes 7,572 6,930
Prepaid expenses and other assets 5,842 4,735
---------- ----------
Total current assets 90,670 50,566
Property and equipment, net 9,878 9,929
Intangible assets, net of accumulated amortization of
$10,735 and $9,798, respectively 103,778 103,248
Deferred income taxes 6,173 6,173
Other assets 3,034 2,205
---------- ----------
Total assets $ 213,533 $ 172,121
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 4,530 $ 1,364
Accounts payable 6,641 5,058
Accrued expenses 12,322 14,899
Income taxes payable 3,473 3,240
---------- ----------
Total current liabilities 26,966 24,561
Long-term debt 62,887 54,407
Notes payable 33,934
Deferred income taxes and other 1,863 1,879
---------- ----------
Total liabilities 125,650 80,847
---------- ----------
Commitments and contingencies (Note 5)
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 17,551 176 176
Additional paid-in capital 125,526 125,526
Accumulated other comprehensive loss (2,884) (405)
Retained deficit (34,935) (34,023)
---------- ----------
Total stockholders' equity 87,883 91,274
---------- ----------
Total liabilities and stockholders' equity $ 213,533 $ 172,121
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
Page 4
<PAGE>
TRANSWORLD HEALTHCARE, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------
DECEMBER 31, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
Revenues:
Net patient services $ 22,091 $ 17,905
Net respiratory, medical equipment and supplies sales 15,394 19,726
Net infusion services 2,797 2,423
--------- --------
Total revenues 40,282 40,054
--------- --------
Cost of revenues:
Patient services 14,922 12,465
Respiratory, medical equipment and supplies sales 9,027 10,826
Infusion services 2,072 1,817
--------- --------
Total cost of revenues 26,021 25,108
--------- --------
Gross profit 14,261 14,946
Selling, general and administrative expenses 12,683 13,603
--------- --------
Operating income 1,578 1,343
Interest income (101) (69)
Interest expense 1,394 1,401
--------- --------
Income before income taxes and
extraordinary loss 285 11
Provision for income taxes 438 7
--------- --------
(Loss) income before extraordinary loss (153) 4
Extraordinary loss on early extinguishment of debt
(net of income tax benefit of $408) (759)
--------- --------
Net (loss) income $ (912) $ 4
========= ========
(Loss) income per share of common stock before extraordinary loss:
Basic and diluted $ (0.01) $ -
========= ========
Net (loss) income per share of common stock:
Basic and diluted $ (0.05) $ -
========= ========
Weighted average number of common shares outstanding:
Basic 17,551 17,536
========= ========
Diluted 17,551 17,726
========= ========
</TABLE>
See notes to condensed consolidated financial statements.
Page 5
<PAGE>
TRANSWORLD HEALTHCARE, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------
DECEMBER 31, DECEMBER 31,
1999 1998
--------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (912) $ 4
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,544 1,372
Amortization of debt issuance costs 224 264
Provision for doubtful accounts 1,502 2,027
Deferred income taxes (642)
Extraordinary loss on early extinguishment of debt 1,167
Changes in assets and liabilities excluding the effect of businesses
acquired and sold:
Increase in accounts receivable (905) (2,041)
Increase in inventories (698) (1,033)
Increase in prepaid expenses and other assets (1,150) (1,530)
(Decrease) increase in accounts payable and other liabilities (220) 1,267
---------- ----------
Net cash (used in) provided by operating activities (90) 330
---------- ----------
Cash flows from investing activities:
Capital expenditures (689) (844)
Notes receivable - payments received 20
Payments for acquisitions - net of cash acquired (3,417) (548)
---------- ----------
Net cash used in investing activities (4,106) (1,372)
---------- ----------
Cash flows from financing activities:
Proceeds from notes payable 63,491
Payments on long-term debt (55,759) (56)
Proceeds from long-term debt 34,245
Borrowing under revolving loan 4,531
Payments for financing fees and issuance costs (2,252)
---------- ----------
Net cash provided by (used in) financing activities 44,256 (56)
---------- ----------
Effect of exchange rate on cash (1,427) (131)
---------- ----------
Increase (decrease) in cash 38,633 (1,229)
Cash and cash equivalents, beginning of period 5,158 10,413
---------- ----------
Cash and cash equivalents, end of period $ 43,791 $ 9,184
========== ==========
Supplemental cash flow information:
Cash paid for interest $ 1,178 $ 1,140
========== ==========
Cash paid for income taxes, net $ 407 $ 12
========== ==========
</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)
1. BASIS OF PRESENTATION:
Transworld Healthcare, Inc. (the "Company") is a provider of a broad range
of health care services and products with operations in the United Kingdom
("U.K.") and the United States ("U.S."). The Company provides the
following services and products: (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 presented 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 (the "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, 1999.
2. EARNINGS PER SHARE:
Basic earnings per share ("EPS") is computed using the weighted average
number of common shares outstanding. Diluted EPS is computed using the
weighted average number of common shares outstanding and dilutive stock
options and warrants using the treasury stock method. At December 31, 1999
and 1998, the Company had outstanding stock options and warrants to
purchase 4,140 and 3,890 shares, respectively, of common stock ranging in
price from $2.65 to $12.45 and $4.38 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.
