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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 2002
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No.: 1-11570
ALLIED HEALTHCARE INTERNATIONAL INC.
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(Exact Name of Registrant as Specified in Its Charter)
NEW YORK 13-3098275
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(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation)
555 MADISON AVENUE
NEW YORK, NEW YORK (212) 750-0064 10022
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(Address of principal executive (Registrant's telephone number, including (Zip Code)
offices) area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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Common Stock, $.01 par value American Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
None
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(Title of Class)
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(Title of Class)
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 reporting
requirements for the past 90 days. Yes__X___ No ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best or registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [___]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes_____ No__X__
The aggregate market value of the voting and non-voting stock held by
non-affiliates of the registrant as of December 6, 2002 was approximately
$35,761,968 based on the closing sales price of $4.50 per share of common stock
of the registrant on such date, as reported by the American Stock Exchange.
The number of shares of common stock of the registrant outstanding on December
6, 2002 was 22,238,901.
DOCUMENTS INCORPORATED BY REFERENCE
None
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ALLIED HEALTHCARE INTERNATIONAL INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2002
TABLE OF CONTENTS
PART I
Item 1. Business.................................................................................................1
Item 2. Properties..............................................................................................24
Item 3. Legal Proceedings.......................................................................................24
Item 4. Submission of Matters to a Vote of Security Holders.....................................................25
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...................................25
Item 6. Selected Financial Data.................................................................................28
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...................31
Item 7A Quantitative and Qualitative Disclosures About Market Risk..............................................51
Item 8. Financial Statements and Supplementary Data.............................................................52
Item 9. Changes and Disagreements with Accountants on Accounting and Financial Disclosure.......................52
PART III
Item 10. Directors and Executive Officers of the Registrant......................................................52
Item 11. Executive Compensation..................................................................................56
Item 12. Security Ownership of Certain Beneficial Owners and Management..........................................62
Item 13. Certain Relationships and Related Transactions..........................................................65
Item 14. Controls and Procedures.................................................................................69
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.........................................71
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes forward-looking statements.
Forward-looking statements are identified by words such as "believe,"
"anticipate," "expect," "intend," "plan," "will," "may," "should," "could,"
"think," "estimate" and "predict," and other similar expressions. In addition,
any statements that refer to expectations, projections or other
characterizations of future events or circumstances are forward-looking
statements.
We based these forward-looking statements on our current expectations
and projections about future events. Our actual results could differ materially
from those discussed in, or implied by, these forward-looking statements.
Factors that could cause actual results to differ from those implied by the
forward-looking statements include:
o our ability to continue to recruit and retain qualified
flexible and other healthcare staffing professionals and
ability to attract and retain operational personnel;
o our ability to enter into contracts with hospitals and other
healthcare facility clients on terms attractive to us;
o the general level of patient occupancy at our hospital and
healthcare facility clients' facilities;
o our ability to successfully implement our acquisition and
integration strategies;
o the effect of existing or future government regulation of the
healthcare industry, and our ability to comply with these
regulations; and
o the impact of medical malpractice and other claims asserted
against us.
Other factors that could cause actual results to differ from those
implied by the forward-looking statements in this Annual Report on Form 10-K are
more fully described elsewhere in this document, as well as changes in any of
the following: the demand for our products and services, general economic
conditions, governmental regulation, the level of competition we face, customer
strategies and pricing and reimbursement policies.
PART I
ITEM 1. BUSINESS
GENERAL
Allied Healthcare International Inc. ("our company," "we" or "us") is
one of the leading providers of healthcare staffing services, including nursing
and ancillary services, to the U.K. healthcare industry. We operate a
community-based network of over 100 branches, with the capacity to provide
nurses, carers (known as home health aides in the U.S.) and specialized medical
personnel to locations covering approximately 90% of the population of the
United Kingdom. We provide healthcare staffing services to hospitals, local
governmental authorities, nursing homes and private patients in the U.K. Through
our U.K. operations, we also supply medical grade oxygen for use in respiratory
therapy to the U.K. pharmacy market and to private patients in Northern Ireland.
Our U.S. operations, which are concentrated in New York and New Jersey,
supply infusion therapy, respiratory therapy and home medical equipment and
accounted for less than 10% of our revenues during the fiscal year ended
September 30, 2002. We have two reportable business segments: our U.K.
operations and our U.S. home healthcare operations.
We previously provided specialty pharmaceuticals and medical supplies.
On October 3, 2000, we sold a substantial portion of the assets of our U.S.
mail-order operations. In addition, on November 22, 2000, we sold Amcare, Ltd.,
a U.K. subsidiary.
On June 7, 2002 we changed our name from Transworld Healthcare, Inc.
to Allied Healthcare International Inc. In September 2002, we changed our
trading symbol from TWH to ADH.
On July 25, 2002, we consummated a reorganization (the
"Reorganization") involving our company and two of our U.K. subsidiaries --
Allied Healthcare Group Limited ("Allied Healthcare (UK)") and Transworld
Healthcare (UK) Limited ("TWUK"). The Reorganization was consummated pursuant to
a Master Reorganization Agreement, dated as of April 24, 2002, as amended on May
16, 2002 and June 26, 2002 (the "Reorganization Agreement"), among our company,
Allied Healthcare (UK), TWUK and certain investors in such subsidiaries.
In the Reorganization, equity investments in TWUK and subordinated debt
investments in Allied Healthcare (UK) were exchanged for shares of our common
stock and shares of our new Series A preferred stock. The net effect of the
Reorganization was that TWUK became an indirect wholly-owned subsidiary of our
company and the senior subordinated debt of Allied Healthcare (UK) was replaced
by shares of our Series A preferred stock. We believe that the Reorganization
resulted in our company having a more straight-forward and integrated management
and corporate structure.
In the Reorganization, we issued an aggregate of 2,358,930 shares of
our common stock and 7,773,660 shares of our Series A preferred stock. We have
registered the resale of all of the shares of our common stock (including the
shares of common stock issuable upon conversion of
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the Series A preferred stock of our company) issued in the Reorganization (an
aggregate of 10,132,590 shares of common stock). Of the shares of common stock
we issued in connection with the consummation of the Reorganization, 1,468,832
were issued in July 2002 and 890,098 were issued in December 2002.
On November 28, 2002, we acquired Medic-One Group Limited, a supplier
of temporary staffing to National Health Service hospitals and private hospitals
in the U.K. The consideration consisted of (pound)3,000,000 and the issuance of
669,738 shares of our common stock. We may be obligated to issue additional
consideration of up to (pound)8,560,000, depending upon the EBIDTA of the
business in fiscal 2003 and fiscal 2004. The additional consideration, if any,
will be satisfied by a combination of cash and shares of our common stock.
Our principal executive offices are located at 555 Madison Avenue, New
York, New York 10022, and our telephone number at that location is (212)
750-0064.
STRATEGY
We are one of the leading providers of flexible staffing services to
the U.K. healthcare industry. Our U.K. growth strategy has been to take
advantage of policy moves by the U.K. government-funded National Health Service
(the "NHS") and by private payors seeking to treat a larger number of patients
than in the past and to shorten waiting lists for access to care, as well as the
general trend of local government toward outsourcing its home care requirements
to private industry.
It has been, and will continue to be, our intention in the U.K. to
focus on internal growth, as well as to acquire additional nursing and other
care giving operations to expand and complement our existing operations. We
believe that the healthcare flexible staffing services industry in the U.K. is
highly fragmented and that additional acquisition opportunities will continue to
arise in a general trend toward industry consolidation. Consistent with this
strategy, we acquired six nursing and care giving operations in the U.K. during
fiscal 2002, twelve during fiscal 2001 and twelve during fiscal 2000.
In order to take advantage of these opportunities in the U.K., we
established our U.K. operations on a stand-alone basis with their own financing
in order to execute an aggressive expansion program. On December 17, 1999, our
U.K. subsidiaries completed the refinancing of their operations (the
"Refinancing"). In the Refinancing, our U.K. subsidiaries received $125,700,000,
which was used to repay our existing senior indebtedness of $55,755,000, to
provide approximately $46,000,000 for additional acquisitions in the U.K., and
for miscellaneous uses. In September 2001, borrowings of our U.K. subsidiaries
were increased by $73,000,000 under our senior collateralized term and revolving
credit facility (the "Senior Credit Facility") to fund the acquisition of
Staffing Enterprise Limited and Staffing Enterprise (PSV) Limited (collectively,
"Staffing Enterprise") and provide additional resources for future acquisitions.
We believe that the key competitive advantages of our U.K. flexible
staffing business are our:
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o EXTENSIVE BRANCH NETWORK. We operate a community-based network
of over 100 branches, with the capacity to provide nurses,
carers and specialized medical personnel to locations covering
90% of the population of Great Britain. We also actively assess
opportunities to extend our geographic coverage and increase
our market penetration by evaluating customer needs, the skill
base of flexible staff and growth potential in identified
areas.
o DIVERSIFIED CUSTOMER BASE. We provide flexible staff to four
types of customers: hospitals, local authorities, nursing homes
and private patients. We also believe this diversity of
customers provides us with a competitive advantage in our
recruiting and retention efforts, as staff are attracted by the
broad range of placement opportunities.
o ENTREPRENEURIAL BUSINESS CULTURE. Our branches are managed
either by general managers, in the case of larger acquisitions,
or by employed branch managers or self-employed
superintendents. In each case, the individual's remuneration is
dependent upon branch performance. Self-employed
superintendents are remunerated on an entirely
performance-related basis linked to the gross profit of the
branches they manage, while employed branch managers are
remunerated with salary and performance bonuses.
o QUALITY REPUTATION. We believe that our customers choose
flexible staffing agencies on the basis of local branch
awareness and reputation. We focus on providing a consistently
high quality of service to the local communities where our
branches are located. We believe that the principal brand names
within our U.K. operations each have strong individual
reputations, and it is our current intention to retain all such
brands.
o TRACK RECORD OF ACQUISITIONS. We have achieved significant
growth through acquisitions, growing from 71 branches in 1999
to 111 branches as of September 30, 2002. We believe this
growth is attributable to our structured acquisition and
integration process. We first identify suitable branches for
acquisition and develop a relationship with the vendor and key
management team.
o MANAGEMENT EXPERTISE. Timothy M. Aitken, our chairman and
chief executive officer, and Sarah L. Eames, our president and
chief operating officer have, respectively, 12 and 22 years
experience in the healthcare industry. In addition, many of our
U.K. branch managers and superintendents were former nurses or
have otherwise been involved in the healthcare industry.
Utilizing our successes in the U.K., we believe favorable industry
trends create significant opportunities for us to grow our flexible staffing
services healthcare business in the U.S.
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While we have not in recent years had a significant presence in the
U.S. flexible staffing sector of the U.S. healthcare industry, we believe that
the following industry characteristics and competitive strengths provide us an
attractive opportunity to grow our business here:
o Favorable industry trends have increased demand in the
flexible healthcare staffing industry, which is projected by
the Staffing Industry Report to grow 21% from $8.7 billion in
revenue in 2001 to $10.6 billion in revenue in 2002. We
believe these trends will continue to increase demand for our
services.
o The Center for Medicare and Medicaid Services projects
healthcare expenditures will increase from 2002 to 2010 by
approximately $1.1 trillion to $2.6 trillion. This growth is
expected to be fueled by an increasingly aging U.S. population
and by advances in medical technology.
o Most regions of the U.S. are experiencing a shortage of
nurses. The American Hospital Association estimates that up to
126,000 position vacancies currently exist for registered
nurses, representing approximately 10% of the current
hospital-based nursing workforce. A study published in the
Journal of the American Medical Association in June 2000
projects that the registered nurse workforce will be nearly
20% below projected requirements by 2020.
o In the current cost-containment environment, hospitals and
healthcare facilities are increasingly using flexible staffing
models to more effectively manage labor costs and fluctuations
in demand for their services.
o We believe our substantial presence in the U.K. flexible
staffing market gives us a competitive advantage in
recruitment of English-speaking nurses.
o Our management team averages approximately 15 years of
experience in the healthcare industry. Our management team has
consistently demonstrated the ability to successfully identify
and integrate strategic acquisitions.
o The home healthcare market is highly fragmented and we intend
to continue to evaluate opportunities to acquire complementary
businesses to strengthen and broaden our market presence.
U.K. OPERATIONS
Our U.K. operations provide patient services, principally nursing and
para-professional services and respiratory therapy products to patients
throughout the U.K.
During fiscal 2002, we derived 93.4% of our consolidated revenues from
our U.K. operations, with the following contributions by product line:
o 98% of our U.K. revenues from patient services; and
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o 2% from respiratory therapy.
Patient Services
We are a leading provider of flexible staffing services to the U.K.
healthcare industry, including carers (known as home health aides in the U.S.)
and other specialized medical personnel. We provide these services through
Allied Healthcare (UK) Limited ("Allied Operating Company (UK)"), Nightingale
Nursing Bureau Limited ("Nightingale"), Crystalglen Limited (operating under the
trade name "Nurses Direct"), Balfor Medical Limited ("Balfor"), and Staffing
Enterprise to four main types of customers:
o hospitals (comprising NHS Trusts, NHS hospitals and independent
hospitals);
o local authorities;
o nursing homes; and
o private patients.
Allied Operating Company (UK) was founded in 1972 as a home nursing
service and has expanded through the establishment and acquisition of branch
offices throughout the U.K. In the last three fiscal years, Allied Operating
Company (UK) has acquired an additional 45 branches to extend its geographical
coverage in the U.K. Allied Operating Company (UK) primarily provides carers to
local authorities, nursing homes and private patients, as well as nurses and
carers to hospitals. Allied Operating Company (UK) operates 91 of our branches,
which are managed on a day to day basis either by self-employed superintendents
or employed branch managers. Under the superintendent model, branches are
operated by self employed individuals who are responsible for the operating
costs of the branch and receive a percentage of the gross profit. Allied
Operating Company (UK) is responsible for centralized support services,
including payroll administration, accounts receivable collections, quality
assurance and regulatory affairs, contract administration and central sales and
marketing services.
Allied Operating Company (UK) owned and managed branches principally
operate where the business will not easily support superintendent status or
where the branch is newly acquired and has not been fully integrated into the
network. In a managed branch, all operating costs are the responsibility of
Allied Operating Company (UK). As of December 1, 2002, Allied Operating Company
(UK) is represented by 33 superintendent branches and 58 managed branches.
We believe that although our branch network provides nationwide
coverage, each branch is a community-based business which should be managed
locally to suit the needs of our customers and flexible staff. The branch
managers and superintendents are therefore recruited locally and often have
prior experience in the healthcare industry.
Allied Operating Company (UK), Nurses Direct and Balfor are managed by
employed branch managers or self-employed superintendents. Both the
superintendent and employed
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branch manager models involve incentivizing the individuals based on branch
performance. Superintendents are self-employed and are responsible for the
operating costs of the branches they run (including branch rent, administrative
staff wages and other overhead costs). Superintendents are paid a commission
based solely on a percentage of gross profit of those branches, out of which
they pay such operating costs. In an employee-managed branch, we are responsible
for all operating costs and branch managers are paid a salary and
performance-linked bonus.
In the Refinancing in December 1999, we raised debt and new equity
funding in the U.K., which enabled us to continue our expansion program and
complete the following significant acquisitions:
o Nightingale, which was acquired in April 2000, is a provider
of nursing and care staff to the NHS and independent sector in
London. Nightingale primarily recruits its nurses from
Australia, where it maintains a branch, and other Commonwealth
countries.
o Nurses Direct, which was acquired in June 2001, operates a
nursing and care agency with 14 branches in South East
England.
o Balfor, which was acquired in August 2001, provides qualified
nurses, specialized theatre staff and nursing auxiliaries to
hospitals in the Midlands and Northern England.
o Staffing Enterprise, which was acquired in September 2001, is
a London based provider of temporary staffing of specialist
nurses and other healthcare professionals to London NHS Trust
and independent hospitals.
We believe that the demand for most forms of nursing and other
healthcare services is expected to increase in the medium term as the U.K.
population grows older in line with demographic trends. Consequently, we
anticipate that requirements for temporary nursing services will increase in the
future, benefiting our flexible staffing operations.
Acquisition and Integration Process
We have designated employees who identify suitable acquisition targets
and typically seek to develop a pre-acquisition relationship with the vendors
and key management in order to assess business "fit." We structure our
acquisitions so as to encourage continuity of management on acquisitions and
seek to align our business interests and the vendors/management through
performance based earn-out provisions. We also have a separate team responsible
for the integration of acquired businesses. The process of integrating newly
acquired businesses begins prior to the closing of the acquisition and for the
smaller acquisitions is usually completed within three months. These
acquisitions are generally acquired by and integrated within Allied Operating
Company (UK), including the adoption of our policies and procedures and the
implementation of Allied Operating Company (UK)'s IT system.
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We believe it is important to allow larger acquired businesses to
retain certain functions essential to their continuing efficiency, such as their
own IT systems including accounting functions, payroll and invoicing.
Integration plans and timelines for such larger acquisitions are determined on a
case-by-case basis. However, we seek to provide an appropriate degree of control
and monitoring. Thus, upon the completion of these acquisitions, branch
management contributes to our weekly management meetings and must adhere to
weekly and monthly financial reporting requirements. Over time, we intend that
the larger acquisitions will be fully integrated into our proposed new IT
platform.
Respiratory Therapy
The respiratory therapy business, comprised of Allied Oxycare Limited
("Allied Oxycare") and Medigas Limited ("Medigas"), serves two segments of the
oxygen therapy market: (a) oxygen cylinders and (b) oxygen concentrators. The
business services patients with chronic respiratory diseases either in their own
homes or via community pharmacies and is centrally managed from a national
distribution center in Wolverhampton, with a further seven leased depots in
mainland Britain and three in Northern Ireland.
Medigas
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Home oxygen therapy delivered from a cylinder via face-mask is
prescribed for a wide array of respiratory diseases ranging from asthma and
emphysema to severe bronchitis. Medigas supplies filled oxygen cylinders and
related equipment solely to pharmacies, both small independent stores and large
retail pharmacy chains, for patients at home who require lower volumes of oxygen
per day than that provided by oxygen concentrators or who may have temporary
respiratory conditions. Medigas provides approximately 1,200 cylinders per day
to pharmacies from eight depots around the U.K. The NHS reimburses the
pharmacist for the product and the pharmacist subsequently pays Medigas. The
total U.K. oxygen cylinder market is estimated by the Prescription Pricing
Authority at (pound)12,000,000 per year and has three main participants:
o BOC (British Oxygen Company);
o Medigas; and
o Air Products plc.
Medigas revenue calculations indicate that it provides approximately
20% of the oxygen cylinder market in the U.K., having grown from less than a 5%
share of this market in the early 1990s. It is second in the market to BOC, the
largest provider in this market with a market share of approximately 70%. Air
Products has a market share of approximately 5%. The provision of cylindered
oxygen at home is price regulated under the U.K. drug tariffs. We believe that
the key to maintaining and growing market share is to ensure the service is
delivered quickly and efficiently and that Medigas is able to respond promptly
to client demand.
In the fiscal year ended September 30, 2002, approximately 90% of the
revenues of Medigas related to the sales of oxygen cylinders and the remainder
related to ancillary consumables and equipment required for the utilization of
the gases sold.
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Allied Oxycare
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Patients that require more than eight hours of oxygen per day cross a
usage "threshold" where the U.K. Department of Health considers their needs are
more economically supplied by an on-site concentrator. Allied Oxycare provides
oxygen concentrators, which separate room air into its constituent gases to
provide 95% oxygen gas, on an as-needed basis to a total of approximately 1,100
patients at home in Northern Ireland. The NHS is charged by Allied Oxycare on a
monthly basis for the period during which the patients have the equipment at
home. The provision of concentrator oxygen at home is tendered by government
services agencies in the U.K. on behalf of the relevant country's health
authority or health board.
A U.K. Department of Health commissioned report in 2000 estimates the
total concentrator market at approximately (pound)10,000,000 per year. Business
to supply oxygen concentrators is mainly sought through open tender for regional
contracts. The revenue for Allied Oxycare is derived wholly from contracts with
the relevant government services agency, which contracts on behalf of the four
Northern Ireland health boards for the provision of home oxygen therapy services
in Northern Ireland. This five year contract for the Northern Ireland market was
recently extended for a further 12 months and is now due to be re-tendered in
September 2003. Eight further oxygen concentrator contracts for the Greater
London area (2 regions), Central England (3), Northern England (2) and South
West England (1), with an estimated market value of (pound)10,000,000 to
(pound)12,000,000, will be put out to tender during 2003. Allied Oxycare intends
to participate in this tender process. The main barrier to entry into the oxygen
therapy market is the cost of investment in the equipment and putting in place a
distribution network.
Respiratory Therapy Market
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Although our respiratory therapy business has grown at a slower rate
than our core flexible staffing business, Medigas has increased both its
revenues and its profits over the last three years. The growth in revenues has
been due to an increased willingness by doctors to prescribe oxygen related
treatments in the home, as well as an increase in the number of cases of asthma
and allergies verifications received. Part of the NHS plan is that more
individuals should be treated in their own homes, and with a growing elderly
population, there may remain some limited growth potential in this market.
Quality Assurance
Our U.K. operations maintain quality assurance policies and procedures
and monitor operations to provide quality care and services to patients and
healthcare professionals in the U.K. Where appropriate, our U.K. operations
operate under license of the U.K. Department of Health and Medicines Control
Agency, subject to the terms and conditions of service demanded by such
licensing authority.
The European Quality Standards' highest rating has been awarded to
Allied Oxycare. The awarding authority checks the continued adherence to its
standards on a six-month basis.
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Sales, Marketing Activities and Types of Customers
Our U.K. operations primarily market their products and services to
healthcare professionals who act as referral sources to patients. These
healthcare professionals include medics, nurses, pharmacists, administrators,
the NHS and private health care providers. Other important targets for
promotional activity include patient associations and community social services
organizations. Fundamental to our ability to obtain and retain referral sources
is establishing and maintaining a reputation for quality service and
responsiveness to the needs of referral sources and their patients and clients.
Our U.K. nursing operations market their nursing agency service via
their branch network and their staff within each of their independent locations.
These branch locations are supported by small teams of sales and marketing
professionals based centrally to coordinate and support the sales activity.
Nightingale markets its nursing agency services directly to NHS Trust hospitals
and the independent sector.
Medigas and Allied Oxycare are marketed directly to the pharmacist for
oxygen cylinders and the NHS supplies for oxygen concentrator services, by a
senior manager. In addition to primary sales activity, delivery drivers play a
key role as secondary sales staff.
In general, the sales representatives and managers of our U.K.
operations market our U.K. products and services through direct contact with
referral sources in the form of meetings, telephone calls and solicitations.
Contact is maintained with these sources to strengthen their relationships.
While representatives strive to develop the strongest provider relationship
possible, referral sources often choose to use several service and product
providers.
As in many European and U.S. markets, the escalating pressures to
reduce the cost of healthcare has, for some lines of business (prescribed
products and services, including cylinder oxygen, concentrators and medical
supplies) in our U.K. operations, resulted in reductions in reimbursement rates.
However, our intended focus towards offering integrated home healthcare could
result in an overall cost savings leading to, we believe, substantial sales
opportunities for our U.K. operations.
The development of the services we offer has closely followed market
developments and has led to the diversified customer base from which we now
benefit. We provide flexible healthcare staffing services to the following
customers:
o Hospitals. We provide services to publicly funded NHS Trusts,
NHS hospitals and independent hospitals situated throughout
the U.K.
o NHS Trust hospitals. We supply flexible staff including all
grades of nurses, as well as nursing auxiliaries and carers
to NHS Trust hospitals.
o Independent hospitals. We provide flexible staff comprising
both nurses and carers to independent hospitals in the
private sector. The services provided to this
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customer type are paid for by a patient's private medical
insurance or his/her own financial resources.
o Local authorities. Local authority social services
departments provide subsidized care in the home to members of
the community and use carers more frequently than nurses.
o Nursing homes. We provide both carers and nurses to nursing
homes.
o Private patients. We provide both nurses and carers to
private patient customers. These patients may include
incapacitated individuals who require daily attention or
patients with long-term illnesses living at home.
Types of Customer Contracts
The flexible staffing business operates 24 hours a day, 7 days a week,
365 days a year on a branch-by-branch basis. We provide staff to our customers
under a variety of arrangements, including the following broad categories of
contracts common to the healthcare staffing industry:
o Per diem purchases. Business provided on a per diem basis
arises when a customer requires flexible staff, and there is
no formal or ongoing contractual commitment with the customer.
The work services provided on a per diem basis may be limited
to one shift, lasting a short period of time or may be an
engagement for a period until further notice. We provide most
of our nurses and carers to customers on a per diem basis.
o Preferred supplier arrangements. These arrangements involve
the designation of an agency by a customer as a "preferred
supplier" of staff. A preferred supply contract may contain
agreed rates but is not an exclusive arrangement and does not
guarantee that an agency will be used by the customer. A small
proportion of our services are provided under preferred
supplier agreements, which tend to be with local authorities
or hospitals.
o "Cost-volume" contracts. Under a "cost-volume" contract, an
agency specifies a price to the customer for an indicative
number of hours. Such an agreement may enable customers to
negotiate lower prices for minimum volumes of business. Local
authorities are the principal users of these contracts. A very
small percentage of our business is conducted on a
"cost-volume" basis.
o Long-term contracts. Under a long-term contract a purchaser of
services enters into a long-term arrangement (typically three
years) with a supplier of staff under which contract rates,
usually discounted, are agreed. These arrangements may be
exclusive, with penalties if the agency is not able to satisfy
the purchaser's minimum demand criteria. Some of our services
are provided under long-term contracts. We are committed to
such contracts where that approach is beneficial
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to us and we believe that long-term contracts may become more
prevalent among our customers in the medium term.
Recruiting and Training of Personnel
The U.K. healthcare industry faces a shortage of nurses and carers
(known as home health aides in the U.S.) and the market to attract staff is
highly competitive. Many healthcare professionals are attracted to flexible
staffing positions because of their desire to tailor work schedules to personal
and family needs, obtain varied and challenging work experiences and acquire new
skills. We believe that our ability to offer quality flexible staffing
assignments well-matched to individuals' preferences assists in our attracting a
large number of appropriately qualified personnel.
We provide a diverse range of flexible staff to our customers, namely
carers, nurses and specialized medical personnel. Seventy-five percent of Allied
Operating Company (UK)'s flexible staff are carers; however, most of our recent
acquisitions have been of businesses whose flexible staff are mainly nurses. As
a result, our mix of flexible staff is 57% nurses and 43% carers.
Carers include personnel who provide personal or basic care in the
community as well as healthcare assistants or nursing auxiliaries, who also work
in hospitals. A large number of our nurses are comprised of newly and recently
qualified nurses (Grades D and E), which are generally provided to hospitals and
nursing homes. The balance of our flexible staff is higher grade nurses,
specialist nurses and Professionals Allied to Medicine ("PAM") and are primarily
provided by Staffing Enterprise and Balfor.
Recruitment of Flexible Staff
We recruit flexible staff in a variety of ways. The primary source of
recruitment is through word-of-mouth referrals from nurses and carers. On an
informal basis, our businesses and branches may run internal financial
promotions to encourage referrals from current flexible staff on their
registers. Our businesses also recruit through local and national print
advertising and organize recruitment events, including national recruitment days
at the branch level which we promote. Our website also contains national branch
vacancies.
Nightingale primarily recruits qualified nursing professionals from
Australia, New Zealand and other Commonwealth countries visiting the U.K. under
working visa programs typically via referral from other nurses. It also
advertises in journals and magazines with a high overseas traveler readership.
In addition, Nightingale's branch office in Australia provides a recruitment
channel into the U.K.
Retention of Flexible Staff
Our retention philosophy is based upon each branch maintaining personal
contact with the flexible staff on its register, including a structured campaign
whereby current and former staff are contacted periodically by each branch to
assess their needs and to attempt to meet their
11
individual working preferences. Our flexible staffing business also conducts a
formal annual review of all charge and pay rates within the business and
compares its pay rates for flexible staff to prevailing market rates.
Flexible staff are also offered training programs to ensure compliance
with legislative requirements, such as the Moving and Handling Certificate. One
of the attractions of such training programs for flexible staff is that they can
enhance their skills and competencies to enable placement in diverse work
settings.
Suppliers
Our U.K. respiratory therapy operations purchase their equipment and
supplies required in connection with the provision of our services from various
approved suppliers. We believe that there are a number of alternative sources
for these items at prices comparable to our current sources.
Competition
The U.K. flexible healthcare staffing industry is highly fragmented
with over 2,100 small operators providing staff locally. The market at the local
level is characterized by relatively low barriers to entry. The barriers to
entry at a U.K.-wide level are more significant, as the establishment and growth
of a flexible health-care staffing business is largely dependent on access to
capital.
The competitors of our flexible staffing business are mainly small,
locally based agencies serving a limited area or group of customers. These
agencies compete with our relevant branch covering the same local area, but do
not otherwise compete for U.K.-wide market share. In addition, a limited number
of larger U.K.-based companies compete with us in areas of high population such
as London. Such companies include Nestor Healthcare Group and Reed Health Group.
The nature of the U.K. marketplace is such that nurses and carers often
accept placements with more than one agency.
Patents and Trademarks
Our U.K. operations own no patents. Our U.K. operations operate under
the following trade names:
o Allied Healthcare Group Limited;
o Allied Healthcare (UK) Limited;
o Medicare;
o Medigas Limited;
o Allied Oxycare Limited;
o Omnicare Limited;
o Transworld Healthcare (UK) Limited;
12
o Nightingale Nursing Bureau Limited;
o Nursing UK;
o Balfor Medical Limited;
o Crystalglen Limited;
o Nurses Direct;
o Staffing Enterprise Limited; and
o Staffing Enterprise (PSV) Limited.
Trademarks have been registered in the U.K. for the following names:
o ALLIED HEALTHCARE;
o CAREERS GO FURTHER WITH CAREMILES;
o CAREMILES;
o 50-30-20;
o FLEXMED;
o HOSPITAL HOME;
o NIGHTINGALE NURSING BUREAU;
o NNB; and
o OMNICARE.
U.K. trademark applications have been filed (and are currently awaiting
ratification) in respect of the following:
o EARN AS YOU LEARN WITH CAREMILES;
o HOSPITAL AT HOME; and
o OUR PEOPLE OUR STRENGTH.
We do not believe that our business in the U.K. is dependent upon the
use of any patent, trademark or similar property.
Employees
As of December 2, 2002, our U.K. operations employed approximately 465
full-time employees and 240 part-time employees.
In addition, our U.K. operations maintain registers of approximately
30,000 registered nurses, carers
and aides available to staff home and health service nursing arrangements on a
temporary basis. We consider our relationship with our U.K. employees and
independent contractors to be good. None of our U.K. employees are represented
by a labor union.
Third-Party Reimbursement
For the year ended September 30, 2002 our U.K. operations received
approximately 67.8% of revenues from U.K. governmental payors (primarily the
NHS) compared to approximately 61.3% for the year ended September 30, 2001. The
remaining 32.2% and 38.7%
13
of revenues received for 2002 and 2001 were derived from products and services
provided to the private healthcare sector and other commercial organizations,
such as privately owned nursing homes.
In general, reimbursement is received regularly and reliably from all
governmental department payors and this is also the case for most of the
remaining customer base. Our U.K. operations generally collect payments from
third-party payors within less than two months after products are supplied or
services are rendered but we pay accounts payable and employees currently. The
billing and reimbursement process includes the rendering of invoices for
products and services rendered, as well as prescriptions and other support
documentation for reimbursement of drugs and medical supplies.
U.S. OPERATIONS
During fiscal 2002, we derived 100% of our U.S. revenues from home
healthcare operations (formerly Hi-Tech Operations). For a discussion of our
revenues from external customers, a measure of profit or loss and total assets
for U.S. operations, refer to Note 14 of Notes to Consolidated Financial
Statements for the fiscal year ended September 30, 2002.
Home Healthcare Operations
Our home healthcare operations provide the following services and
products in the U.S.:
o infusion therapy;
o respiratory therapy; and
o home medical equipment.
Our home healthcare operations are concentrated in New Jersey and New
York. During fiscal 2002, our home healthcare operations derived 72.5% of its
revenues from infusion therapy, 6.1% from respiratory therapy and 21.4% from
home medical equipment.
Infusion Therapy
Infusion therapy involves the intravenous administration of
antibiotics, nutrients or other medications to patients at home usually as a
continuation of treatment initiated in the hospital. Our related support
services include patient training in the self-administration of infusion
therapies, nursing support, pharmacy operations and related delivery services
and insurance reimbursement assistance. Our U.S. operations offer these
therapies and services to patients in the New York metropolitan area and in New
Jersey from our facility located in Clark, New Jersey.
Respiratory Therapy
We provide home respiratory services to patients with a variety of
conditions, primarily chronic obstructive pulmonary disease (e.g., emphysema,
chronic bronchitis and asthma). Our clinical staff of respiratory care
professionals provide support to our home respiratory therapy
14
patients. These professionals manage the needs of our patients according to
physician-directed plans of care. Our respiratory therapy revenues are derived
primarily from the provision of oxygen systems, nebulizers (devices to
aerosolize medication), home ventilators and respiratory medication on a unit
dose basis. We offer respiratory therapy services principally in New Jersey and
the New York metropolitan area.
Home Medical Equipment
Our U.S. product offerings in home medical equipment consist of patient
room equipment (such as hospital beds, patient lifts and commodes), ambulatory
aids (such as walkers and canes) and bathroom safety items. We generally
purchase this equipment from manufacturers and rent it to patients. Accordingly,
we generally promote our home medical equipment and services business as a
complementary product line in each of the markets where we also provide
respiratory therapy and infusion therapy.
Quality Assurance
We maintain quality assurance policies and procedures and closely
monitor operations to provide high quality care with respect to the services we
offer. The Community Health Accreditation Program, a not-for-profit private
organization that has established standards for healthcare organizations, has
granted accreditation status to all of our home healthcare operations. We
believe that accreditations of our eligible facilities by the Community Health
Accreditation Program is a prerequisite for entering into contracts with managed
care providers and other intermediaries and for obtaining and maintaining
required licensure or certification.
Sales and Marketing Activities
We primarily market our services and products to referral sources
including:
o physicians;
o hospital discharge planners and social service workers;
o insurance companies;
o prepaid health plans;
o health maintenance organizations ("HMOs");
o county medical services; and
o private charitable organizations.
It is important that we establish and maintain a reputation for quality
service and responsiveness to the requirements of the referral sources, so we
may obtain and retain referral sources.
We currently employ full-time sales representatives for our home
healthcare operations. We use primarily the same sales force to cross-market our
products and services.
In general, the sales representatives market our services through
direct contact with referral sources in the form of meetings, telephone calls
and sales presentations. While the sales
15
representatives strive to develop exclusive provider relationships, referral
sources frequently utilize the services of several home healthcare companies. We
train the sales representatives to provide information to referral sources
concerning the quality and convenience of our home healthcare services and the
potential cost-saving advantages of these services. Primarily due to escalating
pressures to contain healthcare costs, third-party payors are participating to a
greater extent in decisions regarding healthcare alternatives and are
consequently becoming more important in the referral and case management
process.
Third Party Reimbursement
Substantially all of our U.S. revenues are attributable to third-party
payors, including Medicare and Medicaid, private insurers, managed care plans
and HMOs. The amounts received from government programs and private third-party
payors are dependent upon the specific benefits included under the program or
the patient's insurance policies. Like other medical service providers, we are
subject to lengthy reimbursement delays as a result of third-party payment
procedures. We generally collect payments from third-party payors within three
months after products are supplied or services are rendered, but we pay accounts
payable and employees currently.
The billing and reimbursement process involves the collection, review
and approval of a significant number of required documents. Certain payors such
as Medicare, Medicaid and managed care plans require very specific procedures
and documentation prior to approving any request for reimbursement. Our
reimbursement specialists work together to assess patient coverage, review the
adequacy of documentation, submit documentation and claims to the third-party
payors and expedite payment. We accept assignment of insurance benefits from the
patient, and in most instances the third-party payors pay us directly.
For the year ended September 30, 2002, 12.9% of our U.S. revenues were
directly attributable to the Medicare program and 13.9% of our U.S revenues were
directly attributable to the Medicaid program. For the year ended September 30,
2001, 15.8% of our U.S. revenues were directly attributable to the Medicare
program and 19.8% of our U. S. revenues were directly attributable to the
Medicaid programs.
Suppliers
We purchase our equipment and supplies, including drugs, home medical
equipment, nutritional solutions and other materials required in connection with
our therapies from various suppliers. We believe that there are a number of
available sources of supply for our products.
Competition
The U.S. home healthcare market is highly fragmented and consists of
numerous providers, relatively few of which are national or regional in scope.
We compete with a large number of companies, including numerous local, regional
and national companies, in all areas in which we conduct business.
16
We believe that the principal competitive factors in the U.S. are:
o quality of care;
o responsiveness of services;
o quality of professional personnel;
o breadth of services offered;
o general reputation with physicians, other referral sources
and potential patients; and
o price.
Patents and Trademarks
We own no patents in the U.S. We own, or have filed applications in
respect of, the following service marks in the U.S.:
o ADVOCATE HOME CARE;
o ALLIED HEALTHCARE INTERNATIONAL;
o CAREMILES
o PLANETWELLNESS;
o PLANETWELLNESS.COM; and
o RESPIFLOW.
In addition, we have registered the PLANETWELLNESS and
PLANETWELLNESS.COM marks in the European Union. We do not believe that our
business is dependent upon the use of any patent, trademark or similar property.
Employees
As of December 1, 2002, we had approximately 80 full-time employees
and 26 part-time employees in the U.S. We consider our relationship with our
U.S. employees to be good. None of our U.S. employees are represented by a labor
union.
GOVERNMENT REGULATION
U.K. Government Regulation
General
- -------
Our U.K. operations are subject to regulation by the government of the
U.K. via acts of Parliament related to healthcare provision.
Approximately 81% of healthcare in the U.K. is provided under the NHS
with the remaining 19% being provided by private healthcare organizations.
However, all care provision is regulated by statute and under the general health
regulations of the Department of Health.
17
Healthcare Laws and Regulations
- -------------------------------
Our U.K. operations are subject to licensing and approval regulations
from both governmental and non-governmental bodies according to terms of service
and operating procedures decided by the U.K. government.
Our U.K. operations are currently authorized in England and Wales under
the Nurse Agencies Act 1957 (as amended by the Nurses Midwives and Health
Visitor Act 1979) and the Nurses Agencies Regulations 1961 to carry on an agency
for the supply of nurses. This legislation required that a person who carries on
an agency for the supply of nurses on any premises in the area of the licensing
authority must be the holder of a license from that authority authorizing that
person to supply on those premises. Our U.K. operations are authorized in
Scotland by the Regulation of Care (Scotland) Act 2001.
A new act, the Care Standards Act 2000 (the "Care Act 2000") is
currently coming into force in stages (along with regulations made in connection
with the Care Act 2000) in England and Wales and it is planned to come into full
force on January 1, 2003. The Regulation of Care (Scotland) Act 2001 is also
introducing new legislation relating to this area in Scotland. The Care Act 2000
introduces a new regulatory structure for all non-NHS health and care services
in England and Wales. It establishes a new independent registration and
regulatory body for independent healthcare services and social care in England,
including nurses agencies, called the National Care Standards Commission, and
enforces registration of all care agencies and establishments. The Care Act 2000
also appoints a similar registration authority for Wales, the National Assembly
for Wales. The Care Act 2000 also makes provision for a new General Social Care
Council in England and a new Care Council for Wales to be established as
non-departmental statutory bodies responsible to the Department of Health and
National Assembly of Wales, respectively, with the aim of increasing the
protection of service users, their carers and the general public.
The Care Act 2000 is essentially an enabling act which provides for
regulations to be made by secondary legislation. Regulations relating to
registration are already in force or will shortly come into force. The Care Act
2000 also provides that regulations can be made imposing any requirements which
the appropriate Minister thinks fit for the purposes of Part II of the Care Act
2000 relating to establishments and agencies. Specific regulations set out in
the Care Act 2000 that may be introduced include provisions relating to the
services to be provided by agencies, the keeping of accounts, the keeping of
records and documents and arrangements to be made for dealing with complaints
made by those seeking or receiving any of the services provided by the agency.
No such regulations have yet been introduced nor are any such regulations
currently awaiting commencement. However, there can by no assurance that new
regulations may not be introduced which impose additional obligations in terms
of compliance.
Contracts between nursing agencies and NHS Trusts for the provision of
services will be reviewed by a new commission, to be called the Commission for
Healthcare Audit and Inspection. Allied Operating Company (UK) is accredited by
various U.K. social services agencies for the supply of carers to community
services within that specific area. The U.K.
18
Department of Health and Medicines Control Agency has granted licenses to
Medigas for the production and distribution of medical grade oxygen to
pharmacies throughout the U.K.
We believe that we are in substantial compliance in all material
respects with U.K. healthcare laws and regulations applicable to our U.K.
operations.
Healthcare Reform
- -----------------
The U.K. government has carried out an in-depth review of healthcare
provision in the U.K. and its regulation to ensure consistent quality in
provision of staff and other aspects of care outside the NHS. This began in 1998
when the government released a green paper "Towards a Healthier Future" and two
white papers, one concerned with community care and the second with primary care
reforms.
The current Labour government has continued to develop the previous
Conservative government's plans of devolving decisions on patient care down to
the family doctor. Primary Care Trusts based in local communities are now in
operation, which will increasingly mean that decisions related to patient care
and the funding required will be decided by a group representing general
practitioners, nurses, pharmacists and community care workers operating in
conjunction with the district health authorities and local authorities. However,
local decisions relating to drug and treatment regimes are subject to national
policies and the decisions of the government-appointed National Institute for
Clinical Excellence (N.I.C.E.).
In addition to this top-level development change, the NHS continues to
seek ways in which it can reduce costs. We believe that contractors to the NHS
will continue to come under pressure over the next four years, until the next
election, notwithstanding the current government's stated determination
substantially to increase funding in the NHS.
U.S. Government Regulation
General
- -------
Our business is subject to extensive federal and state regulation.
Federal regulation covers, among other things:
o Medicare and Medicaid billing and reimbursement;
o reporting requirements;
o supplier standards;
o limitations on ownership and other financial relationships
between a provider and its referral sources; and
o approval by the Food and Drug Administration of the safety
and efficacy of pharmaceuticals and medical devices.
19
In addition, the requirements that we must satisfy to conduct our
businesses vary from state to state. We believe that our operations have been
structured to comply with applicable federal and state laws and regulations in
all material respects. However, changes in the law or new interpretations of
existing laws could have a material effect on our permissible activities, the
relative costs associated with doing business and the amount of reimbursement
for our products and services paid by government and other third-party payors.
Healthcare Reform
- -----------------
Political, economic and regulatory influences are subjecting the
healthcare industry in the U.S. to change. Federal budgetary pressures have a
particular impact on health care providers. For example, the Balanced Budget Act
of 1997 (the "Balanced Budget Act") and subsequent legislation made several
changes to the Medicare reimbursement system that affect payment for the
products we provide, such as a reduction in the payment rates for respiratory
drugs and durable medical equipment and supplies..
In addition, our reimbursement can by affected by the Centers for
Medicare & Medicaid Services ("CMS) (formerly known as the Health Care Financing
Administration), which has the authority to alter certain reimbursement rates
that are not inherently reasonable. In 1999, Congress limited CMS's ability to
alter reimbursement rates based on inherent reasonableness until certain events
occurred. Specifically, Congress mandated that (1) the Comptroller General of
the U.S. (the General Accounting Office) issue a report regarding the impact of
CMS's and/or its contractor's use of such authority; and (2) CMS publish final
regulations implementing the agency's inherent reasonableness authority. In
2001, the Comptroller General released its report and CMS is expected to issue
its regulations soon. These regulations could have a material adverse effect on
the margins on certain of our products.
We anticipate that Congress and state legislatures will continue to
review and assess alternative healthcare delivery and payment systems and may in
the future propose and adopt legislation affecting changes in the healthcare
industry, such as prescription drug benefit for Medicare beneficiaries. We
cannot predict the ultimate timing, scope or effect of any legislation
concerning healthcare reform. Any proposed federal legislation, if adopted,
could result in significant changes in the availability, delivery, pricing and
payment for healthcare services and products. Various state agencies also have
undertaken or are considering significant healthcare reform initiatives.
Although it is not possible to predict whether any healthcare reform legislation
will be adopted or, if adopted, the exact manner and the extent to which we will
be affected, it is likely that we will be affected in some fashion, and there
can be no assurance that any healthcare reform legislation, if and when adopted,
will not have a material adverse effect on our consolidated business, financial
position, cash flows or results of operations.
Average Wholesale Price
- -----------------------
Many government payors, including Medicare and Medicaid, as well as
some private payors, pay us directly or indirectly based upon the drug's average
wholesale price (or "AWP"). The AWP for most drugs is compiled and published by
private companies such as First DataBank, Inc. Various federal and state
government agencies have been investigating whether
20
the reported AWP of many drugs, including some that we sell, is an appropriate
or accurate measure of the market price of the drugs. In 2001, Bayer Corporation
agreed to pay $14 million in a settlement with the federal government and 45
states in order to close an investigation regarding several issues, including
its pricing strategy. Bayer also entered into a five-year corporate integrity
agreement with the federal government, in which Bayer agreed to provide to the
government information on the average sales price of its drugs. In February
2000, First DataBank published a Market Price Survey of 437 drugs, which was
significantly lower than the historic AWP for a number of the clotting factor
and IntraVenous Immune Globulin ("IVIG") products that we sell. Consequently, a
number of state Medicaid agencies have revised their payment methodology as a
result of the Market Price Survey.
In 2001 and 2002, several committees of the U.S. Congress held hearings
regarding Medicare reimbursement for covered drugs. In conjunction with these
hearings, the Comptroller General issued a report recommending that Medicare
establish payment levels for part-B prescription drugs and their delivery and
administration that are more closely related to their costs, and that payments
for drugs be set at levels that reflect actual market transaction prices and the
likely acquisition costs to providers. CMS has indicated that if Congress does
not pass legislation addressing this issue, then CMS will propose certain
changes to AWP.
Although we cannot predict the eventual results of the government
investigations and the changes occurring in the reporting and/or definition of
AWP and any effects on Medicare and Medicaid reimbursements, these events could
have a material adverse effect on our business, financial condition and results
of operation, including reducing the pricing and margins on certain of our
products.
Permits and Licensure
- ---------------------
Our facilities are subject to state licensure laws, including licensing
from state boards of pharmacy. Federal laws require our facilities to comply
with rules applicable to controlled substances. These rules include an
obligation to register with the Drug Enforcement Administration of the U.S.
Department of Justice and to meet requirements concerning security, record
keeping, inventory controls, prescription and order forms and labeling. Our
pharmacists and nurses also are subject to state licensing requirements. We
believe that we are in substantial compliance with all applicable licensure
requirements, but if we are unable to maintain our licenses because states place
burdensome restrictions or limitations on us, it could limit or affect our
ability to operate, which could materially harm our business.
Fraud and Abuse Laws
- --------------------
We are subject to federal and state laws prohibiting direct or indirect
payments for patient referrals for items and services reimbursed under Medicare,
Medicaid and state programs, as well as in relation to private payors. We are
also subject to federal and state laws governing certain financial relationships
with physicians and other fraud and abuse laws prohibiting the submission of
false claims.
21
The federal Medicare and Medicaid "Anti-kickback Statute" prohibits
certain conduct involving improper payments in connection with the delivery of
items or services covered by a number of federal and state healthcare programs.
Among other things, these prohibitions apply to anyone who knowingly and
willfully solicits, receives, offers, or pays any remuneration in return for
referring an individual to another person for the furnishing, or arranging for
the furnishing, of any item or service that may be paid, in whole or in part, by
the Medicare, Medicaid or other federal healthcare programs. To date, courts
have interpreted the Anti-kickback Statute to apply to a broad range of
financial relationships between providers and referral sources, including
physicians and other direct healthcare providers, as well as persons who do not
have a direct role in the provision of healthcare services. Violations of the
statute may result in criminal penalties, including fines of up to $25,000 and
imprisonment for up to five years for each violation, exclusion from
participation in the Medicare and Medicaid programs, and civil penalties of up
to $50,000 and treble the amount of remuneration for each violation.
The Office of Inspector General of the U.S. Department of Health and
Human Services (the "DHHS") has adopted regulations creating "safe harbors" from
federal criminal and civil penalties under the Anti-kickback Statute by
identifying certain types of ownership interests and other financial
arrangements that do not appear to pose a threat of Medicare and Medicaid
program abuse. Transactions covered by the Anti-kickback Statute that do not
conform to an applicable safe harbor are not necessarily in violation of the
Anti-kickback Statute.
The federal self-referral or "Stark Law" provides that where a
physician has a "financial relationship" with a provider of "designated health
services," including, among other things, parenteral and enteral nutrients,
equipment and supplies, outpatient prescription drugs and home medical
equipment, which are products and services that we provide, the physician is
prohibited from referring a Medicare patient to the healthcare provider, and
that provider is prohibited from billing Medicare, for the designated health
service. Submission of a claim that a provider knows or should know is for
services for which payment is prohibited under the Amended Stark Law and which
does not meet an exception could result in refunds of any amounts billed, civil
money penalties of not more than $15,000 for each such service billed, and
possible exclusion from the Medicare program. In addition a state cannot receive
federal financial participation payments under the Medicaid program for
designated health services furnished to an individual on the basis of a
physician referral that would result in a denial of payment under Medicare if
Medicare covered the services to the same extent as under a state Medicaid plan.
A number of federal laws impose civil and criminal liability for
knowingly presenting or causing to be presented a false or fraudulent claim, or
knowingly making a false statement to get a false claim paid or approved by the
government. Under one such law, the "False Claims Act," civil damages may
include an amount that is three times the amount of claims falsely made or the
government's actual damages, and up to $11,000 per false claim. Actions to
enforce the False Claims Act may be commenced by a private citizen, otherwise
known as a qui tam relator, on behalf of the federal government, and such
private citizens can receive a percentage of the government's recovery.
We carefully monitor our submissions of Medicare and Medicaid claims
and all other claims for reimbursement and we use our best efforts to ensure
that these claims are not false or
22
fraudulent. However, to the extent we are investigated and/or found to have
violated these laws, it could have a material adverse effect on us.
Also, from time to time, government payers conduct post-payment audits
of previously paid Medicare or Medicaid claims. At this time, there are several
post-payment overpayment determinations arising from the previous business
activities of RespiFlow, Inc. or M.K. Diabetic Support Services, Inc. Although
appeals are being pursued, if we are unsuccessful in these appeals, such a
result could have a material adverse effect on us.