The weighted average number of shares used in the basic and diluted
earnings per share computations for the three months ended December 31,
1999 and 1998 are as follows:
THREE MONTHS ENDED
DECEMBER 31,
-------------------
1999 1998
------ ------
Weighted average number of common
shares outstanding as used in computation of
basic EPS of common stock 17,551 17,536
Incremental shares of stock options and warrants,
after application of treasury stock method 190
------ ------
Shares used in computation of diluted EPS
of common stock 17,551 17,726
====== ======
Page 7
<PAGE>
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
3. COMPREHENSIVE LOSS:
Components of comprehensive loss include net (loss) income and all other
non-owner changes in equity, such as the change in the cumulative
translation adjustment, unrealized gains and losses on investments
available for sale and minimum pension liability. Currency translation is
the only item of other comprehensive loss impacting the Company. The
following table displays comprehensive loss for the three months ended
December 31, 1999 and 1998:
THREE MONTHS ENDED
DECEMBER 31,
-------------------------------
1999 1998
--------- ---------
Net (loss) income $ (912) $ 4
Change in cumulative
translation adjustment (2,479) (2,219)
--------- ---------
Comprehensive loss $ (3,391) $ (2,215)
========= =========
4. DEBT:
On December 20, 1999, the Company's UK subsidiaries obtained new financing
(the "Refinancing") denominated in pounds sterling, which aggregates
approximately $125,700 at December 31, 1999 as follows:
<TABLE>
<CAPTION>
FACILITY TOTAL OUTSTANDING INTEREST RATE MATURITY
- -------- --------- ----------- ------------- ----------
<S> <C> <C> <C> <C>
SENIOR CREDIT FACILITIES: Dec. 17, 2005
Term loan $ 45,245 $ 45,245 LIBOR + 2% Dec. 17, 2006
Acquisition loan 20,199 1,511 LIBOR + 2.75% Dec. 17, 2005
Working capital facility 8,079 4,491 LIBOR + 2%
--------- -----------
Total senior credit facilities 73,523 51,247 Dec. 17, 2007
MEZZANINE TERM LOAN 16,159 16,159 LIBOR + 7% Dec. 17, 2008
SENIOR SUBORDINATED NOTES (the "NOTES") WITH WARRANTS 36,012 33,934 9.375%
--------- -----------
TOTAL REFINANCING $ 125,694 101,340
LESS, CURRENT MATURITIES ========= 4,525
-----------
$ 96,815
===========
</TABLE>
The mezzanine lenders and the purchasers of the Notes were also issued
warrants to purchase approximately 2% and 27%, respectively, of the fully
diluted shares of Transworld Healthcare (UK) Limited ("TW UK"). Of the
$125,700 net proceeds of the Refinancing, $55,755 was used to repay the
Company's existing senior indebtedness (the "Credit Facility"), $11,617
was provided to the Company for general corporate purposes in the U.S.,
with the balance to be used for acquisitions and working capital in the
U.K.
Repayment of the loans under the senior credit facilities commences on
July 30, 2000 and continues until final maturity. The acquisition loan may
be drawn upon through December 17, 2002. As of December 31, 1999,
borrowings under the senior credit facilities bore interest at a rate of
7.72% to
Page 8
<PAGE>
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
4. DEBT (CONTINUED):
8.47%. Subject to certain exceptions, the senior credit facilities contain
restrictions, prohibitions and affirmative and negative financial
covenants customarily found in agreements of these kind.
The loans under the senior credit facilities are collateralized by, among
other things, a lien on substantially all of TW UK's assets, a pledge of
TW UK's ownership interest in its subsidiaries and guaranties by TW UK's
subsidiaries.
With respect to the mezzanine term loan interest, LIBOR + 3.5% will be
payable in cash, with the remaining interest being added to the principal
amount of the loan. The mezzanine term loan contains terms and conditions
substantially similar to those contained in the senior credit facilities.
As of December 31, 1999, borrowings under the mezzanine term loan bore
interest at a rate of 12.72%.
Interest payments on the Notes are subject to restrictions contained in
the senior credit facilities which require interest on the Notes to be
paid in-kind through the issuance of additional notes for the first 18
months, with payment of interest in cash thereafter subject to meeting
certain financial tests. The documents covering the Notes provide for
customary rights for a transaction of this type, including: (i)
pre-emptive rights with respect to new securities; (ii) rights of first
refusal with respect to proposed transfers of shares of TW UK; (iii)
drag-along rights; (iv) tag-along rights; (v) put and call provisions; and
(vi) certain corporate actions which require the consent of the holder of
the Notes.
Concurrent with the Refinancing, the Company placed 100% of its ownership
interest in TW UK into a voting trust (the "Voting Trust"). The trustee of
the Voting Trust is generally obligated to vote the shares held in trust
pursuant to the instructions of the board of directors of TW UK, as well
as to elect to the board of directors of TW UK, individuals designated in
accordance with the documents governing the Notes. G. Richard Green, a
director of the Company, is the trustee of the Voting Trust.
In connection with the repayment of the Credit Facility, the Company
recorded a non-cash, after-tax, extraordinary charge of $759 during the
three months ended December 31, 1999, related to the write-off of the
deferred financing costs associated with the Credit Facility.
5. COMMITMENTS AND CONTINGENCIES:
On August 20, 1999, Transworld Home HealthCare - Nursing Division, Inc.
("TNI") was named a defendant in a suit brought by Teresa Crutcher, in New
Jersey state court, as administrator of the estate of Aaron Pernell, who
was an infant and Teresa Crutcher's son. The claim is for wrongful death
of Aaron Pernell alleged to have been caused by the negligent manner in
which a TNI home care nurse placed him in an infant car seat. The case was
settled on December 27, 1999 for $325 and was paid on December 29, 1999 by
the Company's insurance carrier. Since this settlement was
Page 9
<PAGE>
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED):
within the policy limits of the Company's insurance policies it did not
have any effect on the Company's consolidated financial position, cash
flows, or results of operations.
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 receivables due from
Health Management, Inc. ("HMI"). 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 3, 2000.