Many states, including the states in which we operate, have adopted
statutes and regulations prohibiting payments for patient referrals and other
types of financial arrangements with healthcare providers, which, while similar
in certain respects to the federal legislation, vary from state to state.
Sanctions for violating these state restrictions may include loss of licensure
and civil and criminal penalties. Certain states also have begun requiring
healthcare practitioners and/or other providers to disclose to patients any
financial relationship with a provider, including advising patients of the
availability of alternative providers.
We continue to review all aspects of our operations and believe that we
have structured our operation to comply in all material respects with applicable
provisions of the Anti-kickback Statute, the Amended Stark Law, False Claims 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 us or that we will not be found to be in violation of one or more of
these provisions. We intend to monitor developments under these federal and
state fraud and abuse laws. At this time, we cannot anticipate what impact, if
any, subsequent administrative or judicial interpretation of the applicable
federal and state fraud and abuse laws may have on our consolidated business,
financial position, cash flows or results of operations.
Administrative Simplification
- -----------------------------
The administrative simplification provisions of the Health Insurance
Portability and Accountability Act of 1996 ("HIPAA") require the use of uniform
electronic data transmission standards for healthcare claims and payment
transactions submitted or received electronically. On August 17, 2000, the DHHS
published final regulations establishing electronic data transmission standards
that all healthcare providers must use when submitting or receiving certain
healthcare transactions electronically. Although these standards were to become
effective in October 2002, Congress extended the compliance deadline until
October 2003 for organizations, such as ours, that submitted a request for an
extension. HIPAA also requires the DHHS to adopt standards to protect the
security and privacy of health-related information. CMS released final
regulations containing privacy standards in December 2000, but on August 14,
2002 the DHHS published final modifications, which eliminated certain
requirements and made other clarifications. Healthcare providers are required to
be compliant with the privacy regulations no later than April 2003. To date, the
DHHS has issued only proposed regulations on the security standards. Violations
of the administrative simplification provisions of HIPAA could result in civil
penalties of up to $25,000 per type of violation in each calendar year and
criminal penalties of up to $250,000 per violation. In addition, we will
continue to remain
23
subject to any state laws that are more restrictive than the regulations issued
under HIPAA, which vary by state and could impose additional penalties.
INSURANCE
Participants in both the U.K. and U.S. healthcare markets are subject
to lawsuits alleging negligence, product liability or other similar legal
theories, many of which involve large claims and significant defense costs. From
time to time, we are subject to such suits as a result of the nature of our
business. We maintain general liability insurance, professional liability
insurance and excess liability coverage, as appropriate. Each of these policies
provides coverage on an "occurrence" basis and has certain exclusions from
coverage. Our insurance policies must be renewed annually. While we have been
able to obtain liability insurance in the past, this insurance varies in cost,
is difficult to obtain and may not be available in the future on terms
acceptable to us, if it is available at all. The failure to maintain insurance
coverage or a successful claim not covered by or in excess of our insurance
coverage could have a material adverse effect on our business, financial
position, cash flows or results of operations. In addition, claims, regardless
of their merit or eventual outcome, may have a material adverse effect on our
reputation. There can be no assurance that our insurance will be sufficient to
cover liabilities that we may incur in the future.
ITEM 2. PROPERTIES
We own one and lease 72 facilities in the U.K., of which 29 are for a
period of three months or less. We lease two facilities in the U.S. We believe
that our existing leases will be renegotiated as they expire or that alternative
properties can be leased on acceptable terms. We also believe that our present
facilities are well maintained and are suitable for continuing our existing
operations. (See Note 13 of Notes to Consolidated Financial Statements for the
fiscal year ended September 30, 2002.)
ITEM 3. LEGAL PROCEEDINGS
On April 13, 1998, one of our shareholders, purporting to sue
derivatively on our behalf, 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 of our officers and directors, and
Hyperion Partners II L.P. ("HPII"), breached fiduciary duties owed to us and our
shareholders, in connection with a transaction, approved by a vote of our
shareholders on March 17, 1998, in which we were to issue certain shares of
stock to Hyperion Partners II L.P. 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.
24
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 we, 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 one of our subsidiaries for inadequate consideration. We have
been vigorously defending this action. In June 2001, the parties reached a
settlement, which was approved by the court in November 2001, that fully
resolved the litigation. The settlement did not have a material adverse effect
on our consolidated financial position, cash flows or results of operations.
On August 4, 2000, we reached a civil settlement with the U.S.
Department of Justice related to an investigation commenced in July 1997 of two
of our U.S. subsidiaries as well as a related qui tam civil whistleblower case.
In addition to our settlement with the federal government, we reached a final
settlement with the prior owners of Respiflow, Inc., MK Diabetic Support
Services Inc. and related subsidiaries (the "Prior Owners") in connection with
an ongoing dispute with such persons. We also agreed to a corporate integrity
agreement with the Office of Inspector General related to our mail-order
operations. We fulfilled our obligations under the Corporate Integrity Agreement
on November 2, 2001.
We are involved in various other legal proceedings and claims
incidental to our normal business activities. We are vigorously defending our
position in all such proceedings. We believe these matters should not have a
material adverse impact on our consolidated financial position, cash flows, or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of our shareholders during our
fourth fiscal quarter.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Our common stock is quoted on the American Stock Exchange and is traded
under the symbol "ADH." The following table sets forth, for the periods
indicated, the high and low sales price of our common stock on the American
Stock Exchange.
PERIOD HIGH LOW
Year Ended September 30, 2001:
First Quarter............................... $1.56 $ 0.6875
Second Quarter.............................. 2.99 0.9375
Third Quarter............................... 3.20 2.21
Fourth Quarter.............................. 4.83 2.48
Year Ended September 30, 2002:
25
First Quarter............................... $ 3.10 $ 2.40
Second Quarter ............................. 4.15 2.85
Third Quarter............................... 6.80 3.55
Fourth Quarter.............................. 5.97 3.65
Year Ended September 30, 2002:
First Quarter (through
December 6, 2002)....................... $ 5.35 $ 4.00
We have neither declared nor paid any dividends on our common stock and
do not anticipate paying dividends in respect of our common stock in the
foreseeable future. Any payment of future dividends will be at the discretion of
our board of directors and will depend upon, among other things, our earnings,
financial position, cash flows, capital requirements and other relevant
considerations, including the extent of our indebtedness and any contractual
restrictions with respect to the payment of dividends, as well as restrictions
upon dividends on our common stock imposed by our Series A preferred stock
(which is described below). Under the terms of our Senior Credit Facility, our
U.K. subsidiaries are prohibited from paying dividends, including to us. See
"Item 7--Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources--Borrowings--Senior Credit
Facility."
As of December 2, 2002, there were approximately 206 shareholders of
record of our common stock.
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK
In the Reorganization, we issued 7,773,660 shares of our Series A
preferred stock. The Series A preferred stock replaced the senior subordinated
promissory notes of Allied Healthcare (UK) (the "Notes") (but not the accrued
and unpaid paid-in-kind ("PIK") interest thereon). Prior to the Reorganization,
there was (pound)22,286,869 in principal amount of Notes outstanding. The Notes
bore interest at the rate of 9.375% per annum.
The following summary highlights the terms of the Series A preferred
stock.
Dividends. Each share of Series A preferred stock is entitled to
receive cumulative, compounding dividends at the per share rate of 9.375% of
(pound)2.857 per year commencing on June 18, 2002. The shares of Series A
preferred stock are entitled to receive dividends at a higher rate in the event
of a covenant breach (as described in the Certificate of Amendment (relating to
the Series A preferred stock) to our Certificate of Incorporation) which
principally relate to the protection of the rights of the holders of the Series
A preferred stock. Any accrued but unpaid dividends will be paid upon
liquidation, redemption or conversion of the Series A preferred stock. We may
not declare or pay any dividends, make any distributions, or set aside any funds
or assets for payment or distribution with regard to our common stock or any
other class or series of our stock ranking junior to the Series A preferred
stock until all accumulated dividends on the Series A preferred stock have been
paid.
Voting Rights. Each outstanding share of Series A preferred stock is
entitled to that number of votes equal to the number of shares of common stock
into which such share of Series
26
A preferred stock is convertible. The Series A preferred stock and the common
stock will vote as a single class on all matters submitted to a vote of our
shareholders. Until Triumph Partners III, L.P. (or any of its affiliates)
beneficially owns less than 50% of the shares of Series A preferred stock issued
to it in the Reorganization, the holders of Series A preferred stock will be
entitled, voting as a separate class, to elect one director to our board of
directors. In addition, the Series A preferred stock and our common stock will
vote as a single class in the election of all other directors of our board of
directors. In the event of a Covenant Breach (as that term is defined in the
Certificate of Amendment (relating to the Series A preferred stock) to our
Certificate of Incorporation), the holders of the Series A preferred stock will
be entitled to elect one additional director to our board of directors.
Liquidation Preference. In the event of any liquidation, dissolution or
winding up of our company, the holders of Series A preferred stock will be
entitled to receive, before the holders of common stock or any other class or
series of stock ranking junior to the Series A preferred stock will be entitled
to receive anything in respect of their shares, a liquidation preference equal
to (pound)2.867 per share (subject to adjustment for stock splits, stock
dividends, recapitalizations and similar transactions), plus any accrued or
declared but unpaid dividends on such shares of Series A preferred stock, which
we refer to as the "Series A Preference Amount"; provided, however, that in the
event that the holders of Series A preferred stock would have received an amount
greater than the Series A Preference Amount had they converted their Series A
preferred stock into shares of common stock immediately prior to the
liquidation, dissolution or winding up of our company, such holders will be
entitled to receive an amount per share equal to the amount they would have
received had they effectuated such a conversion.
Conversion into Common Stock. Each share of Series A preferred stock is
currently convertible, at the option of the holder thereof, into one share of
common stock without the payment of additional consideration. Subject to the
satisfaction of certain conditions, we have the right to require the holders of
the Series A preferred stock to convert all, but not less than all, of their
shares into common stock.
Redemption. Subject to certain limitations, a majority in interest of
the holders of the Series A preferred stock have the right to require our
company to redeem their shares of Series A preferred stock upon the occurrence
of a liquidity event (as described in the Certificate of Amendment (relating to
the Series A preferred stock) to our Certificate of Incorporation) or at any
time after December 17, 2007 if we have paid our Senior Credit Facility and the
Mezzanine Loan (as defined in "Item 7--Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources--Borrowings") in full on or before such date. The redemption right can
be exercised up to three times, but for not less than (pound)5 million on any
one occasion (or such lower amount as is necessary to redeem all of the shares
of Series A preferred stock then outstanding). Upon such a redemption, the
holders of the Series A preferred stock will be entitled to receive an amount
equal to the Series A Preference Amount.
27
EQUITY COMPENSATION PLAN INFORMATION
For certain information concerning securities authorized for issuance
under our equity compensation plans, see "Item 12--Security Ownership of Certain
Beneficial Owners and Management--Equity Compensation Plan Information."
ITEM 6. SELECTED FINANCIAL DATA
The financial data for the three years ended September 30, 2002 and
balance sheet data as of September 30, 2002, 2001 and 2000, as set forth below,
have been derived from the consolidated financial statements of our company,
audited by Ernst & Young, LLP, for such periods and should be read in
conjunction with those consolidated financial statements and the notes thereto
included elsewhere in this Annual Report on Form 10-K. The financial data for
the two years ended September 30, 1999 and balance sheet data as of September
1999 and 1998, as set forth below, have been derived from the consolidated
financial statements of our company, audited by PricewaterhouseCoopers LLP, for
such periods, which do not appear in this Annual Report on Form 10-K. The
selected financial data should be read in conjunction with "Item
1--Business--General" and "Item 7--Management's Discussion and Analysis of
Financial Condition and Results of Operations."
All data in the following table is in thousands, except for per share
data.
28
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------------------------
2002 2001 2000(8) 1999 1998
------------ ------------- ------------- --------- ---------------
FINANCIAL DATA:
Total revenues............................ $259,898 $154,633 $135,408 $154,728 $155,309
Gross profit.............................. 71,790 47,979 45,627 55,318 58,117
Selling, general and administrative
Expenses................................ 47,036 37,382 49,041 57,946 51,980
Stock-based compensation.................. 5,835 (3)
Transaction expense....................... 686 (4)
General and administrative expense related
to mail-order operations............. 3,883
Losses due to sale of subsidiary.......... 354
(Gain) on sale of assets(1)............... (2,511)
Legal settlements, net.................... 5,082 (9)
Restructuring charge...................... 1,288 (10)
Impairment of long-lived assets........... 15,073 (11)
Equity in loss of HMI, net................
---------- ----------- ------------- ----------- ---------------
Operating income (loss)................... 6,360 (24,857) (2,628) 8,648
18,233
Interest expense, net..................... 13,472 (5) 8,433 9,014 (5) 5,218 5,651
Gain on settlement of PIK interest........ (5,143)(6)
Foreign exchange loss..................... 19 400
Provision (benefit) for income taxes(2)... 4,971 24,117 (7,756) (500) 1,844
Equity in income of and interest
income earned from U.K. subsidiaries... 1,101 (8)
Minority interest......................... 120 22 (70)
---------- ----------- ------------- ----------- ---------------
Net income (loss)......................... $ 4,794 $(26,612) $ (24,944) $ (7,346) $ 1,153
Redeemable preferred dividend 1,016(7)
---------- ----------- ------------- ----------- ---------------
Net income (loss) available to common
shareholders.............................. $ 3,778 $ (26,612) $ (24,944) $ (7,346) $ 1,153
========== =========== ============= =========== ===============
Net income (loss) per share of common
stock:
Basic..................................... $ 0.20 $ (1.53) $ (1.42) $ (0.42) $ 0.07
========== =========== ============= =========== ===============
Diluted................................... $ 0.20 $ (1.53) $ (1.42) $ (0.42) $ 0.07
========== =========== ============= =========== ===============
Weighted average number of common shares
outstanding:
Basic..................................... 18,565 17,408 17,551 17,547 17,327
========== =========== ============= =========== ===============
Diluted................................... 18,932 17,408 17,551 17,547 17,488
========== =========== ============= =========== ===============
29
SEPTEMBER 30,
----------------------------------------------------- ------------
2002 2001 2000 1999 1998
---------- ---------- ---------- --------- ------------
BALANCE SHEET DATA:
Working capital...................... $20,607 $19,730 $ 25,640 $ 26,005 $ 39,148
Accounts receivable, net............. 33,634 29,555 23,029 30,814 32,223
Total assets......................... 268,113 248,073 183,746 172,121 179,708
Long-term debt....................... 118,961 175,913 89,677 54,407 57,307
Total shareholders' equity........... 53,943 36,354 63,031 91,274 101,905
(1) We recorded a gain of $2,511,000 on the sale of Transworld Home
Healthcare - Nursing Division, Inc. in the year ended September 30,
1998.
(2) During the year ended September 30, 2001, we established a full
valuation allowance against our deferred tax assets.
(3) For the year ended September 30, 2002, we recorded a non-cash charge of
$4,216,000 for the issuance of shares of common stock to senior
management and $1,619,000 related to the exchange of employees'
redeemable shares in TWUK for shares of our common stock, using the net
exercise method, in the Reorganization.
(4) We recorded a net charge of $686,000 for the year ended September 30,
2002 mainly related to the write-off of non-capitalized costs incurred
in connection with evaluating options to maximize the value of our
ownership interest in our U.K. operations.
(5) Effective October 1, 2001 we adopted FAS 145, and recorded a charge of
$925,000 in interest expense for the year ended September 30, 2002. We
also reclassified $1,167,000 to interest expense which was previously
recorded as an extraordinary item in fiscal 2000. Both charges relate
to the write-off of deferred financing costs associated with the early
extinguishment of debt.
(6) We recorded a gain of $5,143,000 for the year ended September 30, 2002
related to the settlement of PIK interest.
(7) Represents $941,000 of accrued dividends on the Series A preferred
stock issued in connection with the Reorganization and $75,000 of
accreted costs related to the issuance of our Series A preferred stock.
(8) Effective with the Refinancing, we began accounting for the investment
in the Allied Healthcare (UK) and its subsidiaries under the equity
method, retroactive to October 1, 1999. During the second quarter of
fiscal 2000, Allied Healthcare (UK) and TWUK amended their Articles of
Association. The amendments enabled us to consolidate the Allied
Healthcare (UK) and its subsidiaries as of January 1, 2000.
(9) We recorded a net charge of $5,082,000 related to legal settlements in
the year ended September 30, 2000.
(10) We recorded a $1,288,000 restructuring charge related to exiting our
U.S. mail-order operations in the year ended September 30, 2000.
(11) We recorded a charge for impairment of long-lived assets of $15,073,000
in the year ended September 30, 2000. The charge related to the
write-down of assets, mainly goodwill, to their fair value of
$12,346,000 for the U.S. mail-order operations and $2,727,000 for
Amcare, Ltd.
30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction
with the financial statements included in this Annual Report on Form 10-K and in
conjunction with the description of our business included in this Annual Report
on Form 10-K. It is intended to assist the reader in understanding and
evaluating our financial position.
This discussion contains, in addition to historical information,
forward-looking statements that involve risks and uncertainty. Our actual
results could differ materially from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include those discussed in this Annual Report on Form 10-K.
GENERAL
We are one of the leading providers of healthcare staffing services,
including nursing and ancillary services, to the U.K. healthcare industry. We
operate a community-based network of over 100 branches, with the capacity to
provide nurses, carers (known as home health aides in the U.S.) and specialized
medical personnel to locations covering approximately 90% of the population of
the United Kingdom. We provide healthcare staffing services to hospitals, local
governmental authorities, nursing homes and private patients in the U.K. Through
our U.K. operations, we also supply medical grade oxygen for use in respiratory
therapy to the U.K. pharmacy market and to private patients in Northern Ireland.
Our U.S. operations, which are concentrated in New York and New Jersey,
supply infusion therapy, respiratory therapy and home medical equipment and
accounted for less than 10% of our revenues during the fiscal year ended
September 30, 2002.
We previously provided specialty pharmaceutical and medical supplies.
On October 3, 2000, we sold a substantial portion of the assets of our U.S.
mail-order operations. In addition, on November 22, 2000, we sold Amcare, Ltd.
("Amcare"), a U.K. subsidiary.
On April 24, 2002, we entered into the Reorganization Agreement with
two of our subsidiaries, Allied Healthcare (UK) and TWUK, and certain investors
in such subsidiaries. Both the Reorganization Agreement and Reorganization were
voted upon and approved at our company's annual meeting of shareholders on June
7, 2002 and the Reorganization closed on July 25, 2002.
In the Reorganization:
o Holders of redeemable shares of TWUK exchanged their
redeemable shares for shares of our common stock, using the
net exercise method, and received either 0.1308 or 0.1657
shares of our common stock per redeemable share (depending
upon the exercise price of the redeemable share).
o Holders of ordinary shares of TWUK exchanged their ordinary
shares for shares of our common stock at an exchange ratio of
2.867 TWUK ordinary shares for
31
every one share of our common stock (which is the equivalent
of 0.3488 shares of our common stock for every ordinary share
of TWUK). This ratio of TWUK securities for our securities is
referred to as the "Exchange Ratio."
o All warrants held by the mezzanine lenders (the "Mezzanine
Warrants") of TWUK that were issued in connection with the
Refinancing of our U.K. operations in 1999 were exercised for
an aggregate of 1,640,000 ordinary shares of TWUK. Each
resulting ordinary share was exchanged for 0.3488 shares of
our common stock.
o Holders of the equity warrants of TWUK (the "Equity Warrants")
that were issued in connection with the Refinancing of our
U.K. operations in 1999 exercised their Equity Warrants
through the tender of the Notes of Allied Healthcare (UK)
(exclusive of accrued and unpaid PIK interest) and received an
aggregate of 22,286,869 ordinary shares of TWUK. Each
resulting ordinary share was exchanged for 0.3488 shares of
our new Series A preferred stock.
o Holders of accrued and unpaid interest owed in respect of the
Notes issued by Allied Healthcare (UK) in the Refinancing of
our U.K. operations in 1999 were issued funding notes (the
"Loan Notes") by Allied Healthcare (UK) in the principal
amount of the accrued and unpaid interest owed them through
June 17, 2002, less amounts which are withheld from certain
U.K. residents as withholding taxes, and the Loan Notes were
in turn exchanged for shares of our common stock at the rate
of 0.3488 shares for every(pound)2.00 of Loan Notes. Interest
accrued on the Notes through June 17, 2002 (prior to the date
on which the Reorganization was consummated) because the new
shares of Series A preferred stock became entitled to receive
dividends commencing on June 18, 2002. As of September 30,
2002, 116,759 shares of our common stock had been issued in
settlement of accrued interest on the Notes and an additional
890,098 shares were issued in December 2002.
o Lastly, the special voting share of TWUK held by Triumph
Partners III, L.P. was exchanged for one ordinary share of
TWUK. However, since conversion of this ordinary share at the
Exchange Ratio would result in 0.3488 shares of our common
stock being issued, it was agreed that, in the Reorganization,
zero shares of our common stock would be issued in respect of
the ordinary share into which the special voting share has
been exchanged.
As a result of the Reorganization and other transactions, as fully
described in Note 3 of Notes to the Consolidated Financial Statements, we
recognized certain charges. Such amounts were partially offset by a gain on the
settlement of accrued and unpaid interest owed to the holders of the Notes of
Allied Healthcare (UK) in exchange for new shares of our common stock.
32
Our revenue mix and payor mix is influenced to a significant degree by
the relative contribution of acquired businesses and their respective payor
profiles. The following table shows the percentage of historical net revenues
represented by each of our product lines:
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
2002 2001 2000
------ ------ ------
Product Line
Net patient services.......................... 91.5% 84.5% 59.2%
Net respiratory, medical equipment and supplies
sales......................................... 3.7 7.4 32.2
Net infusion services......................... 4.8 8.1 8.6
------ ------ ------
Total revenues.................. 100.0% 100.0% 100.0%
======= ====== ======
The increase in net patient services and the decrease in other product
lines as a percentage of total revenues for the year ended September 30, 2002 as
compared to 2001 is primarily due to growth in our U.K. flexible staffing
business both organically and through our on-going nursing and care agency
acquisition program.
The following table shows the historical payor mix for our total
revenues for the periods presented:
Year Ended Year Ended Year Ended
September 30, September 30, September 30,
2002 2001 2000
---- ---- ----
Payor
U.K. National Health Service
and other U.K. Governmental
Payors...................................... 63.3% 54.7% 43.6%
Private payors................................ 34.9 41.6 38.4
Medicare...................................... .9 1.6 14.7
Medicaid...................................... .9 2.1 3.3
------ ------ ------
Total revenues.................. 100.0% 100.0% 100.0%
------ ------ ------
The increase in NHS and other U.K. governmental payors as a percentage
of total revenues for the year ended September 30, 2002 as compared to 2001 is
primarily due to the U.K. acquisitions, which derive the majority of their
revenues from the NHS, and to organic growth in the core flexible staffing
business. The decrease in Medicare as a percentage of total revenues for the
year ended September 30, 2001 as compared to 2000 is primarily due to our
exiting the U.S. mail-order business. We believe that our payor mix in the
future will be determined
33
primarily by the payor profile of completed acquisitions and to a lesser extent,
from shifts in existing business among payors.
We believe that a substantial portion of our revenues derived from
private payors in the U.S. was subject to case management and managed care and
that this relationship will continue in the future.
Our gross margins will be influenced by the revenue mix of our product
lines and by changes in reimbursement rates. Subsequent acquisitions, when
completed, will continue to impact the relative mix of revenues and overall
gross margin.
At September 30, 2002, we had $127,398,000 of intangible assets
(primarily goodwill) on our balance sheet compared to $109,426,000 at September
30, 2001. This represented 47.6% of total assets and 236.1% of total
shareholders' equity at September 30, 2002 and 44.1% of total assets and 301.0%
of total shareholders' equity at September 30, 2001. In accordance with the
provisions of FAS 142, all existing and newly acquired goodwill and intangible
assets deemed to have indefinite lives were not subject to amortization in
fiscal 2002. Amortization of intangibles for the year ended September 30, 2001
was $3,852,000 and $3,301,000 for the year ended September 30, 2000. Subsequent
acquisitions, when completed, will continue to increase the amount of intangible
assets on the balance sheet. On a pro forma basis, assuming our U.K.
subsidiaries had been consolidated for the entire year ended September 30, 2000,
amortization of intangibles would have been $4,065,000.
CRITICAL ACCOUNTING POLICIES
Accounts Receivable
We are required to estimate the collectibility of our accounts
receivables, which requires a considerable amount of judgment in assessing the
ultimate realization of these receivables, including the current
credit-worthiness of each customer. Significant changes in required reserves may
occur in the future as we continue to expand our business and as conditions in
the marketplace change.
Intangible Assets
We have significant amounts of goodwill. The determination of whether
or not goodwill has become impaired involves a significant amount of judgment.
Changes in strategy and/or market conditions could significantly impact these
judgments and require adjustments to recorded amounts of goodwill.
Deferred Taxes
We account for deferred income taxes based upon differences between the
financial reporting and income tax bases of our assets and liabilities.
Valuation allowances are established, when necessary, to reduce deferred tax
assets to the amounts expected to be realized. The determination of whether or
not valuation allowances are required to be recorded involves
34
significant estimates regarding the future profitability of our company, as well
as potential tax strategies for the utilization of net loss and operating loss
carry forwards.
Contingencies
Related to our acquisitions of flexible staffing agencies, we have
entered into agreements to pay additional amounts, in cash, as contingent
consideration dependent upon future earnings of such acquired entities. See Note
4 of the Notes to Consolidated Financial Statements for the year ended September
30, 2002.
During the normal course of business we are involved in legal
proceedings and claims incidental to our normal business activities. We are
required to assess the likelihood of any adverse judgments or outcomes to these
matters as well as potential ranges of probable losses. A determination of the
amount of reserves required, if any, for these contingencies are made after
careful analysis of each individual issue. The required reserves may change in
the future due to new developments in each matter or changes in approach such as
a change in settlement strategy in dealing with these matters.
Revenue Recognition
Patient services and infusion and respiratory therapy revenues are
recognized when services are performed and are recorded net of estimated
contractual adjustments based on agreements with third-party payors, where
applicable. Revenues from the rental of home medical equipment (including
respiratory equipment) are recognized over the rental period (typically on a
month-to-month basis). Revenues from the sale of pharmaceuticals and supplies
are recognized when products are shipped and are recorded at amounts expected to
be paid by third-party payors.
We receive a majority of our revenue from third-party insurance
companies, the NHS and other U.K. governmental payors, Medicare and Medicaid.
The amount paid by third-party payors is dependent upon the benefits included in
the patient's policy or as allowable amounts set by third-party payors. Certain
revenues are subject to review by third-party payors, and adjustments, if any,
are recorded when determined.
RESULTS OF OPERATIONS
Year Ended September 30, 2002 vs. Year Ended September 30, 2001
Revenues
- --------
Total revenues for the year ended September 30, 2002 were $259,898,000
compared to $154,633,000 for the year ended September 30, 2001, an increase of
$105,265,000 or 68.1% (65.0% excluding the favorable effects of changes in
foreign exchange). This increase relates primarily to the growth of our
company's U.K. flexible staffing operations as a result of acquisitions,
principally Staffing Enterprise Limited and Staffing (PSV) Limited (collectively
"Staffing Enterprise") ($62,902,000), Crystalglen Limited (operating under the
trade name "Nurses
35
Direct") ($13,136,000), and Balfor Medical ($5,642,000) with
the remaining increase ($23,585,000) principally reflecting organic growth in
the staffing operations.
Gross Profit
- ------------
Total gross profit increased by $23,811,000 to $71,790,000 for the year
ended September 30, 2002 from $47,979,000 for the year ended September 30, 2001,
an increase of 49.6% (46.9% excluding the favorable effects of changes in
foreign exchange). As a percentage of total revenue, gross profit for the year
ended September 30, 2002 decreased to 27.6% from 31.0% for the comparable prior
period. Gross margins for patient services decreased (26.9% for the year ended
September 30, 2002 versus 30.7% for the comparable prior period) principally due
to an increase in the percentage of revenues derived from the staffing of nurses
and other more highly paid professionals, which have lower margins than the
historical carer business. In addition, U.K. regulatory changes, which extend
the entitlement of holiday pay to temporary workers, served to reduce gross
margins in the current year. Gross margins in the respiratory, medical equipment
and supplies sales increased (46.3% for the year ended September 30, 2002 versus
37.9% for the comparable prior period) mainly due to the sales mix. Gross
margins for infusion services slightly decreased (26.7% for the year ended
September 30, 2002 versus 28.4% for the comparable prior period) principally due
to product sales mix.
Selling, General and Administrative Expenses
- --------------------------------------------
Total selling, general and administrative expenses increased by
$5,771,000 to $47,036,000 for the year ended September 30, 2002 from $41,265,000
for the year ended September 30, 2001, an increase of 14.0% (12.2% excluding the
favorable effects of changes in foreign exchange). The increase reflects
$2,341,000 representing certain tax equalization bonuses paid to senior
management for the reimbursement of income taxes incurred as a result of share
issuances and the higher level of overhead costs in our U.K. operations due
principally to acquisitions and internal growth. This increase was partially
offset by the application of Financial Accounting Standards Board FAS 142,
"Goodwill and Other Intangible Assets" ("FAS 142"), effective October 1, 2001,
whereby goodwill is no longer being amortized ($3,852,000). In addition, we
incurred $3,883,000 of expenses in fiscal 2001 related to exiting our U.S.
mail-order operations.
Non-Cash Stock-Based Compensation
- ---------------------------------
We recorded a non-cash charge of $5,835,000 for the year ended
September 30, 2002 representing $4,216,000 for the issuance of shares of our
common stock to senior management and $1,619,000 related to exchange of
employees' redeemable shares (options) in TWUK for shares of our common stock,
using the net exercise method in the Reorganization.
Transaction Expenses
- --------------------
We recorded a net charge of $686,000 for the year ended September 30,
2002 principally reflecting the write-off of non-capitalized costs incurred in
connection with evaluating options to maximize the value of our ownership
interest in our U.K. operations.
36
Losses due to Sale of Subsidiary
- --------------------------------
For the year ended September 30, 2001, we recorded losses of $354,000
due to the sale of Amcare as a result of the completion of the transaction.
Interest Income
- ---------------
Total interest income for the year ended September 30, 2002 was
$3,024,000 compared to $1,587,000 for the year ended September 30, 2001. The
increase was attributable to a higher level of funds invested.
Interest Expense
- ----------------
Total interest expense for the year ended September 30, 2002 was
$16,496,000 compared to $10,120,000 for the year ended September 30, 2001. The
increase was primarily attributable to a higher level of average borrowings
outstanding, as well as the write-off of $925,000 of deferred financing fees,
per FAS 145, related to certain costs associated with our 1999 Refinancing.
Gain on Settlement of Paid in Kind Interest
- -------------------------------------------
We recognized a gain of $5,143,000 for the year ended September 30,
2002 on the settlement of accrued and unpaid interest owed to the holders of the
Notes of Allied Healthcare (UK) in exchange for new shares of our common stock.
Provision for Income Taxes
- --------------------------
We recorded a provision for income taxes amounting to $4,971,000 or
50.3% of income before income taxes and minority interest for the year ended
September 30, 2002 versus a provision of $24,117,000 for the year ended
September 30, 2001. The difference between the 50.3% effective tax rate for the
year ended September 30, 2002 and the statutory tax rate is due to our recording
of an additional valuation allowance for the tax benefit associated with the
current year's U.S. operating loss.
We had been previously committed to implementing tax strategies that
provided for the sale of appreciated assets, including a portion of our
ownership interest in our U.K. subsidiary, to generate sufficient taxable income
to realize the tax net operating losses prior to their expiration. While we
believe we will eventually realize the value of our tax losses, current
developments, including the continued expansion of our U.K. operations has
increased the uncertainty as to both the execution of the original strategy and
the appropriateness of a tax strategy which may not align with our current
business strategy. These uncertainties have impaired our ability to determine
whether it is more likely than not that our deferred tax assets will be
realized. Accordingly, in the fourth quarter of fiscal 2001, a full valuation
allowance for all remaining deferred tax assets was provided.
37
Minority Interest
- -----------------
We reported a charge for minority interest of $120,000 in the year
ended September 30, 2002 compared to a charge of $22,000 in the year ended
September 30, 2001. The minority interest represented the 1,050,000 shares of
class A1 common stock of TWUK issued as part of the Nightingale consideration.
In the Reorganization we acquired these shares and the U.K. operations became
wholly owned by our company.
Net Income
- ----------
As a result of the foregoing, we recorded net income of $4,794,000 for
the year ended September 30, 2002 compared to a loss of $26,612,000 for the year
ended September 30, 2001.
Redeemable Preferred Dividend
- -----------------------------
We accrued $941,000 of dividends in the year ended September 30, 2002
for the Series A preferred stock issued in connection with the Reorganization
and accreted $75,000 of costs related to the issuance of our Series A preferred
stock.
Year Ended September 30, 2001 vs. Year Ended September 30, 2000
Revenues
- --------
Total revenues for the year ended September 30, 2001 were $154,633,000
compared to $135,408,000 for the year ended September 30, 2000, an increase of
$19,225,000, or 14.2%. This increase relates primarily to the change in
accounting for our U.K. subsidiaries from consolidation to the equity method
during the first quarter of fiscal 2000 ($28,847,000) and increased revenues in
our U.K. nursing operations as a result of acquisitions and an increase in
billable hours charged ($28,418,000). Our U.S. home healthcare operations also
experienced an increase in revenues ($1,108,000) primarily due to an increase in
the number of patients being serviced. These increases were partially offset by
our exit from the U.S. mail-order operations effective October 2000
($22,476,000) and to the sale of Amcare in November 2000 ($16,667,000).
Gross Profit
- ------------
Total gross profit increased by $2,352,000 to $47,979,000 for the year
ended September 30, 2001 from $45,627,000 for the year ended September 30, 2000.
As a percentage of total revenue, gross profit for the year ended September 30,
2001 decreased to 31.0% from 33.7% for the prior year. The decrease in gross
margins is principally due to growth in our U.K. nursing operations and the
closing of our U.S. mail-order operations, which realized historical gross
margins in excess of 50%. Gross margins for patient services were essentially
flat year over year (30.7% for the year ended September 30, 2001 versus 31% for
the prior year). Gross margins in the respiratory, medical equipment and
supplies sales decreased slightly (37.9% for the year ended September 30, 2001
versus 40.3% for the prior year) principally due to the sale of Amcare in
November 2000 and slightly increased for infusion services (28.4% for the year
ended September 30, 2001 versus 27.6% for the prior year) principally due to
product mix.
38
Selling, General and Administrative Expenses
- --------------------------------------------
Total selling, general and administrative expenses for the year ended
September 30, 2001 were $41,265,000 compared to $49,041,000 for the year ended
September 30, 2000. This represents a decrease in the current year of $7,776,000
or 15.9%. This decrease relates primarily to the decrease in the U.S. mail-order
operations due to our decision to exit this business in September of 2000
($15,946,000) and the sale of Amcare in November 2000 ($2,920,000). Partly
offsetting this decrease is the change in accounting for our U.K. subsidiaries
from the equity method to consolidation ($6,347,000) as well as higher levels of
overhead costs in the U.K. operations principally due to acquisitions and to
support internal growth ($5,016,000). Overhead costs in our U.S. corporate
offices also decreased ($663,000) principally due to headcount reductions and
other cost saving initiatives.
Impairment of Long-Lived Assets
- -------------------------------
For the year ended September 30, 2000, we recorded a $15,073,000 charge
related to the write-down of assets to their fair value for the U.S. mail-order
operations and Amcare. (See Note 4 of Notes to Consolidated Financial Statements
for the fiscal year ended September 30, 2002.)
Losses due to Sale of Subsidiary
- --------------------------------
For the year ended September 30, 2001, we recorded losses of $354,000
due to the sale of Amcare as a result of the completion of the transaction.
Legal Settlements, Net
- ----------------------
For the year ended September 30, 2000, we recorded a one-time charge
of $10,082,000 related to a settlement with the federal government, which was
offset by a $5,000,000 settlement with the Prior Owners. See "Item 3--Legal
Proceedings."
Restructuring Charge
- --------------------
For the year ended September 30, 2000, we recorded a $1,288,000
restructuring charge related to exiting and closing our U.S. mail-order
operations. (See Note 4 of Notes to Consolidated Financial Statements for the
fiscal year ended September 30, 2001.)
Interest Income
- ---------------
Total interest income for the year ended September 30, 2001 was
$1,587,000 compared to $1,443,000 for the year ended September 30, 2000. The
increase was attributable to higher interest income earned ($84,000) on a higher
level of funds invested and by the change in accounting for our U.K.
subsidiaries from consolidation to the equity method during the first quarter of
fiscal 2000 ($60,000).
39
Interest Expense
- ----------------
Total interest expense for the year ended September 30, 2001 was
$10,020,000 compared to $10,457,000 for the year ended September 30, 2000. The
decrease was attributable to the change in accounting for our U.K. subsidiaries
from consolidation to the equity method during the first quarter of fiscal 2000
($308,000), as well as the write-off of $1,167,000 of deferred financing costs
associated with the early extinguishment of borrowings under our former credit
facility. Effective October 1, 2001 we adopted FAS 145 and accordingly
reclassified the $1,167,000 to interest expense which was previously recorded as
an extraordinary item in fiscal 2000. This decrease was partially offset by the
higher level of average borrowings outstanding.
Provision (Benefit) for Income Taxes
- ------------------------------------
We recorded a provision for income taxes amounting to $24,117,000 for
the year ended September 30, 2001 versus a benefit of $7,756,000 or 22.9% of
loss before income taxes, equity income, minority interest and extraordinary
loss for the year ended September 30, 2000. The difference between the current
year provision and the statutory tax rate resulted principally from the
establishment of a full valuation allowance for deferred tax assets.
We had been previously committed to implementing tax strategies that
provided for the sale of appreciated assets, including a portion of our
ownership interest in our U.K. subsidiary, to generate sufficient taxable income
to realize the tax net operating losses prior to their expiration. While we
believe we will eventually realize the value of our tax losses, current
developments, including the continued expansion of our U.K. operations has
increased the uncertainty as to both the execution of the original strategy and
the appropriateness of a tax strategy which may not align with our current
business strategy. These uncertainties have impaired our ability to determine
whether it is more likely than not that our deferred tax assets will be
realized. Accordingly, a full valuation allowance for all remaining deferred tax
assets has been provided.
Equity in Income of and Interest Income Earned from U.K. Subsidiaries
- ---------------------------------------------------------------------
Equity in income of our U.K. subsidiaries for the year ended September
30, 2000 was $319,000, which represents 100% of the net income of our U.K.
subsidiaries for the first quarter of fiscal 2000. (See Note 2 of Notes to
Consolidated Financial Statements for the fiscal year ended September 30, 2002.)
Interest income earned from our U.K. subsidiaries for the year ended September
30, 2000 was $782,000 (net of tax provision of $421,000), which represents
interest income on an intercompany loan, which was repaid on December 20, 1999,
concurrent with the Refinancing. There was no equity in income of and interest
income earned from U.K. subsidiaries for the year ended September 30, 2001 as we
consolidated our U.K. subsidiaries in the current fiscal year.
Minority Interest
- -----------------
We reported a charge for minority interest of $22,000 in the year ended
September 30, 2001 compared to a benefit $70,000 in the year ended September 30,
2000. The minority interest represents the 1,050,000 shares of class A1 common
stock of TWUK issued as part of the Nightingale consideration. (See Note 4 of
Notes to Consolidated Financial Statements for the fiscal year ended September
30, 2002.)
40
Net Loss
- --------
As a result of the foregoing, we recorded a net loss of $26,612,000 for
the year ended September 30, 2001 compared to a loss of $24,944,000 for the year
ended September 30, 2000.
Year Ended September 30, 2001 vs. Pro Forma Year Ended September 30, 2000
The following comparisons of year ended September 30, 2001 as compared
to pro forma September 30, 2000 present the pro forma statement of operations
data as if our U.K. subsidiaries had been consolidated for the entire year ended
September 30, 2000.
Revenues
- --------
Total revenues for the year ended September 30, 2001 were $154,633,000
as compared to pro forma revenues of $164,255,000 for the year ended September
30, 2000, which represents a decrease of $9,622,000 or 5.9%. This decrease was
primarily attributable to exiting the U.S. mail-order operations ($22,476,000)
and the sale of Amcare ($16,667,000). The impact of exiting these businesses was
substantially offset with increased revenues in our U.K. nursing operations
($28,418,000) as a result of acquisitions and an increase in the number of
billable hours. The U.S. home healthcare operations also experienced an increase
in revenues ($1,108,000) primarily due to an increase in the number of patients
being serviced.
Gross Profit
- ------------
Total gross profit for the year ended September 30, 2001 was
$47,979,000 as compared to pro forma gross profit of $54,620,000 for the year
ended September 30, 2000. As a percentage of total revenue, gross profit for the
year ended September 30, 2001 decreased to 31.0% from 33.3% pro forma for the
prior year. The decrease in gross margins is principally due to growth in our
U.K. nursing operations and the closing of our U.S. mail-order operations, which
realized historical gross margins in excess of 50%. Gross margins for patient
services were essentially flat year over year (30.7% for the year ended
September 30, 2001 versus 31.3% pro forma for the prior year). Gross margins in
the respiratory, medical equipment and supplies sales decreased slightly (37.9%
for the year ended September 30, 2001 versus 38.5% pro forma for the prior year)
principally due to the sale of Amcare in November 2000 and slightly increased
for infusion services (28.4% for the year ended September 30, 2001 versus 27.6%
pro forma for the prior year) principally due to product mix.
Selling, General and Administrative Expenses
- --------------------------------------------
Total selling, general and administrative expenses for the year ended
September 30, 2001 were $41,265,000 as compared to pro forma $55,592,000 for the
year ended September 30, 2000,
41
which represents a decrease of $14,327,000 or 25.8%. This decrease was primarily
attributable to exiting the U.S. mail-order operations ($15,945,000) and the
sale of Amcare ($2,920,000). This decrease was partly offset with increased
costs principally in the U.K. operations due to acquisitions and to support
internal growth ($5,016,000). Overhead costs in our U.S. corporate offices also
decreased ($663,000) principally due to headcount reductions and other cost
saving initiatives.
Impairment of Long-Lived Assets
- -------------------------------
For the year ended September 30, 2000, we recorded a $15,073,000 charge
related to the write-down of assets to their fair value for the U.S. mail-order
operations and Amcare. (See Note 4 of Notes to Consolidated Financial Statements
for the fiscal year ended September 30, 2002.)
Legal Settlements, Net
- ----------------------
For the year ended September 30, 2000, we recorded a one-time charge
of $10,082,000 related to a settlement with the federal government, which was
offset by a $5,000,000 settlement with the Prior Owners. See "Item 3--Legal
Proceedings."
Restructuring Charge
- --------------------
For the year ended September 30, 2000, we recorded a $1,288,000
restructuring charge related to exiting and closing our U.S. mail-order
operations. (See Note 4 of Notes to Consolidated Financial Statements for the
fiscal year ended September 30, 2002.)
Interest Income
- ---------------
Total interest income for the year ended September 30, 2001 was
$1,587,000 as compared to pro forma $1,503,000 for the year ended September 30,
2000, which represents an increase of $84,000. This increase was attributable to
higher interest income earned on a higher level of funds invested.
Interest Expense
- ----------------
Total interest expense for the year ended September 30, 2001 was
$10,020,000 as compared to pro forma $10,765,000 for the year ended September
30, 2000, which represents a decrease of $745,000. This variance was primarily
attributable to the write-off of $1,167,000 of deferred financing costs
associated with the early extinguishment of borrowings under our former credit
facility. Effective October 1, 2001 we adopted FAS 145 and accordingly
reclassified the $1,167,000 to interest expense which was previously recorded as
an extraordinary item in fiscal 2000. This decrease was partially offset by the
higher level of borrowings outstanding.
Provision (Benefit) for Income Taxes
- ------------------------------------
We recorded a provision for income taxes for the year ended September
30, 2001 of $24,117,000 versus a pro forma benefit of $6,663,000 or 21.0% of
loss before income taxes for the year ended September 30, 2000. The difference
between the current year provision and the statutory tax rate resulted
principally from the establishment of a full valuation allowance for deferred
tax assets.
42
We had been previously committed to implementing tax strategies that
provided for the sale of appreciated assets, including a portion of our
ownership interest in our U.K. subsidiary, to generate sufficient taxable income
to realize the tax net operating losses prior to their expiration. While we
believe we will eventually realize the value of our tax losses, current
developments, including the continued expansion of our U.K. operations has
increased the uncertainty as to both the execution of the original strategy and
the appropriateness of a tax strategy which may not align with our current
business strategy. These uncertainties have impaired our ability to determine
whether it is more likely than not that our deferred tax assets will be
realized. Accordingly, a full valuation allowance for all remaining deferred tax
assets has been provided.
Minority Interest
- -----------------
We reported a charge for minority interest of $22,000 in the year ended
September 30, 2001 compared to a benefit of $70,000 in the year ended September
30, 2000. The minority interest represents the 1,050,000 shares of class A1
common stock of TWUK issued as part of the Nightingale consideration. (See Note
4 of Notes to Consolidated Financial Statements for the fiscal year ended
September 30, 2002.)
Net Loss
- --------
As a result of the foregoing, we still would have reported a net loss
of $26,612,000 for the year ended September 30, 2001 compared to pro forma
$24,944,000 for the year ended September 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
General
For the year ended September 30, 2002, we generated $9,206,000 from
operating activities. Cash requirements for the fiscal year ended September 30,
2002 were for capital expenditures ($3,713,000), payment on acquisition payable
($1,038,000), payments for acquisitions ($2,047,000), payment on long-term debt
($5,150,000), payments on notes payable ($4,575,000) and payments for financing
fees and share issuance costs ($4,053,000). Such cash requirements were met
through operating cash flows, proceeds from the issuance of stock and cash on
hand.
On April 22, 2002, we issued 684,258 shares of common stock to Timothy
M. Aitken, our chairman and chief executive officer, and 487,099 shares of
common stock to Sarah L. Eames, our president and chief operating officer, as a
bonus for, among other things, services rendered through the date of issuance.
Simultaneously with this issuance, we entered into
43
agreements with Mr. Aitken and Ms. Eames in which we agreed to provide them
(through cash bonuses and loans) with substantially all of the cash necessary
for them to pay the income taxes that they are expected to incur as a result of
the issuances. Pursuant to these agreements, we made a cash bonus payment to Mr.
Aitken of $1,401,000 and loaned him $550,000 and made a cash bonus payment to
Ms. Eames of $846,000 and loaned her $390,000. The loans, which have been issued
on a recourse basis, provide for interest at the rate of 4.65% compounded
annually. All outstanding principal and accrued interest will be due on the
earlier of April 30, 2007 or the date on which the employee disposes of the
common shares received in accordance with the agreements. As collateral for the
loans the employees have pledged an aggregate of 1,155,000 fully vested
non-qualified stock options held by the employees and any proceeds received from
the sale of the underlying securities. In addition, pursuant to these
agreements, TWUK agreed to indemnify Mr. Aitken and Ms. Eames for certain income
tax liabilities that they may incur as a result of these share issuances,
subject to a maximum aggregate amount of $1,000,000. These executive bonuses and
loans were approved by our company's board of directors. We recognized an
aggregate expense of $6,558,000 related to these transactions in the quarter
ended June 30, 2002. See "Item 13--Certain Relationships and Related
Transactions--Recent Issuances of Shares."
In addition, on April 22, 2002, we entered into a Stock Purchase
Agreement with Hyperion TWH Fund II LLC, Triumph Partners III, L.P. and Triumph
III Investors, L.P pursuant to which we agreed to issue an aggregate of 750,000
shares of our common stock at a per share purchase price of $4.25 per share.
Such shares were issued on April 30, 2002. We used the proceeds of these share
issuances to fund the cash bonuses and loans to Mr. Aitken and Ms. Eames. See
"Item 13--Certain Relationships and Related Transactions--Recent Issuances of
Shares."
In January 2001, we initiated a stock repurchase program, whereby we
may purchase up to approximately $1,000,000 of our outstanding common stock in
open market transactions or in privately negotiated transactions. As of
September 30, 2002, we had acquired 266,200 shares for an aggregate purchase
price of $720,000, which are reflected as treasury stock in the consolidated
balance sheet at September 30, 2002. We intend to continue with our stock
repurchase program during fiscal 2003.
We believe our existing capital resources and those generated from
operating activities and available under existing borrowing arrangements will be
adequate to conduct our operations for the next twelve months.
Restricted Cash
Restricted cash represents cash and cash equivalents, advanced under
the Refinancing, available for payment of consideration for certain permitted
acquisitions under the Senior Credit Facility, including the payment of
contingent consideration for completed transactions.
44
Accounts Receivable
We maintain 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 September 30, 2002 and September 30, 2001, $33,634,000
(12.5%) and $29,555,000 (11.9%), respectively, of our total assets consisted of
accounts receivable. The increase in the accounts receivable from 2001 to 2002
is mainly due to revenue growth.
Our 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 we take to
collect our accounts receivable, calculated from the date services are rendered.
At September 30, 2002 and September 30, 2001, our average DSOs were 42 and 60,
respectively. Excluding the impact of the acquisition of Staffing Enterprise as
of September 27, 2001, DSOs as of September 30, 2001 were 44. The decrease in
the DSOs was mainly due to timing of cash collections.
Borrowings
General
- -------
On December 17, 1999, our U.K. subsidiaries, Allied Healthcare (UK) and
TWUK, entered into the Refinancing, pursuant to which they obtained new
financing denominated in pounds sterling. As of September 30, 2002, the
Refinancing consisted of a $149,114,000 Senior Credit Facility, a $17,058,000
mezzanine loan (the "Mezzanine Loan") and $3,480,000 of PIK notes of Allied
Healthcare (UK). (These amounts give effect to the amendment to the Senior
Credit Facility on September 27, 2001 to increase the borrowings thereunder.)
Senior Credit Facility
- ----------------------
The Senior Credit Facility consists of the following:
o $43,719,000 term loan A, maturing December 17, 2005;
o $19,518,000 acquisition term loan B, maturing
December 17, 2006, which may be drawn upon during the first
nine years following closing;
o per the September 27, 2001 amendment, $78,070,000 term
loan C, maturing June 30, 2007; and
o $7,807,000 revolving facility, maturing December 17, 2005.