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 U.S. Department of
Health and Human Services' Office of Audit Services, a division of the
Office of Inspector General ("OIG"). The Company was subsequently informed
that the Audit Letters cover its DermaQuest, Inc. subsidiary. The Company
has produced certain documents and provided related information to the OIG
and to the U.S. Attorney for the Eastern District of Texas regarding these
subsidiaries' financial relationships with suppliers of durable medical
equipment and various other practices including the subsidiaries'
practices regarding the collection of coinsurance and deductible amounts
due from Medicare beneficiaries. Additionally, on November 19, 1997, the
Company was notified by the U.S. Attorney for the Eastern District of
Texas that the Company, RespiFlow, MK, and various other non-affiliated
entities had been named defendants in a qui tam action under the Federal
False Claims Act. The qui tam action was recently partially unsealed and a
copy of the complaint was provided to the Company. The relator is a
private party who has brought action on behalf of the Federal government.
At present, the Company has entered into settlement discussions with the
Department of Justice ("DOJ") and the OIG in an effort to bring closure to
this matter and to avoid the expense, disruption and uncertainty of
litigation. The counsel for the relator has been involved in these
settlement discussions as well. At present, the Company is not able to
determine when a final settlement will be reached with the DOJ, the OIG
and the relator or whether any proposed settlement can be concluded on
terms acceptable to the Company. Accordingly, the Company is unable to
estimate what the potential loss might be at this time. In the event that
these settlement discussions are unsuccessful, the Company will defend
vigorously its interest in these matters. As such, the Company cannot
predict whether the outcome of these actions will have a material adverse
effect on the Company's consolidated financial position, cash flows or
results of operations.
Page 10
<PAGE>
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED):
In addition to the above allegations, 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, cash flows or results of operations.
Effective October 1, 1997, the Company owned 100% of the stock of HMI.
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. Plaintiff alleged 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 inadequate consideration. Plaintiff demands
an accounting, damages, attorney's fees and other payment for other
expenses for unspecified amounts. The defendants filed a motion to dismiss
this action on September 18, 1998. The Court denied defendants' motion in
part and granted the motion in part, leaving intact certain claims.
Plaintiff has propounded discovery requests. The claims are insured.
By letter dated December 20, 1999, the Company received formal written
notification of the intent of two plaintiffs to file a civil action in the
Court of Common Pleas of Allegheny County, Pennsylvania against Transworld
Healthcare, Inc., Transworld Home Healthcare, Inc., Health Management,
Inc. and HMI Pennsylvania, Inc. The two plaintiffs, Irwin Hirsch and Lloyd
Myers, formerly were employees of HMI Pennsylvania, Inc., a subsidiary of
the Company, and had written employment agreements. Myers also served as
an officer of HMI. Based upon their former status as employees and as
officers, both claim entitlement to contractual indemnification from HMI
and HMI Pennsylvania, Inc. for defense costs and settlement of certain
claims made against them. In 1994, Hirsch and Myers also sold two retail
pharmacies they owned to HMI.
Hirsch and Myers were named as defendants in an action filed in the United
States District Court for the Eastern District of New York entitled In re
Health Management, Inc. Securities Litigation, Master File No. 96 Civ.
0889 (ADS), which was a class action by shareholders of HMI alleging,
among other claims against the defendants, fraud in connection with the
valuation of certain securities. Hirsch and Myers incurred non-reimbursed
legal expenses of $100 in defending that litigation and, ultimately,
settled their liability jointly for $1,325, which was non-reimbursed. They
demand that defendants reimburse to them their non-reimbursed legal fees
and the settlement amount
Page 11
<PAGE>
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED):
pursuant to the indemnification provisions of their employee contracts.
In addition to their indemnification claims, Hirsch and Myers also claim
damages in the amount of $7,000 for losses in connection with the
pharmacies sale transaction they entered into with HMI under which they
sold their retail pharmacies to HMI. Hirsch and Myers claim that the
pharmacies sale transaction was based upon fraudulent misrepresentations
by HMI.
The Company and HMI entities will vigorously defend against these claims.
The Company believes that Hirsch and Myers' indemnification claims should
not have any real merit because of testimony given by Hirsch and Myers
under oath in connection with a criminal trial against Clifford Hotte, a
director and former officer of HMI. In their testimony, Hirsch and Myers
acknowledged malfeasance and nonfeasance, which should render their
contractual entitlement to indemnification void. Even if they are entitled
to indemnification despite their acknowledgements, they are liable to
defendants for the economic losses and damages suffered by defendants as a
result of the malfeasance and nonfeasance. Therefore if the civil actions
are filed, the Company and HMI entities will aggressively pursue
counterclaims against Hirsch and Myers for damages which, conservatively,
are far in excess of their claims, including the claims associated with
the pharmacies sale transaction.
The enforcement division of 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 consolidated
financial position, cash flows or results of operations.
6. OPERATIONS BY BUSINESS SEGMENTS AND GEOGRAPHIC AREAS:
During the three months ended December 31, 1999 and 1998, the Company
operated in the following reportable business segments: (i) U.K.
operations; (ii) U.S. specialty mail-order pharmaceuticals and medical
supplies ("Mail-Order") operations; and (iii) U.S. hi-tech ("Hi-Tech")
operations. The U.K. operations derive its revenues from nursing and
para-professional services, mail-order of ostomy, continence and wound
care products and oxygen concentrators and cylinders throughout the U.K.
The Mail-Order operations derive its revenues from mail-order of diabetic
test strips and glucose monitors, respiratory, diabetic, maintenance and
other commonly prescribed medications, as well as ostomy and orthotic
products. The Mail-Order operations provide products
Page 12
<PAGE>
TRANSWORLD HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
6. OPERATIONS BY BUSINESS SEGMENTS AND GEOGRAPHIC AREAS (CONTINUED):
to patients in their home nationwide and Puerto Rico. The Hi-Tech
operations derive its revenues from infusion and respiratory therapy
services and home medical equipment operations concentrated in New Jersey
and New York.