Repayment of the loans commenced on July 30, 2000 and continues until
final maturity. The loans bear interest at rates equal to LIBOR plus 2.25% to
3.50% per annum. As of September 30, 2002, TWUK had outstanding borrowings of
$109,767,000 under the Senior Credit Facility that bore interest at a rate of
6.25% to 7.50%.
45
Subject to certain exceptions, the Senior Credit Facility prohibits or
restricts the following:
o the incurrence of liens;
o the incurrence of indebtedness;
o certain fundamental corporate changes;
o dividends (including distributions to us);
o the making of specified investments; and
o 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 earnings before interest, taxes, depreciation and
amortization, 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 TWUK's and its subsidiaries'
assets, a pledge of TWUK's ownership interest in its subsidiaries and guaranties
by TWUK's subsidiaries.
Mezzanine Loan and Mezzanine Warrants
- -------------------------------------
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 detachable mezzanine warrants to
purchase an aggregate of 2% of the fully-diluted ordinary shares of TWUK (the
"Mezzanine Warrants"). As of September 30, 2002, TWUK had outstanding borrowings
under the Mezzanine Loan of $15,443,000, which bore interest at a rate of 11.0%.
The fair value of the Mezzanine Warrants ($2,476,000) issued to the
mezzanine lenders has been recorded as a discount to the Mezzanine Loan and is
being amortized over the term of the loan using the interest method. In the
Reorganization, the Mezzanine Warrants were exercised for an aggregate exercise
price of $129,000 and the ordinary shares of TWUK received upon such exercise
were exchanged at the Exchange Ratio for an aggregate of 572,032 shares of our
common stock in accordance with the terms of the Reorganization Agreement.
Senior Subordinated Promissory Notes and Equity Warrants
- --------------------------------------------------------
The Notes consisted of an aggregate of $35,051,000 principal amount of
senior subordinated promissory notes of Allied Healthcare (UK) purchased by
several institutional investors and certain members of management (collectively,
the "Investors"), plus Equity Warrants issued by TWUK concurrently with the sale
of the Notes. The Equity Warrants were
46
exercisable for ordinary shares of TWUK ("Warrant Shares"). The Warrant Shares
represented, in the aggregate, approximately 27.0% of the fully-diluted ordinary
shares of TWUK.
The Notes bore interest at the rate of 9.375% per annum, payable
quarterly in cash subject to restrictions contained in the Senior Credit
Facility requiring Allied Healthcare (UK) to pay interest in-kind through the
issuance of 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).
In the Reorganization, all of the outstanding Notes (in the aggregate
principal amount of (pound)22,286,869) were surrendered in payment of the
exercise price of the Equity Warrants. In the Reorganization, the Equity
Warrants were exercised and each resulting Warrant Share of TWUK was exchanged
at the Exchange Ratio for an aggregate of 7,773,660 shares of our Series A
preferred stock. For a description of our shares of Series A preferred stock,
see "Item 5--Market for Registrant's Common Equity and Related Stockholder
Matters."
In addition, in the Reorganization, accrued and unpaid PIK interest on
the Notes in the amount of $9,138,000 ((pound)5,810,204), less $58,000
((pound)37,020) that we withheld as withholding taxes (or a net amount of
$9,080,000 ((pound)5,773,264)), was exchanged for shares of our common stock or
the right to receive a funding note, which funding note is exchangeable for
shares of our common stock. As of September 30, 2002, 116,759 shares of our
common stock had been issued in settlement of accrued interest on the Notes and
an additional 890,098 shares of our common stock were issued in fiscal 2003.
All of the ordinary shares of Allied Healthcare (UK) that we own and
all of the ordinary shares of TWUK owned by Allied Healthcare (UK) are held in a
voting trust. The trustee of the voting trust is G. Richard Green, a director of
our company. Prior to the consummation of the Reorganization, the shares were
held in the voting trust for the benefit of the holders of the ordinary shares
of TWUK (some of which were held by persons other than Allied Healthcare (UK))
and the holders of the Equity Warrants. In the Reorganization, the voting trust
was amended to provide, among other things, that, in the event of a breach of
our company of our obligation to redeem the shares of Series A preferred stock,
the trustee will be obligated to vote and sell the shares held in the voting
trust as directed by Triumph Partners III, L.P.
Notes Due in Connection with Acquisitions
- -----------------------------------------
At September 30, 2002, we had, through TWUK, outstanding notes payable
of $19,840,000, net of $597,000 of unamortized discount, issued in connection
with the acquisition of certain U.K. flexible staffing agencies. The notes
payable are secured by our senior credit lender which requires us to keep an
amount on deposit for the sole purpose of repaying the notes payable. These
notes bear interest at rates ranging from 2.99% to 5.50%. In general, we may not
redeem the notes on or before three years after the date of issuance; however,
such notes may be redeemed by the holder within one year from the first interest
payment due date upon giving not less than sixty days written notice.
Accordingly, the notes and related cash restricted to the payment of such notes
have been classified as current in the accompanying Condensed Balance Sheet
included in our financial statements for the fiscal year ended September 30,
2002.
47
Commitments
Acquisition Agreements
- ----------------------
Related to our acquisitions of flexible staffing agencies, we have
entered into agreements to pay additional amounts, payable in cash, of up to
$38,240,000, at September 30, 2002, in contingent consideration dependent upon
future earnings of such acquired entities.
In addition, we may have to pay up to (pound)8,560,000 in contingent
consideration to the sellers of Medic-One Group Limited, which we acquired in
November 2002. The contingent consideration, if any, will be satisfied by a
combination of cash and shares of our common stock.
Employment Agreements
- ---------------------
We have three employment agreements with certain executive officers
(our chief executive officer, our chief operating officer and our chief
financial officer) that provide for minimum aggregate annual compensation of
$1,055,000 in fiscal 2002. The agreements contain, among other things, customary
confidentiality and termination provisions and provide that in the event of the
termination of the executive following a "change of control" of our company (as
defined in such agreements), or a significant change in their responsibilities,
such person will be entitled to receive a cash payment of up to 2.9 times their
average annual base salary during the preceding 12 months (in the case of our
chief executive officer and our chief operating officer) or one times his base
salary (in the case of our chief financial officer).
Operating Leases
- ----------------
We have entered into various operating lease agreements for office
space and equipment. Certain of these leases provide for renewal options with
extension dates in fiscal 2008 and 2013.
Contractual Cash Obligations
As described under "Borrowings," "Acquisition Agreements," and
"Operating Leases" above, the following table summarizes our contractual cash
obligations as of September 30, 2002:
Total Debt Total Lease Total Other Total
Fiscal Obligations Obligations Obligations Obligations
- ------------------- -------------------------------------------------------------------------
2003 29,569,000 1,756,000 38,240,000 69,565,000
2004 8,744,000 1,307,000 10,051,000
2005 10,930,000 1,175,000 12,105,000
2006 28,886,000 1,097,000 29,983,000
2007 54,649,000 981,000 55,630,000
Thereafter 15,752,000 2,379,000 18,131,000
------------------------------------------------------------------------
$148,530,000 $8,695,000 $38,240,000 $195,465,000
========================================================================
48
Other obligations do not reflect any potential redemption of our Series A
preferred stock or any tax indemnification we may be required to make to either
Mr. Aitken or Ms. Eames. See "Item 13--Certain Relationships and Related
Transactions--Recent Issuances of Shares."
Lease obligations reflect future minimum rental commitments required
under operating leases that have non-cancelable lease terms as of September 30,
2002.
Miscellaneous
Acquisitions
- ------------
During fiscal 2002 we acquired, through TWUK, a total of six flexible
staffing agencies for approximately $2,184,000 in cash. The transactions include
provisions to pay additional amounts, payable in cash, of up to $5,606,000 in
contingent consideration dependent upon future earnings of the acquired
entities.
On September 27, 2001, we acquired, through TWUK, all of the issued and
outstanding shares of Staffing Enterprise, a London based provider of flexible
staffing of specialist nurses and other healthcare professionals to London NHS
Trust and independent hospitals. The consideration included $7,100,000 in cash,
$14,800,000 in demand notes plus an additional sum of up to approximately
$30,800,000 in contingent consideration dependent upon pre-tax profits for the
fiscal year ended September 30, 2002.
In addition to the acquisition of Staffing Enterprise, during fiscal
2001 we acquired, through TWUK, a total of eleven other flexible staffing
agencies for approximately $9,100,000 in cash and the issuance of $5,700,000 in
demand notes. The transactions include provisions to pay additional amounts,
payable in cash, of up to $13,000,000 in contingent consideration dependent upon
future earnings of the acquired entities.
U.S. mail-order operations
- --------------------------
In September 2000, we approved a plan to exit our U.S. mail-order
operations and effective October 3, 2000 sold certain assets of the U.S.
mail-order operations located in Jacksonville, Florida. In addition, we recorded
a $1,288,000 restructuring charge in the fourth quarter of fiscal 2000
representing the estimated costs related to exiting and closing our U.S.
mail-order operations. Based upon additional information and revised cost
benefit estimates, we recorded an additional charge of $1,900,000 in the first
quarter of fiscal 2001 to reflect the write-down of the remaining accounts
receivable to their estimated net realizable value. In addition to the
write-down, we incurred operating expenses of $1,983,000 during the year ended
September 30, 2002 in connection with closing our U.S. mail-order operations. In
fiscal 2002, we recognized income of $280,000, representing the difference
between estimated and actual costs to close and exit the business.
Disposition of Amcare
- ---------------------
On November 22, 2000, we sold, through TWUK, Amcare for approximately
$13,826,000 in cash. In the fourth quarter of fiscal 2000, we recorded a charge
for impairment
49
of long-lived assets of approximately $2,727,000 to reflect the write-down of
the carrying value of goodwill, originally acquired with the purchase of Amcare,
to its fair value as well as a tax charge of approximately $1,654,000 to reflect
the tax effect of the transaction. As a result of the completion of the
transaction, we recorded additional losses of $354,000 and realized a foreign
exchange loss of $391,000 for the three months ended December 31, 2000.
Contingencies
- -------------
Some of our subsidiaries are Medicare Part B suppliers who submit
claims to the designated carrier who is the government's claims processing
administrator. From time to time, the carrier may request an audit of Medicare
Part B claims on a prepayment or postpayment basis. Currently, some of our
subsidiaries have pending audits. If the outcome of any audit results in a
denial or a finding of an overpayment, then the affected subsidiary has appeal
rights. Some of the subsidiaries currently are responding to these audits and
pursuing appeal rights in certain circumstances.
Litigation
- ----------
See "Item 3--Legal Proceedings."
Impact of Recent Accounting Standards
- -------------------------------------
In July 2001, the Financial Accounting Standards Board issued FAS 142.
The provisions of FAS 142 are effective for fiscal years beginning after
December 15, 2001. Under FAS 142, all existing and newly acquired goodwill and
intangible assets deemed to have indefinite lives will no longer be amortized
but will be subject to annual impairment tests. Effective October 1, 2001, we
adopted FAS 142 and suspended the amortization of goodwill. In accordance with
the transitional provisions of FAS 142, previously recognized goodwill was
tested for impairment. We completed the annual impairment test required by FAS
142 during the fourth quarter of fiscal 2002 and determined that there was no
impairment to our recorded goodwill balance.
In October 2001, the FASB issued FAS No. 144, "Accounting for
Impairment or Disposal of Long-lived Assets." FAS No. 144 supersedes FAS No.
121, "Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed Of", and addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. This statement is effective for
fiscal years beginning after December 15, 2001. Adoption of this statement is
not expected to have a material impact on our consolidated financial position or
results of operations.
In April 2002, the FASB issued FAS No. 145, "Rescission of FASB
Statements No. 4 (Reporting Gains and Losses From Extinguishment of Debt), 44
(Accounting for Intangible assets of Motor Carries), and 64 (Extinguishments of
Debt Made to Satisfy Sinking-Fund Requirements), Amendment of FASB Statement
No.13 (Accounting for Leases), and Technical Corrections." FAS No. 145 addresses
gain or loss on the extinguishment of debt and sale-leaseback accounting for
certain lease modifications. This statement is effective for fiscal years
beginning after May 15, 2002. We adopted FAS 145, effective October 1, 2001, and
we
50
recorded a charge of $925,000 in interest expense for the year ended September
30, 2002. We also reclassified $1,167,000 to interest expense which was
previously recorded as an extraordinary item in fiscal 2000.
In June 2002, the FASB issued FAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." FAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." This statement is
effective for exit and disposal activities initiated after December 15, 2002.
Adoption of this statement is not expected to have a material impact on our
consolidated financial position or results of operations.
Inflation
- ---------
Inflation has not had a significant impact on our operations to date.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
FOREIGN CURRENCY EXCHANGE
We face exposure to adverse movements in foreign currency exchange
rates. These exposures may change over time as business practices evolve and
could have a material adverse impact on our consolidated financial results. Our
primary exposure relates to non-U.S. dollar denominated sales in the U.K. where
the principal currency is pounds sterling and to the pounds sterling debt
denominated obligations. See "Interest Rate Risk" below for debt obligations
principal cash flows and related weighted average interest rates by expected
maturity dates. Currently, we do not hedge foreign currency exchange rate
exposures.
INTEREST RATE RISK
Our exposure to market risk for changes in interest rates relate
primarily to our cash equivalents and our U.K. subsidiaries' December 17, 1999
Refinancing which includes the Senior Credit Facility and Mezzanine Loan. Our
cash equivalents include highly liquid short-term investments purchased with
initial maturities of 90 days or less. We are subject to fluctuating interest
rates that may impact our consolidated results of operations or cash flows for
our variable rate Senior Credit Facility, Mezzanine Loan and cash equivalents.
In accordance with provisions of the Refinancing, on January 25, 2000, we hedged
the interest rate (LIBOR cap of 9%) on approximately $41,935,000 of our floating
rate debt in a contract which expires December 31, 2003. The approximate
notional amount of the contract adjusts down (consistent with debt maturity) to
$30,378,000 as December 31, 2002.
As of September 30, 2002, our Series A preferred stock ($32,254,000)
and PIK notes ($3,480,000) mature on December 31, 2008 and bear interest at a
fixed rate of 9.375%. In addition, we had notes payable of $19,840,000, net of
$597,000 debt discount, which were issued in connection with the acquisition of
several U.K. flexible staffing agencies. The notes payable are redeemable, at
the holder's option, in fiscal 2003 and bear interest ranging from 2.99% to
51
5.50% at September 30, 2002. The table below represents the expected maturity of
our variable rate debt and their weighted average interest rates at September
30, 2002.
Expected Weighted Average
Fiscal Maturity Rate
---------------------------------------------
2003 $ 29,569,000 LIBOR +1.92%
2004 8,744,000 LIBOR +2.25%
2005 10,930,000 LIBOR +2.25%
2006 28,886,000 LIBOR +3.26%
2007 54,649,000 LIBOR +3.50%
Thereafter 15,752,000 LIBOR +7.00%
------------
$148,530,000 LIBOR +3.63%
============
The aggregate fair value of our debt was estimated based on quoted
market prices for the same or similar issues and was approximately $149,198,000
at September 30, 2002.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements and required financial statement
schedule of our company are located beginning on page F-i of this Annual Report
on Form 10-K.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
OUR DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the
directors and officers of our company:
NAME AGE POSITIONS WITH OUR COMPANY
Timothy M. Aitken 58 Chairman of the Board and Chief
Executive Officer
Sarah L. Eames 44 Director, President and Chief
Operating Officer
Daniel A. Bergeron 42 Vice President and Chief Financial
Officer
Leslie J. Levinson 47 Secretary
Scott A. Shay 45 Director
Jeffrey S. Peris 56 Director
G. Richard Green 63 Director
52
John W. Matthews 58 Director
David J. Macfarlane 56 Director
Frederick S. Moseley IV 49 Director
Certain biographical information regarding each director and officer is
set forth below:
Timothy M. Aitken has served as chairman of the board and chief
executive officer of our company since January 15, 1997. Prior to joining our
company, Mr. Aitken served as an independent consultant to the healthcare
industry from November 1995 until January 1997. From June 1995 until November
1995, Mr. Aitken served as the vice chairman and president of Apria Healthcare
Group, Inc., a California-based home healthcare company. He also served as
chairman of the board of Omnicare plc from September 1995 until its acquisition
by our company. From 1990 until June 1995, Mr. Aitken served as chairman of the
board, president and chief executive officer of Abbey Healthcare Group Inc., a
California-based home healthcare company.
Sarah L. Eames has served as a director of our company since June 2002,
as chief operating officer of our company since June 2001, as president of our
company since May 1998, and as executive vice president of business development
and marketing of our company from June 1997 to May 1998. Prior to joining our
company, Ms. Eames was employed by Johnson & Johnson Professional, Inc. as a
business development consultant from 1996 to 1997. From June 1995 until November
1995, Ms. Eames served as vice president of marketing for Apria Healthcare
Group, Inc., a California-based home healthcare company. From 1980 until June
1995, Ms. Eames held various marketing and business development positions at
Abbey Healthcare Group Inc., a predecessor company of Apria Healthcare Group,
Inc.
Daniel A. Bergeron joined our company in November 2002 as vice
president and chief financial officer. From June 2000 to October 2002, Mr.
Bergeron was vice president and chief financial officer at Paragon Networks
International, Inc., a telecommunications company. From February 2000 to June
2000, Mr. Bergeron was a consultant. From April 1998 to February 2000, he served
as vice president and chief financial officer of Tridex Corporation, a software
company. Tridex Corporation filed for voluntary reorganization under Chapter 11
of the U.S. Bankruptcy Code in February 2002 and emerged from Chapter 11
protection in July 2002. From July 1987 to March 1998, Mr. Bergeron held various
financial reporting positions with Dorr-Oliver Inc., an international
engineering and manufacturing company, now a subsidiary of Groupe Laperriere &
Verreault, including chief financial officer from 1994 to March 1998.
Leslie J. Levinson has served as secretary of our company since
September 1999 and had previously served in such capacity from October 1990 to
July 1997. Since January 2002, he has
53
been a partner in the law firm of Brown Raysman Millstein Felder & Steiner LLP,
which firm serves as counsel to our company. From June 1991 until January 2002,
he was a partner in the law firm of Baer Marks & Upham LLP, which firm served as
counsel to our company. From January 1988 until June 1991, he was a partner in
the law firm of Dow, Lohnes & Albertson, which firm served as counsel to our
company.
Scott A. Shay has been a director of our company since January 1996 and
served as acting chairman of the board of our company from September 1996 until
January 1997. Mr. Shay has been a managing director of Ranieri & Co., Inc. since
its formation in 1988. Mr. Shay currently serves as the chairman of the board of
Signature Bank, a subsidiary of Bank Hapoalim, and is currently a director of
Allied Healthcare (UK) and TWUK, both of which are subsidiaries of our company,
Bank Hapoalim B.M., in Tel Aviv, Israel, and Super Derivatives, Inc., as well as
an officer or director of other direct and indirect subsidiaries of Hyperion
Partners II, L.P. Prior to joining Ranieri & Co., Inc., Mr. Shay was a director
of Salomon Brothers Inc., where he was employed from 1980 to 1988.
Jeffrey S. Peris has been a director of our company since May 1998. Dr.
Peris has been the vice president of human resources and chief learning officer
of American Home Products Corporation since May 2001. Dr. Peris had been the
vice president of business operation of Knoll Pharmaceutical (Abbott
Laboratories) where he was responsible for human resources and corporate
communications from April 1998 until May 2001. Dr. Peris was a management
consultant to various Fortune 100 companies from May 1997 until April 1998. From
1972 until May 1997, Dr. Peris was employed by Merck & Co., Inc. a
pharmaceutical company, where he served as the executive director of human
resources from 1985 until May 1997, the executive director of marketing from
1976 until 1985, and the director of clinical biostatistics and research data
systems from 1972 until 1976.
G. Richard Green has been a director of our company since August 1998
and is currently a director of Allied Healthcare (UK) and TWUK. Mr. Green has
been the chairman since 1987 and a director since 1960 of J.H. & F.W. Green
Ltd., a conglomerate based in the U.K. Since 1960, Mr. Green has held various
positions at J.H. & F.W. Green Ltd. and several of its subsidiaries. Mr. Green
was also a director of Abbey Healthcare Group, Inc. from 1991 to 1995. He also
held directorships of Omnicare Limited and Medigas Limited from 1993 to 1996.
David John Macfarlane has been a director of our company since June
2002. Mr. Macfarlane has been a partner at Ashurst Morris Crisp, a law firm in
London, since 1986. Ashurst Morris Crisp has, in the past, provided legal
services to our company. Mr. Macfarlane is a director of Knox D'Arcy Trust plc.
John Waylett Matthews has been a director of our company since June
2002. Mr. Matthews has been a director of Crest Nicholson plc, a U.K.
residential and commercial development company, since 1992 and the chairman
thereof since 1996. Mr. Matthews is a director of Regus plc, which leases office
space and related services, such as videoconferencing.
Frederick S. Moseley IV has been a director of our company since July
2002. Mr. Moseley was elected to our board by the holders of our Series A
preferred stock. Mr. Moseley
54
has been the president of Triumph Capital Group, a private equity investor since
1990. Mr. Moseley also serves as a director of Box USA Holdings Inc.
All directors of our company (other than the director elected by of the
holders of the Series A preferred stock) are elected by the shareholders for a
one-year term and hold office until their successors are elected and qualified
or until their earlier death, resignation or removal. Officers are chosen by and
serve at the discretion of the board of directors. There are no family
relationships among our directors and officers.
All directors who are not employees of our company are entitled to
receive an aggregate fee of $10,000 per annum, plus reimbursement of expenses
incurred as a result of acting as a director or as a member of any committee of
our board of directors. In addition, Messrs. Matthew and Macfarlane are entitled
to the following payments:
o $1,000 per board meeting attended in person or by telephone
conference call;
o $1,000 per shareholders' meeting;
o (pound)5,000 per annum for serving on the U.K. Governance
Committee.
Mr. Matthews also receives $2,000 per annum for serving as chairman of
the Audit Committee and $1,000 per Audit Committee meeting attended in person or
by telephone.
Other than Timothy M. Aitken, Sarah L. Eames and Daniel A. Bergeron,
none of our company's executive officers have employment agreements. For more
information, see "Item 11--Executive Compensation--Employment Agreements;
Termination of Employment and Change-in-Control Arrangements."
MEETINGS OF THE BOARD OF DIRECTORS
The business affairs of our company are managed under the direction of
our board of directors. Members of the board of directors are informed about our
company's affairs through various reports and documents distributed to them,
through operating and financial reports routinely presented at meetings of the
board of directors and committee meetings by the chairman and other officers,
and through other means. In addition, directors of our company discharge their
duties throughout the year not only by attending board of directors' meetings,
but also through personal meetings and other communications, including telephone
contact with the chairman of the board and others regarding matters of interest
and concern to our company.
During the fiscal year ended September 30, 2002, our company's board of
directors held three formal meetings and acted by unanimous written consent in
lieu of a meeting on two separate occasions. During the fiscal year ended
September 30, 2002, no director attended fewer than 75% of the board meetings
and any applicable committee meetings.
55
BOARD COMMITTEES
The board of directors has an Audit Committee and a Compensation
Committee but does not have a nominating committee. The members of each
committee are appointed by the board of directors.
Audit Committee. The Audit Committee recommends to the board of
directors the auditing firm to be selected each year as independent auditors of
our company's financial statements and to perform services related to the
completion of such audit. The Audit Committee also has responsibility for, among
other things: (1) reviewing the scope and results of the audit; (2) reviewing
our company's financial condition and results of operations with management; (3)
considering the adequacy of the internal accounting and control procedures of
our company; and (4) reviewing any non-audit services and special engagements to
be performed by the independent auditors and considering the effect of such
performance on the auditor's independence. Until September 4, 2002, the Audit
Committee consisted of Messrs. Shay, Green and Peris. The Audit Committee
presently consists of Messrs. Green, Matthews and Peris. The Audit Committee was
in session during each of the three formal meetings of our company's board of
directors during the fiscal year ended September 30, 2002 and also met on four
separate occasions during that period.
Compensation Committee. The Compensation Committee reviews and approves
overall policy with respect to compensation matters, including such matters as
compensation plans for employees and employment agreements and compensation for
executive officers. Until June 7, 2002, the Compensation Committee consisted of
Scott A. Shay and Lewis S. Ranieri, a former director of our company. As of
October 2, 2002, the Compensation Committee consists of Messrs. Green, Moseley
and Shay. The Compensation Committee was in session during each of the three
formal meetings of our company's board of directors during the fiscal year ended
September 30, 2002.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 and the rules
thereunder promulgated by the Securities and Exchange Commission require the
reporting of securities transactions by our directors and officers and by
shareholders who beneficially own more than 10% of our company's common stock
(collectively, the "Reporting Persons"). Section 16(a) and the rules thereunder
require the Reporting Persons to report initial statements of ownership of our
securities and changes in ownership of our securities. Based solely on a review
of these reports received by our company from the Reporting Persons, our company
believes that no Reporting Person has failed to file a Section 16 report on a
timely basis during the 2002 fiscal year, except that Sarah L. Eames, our
president and chief operating officer, inadvertently filed one statement of
change in beneficial ownership on Form 4 late.
ITEM 11. EXECUTIVE COMPENSATION.
The following table summarizes all compensation earned by or paid to
our chief executive officer and each of the other most highly compensated
executive officers of our
56
company whose total annual salary and bonus compensation exceeded $100,000, who
we refer to as the Named Officers, for services rendered in all capacities to
our company in respect of the fiscal years ended September 30, 2002, 2001 and
2000.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION AWARDS
---------------------------------
ANNUAL RESTRICTED SECURITIES
NAME AND FISCAL COMPENSATION STOCK UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR --------------------------- AWARDS($) OPTIONS (#) COMPENSATION
SALARY BONUS
Timothy M. Aitken........ 2002 $380,000 $1,751,263(5) $2,463,329(8) -- $9,000(9)
Chairman of the 2001 360,089 150,000 -- 195,000 18,378(10)
Board and Chief 2000 250,000 140,000 -- -- 72,090(10)
Executive Officer
Sarah L. Eames(1)........ 2002 $365,000 $1,296,237(6) $1,753,556(8) -- $7,800(9)
President and Chief 2001 333,654 150,000 -- 150,000 9,099(10)
Operating Officer 2000 256,154 160,000 -- -- 7,150(10)
John B. Wynne(2)......... 2002 $190,000 $35,000(7) -- 24,000 $7,800(9)
Vice President and 2001 181,731 35,000 -- -- 7,150(9)
Chief Financial 2000 40,385 -- -- 50,000 --
Officer
Wayne A. Palladino(3).... 2001 $ -- $ -- -- -- $--
Senior Vice President 2000 275,191(4) 150,000 -- -- 6,825(10)
and Chief Financial
Officer
(1) Ms. Eames became a director of our company in June 2002, chief operating
officer of our company in June 2001 and president of our company in May
1998.
(2) Mr. Wynne became vice president of finance in June 2000 and vice president
and chief financial officer in August 2000. Mr. Wynne resigned from these
positions on November 4, 2002. On November 4, 2002, Daniel A. Bergeron was
appointed vice president and chief financial officer of our company.
(3) Mr. Palladino resigned August 11, 2000 as senior vice president and chief
financial officer.
(4) Includes $71,827 payout of vacation time accrued.
(5) Consists of $1,551,263 paid in fiscal 2002 and $200,000 paid in fiscal
2003. The bonus paid in fiscal 2002 consists of $1,401,264 paid in
connection with the Bonus Share Issuances (see Item 13--Certain
Relationships and Related Transactions--Recent Issuance of Shares") and
$150,000 paid in fiscal 2002 as a bonus for fiscal 2001. The bonus paid in
fiscal 2003 was paid in respect of fiscal 2002.
(6) Consists of $1,046,237 paid in fiscal 2002 and $250,000 paid in fiscal
2003. The bonus paid in fiscal 2002 consists of $846,237 paid in
connection with the Bonus Share Issuances (see Item
57
13--Certain Relationships and Related Transactions--Recent Issuance of
Shares") and $200,000 paid in fiscal 2002 as a bonus for fiscal 2001. The
bonus paid in fiscal 2003 was paid in respect of fiscal 2002.
(7) Consists of a $35,000 bonus paid in fiscal 2002 in respect of fiscal 2001.
(8) Reflects the value, on the date of issuance, of the 684,258 and 487,009
shares of our stock issued to Mr. Aitken and Ms. Eames, respectively, in
the Bonus Share Issuances. See Item 13--Certain Relationships and Related
Transactions--Recent Issuance of Shares."
(9) Reflects payments for car allowances.
(10) Reflects payment for car allowances and reimbursement of certain travel
expenses.
The following table sets forth certain information regarding individual
options granted during fiscal 2002 to each of the Named Officers pursuant to our
2002 Stock Option Plan. In accordance with the rules of the Securities and
Exchange Commission, the table sets forth the hypothetical gains or "option
spreads" that would exist for the options at the end of their respective terms.
These gains are based on assumed rates of annual compound stock price
appreciation of 5% and 10% from the date the option was granted to the end of
the option's term.
OPTION GRANTS IN FISCAL 2002
NUMBER OF PERCENTAGE OF
SECURITIES TOTAL OPTIONS POTENTIAL REALIZABLE VALUE AT
UNDERLYING GRANTED TO ASSUMED ANNUAL RATES OF STOCK PRICE
OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION APPRECIATION FOR OPTION TERM(2)
NAME GRANTED(1) FISCAL YEAR PER SHARE DATE 5% 10%
---- ------- ----------- --------- ---- ------------------ ------------------
John B. Wynne 24,000 11.7% $5.41 (3) $35,872 $79,269
- ----------------------
- ---------
(1) The options vest over a three-year period.
(2) The 5% and 10% assumed annual compound rates of stock price appreciation
are mandated by the Securities and Exchange Commission and do not
represent our company's estimate or projection of future common stock
prices.
(3) The options, when granted, expired on June 7, 2007 (five years after their
date of grant). However, Mr. Wynne resigned as the chief financial officer
and vice president of our company in November 2002 and, pursuant to our
2002 Stock Option Plan, such options must be exercised within three months
of termination of employment.
We have granted options to certain of our directors and executive
officers after September 30, 2002. See "Item 13--Certain Relationships and
Related Transactions--Other Transactions with Directors and Executive Officers."
The following table sets forth certain information with respect to our
Named Officers concerning the exercise of options by them during our fiscal year
ended September 30, 2002 and unexercised options held by them as of September
30, 2002
58
AGGREGATE OPTION EXERCISES IN FISCAL 2002
AND 2002 FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED VALUE OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
NAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ----------- -------- ------------------------- -------------------------
Timothy M. Aitken -- -- 845,000/0 $1,076,250/0
Sarah L. Eames -- -- 250,000/0 787,500/0
John B. Wynne -- -- 33,334/40,666 114,669/120,331
- -------------------------
(1) Calculated on the basis of $5.25 per share, the closing sale price of the
common stock as reported on the American Stock Exchange on September 30,
2002, minus the exercise price.
COMPENSATION OF DIRECTORS
See "Item 10--Directors and Executive Officers of the
Registrant--Directors and Executive Officers" with respect to compensation of
non-employee directors.
EMPLOYMENT AGREEMENTS; TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
In September 2001, we entered into employment agreements with Mr.
Aitken and Ms. Eames. The agreements have a three-year term (subject to
automatic renewal for successive additional one-year periods unless either party
provides the other with notice of intent to terminate the agreement at least 90
days before the then applicable termination date). The agreements provide for a
base salary of $380,000 and $365,000 for Mr. Aitken and Ms. Eames, respectively,
during the first year of the term of the agreements. Each of the agreements
provides that our company will negotiate in good faith, commencing not less than
90 days prior to each anniversary date of the employment agreements, the amount,
if any, of future salary increases. The salary of Mr. Aitken for fiscal 2003 is
$420,000 and the salary for Ms. Eames for fiscal 2003 is $405,000. Each
agreement provides that if the officer's employment is terminated during the
term of the agreement other than for cause, death or disability, or if, within
six months of a "change in control" (as defined in the agreements) of our
company, the officer or our company terminates the officer's employment, then
(1) all stock options in our company held by the officer shall immediately vest
and (2) the officer will be entitled to receive a cash payment of 2.9 times his
or her average annual base salary during the twelve months preceding the change
of control or the termination of employment.
In October 2002, we entered into an employment agreement with Mr.
Bergeron. The employment agreement provides for a base salary of $230,000 per
annum, subject to adjustment at the discretion of our company, and the payment
of a minimum bonus of $50,000 in respect of our 2003 fiscal year. The employment
agreement is terminable by either party at any time. However, if, after six
months following the commencement of his employment with our
59
company, Mr. Bergeron is terminated without cause or within six months of a
"change of control" (as defined in the employment agreement) of our company, Mr.
Bergeron will be entitled to a cash payment equal to one year's base salary.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Until June 7, 2002, the Compensation Committee consisted of Messrs.
Shay and Ranieri. The Compensation Committee of the Board of Directors presently
consists of Messrs. Shay, Moseley and Green. Mr. Shay, among others, is a
control person of Hyperion Partners II, L.P., Hyperion TW Fund L.P., Hyperion
TWH Fund LLC and Hyperion TWH Fund II LLC, each of which are principal
shareholders of our company. Mr. Moseley, among others, controls Triumph
Partners III, L.P. and Triumph III Investors, L.P., each of which are principal
shareholders of our company. See "Item 13--Certain Relationships and Related
Transactions" for a description of certain transactions between our company and
the Hyperion and Triumph entities.
STOCK OPTION PLANS
1992 and 2002 Stock Option Plans
In July 1992, the board of directors and shareholders approved the
Transworld Healthcare 1992 Stock Option Plan, which we refer to as the 1992
Stock Option Plan. The 1992 Stock Option Plan, which is substantially similar to
our 2002 Stock Option Plan discussed below, provided for the grant of options to
key employees, officers, directors and non-employee independent contractors of
our company. Effective with the adoption by our shareholders of our 2002 Stock
Option Plan in June 2002, no further options may be granted under the 1992 Stock
Option Plan. Outstanding options granted under the 1992 Stock Option Plan may be
exercised in accordance with the terms of the 1992 Stock Option Plan.
On March 14, 2002, the board of directors adopted, and in June 2002 the
shareholders of our company approved, our 2002 Stock Option Plan. Options
granted under the 2002 Stock Option Plan may be either incentive stock options,
which we refer to as Incentive Options, which are intended to meet the
requirements of section 422 of the Internal Revenue Code of 1986 or options that
do not qualify as Incentive Options, which we refer to as Non-Qualified Options.
Under the 2002 Stock Option Plan, the Compensation Committee may grant (1)
Incentive Options at an exercise price per share which is not less than the fair
market value of a share of common stock on the date on which such Incentive
Options are granted (and not less than 110% of the fair market value in the case
of any optionee who beneficially owns more than 10% of the total combined voting
power of our company) and (2) Non-Qualified Options at an exercise price per
share which is determined by the Compensation Committee (and which may be less
than the fair market value of a share of common stock on the date on which such
Non-Qualified Options are granted). The 2002 Stock Option Plan further provides
that the maximum period in which options may be exercised will be determined by
the Compensation Committee, except that Incentive Options may not be exercised
after the expiration of ten years from the date the Incentive Option was
initially granted (and five years in the case of any optionee who beneficially
owns more than 10% of the total combined voting power of our company). Under the
2002 Stock Option Plan, if an optionee's employment is terminated, generally the
60
unexercised Incentive Options must be exercised within three months after
termination. However, if the termination is due to the optionee's death or
permanent disability, the option must be exercised within one year of the
termination of employment. If we terminate the optionee's employment for cause
by, or if the optionee voluntarily terminates his employment, generally his
options will expire as of the termination date. Any option granted under the
2002 Option Stock Plan will be nontransferable, except by will or by the laws of
descent and distribution, and generally may be exercised upon payment of the
option price in cash or by delivery of shares of common stock with a fair market
value equal to the option price.
Shares delivered under the 2002 Stock Option Plan will be available
from authorized but unissued shares of common stock or from shares of common
stock reacquired by our company. Shares of common stock that are subject to
options under the 2002 Stock Option Plan which have terminated or expired
unexercised will return to the pool of shares available for issuance under the
2002 Stock Option Plan.
1997 Non-Employee Director Plan
In May 1997, our board of directors adopted the Transworld Healthcare
1997 Option Plan for Non-Employee Directors, which we refer to as the Director
Plan, pursuant to which 100,000 shares of common stock of our company were
reserved for issuance upon the exercise of options granted to non-employee
directors of our company. The purpose of the Director Plan is to encourage
ownership of common stock by non-employee directors of our company whose
continued services are considered essential to our company's future progress and
to provide them with a further incentive to remain as directors of our company.
The Director Plan is administered by the board of directors. Directors of our
company who are not employees of our company or any subsidiary or affiliate of
our company are eligible to participate in the Director Plan. The Director Plan
will terminate in May 2007; however, options outstanding on the expiration of
the term shall continue to have full force and effect in accordance with the
provisions of the instruments evidencing such options. The board of directors
may suspend, terminate, revise or amend the Director Plan, subject to certain
limitations.
Under the Director Plan, the board of directors may from time to time
at its discretion determine which of the eligible directors should receive
options, the number of shares subject to such options and the dates on which
such options are to be granted. Each such option is immediately exercisable for
a period of ten years from the date of grant generally, but may not be exercised
more than 90 days after the date an optionee ceases to serve as a director of
our company. Options granted under the Director Plan are not transferable by the
optionee other than by will, laws of descent and distribution, or as required by
law.
Shares of common stock may be purchased from our company upon the
exercise of an option by payment in cash or cash equivalent, through the
delivery of shares of common stock having a fair market value equal to the cash
exercise price of the option or any combination of the above, subject to the
discretion of the board of directors.
61
INDEMNIFICATION
As permitted under the Business Corporation Law of the State of New
York, our Certificate of Incorporation provides that a director of our company
will not be personally liable to our company or our shareholders for monetary
damages for breach of a fiduciary duty owed to our company or our shareholders.
By its terms and in accordance with the law of the State of New York, however,
this provision does not eliminate or otherwise limit the liability of a director
of our company for any breach of duty based upon (1) an act or omission (a)
resulting from acts committed in bad faith or involving intentional misconduct
or involving a knowing violation of law or (b) from which the director
personally derived a financial benefit to which he was not legally entitled, or
(2) an improper declaration of dividends or purchases of our securities or such
other violation of section 719 of the Business Corporation Law of the State of
New York.
Our Certificate of Incorporation and Bylaws provide that our company
shall indemnify its directors and officers to the fullest extent permitted by
New York law. We also have entered into indemnification agreements with each of
our directors and officers.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the number of shares of common stock and
Series A preferred stock, and the percentage of voting stock, beneficially owned
as of December 6, 2002, by (1) all persons known by us to be the beneficial
owner of more than 5% of our outstanding voting stock; (2) each director of our
company; (3) each of our "named executive officers," as defined under the rules
of the Securities and Exchange Commission, and (4) all directors and named
executive officers of our company as a group (9 persons).
NUMBER OF NUMBER
COMMON OF SERIES A PERCENTAGE OF
SHARES PREFERRED VOTING SHARES
BENEFICIALLY SHARES BENEFICIALLY BENEFICIALLY
NAME OWNED(1) OWNED OWNED(21)
Timothy M. Aitken................................. 1,571,991(2) 174,400(16) 5.7%
Sarah L. Eames.................................... 743,912(3) 21,580 2.5%
Daniel A. Bergeron................................ 0(4) 0 *
Scott A. Shay..................................... 11,839,610(5) 0 39.4%
Jeffrey S. Peris.................................. 7,000(6) 0 *
G. Richard Green.................................. 70,414(7) 17,440(17) *
Frederick S. Moseley IV........................... 1,163,870(8) 6,627,200(18) 26.0%
David J. Macfarlane............................... 0(9) 0 _
John W. Matthews.................................. 0(9) 0 _
Hyperion Partners II L.P.......................... 11,839,610(10) 0 39.4%
Hyperion TW Fund L.P.............................. 11,839,610(11) 0 39.4%
Hyperion TWH Fund LLC ............................ 11,839,610(12) 0 39.4%
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NUMBER OF NUMBER
COMMON OF SERIES A PERCENTAGE OF
SHARES PREFERRED VOTING SHARES
BENEFICIALLY SHARES BENEFICIALLY BENEFICIALLY
NAME OWNED(1) OWNED OWNED(21)
Hyperion TWH Fund II LLC ......................... 11,839,610(13) 0 39.4%
Triumph Partners III, L.P........................ 1,163,870(14) 6,627,200(19) 26.0%
Triumph III Investors, L.P........................ 1,163,870(14) 6,627,200(20) 26.0%
All executive officers and
directors as a group
(9 persons)....................................... 15,396,797(15) 6,840,620 71.5%
- ---------------------------------------------
* Less than 1%.
(1) Does not include the share of common stock issuable upon conversion of the
Series A preferred stock.
(2) Consists of 715,625 shares of common stock held by Mr. Aitken, 11,366
shares of common stock held by Aitken (English) Company Limited, an
affiliate of Mr. Aitken, and 845,000 shares subject to options exercisable
within 60 days from December 6, 2002. Does not include an additional
60,000 shares subject to options which are not exercisable within 60 days
of December 6, 2002.
(3) Consists of 493,912 shares of common stock held by Ms. Eames and 250,000
shares subject to options exercisable within 60 days from December 6,
2002. Does not include an additional 60,000 shares subject to options
which are not exercisable within 60 days of December 6, 2002.
(4) Does not include 100,000 shares subject to options, none of which are
exercisable within 60 days of December 6, 2002.
(5) Consists of 6,854,454 shares of common stock owned by Hyperion Partners II
L.P., 4,148,456 shares of common stock owned by Hyperion TW Fund L.P.,
461,700 shares of common stock owned by Hyperion TWH Fund LLC and 375,000
shares of common stock owned by Hyperion TWH Fund II LLC, each of which
are affiliates of Mr. Shay and as to which Mr. Shay disclaims beneficial
ownership except to the extent of his pecuniary interest therein.
(6) Consists of 2,000 shares of common stock held by Mr. Peris and 5,000
shares subject to options exercisable within 60 days from December 6,
2002. Does not include an additional 7,000 shares subject to options which
are not exercisable within 60 days of December 1, 2002.
(7) Consists of 60,995 shares of common stock held by Mr. Green, 1,819 shares
of common stock held by Orion Nominees Limited, an affiliate of Mr. Green,
5,000 shares subject to options exercisable within 60 days from December
6, 2002 and 2,600 shares owned of record by Mr. Green's wife, as to which
Mr. Green disclaims beneficial ownership.
(8) Consists of 1,149,904 shares of common stock held by Triumph Partners III,
L.P. and 13,966 shares of common stock held by Triumph III Investors, L.P.
Mr. Moseley is the president of Triumph Capital Group and holds positions
as a general and limited partner in Triumph Capital Group-related
entities, and may be considered a beneficial owner of the shares held by
Triumph Capital Group and its related entities. Mr. Moseley disclaims such
beneficial ownership, except as to his pecuniary interest therein.
63
(9) Excludes 12,000 options held by each of the named individuals, none of
which are exercisable within 60 days of December 6, 2002.
(10) Consists of (a) 6,854,454 shares of common stock held by Hyperion Partners
II and (b) 4,148,456 shares of common stock beneficially owned by Hyperion
TW Fund, 461,700 shares of common stock beneficially owned by Hyperion TWH
Fund and 375,000 shares of common stock beneficially owned by Hyperion TWH
Fund II, all of which are affiliates of Hyperion Partners II and as to
which Hyperion Partners II disclaims beneficial ownership except to the
extent of its pecuniary interest therein.
(11) Consists of (a) 4,148,456 shares of common stock held by Hyperion TW Fund
and (b) 6,854,454 shares of common stock beneficially owned by Hyperion
Partners II, 461,700 shares of common stock beneficially owned by Hyperion
TWH Fund and 375,000 shares of common stock beneficially owned by Hyperion
TWH Fund II, all of which are affiliates of Hyperion TW Fund and as to
which Hyperion TW Fund disclaims beneficial ownership.
(12) Consists of (a) 461,700 shares of common stock held by Hyperion TWH Fund
and (b) 6,854,454 shares of common stock beneficially owned by Hyperion
Partners II, 4,148,456 shares of common stock beneficially owned by
Hyperion TW Fund and 375,000 shares of common stock beneficially owned by
Hyperion TWH Fund II, all of which are affiliates of Hyperion TWH Fund and
as to which Hyperion TWH Fund disclaims beneficial ownership.
(13) Consists of (a) 375,000 shares of common stock held by Hyperion TWH Fund
II and (b) 6,854,454 shares of common stock beneficially owned by Hyperion
Partners II, 4,148,456 shares of common stock beneficially owned by
Hyperion TW Fund and 461,700 shares of common stock beneficially owned by
Hyperion TWH Fund, all of which are affiliates of Hyperion TWH Fund II and
as to which Hyperion TWH Fund II disclaims beneficial ownership.
(14) Consists of 1,149,904 shares of common stock held by Triumph Partners III,
L.P. and 13,966 shares of common stock held by Triumph III Investors, L.P.
Triumph Partners III, L.P. and Triumph III Investors, L.P. are affiliates.
(15) Includes an aggregate of 1,105,000 shares subject to options held by our
executive officers and directors which are exercisable within 60 days of
December 6, 2002 and 2,600 shares owned of record by Mr. Green's wife, as
to which Mr. Green disclaims beneficial ownership.
(16) Consists of 87,200 shares of Series A preferred stock held by Mr. Aitken
and 87,200 shares of Series A preferred stock held by Aitken (English)
Company Limited, an affiliate of Mr. Aitken.
(17) Consists of 17,440 shares of Series A preferred stock held by Orion
Nominees Limited, an affiliate of Mr. Green.
(18) Consists of 6,627,200 shares of Series A preferred stock held by Triumph
Partners III, L.P. and Triumph III Investors, L.P. Mr. Moseley is the
president of Triumph Capital Group and holds positions as a general and
limited partner in Triumph Capital Group-related entities, and may be
considered a beneficial owner of the shares held by Triumph Capital Group
and its related entities. Mr. Moseley disclaims such beneficial ownership,
except as to his pecuniary interest therein.
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(19) Consists of 6,547,674 shares of Series A preferred stock held by Triumph
Partners III, L.P. and 79,526 shares of Series A preferred stock held by
Triumph III Investors, L.P., an affiliate of Triumph Partners III, L.P.
(20) Consists of 79,526 shares of Series A preferred stock held by Triumph III
Investors, L.P. and 6,547,674 shares of Series A preferred stock held by
Triumph Partners III, L.P., an affiliate of Triumph III Investors, L.P.
(21) As of December 6, 2002, the voting shares of our company consist of
22,238,901 shares of common stock and 7,773,660 shares of Series A
preferred stock.
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth certain information as of September 30,
2002 regarding compensation plans under which equity securities of our company
are authorized for issuance:
EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE EXERCISE FUTURE ISSUANCE UNDER EQUITY
ISSUED UPON EXERCISE OF PRICE OF OUTSTANDING COMPENSATION PLANS
OUTSTANDING OPTIONS, WARRANTS OPTIONS, WARRANTS AND (EXCLUDING SECURITIES
AND RIGHTS RIGHTS REFLECTED IN COLUMN (A))
PLAN CATEGORY (A) (B) (C)
- ------------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by shareholders 1,530,000 $4.24 2,795,000
- ------------------------------------------------------------------------------------------------------------------------
Equity compensation plans
not approved by shareholders -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Total 1,530,000 $4.24 2,795,000
- ------------------------------------------------------------------------------------------------------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
THE REORGANIZATION
Certain executive officers and directors of our company received shares
of common stock and Series A preferred stock in the Reorganization. These
issuances are described below:
o Timothy M. Aitken, the chairman and chief executive officer of our
company and a director of TWUK, beneficially owned Equity Warrants
to purchase 500,000 ordinary shares of TWUK (250,000 of which were
owned by Aitken (English) Company Limited, an affilate of Mr.
Aitken) and(pound)500,000 in principal amount of Notes of Allied
Healthcare (UK) ((pound)250,000 of which were held by Aitken
(English) Company Limited) and was entitled to receive, together
with Aitken
65
(English) Company Limited,(pound)130,352 of accrued PIK interest
on the Notes. In the Reorganization, Mr. Aitken and Aitken
(English) Company Limited exercised their Equity Warrants through
the tender of their Notes and received an aggregate of 174,400
shares of Series A preferred stock. In addition, as a result of
the consummation of the Reorganization, Mr. Aitken and Aitken
(English) Company Limited were entitled to receive an aggregate of
22,733 shares of our common stock in satisfaction of their PIK
interest. These shares were issued in December 2002.
o Sarah L. Eames, the president and chief operating officer of our
company and an executive officer of TWUK, owned Equity Warrants to
purchase 61,869 ordinary shares of TWUK and(pound)61,869 in
principal amount of Notes of Allied Healthcare (UK) and was
entitled to receive(pound)16,130 of accrued PIK interest on the
Notes. In the Reorganization, she exercised her Equity Warrants
through the tender of her Notes and received 21,580 shares of
Series A preferred stock. In addition, as a result of the
consummation of the Reorganization, Ms. Eames was entitled to
receive an aggregate of 2,813 shares of our common stock in
satisfaction of her PIK interest. These shares were issued in
December 2002.
o G. Richard Green, a director of our company, beneficially owned
350,000 redeemable shares of TWUK, Equity Warrants to purchase
50,000 ordinary shares of TWUK and(pound)50,000 of Notes of Allied
Healthcare (UK) and was entitled to receive (after deducting
amounts due as a withholding tax) (pound)10,428 of accrued PIK
interest on the Notes. In the Reorganization, he received 57,995
shares of common stock in exchange for his redeemable shares and
he exercised his Equity Warrants through the tender of his Notes
and received 17,440 shares of Series A preferred stock. In
addition, in the Reorganization, Orion Nominees Limited, an
affiliate of Mr. Green, received 1,819 shares of our common stock
in satisfaction of its PIK interest.
o Frederick S. Moseley IV holds positions as a general and limited
partner in Triumph Capital Group-related entities and may be
considered the beneficial owner of securities held by two Triumph
Capital Group-related entities, Triumph Partners III, L.P. and
Triumph III Investors, L.P. Triumph Partners III, L.P. and Triumph
III Investors, L.P. held Equity Warrants to purchase an aggregate
of 19,000,000 ordinary shares of TWUK and an aggregate
of(pound)19,000,000 of Notes of Allied Healthcare (UK) and they
were entitled to receive(pound)4,953,383 of accrued PIK interest
on the Notes. In the Reorganization, the two Triumph entities
exercised their Equity Warrants through the tender of their Notes
and received an aggregate of 6,627,200 shares of Series A
preferred stock. In addition, as a result of the consummation of
the Reorganization, the two Triumph entities were entitled to
receive an aggregate of 863,870 shares of our common stock in
satisfaction of their PIK interest. These shares were issued in
December 2002.