The Company uses differences in geographic areas, as well as in products
and services to identify the reportable segments. The Company evaluates
performance and allocates resources based on profit and loss from
operations before corporate expenses, interest and income taxes. Inter
segment sales are not material. The following tables present certain
financial information by reportable business segments and geographic areas
of operations for the three months ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31, 1999
---------------------------------------------------------------------
U.K. U.S. U.S. U.S.
OPERATIONS MAIL-ORDER HI-TECH TOTAL TOTAL
---------- ---------- ------- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues to unaffiliated customers $ 28,847 $ 7,632 $ 3,803 $ 11,435 $ 40,282
========= ======== ======== ======== =========
Segment operating profit $ 2,442 $ 29 $ 88 $ 117 $ 2,559
========= ======== ======== ========
Corporate expenses (981)
Interest expense, net (1,293)
---------
Income before income taxes and
extraordinary loss $ 285
=========
Identifiable assets, December 31, 1999 $ 150,296 $ 26,721 $ 11,188 $ 37,909 $ 188,205
========= ======== ======== ========
Corporate assets 25,328
---------
Total assets, December 31, 1999 $ 213,533
=========
THREE MONTHS ENDED DECEMBER 31, 1999
---------------------------------------------------------------------
U.K. U.S. U.S. U.S.
OPERATIONS MAIL-ORDER HI-TECH TOTAL TOTAL
---------- ---------- ------- ----- -----
Revenues to unaffiliated customers $ 24,489 $ 12,117 $ 3,448 $ 15,565 $ 40,054
========= ======== ======== ======== =========
Segment operating profit (loss) $ 2,467 $ 308 $ (249) $ 59 $ 2,526
========= ======== ======== ========
Corporate expenses (1,183)
Interest expense, net (1,332)
---------
Income before income taxes $ 11
=========
</TABLE>
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company is a provider of a broad range of health care services and products
with operations in the U.K. and the U.S. The Company provides the following
services and products: (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 Company provides these services and products from the following
reportable business segments: (i) U.K. operations; (ii) U.S. specialty
mail-order pharmaceuticals and medical supplies ("Mail-Order") operations; and
(iii) U.S. hi-tech ("Hi-Tech") operations. The Company's U.K. operations include
the U.K.'s second largest commercial provider of nursing and para-professional
care to the community and U.K. healthcare institutions, the U.K.'s second
largest home respiratory supplier as well as a leading value-added medical
supplies distributor, all with operations located throughout the U.K. The
Company's Mail-Order operations provide products to patients in their home
nationwide and in Puerto Rico while its Hi-Tech operations are concentrated in
New Jersey and New York.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1999 VS. THREE MONTHS ENDED DECEMBER 31, 1998
Revenues. Total revenues increased by $228,000 or .6% to $40,282,000 for the
three months ended December 31, 1999 from $40,054,000 for the three months ended
December 31, 1998. This increase was primarily attributable to increased
revenues in the Company's U.K. nursing operations ($4,186,000) as a result of
continued expansion, increased billing rates and an increase in the number of
patients being serviced. Partly offsetting the increase from the U.K. operations
were declines in revenue experienced by the Mail-Order operations ($4,486,000)
due to a reduction in the number of patients serviced.
Cost of Revenues. Total cost of revenues increased by $913,000 to $26,021,000
for the three months ended December 31, 1999 from $25,108,000 for the three
months ended December 31, 1998. Total cost of revenues as a percentage of
revenues for the three months ended December 31, 1999 increased to 64.6% from
62.7% for the three months ended December 31, 1998. Cost of revenues as a
percentage of revenues increased for respiratory, medical equipment and supplies
sales operations (58.6% for the three months ended December 31, 1999 versus
54.9% for the prior period), decreased for infusion services (74.1% for the
three months ended December 31, 1999 versus 75.0% for the prior period) and
decreased for patient services (67.5% for the three months ended December 31,
1999 versus 69.6% in the prior period). The increase in respiratory, medical
equipment and supplies sales operations is attributable to the decrease in
revenues in the Mail-Order operations which carry a lower cost of revenues as a
percentage of revenues (46.3%) than the U.K. respiratory, medical equipment and
supplies sales operations (73.0%). The decrease in infusion services is due to
an increase in infusion therapies in the Hi-Tech operations with lower product
costs. The decline in patient services is primarily due from increased billing
rates in the U.K. nursing operations.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by $920,000 or 6.8% to $12,683,000 for the
three months ended December 31, 1999 from $13,603,000 for the three months ended
December 31, 1998. This decrease was primarily due to an overhead reduction
program in the Company's Mail-Order operations ($2,064,000) and Hi-Tech
operations ($135,000). These decreases were offset by higher levels of overhead
in the U.K.
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operations due to its continued expansion ($1,277,000).
Interest Income. Interest income increased by $32,000 or 46.4% to $101,000 for
the three months ended December 31, 1999 from $69,000 for the three months ended
December 31, 1998. This increase was attributable to higher interest income
earned on a higher level of funds invested.
Interest Expense. Interest expense decreased by $7,000 or .5% to $1,394,000 for
the three months ended December 31, 1999 from $1,401,000 for the three months
ended December 31, 1998. This favorable variance was primarily attributable to a
lower level of borrowings under the Company's senior secured revolving credit
facility (the "Credit Facility") combined with a reduced borrowing rate.