Pursuant to the Certificate of Amendment (relating to the Series A
preferred stock) to our Certificate of Incorporation, the holders of our Series
A preferred stock have the right to elect
66
one director to our board of directors until such time as Triumph Partners III,
L.P. and its affiliates own less than 50% of the shares of Series A preferred
stock issued to them in the Reorganization. Mr. Moseley, the designee of the
Series A preferred stockholders, became a director of our company on July 29,
2002. Mr. Moseley is a principal of Triumph Partners III, L.P. and Triumph III
Investors, L.P., principal investors in our company.
RECENT ISSUANCES OF SHARES
Issuance of Shares to Mr. Aitken and Ms. Eames
On April 22, 2002, we issued 684,258 shares of our common stock to
Timothy M. Aitken, our chairman and chief executive officer, and 487,099 shares
of common stock to Sarah L. Eames, our president and chief operating officer, as
a bonus for among, other things, services rendered to our company through the
date of issuance. We refer to such issuances as the "Bonus Share Issuances."
Tax Agreements
In connection with the Bonus Share Issuances, on April 22, 2002, our
company and TWUK entered into a Tax Bonus, Tax Loan and Tax Indemnification
Agreement (the "Tax Agreement") with each of Mr. Aitken and Ms. Eames.
Pursuant to the Tax Agreements, we:
o made cash bonus payments to Mr. Aitken and Ms. Eames in the
amounts of $1,401,263 and $846,237, respectively (or an aggregate
of $2,247,500); and
o loaned Mr. Aitken and Ms. Eames the amounts of $550,000 and
$390,000, respectively (or an aggregate of $940,000).
Pursuant to the Tax Agreements, TWUK will be obligated to indemnify
each of Mr. Aitken and Ms. Eames for all federal, New York State and New York
City taxable income in excess of agreed-upon amounts, which may arise from the
Bonus Share Issuances. However, TWUK's indemnity obligation to Mr. Aitken is
capped at $622,371 and TWUK's indemnity obligation to Ms. Eames is capped at
$377,629 (or an aggregate of $1,000,000). Moreover, of the tax indemnity
payments, if any, an amount equal to 20% of such excess taxable income (but not
more than $175,247 in the case of Mr. Aitken and not more than $119,132 in the
case of Ms. Eames) will be made in the form of a loan.
Promissory Notes
The loans of $550,000 and $390,000 to Mr. Aitken and Ms. Eames,
respectively, that we were required to make by the Tax Agreements are evidenced
by recourse promissory notes that have been executed by each of Mr. Aitken and
Ms. Eames. The promissory notes are payable on the fifth anniversary of the date
that the loans that they evidence are made; however, in the event that either
Mr. Aitken or Ms. Eames sells any of the shares of our common stock received in
the Bonus Share Issuances, the promissory notes require him or her to prepay a
portion of the loans
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in accordance with a formula set forth in the promissory notes. The promissory
notes bear interest at the rate of 4.65% per annum.
Pledge and Security Agreements
Pursuant to Pledge and Security Agreements entered into by our company
and each of Mr. Aitken and Ms. Eames, the payments under their promissory notes
are secured by a pledge by them of all of their respective non-qualified stock
options of our company, the shares of our common stock issuable upon the
exercise of any stock options of our company (whether qualified or
non-qualified) and the dividends, if any, they receive in respect of any of such
shares of common stock. In addition, in the event of a failure to pay the
promissory note when due, we will have the right to apply after-tax amounts owed
to Mr. Aitken and Ms. Eames under their respective employment agreements with
our company or TWUK (or any consulting, severance, non-competition or similar
agreement with our company or TWUK) to the repayment of the promissory note.
Agreement Not to Exercise Redeemable Shares
Pursuant to Irrevocable Undertakings executed in connection with the
Tax Agreements, each of Mr. Aitken and Ms. Eames agreed that they would not
exercise their redeemable shares of TWUK and purchase ordinary shares of TWUK.
TWUK purchased the 4,130,000 redeemable shares held by Mr. Aitken and the
2,940,000 redeemable shares held Ms. Eames for their nominal value prior to the
Reorganization. Had these redeemable shares not been purchased by TWUK prior to
the Reorganization for nominal value, they would have been exchanged in the
Reorganization (as were the redeemable shares held by all other holders thereof)
for shares of our common stock at the ratio of 0.1308 or 0.1657 shares of our
common stock per redeemable share (depending upon the exercise price of the
redeemable share).
Sale of Shares to Hyperion and Triumph
On April 22, 2002, we entered into a stock purchase agreement with
Hyperion TWH Fund II LLC, Triumph Partners III, L.P. and Triumph III Investors,
L.P. pursuant to which we agreed to sell 375,000 shares of our common stock to
Hyperion TWH Fund II LLC and 375,000 shares of our common stock, in the
aggregate, to Triumph Partners III, L.P. and Triumph III Investors, L.P. at
$4.25 per share. Hyperion TWH Fund II LLC is an affiliate of the other Hyperion
Funds. Triumph Partners III, L.P. and Triumph III Investors, L.P. were investors
in TWUK and are principal shareholders in our company. We issued the 750,000
shares on April 30, 2002 and received proceeds of an aggregate of $3,187,500.
We used approximately $2,247,500 of the proceeds we received from the
issuance of our shares of common stock to Hyperion and Triumph to pay Mr. Aitken
and Ms. Eames the cash bonus we were required to make to them pursuant to the
Tax Agreements and we used approximately $940,000 of the proceeds we receive
from the issuance of the shares of our common stock to Hyperion and Triumph to
make the loans we were required to make to Mr. Aitken and Ms. Eames pursuant to
the Tax Agreements.
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REGISTRATION OF SHARES FOR SELLING SHAREHOLDERS
We filed a registration statement on Form S-3 with the Securities and
Exchange Commission covering resales of an aggregate of 23,479,157 shares of our
common stock by the selling shareholders named in the registration statement.
The registration statement was declared effective by the Securities and Exchange
Commission on August 21, 2002. The 23,479,157 shares of common stock covered by
the registration statement consist of:
o 10,132,590 shares of common stock that we issued in connection
with the Reorganization (including 7,773,660 shares of common
stock issuable upon the conversion of our Series A preferred
stock);
o 11,800,210 shares of our common stock held by the Hyperion funds
(including the 375,000 shares of common stock issued to Hyperion
TWH Fund II LLC on April 22, 2002). The shares of our common stock
held by the Hyperion funds that are covered by the registration
statement were acquired by them in privately negotiated
transactions and in open market purchases;
o 375,000 shares of our common stock issued to Triumph Partners III,
L.P and Triumph III Investors, L.P. on April 30, 2002 (including
75,000 shares subsequently transferred by these entities to BNP
Paribas); and
o 1,171,357 shares of our common stock issued to Timothy M. Aitken
and Sarah L. Eames in the Bonus Share Issuances.
The registration statement was filed pursuant to a Registration Rights
Agreement, dated as of July 25, 2002, that our company entered into at the
consummation of the Reorganization.
OTHER TRANSACTIONS WITH DIRECTORS AND EXECUTIVE OFFICERS
During our fiscal year ended September 30, 2002, we granted 24,000
options to purchase shares of common stock at $5.41 per share under the 2002
Stock Option Plan to Mr. Wynne, our former chief financial officer. See "Item
12--Executive Compensation--Option Grants in Fiscal 2002."
On November 13, 2002, we granted the following options to purchase
shares of common stock at $4.70 per share under the 2002 Stock Option Plan: (1)
60,000 to Mr. Aitken, (2) 60,000 to Ms. Eames, (3) 7,000 to Mr. Peris and (4)
100,000 to Mr. Bergeron.
ITEM 14. CONTROLS AND PROCEDURES.
Within the 90 day period prior to the date of this Annual Report on
Form 10-K, our company evaluated the effectiveness of the design and operation
of our disclosure controls and procedures ( "Disclosure Controls"). This
evaluation (the "Controls Evaluation") was done under the supervision and with
the participation of management, including our chief executive officer (the
"CEO") and chief financial officer (the "CFO").
69
Disclosure Controls are procedures that are designed with the objective
of ensuring that information required to be disclosed in our reports filed under
the Securities Exchange Act of 1934, such as this Annual Report, is recorded,
processed, summarized and reported within the time periods specified in the
rules of the Securities and Exchange Commission. Disclosure Controls are also
designed with the objective of ensuring that such information is accumulated and
communicated to our management, including the CEO and CFO, as appropriate to
allow timely decisions regarding required disclosure.
A control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the
control system are met. The design of any system of controls also is based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions.
70
Based upon the Controls Evaluation, our CEO and CFO have concluded
that, subject to the limitations noted above, our Disclosure Controls are
effective to ensure that material information relating to our company
is made known to management, including the CEO and CFO, particularly during the
period when our periodic reports are being prepared.
Since the date of the Controls Evaluation to the date of this Annual
Report, there have been no significant changes in our internal controls or in
other factors that could significantly affect internal controls, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Index to Consolidated Financial Statements Page
------------------------------------------ ----
Report of Independent Auditors F-1
Consolidated Balance Sheets - September 30, 2002 and 2001 F-2
Consolidated Statements of Operations - For the Years Ended
September 30, 2002, 2001 and 2000 F-3
Consolidated Statements of Changes in Stockholders' Equity -
For the Years Ended September 30, 2002, 2001 and 2000 F-4
Consolidated Statements of Cash Flows - For the Years Ended
September 20, 2002, 2001 and 2000 F-5
Notes to Consolidated Financial Statements F-7
(a)(2) Index to Consolidated Financial Statements Schedule
---------------------------------------------------
Schedule II - Valuation and Qualifying Accounts S-1
Schedules other than those listed above are omitted because they
71
are not required or are not applicable or the information is shown
in the audited consolidated financial statements or related notes.
(b) Reports on Form 8-K
On August 9, 2002, we filed a Report on Form 8-K which included
information required by Items 2, 5 and 7 of Form 8-K. The Form 8-K disclosed the
consummation of the Reorganization and the election by the holders of the Series
A preferred stock of Frederick S. Moseley IV to our board of directors. The Form
8-K incorporated by reference the historical financial statements of TWUK and
pro forma financial statements of our company that gave effect to the
Reorganization.
(c) Exhibits.
The exhibits listed below are filed as part of this Annual Report on
Form 10-K.
Exhibit
Number Title
- ------- -----
3.1 Restated Certificate of Incorporation of our company filed on December
12, 1990, as amended on August 7, 1992 (incorporated herein by
reference to Exhibit 3.1 to our Quarterly Report on Form 10-Q for the
quarter ended April 30, 1997).
3.2 Certificate of Amendment to the Restated Certificate of Incorporation
of our company filed on June 28, 1995 (incorporated herein by reference
to Exhibit 3.2 to our Quarterly Report on Form 10-Q for the quarter
ended April 30, 1997).
3.3 Certificate of Amendment to the Restated Certificate of Incorporation
of our company filed on October 9, 1996 (incorporated herein by
reference to Exhibit 3.3 to our Quarterly Report on Form 10-Q for the
quarter ended April 30, 1997).
3.4 Certificate of Amendment to the Restated Certificate of Incorporation
of our company filed on May 6, 1997 (incorporated herein by reference
to Exhibit 3.4 to our Quarterly Report on Form 10-Q for the quarter
ended April 30, 1997).
3.5 Certificate of Amendment of the Certificate of Incorporation of our
company filed on April 16, 1998 (incorporated by reference to Exhibit
3.5 of our Registration Statement on Form S-4 (Reg. St. No. 333-87304)
filed with the Securities and Exchange Commission on May 1, 2002).
3.6 Certificate of Amendment to the Certificate of Incorporation of our
company filed on June 7, 2002 (incorporated by reference to Exhibit 3.1
of our Current Report on Form 8-K filed with the Securities and
Exchange Commission on June 10, 2002).
3.7 Restated Bylaws of our company, as amended (incorporated herein by
reference to Exhibit 3.4 to our Annual Report on Form 10-K for the year
ended October 31, 1996).
72
3.8 Amendment to the Bylaws of our company effective June 7, 2002
(incorporated herein by reference to Exhibit 3.2 of our Current Report
on Form 8-K filed with the Securities and Exchange Commission on June
10, 2002).
4.1 Specimen Certificate of Common Stock (incorporated herein by reference
to Exhibit 4.1 of our Current Report on Form 8-K filed with the
Securities and Exchange Commission on June 10, 2002).
4.2 Specimen Certificate of Series A Convertible Preferred Stock
(incorporated herein by reference to Exhibit 4.2 of Amendment No. 1 to
our Registration Statement on Form S-4 (Reg. St. No. 333-87304 filed
with the Securities and Exchange Commission on May 21, 2002).
4.3 Certificate of Amendment to the Certificate of Incorporation of our
company which defines the rights of the Series A Convertible Preferred
Stock, filed June 26, 2002 (incorporated herein by reference to Exhibit
4.1 of our Current Report on Form 8-K filed with the Securities and
Exchange Commission on August 9, 2002).
10.1 Transworld Home HealthCare, Inc. 1992 Stock Option Plan, as amended
(incorporated herein by reference to Exhibit 10.3 to our Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998).
10.2 Form of Indemnification Agreement with our company (incorporated herein
by reference to Exhibit 10.31 to our Annual Report on Form 10-K for the
year ended October 31, 1994).
10.3 Transworld Home HealthCare, Inc. 1997 Option Plan for Non-Employee
Directors (incorporated herein by reference to Exhibit A to our Proxy
Statement for its Annual Meeting held on May 28, 1997).
10.4 Voting Trust Agreement dated December 17, 1999 by and among Transworld
Holdings (UK) Limited (now known as Allied Healthcare Group Limited
("Allied Healthcare (UK)"), Transworld Healthcare (UK) Limited
("TWUK"), our company, Triumph Partners III, L.P. and Richard Green, as
trustee (incorporated herein by reference to Exhibit 10.65 to our
Annual Report on Form 10-K for the year ended September 30, 1999).
10.5 Securities Purchase Agreement , dated December 17, 1999, among Allied
Healthcare (UK), TWUK and the Purchasers identified therein
(incorporated herein by reference to Exhibit 10.66 to our Annual Report
on Form 10-K for the year ended September 30, 1999).
10.6 Senior Credit Agreement, dated as of December 17, 1999, among Allied
Healthcare (UK), TWUK, Paribas as Arranger, Paribas and Barclays Bank
PLC as Underwriters, Barclays Bank PLC as Agent and Security Agent and
Others (incorporated herein by reference to Exhibit 10.67 to our Annual
Report on Form 10-K for the year ended
73
September 30, 1999).
10.7 Mezzanine Credit Agreement, dated as of December 17, 1999, among Allied
healthcare (UK), TWUK, Paribas as Arranger, Underwriter and Agent,
Barclays Bank PLC as Security Agent and Others (incorporated herein by
reference to Exhibit 10.68 to our Annual Report on Form 10-K for the
year ended September 30, 1999).
10.8 Warrant Instrument to subscribe for Shares in TWUK in favor of the
mezzanine lenders, dated as of December 17, 1999 (incorporated herein
by reference to Exhibit 10.69 to our Annual Report on Form 10-K for the
year ended September 30, 1999).
10.9 Share Sale and Purchase Agreement of Nightingale Nursing Bureau
Limited, dated as of April 6, 2000, between Transworld Healthcare (UK)
Limited, W.A. Thompson, D.T. Thompon and others (incorporated herein by
reference to Exhibit 99.1 to our Current Report on Form 8-K dated April
20, 2000).
10.10 Asset Purchase Agreement, dated as of September 18, 2000, between MK
Diabetic Support Services, Inc., Respiflow, Inc. and Transworld Ostomy,
Inc. and Express-Med, Inc. (incorporated herein by reference to Exhibit
10.1 to our Current Report on Form 8-K filed dated October 11, 2000).
10.11 Sale and Purchase Agreement of entire share capital of Amcare Limited
together with its subsidiary Novacare UK Limited dated November 22,
2000 between Omnicare Limited and Bristol-Myers Squibb Holdings Limited
(incorporated herein by reference to Exhibit 10.73 to our Annual Report
on Form 10-K for the year ended September 30, 2000).
10.12 Agreement for Sale and Purchase of Staffing Enterprise Limited and
Staffing Enterprise (PSV) Limited between Allied Healthcare (UK)
Limited and David Christopher Pain and Deborah Kay Pain dated September
27, 2001 (incorporated herein by reference to Exhibit 10.2 to our
Current Report on Form 8-K filed October 12, 2001).
10.13 Second Amendment Agreement, dated September 27, 2001, relating to the
Mezzanine Credit Agreement dated December 17, 1999 among Allied
Healthcare Group Limited, Transworld Healthcare (UK) Limited, BNP
Paribas as Arranger, Underwriter and Agent, Barclays Bank PLC as Agent
and Security Agent and Others (incorporated herein by reference to
Exhibit 10.3 to our Current Report on Form 8-K filed October 12, 2001).
10.14 Second Amendment Agreement, dated September 27, 2001, relating to the
Senior Credit Agreement dated December 17, 1999 among Allied Healthcare
Group Limited, Transworld Healthcare (UK) Limited, BNP Paribas as
Arranger, Underwriter and Agent, Barclays Bank PLC as Agent and
Security Agent and Others (incorporated herein by reference to Exhibit
10.4 to our Current Report on Form 8-K
74
filed October 12, 2001).
10.15 Employment Agreement, dated September 24, 2001, between our company and
Timothy M. Aitken (incorporated herein by reference to Exhibit 10.16 to
our Annual Report on Form 10-K for the year ended September 30, 2001).
10.16 Employment Agreement, dated September 24, 2001, between our company and
Sarah Eames (incorporated herein by reference to Exhibit 10.17 to our
Annual Report on Form 10-K for the year ended September 30, 2001).
10.17 Master Reorganization Agreement, dated as of April 24, 2002, among our
company, Allied Healthcare (UK), TWUK and the Investors named therein
(incorporated by reference to Annex A-1 to the proxy
statement/prospectus forming a part of our Registration Statement on
Form S-4 (Reg. St. No. 333-87304) filed with the Securities and
Exchange Commission on May 1, 2002).
10.17A First Amendment to Master Reorganization Agreement, dated as of May 16,
2002, by and among our company, Allied Healthcare (UK), TWUK and the
Investors named therein (incorporated herein by reference to Exhibit
10.17A of Amendment No. 1 to our Registration Statement on Form S-4
(Reg. St. No. 333-87304) filed with the Securities and Exchange
Commission on May 21, 2002).
10.17B Second Amendment to Master Reorganization Agreement, dated as of June
26, 2002, by and among our company, Allied Healthcare (UK), TWUK and
the Investors named therein (incorporated herein by reference to
Exhibit 10.3 of our Current Report on Form 8-K filed with the
Securities and Exchange Commission on August 9, 2002).
10.18 Amendment No. 1, dated as of July 25, 2002, among Allied Healthcare
(UK), TWUK and the Purchasers identified therein to the Securities
Purchase Agreement dated December 17, 1999 (incorporated herein by
reference to Exhibit 10.4 of our Current Report on Form 8-K filed with
the Securities and Exchange Commission on August 9, 2002).
10.19 Registration Rights Agreement, dated as of July 25, 2002, among our
company and the persons named therein (incorporated herein by reference
to Exhibit 10.5 of our Current Report on Form 8-K filed with the
Securities and Exchange Commission on August 9, 2002).
10.20 Amendment No. 1, dated as of July 25, 2002, among TWUK, Allied
Healthcare (UK), Richard Green, Triumph Partners III, L.P. and our
company to the Voting Trust Agreement dated December 17, 1999
(incorporated herein by reference to Exhibit 10.6 of our Current Report
on Form 8-K filed with the Securities and Exchange Commission on
August 9, 2002).
10.21A Tax Bonus, Tax Loan and Tax Indemnification Agreement, dated as of
April 22,
75
2002, by and among TWUK, our company and Timothy M. Aitken
(incorporated herein by reference to Exhibit 10.21 of our Registration
Statement on Form S-4 (Reg. St. No. 333-87304) filed with the
Securities and Exchange Commission on May 1, 2002).
10.21B Tax Bonus, Tax Loan and Tax Indemnification Agreement, dated as of
April 22, 2002, by and among TWUK, our company and Sarah L. Eames
(incorporated herein by reference to Exhibit 10.22 of our Registration
Statement on Form S-4 (Reg. St. No. 333-87304) filed with the
Securities and Exchange Commission on May 1, 2002).
10.22A Promissory Note, dated April 30, 2002, executed by Timothy M. Aitken in
favor of our company (incorporated herein by reference to Exhibit 10.7A
of our Quarterly Report on Form 10-Q for the quarterly period ended
June 10, 2002).
10.22B Promissory Note, dated April 30, 2002, executed by Sarah L. Eames in
favor of our company (incorporated herein by reference to Exhibit 10.7B
of our Quarterly Report on Form 10-Q for the quarterly period ended
June 10, 2002).
10.23A Pledge and Security Agreement, dated as of April 30, 2002, between
Timothy M. Aitken and our company (incorporated herein by reference to
Exhibit 10.8A of our Quarterly Report on Form 10-Q for the quarterly
period ended June 10, 2002).
10.23B Pledge and Security Agreement, dated as of April 30, 2002, between
Sarah L. Eames and our company (incorporated herein by reference to
Exhibit 10.8B of our Quarterly Report on Form 10-Q for the quarterly
period ended June 10, 2002).
10.24 Registration Rights Agreement, dated April 30, 2002, among our company,
Timothy M. Aitken and Sarah L. Eames (incorporated herein by reference
to Exhibit 10.25 of our Registration Statement on Form S-4 (Reg. St.
No. 333-87304) filed with the Securities and Exchange Commission on May
1, 2002).
10.25A Irrevocable Undertaking, dated April 22, 2002, of Timothy M. Aitken
relating to the redeemable shares of TWUK (incorporated herein by
reference to Exhibit 10.26 of our Registration Statement on Form S-4
(Reg. St. No. 333-87304) filed with the Securities and Exchange
Commission on May 1, 2002).
10.25B Irrevocable Undertaking, dated April 22, 2002, of Sarah L. Eames
relating to the redeemable shares of TWUK (incorporated herein by
reference to Exhibit 10.27 of our Registration Statement on Form S-4
(Reg. St. No. 333-87304) filed with the Securities and Exchange
Commission on May 1, 2002).
76
10.26 Stock Purchase Agreement, dated as of April 22, 2002, among our
company, Hyperion TWH Fund II LLC, Triumph Partners III, L.P. and
Triumph III Investors, L.P. (incorporated herein by reference to
Exhibit 10.28 of our Registration Statement on Form S-4 (Reg. St. No.
333-87304) filed with the Securities and Exchange Commission on May 1,
2002).
10.27 Registration Rights Agreement, dated April 30, 2002, among our company,
Triumph Partners III, L.P. and Triumph III Investors, L.P.
(incorporated herein by reference to Exhibit 10.29 of our Registration
Statement on Form S-4 (Reg. St. No. 333-87304) filed with the
Securities and Exchange Commission on May 1, 2002).
10.28 2002 Stock Option Plan (incorporated herein by reference to Annex D to
the proxy statement/prospectus forming a part of the Amendment No. 1 to
our Registration Statement on Form S-4 (Reg. St. No. 333-87304) filed
with the Securities and Exchange Commission on May 21, 2002).
10.29* Employment Agreement, dated as of October 30, 2002, between our company
and Daniel A. Bergeron.
11 Statement re: computation of earnings per share (computation can be
determined clearly from the material contained in this Annual Report on
Form 10-K).
21* Subsidiaries of our company.
23* Consent of Ernst & Young LLP, independent auditors of our company.
99.1* Certification of Chairman and Chief Executive Officer pursuant to 18
U.S. C.ss. 1350, as adopted pursuant to Section 906 of the
Sarabanes-Oxley Act of 2002.
99.2* Certification of Chief Financial Officer pursuant to 18 U.S. C.ss.1350,
as adopted pursuant to Section 906 of the Sarabanes-Oxley Act of 2002.
- -----------------------
* Filed herewith.
77
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
ALLIED HEALTHCARE INTERNATIONAL INC.