Provision for Income Taxes. The Company recorded a provision for income taxes
amounting to $438,000 or 153.7% of income before income taxes for the three
months ended December 31, 1999 versus a provision of $7,000 or 63.6% of income
before income taxes in the comparable prior period. The difference between the
153.7% effective tax rate for the three months ended December 31, 1999 and the
statutory tax rate resulted from non-deductible expenses, primarily amortization
of intangible assets.
Management believes that it is more likely than not that the Company will
generate sufficient levels of taxable income in the future to realize the
$12,022,000 net deferred tax assets comprised of the tax benefit associated with
future deductible temporary differences and net operating loss carryforwards,
prior to their expiration (primarily 13 years or more). This belief is based
upon, among other factors, changes in operations over the last few years,
management's focus on its business realignment activities and current business
strategies primarily with respect to its U.K. operations. Failure to achieve
sufficient levels of taxable income might affect the ultimate realization of the
net deferred tax assets. If this were to occur, management is committed to
implementing tax planning strategies, such as the sale of net appreciated assets
of the Company to the extent required (if any) to generate sufficient taxable
income prior to the expiration of these benefits. Should such strategies be
required, they could potentially result in the sale of a portion of the
Company's interest in the U.K. operations and repatriation of such proceeds to
the U.S. 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.
Extraordinary Loss on Early Extinguishment of Debt. An extraordinary loss (net
of tax benefit of $408,000) of $759,000 was recorded in the three months ended
December 31, 1999, as a result of the write-off of the deferred financing costs
associated with the early extinguishment of borrowings under the Credit
Facility.
Net Loss (Income). As a result of the foregoing, the Company recorded a net loss
of $912,000 for the three months ended December 31, 1999 compared to net income
of $4,000 for the three months ended December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL.
During the three months ended December 31, 1999, the Company utilized $90,000 in
operating
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activities and $4,106,000 in investing activities including $3,417,000 for
further expansion of the Company's U. K. operations and $689,000 for capital
expenditures. Cash requirements during the three months ended December 31, 1999
for operating and investing activities, as well as the $55,755,000 repayment of
the Credit Facility and $2,252,000 of debt issuance costs were met through funds
generated by the Refinancing (as defined and described below) ($102,267,000).
The Company believes it has adequate capital resources to conduct its operations
for the next twelve months. The Refinancing has provided funds for additional
acquisitions in the U.K., subject to the terms of the Refinancing agreements.
Future acquisitions, if completed could have an impact on future cash flow. See
"- Refinancing."
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, 1999 and September 30, 1999,
$29,864,000 (14.0%) and $30,814,000 (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 December 31, 1999 and September 30, 1999, the
Company's average DSOs were 67 and 73, respectively.
REFINANCING.
General. As described more fully below, on December 20, 1999, the Company's U.K.
subsidiaries, Transworld Holdings (UK) Limited ("UK Parent") and its subsidiary
Transworld Healthcare (UK) Limited ("TW UK") obtained new financing denominated
in pounds sterling, which aggregates approximately $125,700,000 at December 31,
1999. The new financing consists of a $73,523,000 senior secured term and
revolving credit facility (the "Senior Credit Facility"), $16,159,000 in
mezzanine indebtedness (the "Mezzanine Loan") and $36,012,000 principal amount
of senior subordinated notes (the "Notes") (each of the foregoing are sometimes
referred to collectively herein as the "Refinancing"). Of the $125,700 net
proceeds of the Refinancing, $55,755,000 was used to repay the Company's
existing Credit Facility, $11,617,000 was provided to the Company for general
corporate purposes, with the balance to be used for acquisitions and working
capital in the U.K., subject to the
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terms of the documents governing the Refinancing. In connection with the
repayment of the Company's existing Credit Facility, the Company recorded a
non-cash, after-tax, extraordinary charge of approximately $759,000 in its first
quarter of fiscal 2000 relating to the write-off of the deferred financing costs
associated with the Credit Facility.
Senior Credit Facility. The Senior Credit Facility consists of a (i) $45,245,000
term loan A, maturing December 17, 2005, (ii) $20,199,000 acquisition term loan
B, maturing December 17, 2006 which may be drawn upon during the first three
years following closing, and (iii) $8,079,000 revolving facility, maturing
December 17, 2005. Repayment of the loans commences on July 30, 2000 and
continues until final maturity. The loans bear interest at rates equal to LIBOR
plus 2% to 2.75% per annum. As of February 1, 2000, TW UK had outstanding
borrowings of $49,671,000 under the Senior Credit Facility. As of February 1,
2000, borrowings under the Senior Credit Facility bore interest at a rate of
7.914% to 8.664%.
Subject to certain exceptions, the Senior Credit Facility prohibits or
restricts, among other things, the incurrence of liens, the incurrence of
indebtedness, certain fundamental corporate changes, dividends (including
distributions to the Company), the making of specified investments and certain
transactions with affiliates. In addition, the Senior Credit Facility contains
affirmative and negative financial covenants customarily found in agreements of
this kind, including the maintenance of certain financial ratios, such as senior
interest coverage, debt to EBITDA, fixed charge coverage and minimum net worth.
The loans under the Senior Credit Facility are collateralized by, among other
things, a lien on substantially all of TW UK's and its subsidiaries' assets, a
pledge of TW UK's ownership interest in its subsidiaries and guaranties by TW
UK's subsidiaries.
Mezzanine Loan. The Mezzanine Loan is a term loan maturing December 17, 2007 and
bears interest at the rate of LIBOR plus 7% per annum, where LIBOR plus 3.5%
will be payable in cash, with the remaining interest being added to the
principal amount of the loan. The Mezzanine Loan contains other terms and
conditions substantially similar to those contained in the Senior Credit
Facility. The lenders of the Mezzanine Loan also received warrants to purchase
2% of the fully diluted ordinary shares of TW UK. As of February 1, 2000,
borrowings under the Mezzanine Loan bore interest at a rate of 12.914%.
Senior Subordinated Notes and Warrants. Notes. The Notes consist of $36,012,000
principal amount of senior subordinated notes of UK Parent purchased by several
institutional investors and certain members of management (collectively, the
"Investors"), plus equity warrants issued by TW UK concurrently with the sale of
the Notes (the "Warrants") exercisable for ordinary shares of TW UK ("Warrant
Shares") representing in the aggregate 27% of the fully diluted ordinary shares
of TW UK.
The Notes bear interest at the rate of 9.375% per annum payable quarterly in
cash subject to restrictions contained in the Senior Credit Facility requiring
UK Parent to pay interest in-kind through the issuance of additional notes ("PIK
Notes") for the first 18 months, with payment of interest in cash thereafter
subject to a fixed charge coverage test (provided that whenever interest cannot
be paid in cash, additional PIK Notes shall be issued as payment in-kind of such
interest). The Notes mature nine years from issuance.
UK Parent will not have the right to redeem the Notes and the PIK Notes except
as provided in, and
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in accordance with the documents governing the issuance of the Notes and
Warrants (herein the "Securities Purchase Documents"). The redemption price of
the Notes and the PIK Notes will equal the principal amount of the Notes and the
PIK Notes plus all accrued and unpaid interest on each.
The Investors have the right, at their option, to require UK Parent to redeem
all or any portion of the Notes and the PIK Notes under certain circumstances
and in accordance with the terms of the Securities Purchase Documents. The
redemption price of the Notes and the PIK Notes shall be equal to the principal
amount of the Notes and the PIK Notes, plus all accrued and unpaid interest on
each.
UK Parent's redemption obligation of the Notes and the PIK Notes is guaranteed
by TW UK, which guarantee is subordinated to the existing senior indebtedness of
TW UK to the same extent as the Notes and the PIK Notes are subordinated to
senior indebtedness of UK Parent. If UK Parent fails to perform in full its
obligations following exercise of the Investors put of Notes and TW UK fails to
perform its obligations as a guarantor of such obligations, the Investors shall
have the right to among other things exercise directly (through the voting trust
described below) the drag-along rights described without the requirement that
the board of directors of TW UK first take any action.
Warrants. The Warrants may be exercised, in whole or in part, at any time,
unless previously purchased or cancelled upon a redemption of the Notes, at the
option of the holders prior to the time of maturity of the Notes for Warrant
Shares representing approximately 27% of TW UK's fully diluted ordinary share
capital, subject to antidilution adjustment as contained in the Securities
Purchase Documents.
The exercise price of the Warrants shall equal the entire principal amount of
the Notes (other than PIK Notes and excluding any accrued unpaid interest) for
all Warrants in the aggregate and must be paid through the tender of Notes
(other than PIK Notes) to TW UK, whereby TW UK shall issue to the Investors the
appropriate number of Warrant Shares and pay to the Investors in cash an amount
equal to the principal amount of the PIK Notes and all accrued unpaid interest
on the Notes and the PIK Notes.
The Warrants will automatically be exercised for Warrant Shares in the event
that TW UK consummates a public offering of shares valuing the Investors'
ordinary shares of TW UK issuable upon a voluntary exercise of the Warrants at
or above 2.5x the initial investment.
The Investors will have the right, at their option, to require UK Parent to
purchase all or any portion of the Warrants or the Warrant Shares under certain
circumstances and in accordance with the terms of the Securities Purchase
Documents. The purchase price of the Warrants shall be equal to the difference,
if a positive number, between (i) the fair market value of the Warrant Shares
which the Investors have the right to acquire upon exercise of such Warrants and
(ii) the exercise price of such Warrants. The purchase price of the Warrant
Shares shall be equal to the fair market value of such Warrant Shares.
UK Parent's purchase obligation of the Warrants is guaranteed by TW UK, which
guarantee is subordinated to existing senior indebtedness of TW UK. If UK Parent
fails to perform in full its obligations following exercise of the Investors put
of Warrants and TW UK fails to perform its obligations as a guarantor of such
obligations, the Investors shall have the right to among other things exercise
directly through the voting trust the drag-along rights without the requirement
that the board of directors of TW UK first take any action.
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If UK Parent fails to perform in full its obligations following exercise of the
Investors put of Warrant Shares, the Investor shall have the right to among
other things exercise directly through the voting trust the drag-along rights
without the requirement that the board of directors of TW UK first take any
action.
Following an initial public offering and upon exchange of the Warrants, the
Investors shall be entitled to two demand rights and unlimited piggyback
registrations with respect to the Warrant Shares. The Warrant Shares shall be
listed for trading on any securities exchange on which the ordinary shares of TW
UK are listed for trading.
All ordinary shares of UK Parent owned by the Company and all ordinary shares of
TW UK owned by UK Parent will be held in a voting trust for the benefit of the
holders of ordinary shares of TW UK and the holders of the Warrants, with the
trustee of the trust being obligated to vote the shares held in trust as
follows: (i) to elect to the board of directors of TW UK individuals designated
in accordance with the Securities Purchase Documents and on any other matter,
pursuant to instructions approved by the required majority of the board of
directors of TW UK as contemplated by the Securities Purchase Documents; and
(ii) following the breach by UK Parent and TW UK of their obligations to honor
an Investor put of Notes, an Investor put of Warrants or an Investor put of
Warrant Shares, the Investors have the right to exercise drag-along rights
directly without any action of the board of directors of TW UK on a transaction
to which such drag-along rights apply pursuant to instructions from the
Investors. G. Richard Green, a Director of the Company, is the trustee of the
voting trust. The voting trust includes provisions to the effect that under
certain circumstances the shares held in trust shall thereafter be voted on all
matters, including the election of directors, pursuant to instructions from a
majority of those members of the board of directors of TW UK who are not
affiliated or associated with the Company, Hyperion Partners II L.P. ("HPII"),
or any of their successors.
The Articles of Association of TW UK and the Securities Purchase Documents
provide that neither UK Parent nor TW UK will enter into any transaction with or
make contributions to the Company or UK Parent (except as required by the terms
of the Notes, the Warrants or the Warrant Shares) in the form of dividends,
fees, re-charges, loans, guarantees or any other benefit, in any form, unless
they have been previously agreed upon by all shareholders.
The Securities Purchase Documents also provide that the Investors will have the
benefit of customary shareholder rights for a transaction of this type
including, without limitation: (i) pre-emptive rights with respect to new
securities; (ii) rights of first refusal with respect to proposed transfers of
ordinary shares of TW UK; (iii) drag-along rights; (iv) tag-along rights; and
(v) the exercise of voting rights by the holders of the Warrants as therein
described including the right to elect one director to the TW UK board of
directors. The Securities Purchase Documents also include limitations on TW UK's
ability to do the following, among others, without the consent of the Investors:
(i) issue additional equity securities of TW UK; (ii) pay dividends or make
other restricted payments, except as required by the terms of the Notes, the
Warrants or the Warrant Shares; (iii) sell, lease or otherwise dispose of assets
exceeding specified values; (iv) enter into any transactions with affiliates;
(v) amend the Memorandum or Articles of Association; or (vi) merge or
consolidate with another entity.
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
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computer programs may not appropriately function as of January 1, 2000 because
these programs will read the "00" in the year 2000 as January 1, 1900. If
uncorrected, the problem could have resulted 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. To date, there have
been no material malfunctions of the Company's systems or activities due to Year
2000 issues. However, there can be no assurance that unanticipated events still
will not occur or that the Company was able to identify all Year 2000 issues
before problems arise.
As of February 1, 2000, costs incurred for all efforts of the Company's Year
2000 action plan amounted to $245,000 and have not been material to the Company.
These costs have been expensed as incurred and have been funded by operating
cash flows. Based upon the best estimate by the Company's management and the
Year 2000 task force, the Company does not expect any additional costs
associated with the Company's Year 2000 action plan. If additional costs are
incurred they will also be expensed as incurred and be funded by operating cash
flow.
In addition, the Company relies heavily upon third party payors, including to a
large extent governmental payors such as the NHS in the U.K. and Medicare and
Medicaid in the U.S. 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 was working to solve its own Year 2000
issues in a timely manner, the Company has received no assurance that their
systems and interfaces were 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 consolidated
financial position, cash flows, or results of operations.
There can be no assurance that unanticipated events still will not occur or that
the Company was able to identify all Year 2000 issues before problems arise. In
addition, the Company has no assurance that third party payors and vendors have
or had 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 still
will not have a material adverse effect on the Company's consolidated financial
position, cash flows or results of operations.
LITIGATION.
On August 20, 1999, Transworld Home HealthCare - Nursing Division, Inc. ("TNI")
was named a defendant in a suit brought by Teresa Crutcher, in New Jersey state
court, as administrator of the estate of Aaron Pernell, who was an infant and
Teresa Crutcher's son. The claim is for wrongful death of Aaron Pernell alleged
to have been caused by the negligent manner in which a TNI home care nurse
placed him in an infant car seat. The case was settled on December 27, 1999 for
$325,000, and was paid on December 29, 1999 by the Company's insurance carrier.
Since this settlement was within the policy limits of the Company's insurance
policies it did not have any effect on the Company's financial position, cash
flows, or results of operations.
On April 13, 1998, a shareholder of the Company, purporting to sue derivatively
on behalf of the Company, commenced a derivative suit in the Supreme Court of
the State of New York, County of New York, entitled Kevin Mak, derivatively and
on behalf of Transworld Healthcare, Inc., Plaintiff, vs. Timothy Aitken, Scott
A. Shay, Lewis S. Ranieri, Wayne Palladino and Hyperion Partners II L.P.,
Defendants, and Transworld Healthcare, Inc., Nominal Defendant, Index No.
98-106401. The suit alleges that certain officers and directors of the Company,
and HPII, breached fiduciary duties to the
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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 receivables due
from Health Management, Inc. ("HMI"). 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 3, 2000.
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 U.S. Department of Health and Human
Services' Office of Audit Services, a division of the Office of Inspector
General ("OIG"). The Company was subsequently informed that the Audit Letters
cover its DermaQuest, Inc. subsidiary. The Company has produced certain
documents and provided related information to the OIG and to the U.S. Attorney
for the Eastern District of Texas regarding these subsidiaries' financial
relationships with suppliers of durable medical equipment and various other
practices including the subsidiaries' practices regarding the collection of
coinsurance and deductible amounts due from Medicare beneficiaries.
Additionally, on November 19, 1997, the Company was notified by the U.S.
Attorney for the Eastern District of Texas that the Company, RespiFlow, MK, and
various other non-affiliated entities had been named defendants in a qui tam
action under the Federal False Claims Act. The qui tam action was recently
partially unsealed and a copy of the complaint was provided to the Company. The
relator is a private party who has brought action on behalf of the Federal
government. At present, the Company has entered into settlement discussions with
the Department of Justice ("DOJ") and the OIG in an effort to bring closure to
this matter and to avoid the expense, disruption and uncertainty of litigation.
The counsel for the relator has been involved in these settlement discussions as
well. At present, the Company is not able to determine when a final settlement
will be reached with the DOJ, the OIG and the relator or whether any proposed
settlement can be concluded on terms acceptable to the Company. Accordingly, the
Company is unable to estimate what the potential loss might be at this time. In
the event that these settlement discussions are unsuccessful, the Company will
defend vigorously its interest in these matters. As such, the Company cannot
predict whether the outcome of these actions will have a material adverse effect
on the Company's consolidated financial position, cash flows or results of
operations.
In addition to the above allegations, 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, cash flows or results of operations.
Effective October 1, 1997, the Company owned 100% of the stock of HMI.
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,
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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. Plaintiff alleged 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 inadequate consideration. Plaintiff demands an accounting, damages,
attorney's fees and other payment for other expenses for unspecified amounts.
The defendants filed a motion to dismiss this action on September 18, 1998. The
Court denied defendants' motion in part and granted the motion in part, leaving
intact certain claims. Plaintiff has propounded discovery requests. The claims
are insured.
By letter dated December 20, 1999, the Company received formal written
notification of the intent of two plaintiffs to file a civil action in the Court
of Common Pleas of Allegheny County, Pennsylvania against Transworld Healthcare,
Inc., Transworld Home Healthcare, Inc., Health Management, Inc. and HMI
Pennsylvania, Inc. The two plaintiffs, Irwin Hirsch and Lloyd Myers, formerly
were employees of HMI Pennsylvania, Inc., a subsidiary of the Company, and had
written employment agreements. Myers also served as an officer of HMI. Based
upon their former status as employees and as officers, both claim entitlement to
contractual indemnification from HMI and HMI Pennsylvania, Inc. for defense
costs and settlement of certain claims made against them. In 1994, Hirsch and
Myers also sold two retail pharmacies they owned to HMI.
Hirsch and Myers were named as defendants in an action filed in the United
States District Court for the Eastern District of New York entitled In re Health
Management, Inc. Securities Litigation, Master File No. 96 Civ. 0889 (ADS),
which was a class action by shareholders of HMI alleging, among other claims
against the defendants, fraud in connection with the valuation of certain
securities. Hirsch and Myers incurred non-reimbursed legal expenses of $100,000
in defending that litigation and, ultimately, settled their liability jointly
for $1,325,000 which was non-reimbursed. They demand that defendants reimburse
to them their non-reimbursed legal fees and the settlement amount pursuant to
the indemnification provisions of their employee contracts.
In addition to their indemnification claims, Hirsch and Myers also claim damages
in the amount of $7,000,000 for losses in connection with the pharmacies sale
transaction they entered into with HMI under which they sold their retail
pharmacies to HMI. Hirsch and Myers claim that the pharmacies sale transaction
was based upon fraudulent misrepresentations by HMI.
The Company and HMI entities will vigorously defend against these claims. The
Company believes that Hirsch and Myers' indemnification claims should not have
any real merit because of testimony given by Hirsch and Myers under oath in
connection with a criminal trial against Clifford Hotte, a director and former
officer of HMI. In their testimony, Hirsch and Myers acknowledged malfeasance
and nonfeasance, which should render their contractual entitlement to
indemnification void. Even if they are entitled to indemnification despite their
acknowledgements, they are liable to defendants for the economic losses and
damages suffered by defendants as a result of the malfeasance and nonfeasance.
Therefore if the civil actions are filed, the Company and HMI entities will
aggressively pursue counterclaims against Hirsch and Myers for damages which,
conservatively, are far in excess of their claims, including the claims
associated with the pharmacies sale transaction.
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
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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 consolidated financial position, cash
flows or results of operations.
Page 23
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
On August 20, 1999, Transworld Home HealthCare - Nursing Division, Inc. ("TNI")
was named a defendant in a suit brought by Teresa Crutcher, in New Jersey state
court, as administrator of the estate of Aaron Pernell, who was an infant and
Teresa Crutcher's son. The claim is for wrongful death of Aaron Pernell alleged
to have been caused by the negligent manner in which a TNI home care nurse
placed him in an infant car seat. The case was settled on December 27, 1999 for
$325,000, and was paid on December 29, 1999 by the Company's insurance carrier.
Since this settlement was within the policy limits of the Company's insurance
policies it did not have any effect on the Company's financial position, cash
flows, or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27 Financial Data Schedule
(b) Reports on Form 8-K.
None.
Page 24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this Report to be signed on its behalf by
the undersigned thereunto duly authorized.
Dated: February 18, 2000
TRANSWORLD HEALTHCARE, INC.
By: /s/ Wayne A. Palladino
-------------------------------------------
Wayne A. Palladino
Senior Vice President and Chief Financial
Officer (Principal Financial Officer and
Duly Authorized to Sign on Behalf of
Registrant)
Page 25
<PAGE>
EXHIBIT INDEX
Exhibit Description
27 Financial Data Schedule
Page 26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 43,791
<SECURITIES> 0
<RECEIVABLES> 49,915
<ALLOWANCES> 20,051
<INVENTORY> 3,601
<CURRENT-ASSETS> 90,670
<PP&E> 20,780
<DEPRECIATION> 10,902
<TOTAL-ASSETS> 213,533
<CURRENT-LIABILITIES> 26,966
<BONDS> 0
0
0
<COMMON> 176
<OTHER-SE> 87,707
<TOTAL-LIABILITY-AND-EQUITY> 213,533
<SALES> 40,282
<TOTAL-REVENUES> 40,282
<CGS> 26,021
<TOTAL-COSTS> 26,021
<OTHER-EXPENSES> 12,683
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,293
<INCOME-PRETAX> 285
<INCOME-TAX> 438
<INCOME-CONTINUING> (153)
<DISCONTINUED> 0
<EXTRAORDINARY> (759)
<CHANGES> 0
<NET-INCOME> (912)
<EPS-BASIC> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