By: /s/ Timothy M. Aitken
-----------------------------------
Name: Timothy M. Aitken
Title: Chairman of the Board and
Chief Executive Officer
Dated: December 6, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Timothy M. Aitken Chairman of the Board and December 6, 2002
- -------------------------------- Chief Executive Officer (Principal
Timothy M. Aitken Executive Officer)
/s/ Sarah L. Eames Director, President and Chief December 6, 2002
- -------------------------------- Operating Officer
Sarah L. Eames
/s/ Daniel A. Bergeron Chief Financial Officer December 6, 2002
- -------------------------------- (Principal Financial and
Daniel A. Bergeron Accounting Officer)
G. Richard Green Director December 6, 2002
- --------------------------------
G. Richard Green
/s/ David J. MacFarlane Director December 6, 2002
- --------------------------------
David J. MacFarlane
/s/ John W. Matthews Director December 6, 2002
- --------------------------------
John W. Matthews
/s/ Frederick S. Moseley Director December 6, 2002
- --------------------------------
Frederick S. Moseley
78
/s/ Jeffrey S. Peris Director December 6, 2002
- --------------------------------
Jeffrey S. Peris
/s/ Scott A. Shay Director December 4, 2002
- --------------------------------
Scott A. Shay
79
CERTIFICATION FOR FORM 10-K
I, Timothy M. Aitken, certify that:
1. I have reviewed this Annual Report on Form 10-K of Allied
Healthcare International Inc. (the "Registrant");
2. Based on my knowledge, this Annual Report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
Annual Report;
3. Based on my knowledge, the financial statements and other
financial information included in this Annual Report fairly present in all
material respects the financial condition, results of operations and cash flows
of the Registrant as of, and for, the periods presented in this Annual Report;
4. The Registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this Annual Report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this Annual Report (the "Evaluation Date"); and
(c) presented in this Annual Report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the Registrant's auditors and the audit
committee of the Registrant's board of directors:
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have identified for the
Registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officers and I have indicated in
this Annual Report whether there were significant changes in internal controls
or in other factors that could
significantly affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: December 6, 2002
/s/ Timothy M. Aitken
----------------------------------------
Timothy M. Aitken
Chairman of the Board and Chief Executive Officer
2
CERTIFICATION FOR FORM 10-K
I, Daniel A. Bergeron, certify that:
1. I have reviewed this Annual Report on Form 10-K of Allied
Healthcare International Inc. (the "Registrant")
2. Based on my knowledge, this Annual Report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
Annual Report;
3. Based on my knowledge, the financial statements and other
financial information included in this Annual Report fairly present in all
material respects the financial condition, results of operations and cash flows
of the Registrant as of, and for, the periods presented in this Annual Report;
4. The Registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this Annual Report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this Annual Report (the "Evaluation Date"); and
(c) presented in this Annual Report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the Registrant's auditors and the audit
committee of the Registrant's board of directors:
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have identified for the
Registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officers and I have indicated in
this Annual Report whether there were significant changes in internal controls
or in other factors that could
significantly affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: December 6, 2002
/s/ Daniel A. Bergeron
---------------------------------------
Daniel A. Bergeron
Vice President and Chief Financial Officer
2
ALLIED HEALTHCARE INTERNATIONAL INC.
Index to Consolidated Financial Statements Page
- ------------------------------------------ ----
Report of Independent Auditors F-1
Consolidated Balance Sheets - September 30, 2002
and 2001 F-2
Consolidated Statements of Operations - for the
years ended September 30, 2002, 2001 and 2000 F-3
Consolidated Statements of Changes in
Stockholders' Equity - for the years ended
September 30, 2002, 2001 and 2000 F-4
Consolidated Statements of Cash Flows - for the
years ended September 30, 2002, 2001 and 2000 F-5
Notes to Consolidated Financial Statements F-7
Index to Consolidated Financial Statements Schedule
- ---------------------------------------------------
Schedule II - Valuation and Qualifying Accounts S-1
F-i
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Allied Healthcare International, Inc.
We have audited the accompanying consolidated balance sheets of Allied
Healthcare International Inc. (the "Company") as of September 30, 2002 and 2001
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended September 30, 2002.
Our audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Allied Healthcare
International Inc. at September 30, 2002 and 2001, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended September 30, 2002, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 2, the Company changed its method of accounting for
goodwill and other intangibles effective October 1, 2001.
Ernst & Young LLP
New York, New York
November 8, 2002
F-1
ALLIED HEALTHCARE INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, SEPTEMBER 30,
2002 2001
------------------- -------------------
ASSETS
Current assets:
Cash and cash equivalents $ 18,807 $ 15,357
Restricted cash 19,840
Accounts receivable, less allowance for doubtful
accounts of $24,499 and $24,611, respectively 33,634 29,555
Inventories 956 972
Prepaid expenses and other assets 9,450 7,336
-------------------- -------------------
Total current assets 82,687 53,220
Property and equipment, net 9,506 7,545
Restricted cash 43,678 71,020
Intangible assets, net 127,398 109,426
Deferred financing costs and other assets 4,844 6,862
-------------------- -------------------
Total assets $ 268,113 $ 248,073
==================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 19,840 $
Short-term debt 3,480
Current portion of long-term debt 6,249 4,868
Accounts payable 2,251 2,160
Accrued expenses 25,504 20,795
Taxes payable 4,756 5,667
-------------------- -------------------
Total current liabilities 62,080 33,490
Long-term debt 118,961 175,913
Deferred income taxes and other long term liabilities 875 702
Minority interest 1,614
-------------------- -------------------
Total liabilities 181,916 211,719
-------------------- -------------------
Commitments and contingencies
Redeemable convertible preferred stock , 7,774 shares
issued and outstanding (liquidation value of $35,051) $ 32,254 $
Stockholders' equity:
Preferred stock, $.01 par value; authorized
10,000 shares, issued and outstanding - 7,774
shares of Series A preferred stock 78
Common stock, $.01 par value; authorized
40,000 shares, issued 20,945 and
17,555 shares, respectively 209 176
Additional paid-in capital 139,231 128,077
Accumulated other comprehensive loss (3,112) (5,600)
Accumulated deficit (80,785) (85,579)
-------------------- -------------------
55,621 37,074
Less notes receivable from officers (958)
Less cost of treasury stock (266 shares) (720) (720)
-------------------- -------------------
Total stockholders' equity 53,943 36,354
-------------------- -------------------
Total liabilities and stockholders' equity $ 268,113 $ 248,073
==================== ===================
See notes to consolidated financial statements.
F-2
ALLIED HEALTHCARE INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2000
--------------- ----------------- ------------------
Revenues:
Net patient services $ 237,890 $ 130,719 $ 80,210
Net respiratory, medical equipment and supplies sales 9,635 11,409 43,619
Net infusion services 12,373 12,505 11,579
-------------- ---------------- ----------------
Total revenues 259,898 154,633 135,408
-------------- ---------------- ----------------
Cost of revenues:
Patient services 173,868 90,614 55,370
Respiratory, medical equipment and supplies sales 5,172 7,081 26,024
Infusion services 9,068 8,959 8,387
-------------- ---------------- ----------------
Total cost of revenues 188,108 106,654 89,781
-------------- ---------------- ----------------
Gross profit 71,790 47,979 45,627
Selling, general and administrative expenses 47,036 37,382 49,041
Non cash compensation 5,835
Transaction costs 686
General and administrative expenses related to Mail-Order
operations 3,883
Losses due to sale of subsidiary 354
Impairment of long-lived assets 15,073
Restructuring charge 1,288
Legal Settlements, net 5,082
-------------- ---------------- ----------------
Operating income (loss) 18,233 6,360 ( 24,857 )
Interest income ( 3,024 ) ( 1,587 ) ( 1,443 )
Interest expense 16,496 10,020 10,457
Gain on settlement of PIK interest ( 5,143 )
Foreign exchange loss 19 400
-------------- ---------------- ----------------
Income (loss) before income taxes, equity income
and minority interest 9,885 ( 2,473 ) ( 33,871 )
Provision (benefit) for income taxes 4,971 24,117 ( 7,756 )
-------------- ---------------- ----------------
Income (loss) before equity income and minority interest 4,914 ( 26,590 ) ( 26,115 )
Equity in income of and interest income earned
from U.K. subsidiaries 1,101
Minority interest 120 22 ( 70 )
-------------- ---------------- ----------------
Net Income (loss) $ 4,794 $( 26,612 ) $( 24,944 )
Redeemable preferred dividend and accretion 1,016
-------------- ---------------- ----------------
Net income (loss) available to common shareholders $ 3,778 $( 26,612 ) $( 24,944 )
============== =============== ================
Basic and diluted net income (loss) per share of
common stock $ 0.20 $( 1.53 ) ( 1.42 )
============== ================ ================
Weighted average number of common shares outstanding:
Basic 18,565 17,408 17,551
============== ================ ================
Diluted 18,932 17,408 17,551
============== ================ ================
See notes to consolidated financial statements.
F-3
ALLIED HEALTHCARE INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS EQUITY (IN THOUSANDS)
COMMON STOCK PREFERRED STOCK
----------------------------- --------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------- ----------- ---------------- --------------
Balance, September 30, 1999 17,551 $ 176
Comprehensive loss:
Net loss
Foreign currency translation adjustment
Comprehensive loss
Issuance of detachable warrants to
purchase common stock
------------- --------- --------------- -----------
Balance, September 30, 2000 17,551 $ 176 $
Comprehensive loss:
Net loss
Foreign currency translation adjustment
Comprehensive loss
Issuance of common stock for:
Exercise of stock options 4
Cost of treasury shares
------------- --------- --------------- -----------
Balance, September 30, 2001 17,555 $ 176 $
Comprehensive income:
Net income
Foreign currency translation adjustment
Comprehensive income:
Issuance of common stock for:
Hyperion shares 375 4
Triumph shares 375 4
Non-cash based compensation 1,171 11
Reorganization 1,469 14
Issuance of preferred stock for:
Exercise of equity warrants 7,774 78
Accretion of Series A preferred
stock issuance costs
Stock issuance costs
Preferred dividends on Series A stock
Notes issued to officers
Interest on notes to officers
------------- --------- --------------- -----------
Balance, September 30, 2002 20,945 $ 209 7,774 $ 78
============= ========= =============== ===========
ACCUMULATED
ADDITIONAL OTHER RETAINED
PAID-IN COMPREHENSIVE (DEFICIT)
CAPITAL (LOSS) INCOME EARNINGS
---------------- -------------- ---------------
Balance, September 30, 1999 $ 125,526 $( 405 ) $( 34,023 )
Comprehensive loss:
Net loss ( 24,944 )
Foreign currency translation adjustment ( 5,843 )
Comprehensive loss
Issuance of detachable warrants to
purchase common stock 2,544
--------------- ----------- --------------
Balance, September 30, 2000 $ 128,070 $( 6,248 ) $( 58,967 )
Comprehensive loss:
Net loss ( 26,612 )
Foreign currency translation adjustment 648
Comprehensive loss
Issuance of common stock for:
Exercise of stock options 7
Cost of treasury shares
--------------- ----------- --------------
Balance, September 30, 2001 $ 128,077 $( 5,600 ) $( 85,579 )
Comprehensive income:
Net income 4,794
Foreign currency translation adjustment 2,488
Comprehensive income:
Issuance of common stock for:
Hyperion shares 1,590
Triumph shares 1,590
Non-cash based compensation 4,205
Reorganization 5,727
Issuance of preferred stock for:
Exercise of equity warrants ( 78 )
Accretion of Series A preferred
stock issuance costs ( 75 )
Stock issuance costs ( 864 )
Preferred dividends on Series A stock ( 941 )
Notes issued to officers
Interest on notes to officers
--------------- ----------- --------------
Balance, September 30, 2002 $ 139,231 $( 3,112 ) $( 80,785 )
=============== =========== ==============
OFFICERS TREASURY
LOANS SHARES TOTAL
-------------- -------------- --------------
Balance, September 30, 1999 $ 91,274
Comprehensive loss:
Net loss ( 24,944 )
Foreign currency translation adjustment ( 5,843 )
--------------
Comprehensive loss ( 30,787 )
Issuance of detachable warrants to
purchase common stock 2,544
------------- ------------- --------------
Balance, September 30, 2000 $ $ $ 63,031
Comprehensive loss:
Net loss ( 26,612 )
Foreign currency translation adjustment 648
--------------
Comprehensive loss ( 25,964 )
Issuance of common stock for:
Exercise of stock options 7
Cost of treasury shares ( 720 ) ( 720 )
------------- ------------- --------------
Balance, September 30, 2001 $ $( 720 ) $ 36,354
Comprehensive income:
Net income 4,794
Foreign currency translation adjustment 2,488
--------------
Comprehensive income: 7,282
Issuance of common stock for:
Hyperion shares 1,594
Triumph shares 1,594
Non-cash based compensation 4,216
Reorganization 5,741
Issuance of preferred stock for:
Exercise of equity warrants 0
Accretion of Series A preferred
stock issuance costs ( 75 )
Stock issuance costs ( 864 )
Preferred dividends on Series A stock ( 941 )
Notes issued to officers ( 940 ) ( 940 )
Interest on notes to officers ( 18 ) ( 18 )
------------- ------------- --------------
Balance, September 30, 2002 $( 958 ) ( 720 ) $ 53,943
============= ============= ==============
F-4
ALLIED HEALTHCARE INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2000
----------------- --------------- -----------------
Cash flows from operating activities:
Net income (loss) $ 4,794 $( 26,612 ) $( 24,944 )
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 2,116 2,042 2,119
Amortization of goodwill 3,839 3,145
Amortization of other intangible assets 13 156
Amortization of debt issuance costs 2,218 1,117 1,182
Provision for doubtful accounts 1,836 3,568 9,026
Impairment of long-lived assets 15,073
Losses due to sale of subsidiary 354
Restructuring charge 1,288
Interest in kind 3,063 3,964 2,975
Minority interest 120 22 ( 70 )
Stock based compensation 5,835
Interest accrued on loans to officers ( 18 )
Write-off of deferred financing fees 925 1,167
Gain on settlement of PIK interest ( 5,143 )
Gain on acquisition of minority interest ( 179 )
Equity in income of U.K. subsidiaries ( 411 )
Deferred income taxes 159 21,494 ( 9,529 )
Changes in assets and liabilities, excluding the
effect of businesses acquired and sold:
Increase in accounts receivable ( 3,957 ) ( 3,952 ) ( 2,967 )
Decrease (increase) in inventories 36 ( 276 ) 829
Increase in prepaid expenses and other assets ( 1,601 ) ( 1,378 ) ( 424 )
Increase (decrease) in accounts payable 41 850 ( 1,865 )
(Decrease) increase in accrued expenses and other liabilities ( 1,039 ) ( 873 ) 2,621
--------------- ------------- ---------------
Net cash provided by (used in) operating activities 9,206 4,172 ( 629 )
--------------- ------------- ---------------
Cash flows from investing activities:
Capital expenditures ( 3,713 ) ( 1,937 ) ( 1,207 )
Proceeds from sale of property and equipment 93 52 184
Notes issued to officers ( 940 )
Notes receivable from U.K. subsidiaries - payments received 58,983
Advances to U.K. subsidiaries ( 304 )
Repayment of advances to U.K. subsidiaries 8,390
Payments for acquisitions - net of cash acquired ( 2,047 ) ( 14,616 ) ( 13,687 )
Notes receivable - payments received
Proceeds limited to future acquisitions 11,018 ( 52,487 ) ( 18,395 )
Proceeds from sale of business 15,075
Payments on acquisitions payable ( 1,038 ) ( 2,163 )
----------------- ------------- ---------------
Net cash provided by (used in) investing activities 3,373 ( 56,076 ) 33,964
--------------- ------------- ---------------
(Continued)
See notes to consolidated financial statements.
F-5
ALLIED HEALTHCARE INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2000
---------------- --------------- -----------------
Cash flows from financing activities:
Payments for financing fees and issuance costs ( 4,053 ) ( 2,004 ) ( 2,849 )
Proceeds from issuance of stock 3,188
Proceeds from notes payable 2,012
Payments on notes payable ( 4,575 )
Payments on long-term debt ( 55,755 )
Borrowing under revolving loan 781
Payments on revolving loan ( 6,550 ) ( 5,121 )
Borrowing under acquisition loan 5,632
Proceeds from long-term debt 72,115
Principal payments on long-term debt ( 5,150 ) ( 4,038 ) ( 2,187 )
Payments for treasury shares acquired ( 720 )
Stock options and warrants exercised, net, including tax benefit 7
--------------- ------------- ---------------
Net cash (used in) provided by financing activities ( 10,590 ) 58,810 ( 57,487 )
--------------- ------------- ---------------
Effect of exchange rate on cash 1,461 584 ( 1,135 )
Decrease in cash due to deconsolidation of U.K. subsidiaries ( 2,598 )
Increase in cash due to reconsolidation of U.K. subsidiaries 30,594
--------------- ------------- ---------------
Increase in cash 3,450 7,490 2,709
Cash and cash equivalents,
beginning of period 15,357 7,867 5,158
--------------- ------------- ---------------
Cash and cash equivalents,
end of period $ 18,807 $ 15,357 $ 7,867
=============== ============= ===============
Supplemental cash flow information:
Cash paid for interest $ 10,729 $ 5,670 $ 5,612
=============== ============= ===============
Cash paid for income taxes, net $ 5,914 $ 2,101 $ 2,031
=============== ============= ===============
Supplemental disclosure of non-cash investing and financing activities: Details
of business acquired in purchase transactions:
Fair value of assets acquired $ 2,525 $ 44,395 $ 18,841
=============== ============= ===============
Liabilities assumed or incurred $ 341 $ 6,080 $ 1,470
=============== ============= ===============
Cash paid for acquisitions (including related expenses) $ 2,184 $ 18,297 $ 15,731
Cash acquired 137 3,681 2,044
--------------- ------------- ---------------
Net cash paid for acquisitions $ 2,047 $ 14,616 $ 13,687
=============== ============= ===============
Issuance of notes payable $ 20,018
=============
Issuance of class A1 common shares of TWUK $ 1,662
===============
See notes to consolidated financial statements.
F-6
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1. BASIS OF PRESENTATION:
Allied Healthcare International Inc. (formerly known as Transworld
Healthcare, Inc.) (the "Company") is one of the leading providers of
healthcare staffing services, including nursing and ancillary services, to
the United Kingdom ("U.K.") healthcare industry. The Company operates a
community-based network of over 100 branches, with the capacity to provide
nurses, carers (often referred to as home health aides in the United
States) and specialized medical personnel to locations covering
approximately 90% of the population of the U.K. The Company provides
healthcare staffing services to hospitals, local governmental authorities,
nursing homes and private patients in the U.K. Through its U.K.
operations, the Company also supplies medical grade oxygen for use in
respiratory therapy to the U.K. pharmacy market and to private patients in
Northern Ireland.
The Company's United States ("U.S.") operations, which are concentrated in
New York and New Jersey, provide infusion therapy, respiratory therapy and
home medical equipment and accounted for less than 10% of the Company's
revenues during the year ended September 30, 2002.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF ACCOUNTING:
The accompanying consolidated financial statements are prepared on the
accrual basis of accounting in accordance with U.S. generally accepted
accounting standards.
PRINCIPLES OF CONSOLIDATION:
On December 17, 1999, the Company's U.K. subsidiaries obtained financing
(the "Refinancing") denominated in pounds sterling, which aggregated
approximately $125,700 at December 31, 1999. Concurrent with the
Refinancing, specifically relating to the senior subordinated notes (the
"Notes"), the Company placed 100% of its ownership interest in Transworld
Healthcare (UK) Limited ("TWUK") into a voting trust (the "Voting Trust").
As a result of the establishment of the Voting Trust, the Company would
initially own 100% of the outstanding voting certificates. The term of the
Voting Trust is 20 years. The Voting Trust agreement stipulates that the
composition of the board of directors of TWUK will consist of one person
designated by the Company, one person appointed by the purchasers of the
Notes, one representative of TWUK management (currently the Chairman and
Chief Executive Officer of the Company) and two independent directors. The
board of directors of TWUK will then vote on substantially all matters
regarding its operations. G. Richard Green, a director of the Company, is
the trustee of the Voting Trust.
As a result of the provisions of the Voting Trust discussed above, the
Company controlled only 50% of the board of directors and the holders of
the Notes (the "Investors") had the right to approve or veto the annual
budget and financial forecast of results of operations and sources and
uses of cash and any material deviation from such approved budget. Since
the Company did not control a majority of the board of directors and the
Investors held substantive rights, principally in the form of their
ability to approve the annual budget and financial forecast of results of
operations and sources and uses of cash, it was no longer able to
consolidate the U.K. subsidiaries into its financial statements although
it
F-7
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
owned 100% of the outstanding shares of the stock of the parent company,
Allied Healthcare Group Limited (formerly Transworld Holdings (UK)
Limited) ("Allied Healthcare (UK)"). Therefore, effective with the
Refinancing, the Company began accounting for the investment in Allied
Healthcare (UK) and its subsidiaries under the equity method, retroactive
to October 1, 1999.
During the second quarter of fiscal 2000, Allied Healthcare (UK) and TWUK
amended their Articles of Association to give the Chairman (a Company
designee) the right to resolve any tie votes of the board of directors and
certain documents covering the Notes were amended to eliminate the
requirement that the Investors approve the operating budget. These
amendments enabled the Company to consolidate the U.K. subsidiaries as of
January 1, 2000.
The table below presents pro forma condensed consolidated statement of
operations data as if the U.K. subsidiaries had been consolidated for the
entire year ended September 30, 2000.
Net revenues $ 164,255
Gross profit 54,620
Operating loss (22,415)
Interest income (1,503)
Interest expense 10,765
Benefit for income taxes (6,663)
Net loss (24,944)
REVENUE RECOGNITION:
Patient services and infusion and respiratory therapy revenues are
recognized when services are performed and are recorded net of estimated
contractual adjustments based on agreements with third-party payors, where
applicable. Revenues from the rental of home medical equipment (including
respiratory equipment) are recognized over the rental period (typically on
a month-to-month basis) and approximated $5,845, $6,275 and $6,148 in
fiscal 2002, 2001 and 2000, respectively. Revenues from the sale of
pharmaceuticals and supplies are recognized when products are shipped and
are recorded at amounts expected to be paid by third-party payors.
The Company receives a majority of its revenue from third-party insurance
companies, the National Health Services (the "NHS") and other U.K.
governmental payors, Medicare and Medicaid. The amount paid by third-party
payors is dependent upon the benefits included in the patient's policy or
as allowable amounts set by third-party payors. Certain revenues are
subject to review by third-party payors, and adjustments, if any, are
recorded when determined. For the years ended September 30, 2002, 2001 and
2000, 63%, 55% and 44% respectively of the Company's net revenues were
attributable to the NHS and other U.K. governmental payor programs. For the
years ended September 30, 2002, 2001 and 2000 the Company's net revenues
attributable to the Medicare and Medicaid programs were approximately 2%,
4% and 18%, respectively, of the Company's total revenues.
F-8
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
INCOME TAXES:
The Company accounts for income taxes using the liability method in
accordance with Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes." Under this method, deferred income tax
assets and liabilities reflect tax carryforwards and the net effects of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting and income tax purposes, as determined
under currently enacted tax rates. Deferred tax assets are recorded if
future realization is more likely than not.
Deferred taxes are recorded primarily for bad debts, Federal and state net
operating loss carry forwards, depreciation and amortization of
intangibles, which are reported in different periods for Federal income tax
purposes than for financial reporting purposes. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amounts
expected to be realized.
EARNINGS (LOSS) PER SHARE:
Basic earnings (loss) per share is computed using the weighted average
number of common shares outstanding, after giving effect to issuable shares
per agreements. Diluted earnings (loss) per share adjusts basic earnings
(loss) per share for the effects of stock options, warrants and redeemable
convertible stock only when such effect is dilutive.
The weighted average number of shares used in the basic and diluted
earnings (loss) per share computations for the years ended September 30,
2002, 2001 and 2000 are as follows:
2002 2001 2000
------ ------ ------
Weighted average number of common shares outstanding 18,399 17,408 17,551
Weighted average number of common shares contingently
issuable 166
------ ------ ------
Weighted average number of common shares outstanding
as used in computation of basic earnings (loss)
per share of common stock 18,565 17,408 17,551
Effect of dilutive securities - stock options 367
------ ------ ------
Shares used in computation of diluted earnings (loss)
per share of common stock 18,932 17,408 17,551
====== ====== ======
IMPAIRMENT OF LONG-LIVED ASSETS:
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If
the sum of the undiscounted future cash flows is less than the carrying
amount of the asset, a loss is recognized for the difference between the
fair value (discounted future cash flows) and carrying value of the asset.
Impairment loss on assets to be sold, if any, is based on the estimated
proceeds to be received, less estimated costs to sell (See Note 3).
STOCK-BASED COMPENSATION:
The accompanying consolidated financial statements of the Company have been
prepared in accordance with the Accounting Principles Board's Opinion No.
25, Accounting for Stock Issued to Employees ("APB No. 25"). Under APB No.
25, generally, no compensation expense is recognized in connection with the
awarding of stock option grants to employees provided that, as of the grant
date, all terms associated with the award are fixed and the quoted market
price of the stock is equal to or less than the amount an employee must pay
to acquire the stock as defined. As the Company only issues fixed term
stock option grants at or above the quoted market price on the date of the
grant, there is no compensation expense recognized in the accompanying
consolidated financial statements.
The Company adopted the disclosure only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," which requires certain financial
statement disclosures, including pro forma operating results had the
Company prepared its consolidated financial statements in accordance with
the fair value based method of accounting for stock-based compensation (See
Note 12).
F-9
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
COMPREHENSIVE INCOME (LOSS):
Components of comprehensive income (loss) include net income (loss) 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.
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents include highly liquid short-term investments
purchased with initial maturities of 90 days or less.
RESTRICTED CASH:
Restricted cash represents cash and cash equivalents, advanced under the
refinancing of the Company's U.K. operations, available for payment of
consideration for certain permitted acquisitions under the senior credit
facility, including the payment of contingent consideration for completed
transactions.
The current portion of restricted cash represents the amount on deposit,
as required by the senior credit lender, for the sole purpose of repaying
the notes payable issued in connection with the acquisition of certain
U.K. flexible staffing agencies. (See Notes 4 and 8).
INVENTORIES:
Inventories, which consist primarily of finished goods, include
pharmaceuticals, ancillary medical supplies and certain medical equipment,
are valued at the lower of cost (determined using a first-in, first-out
method) or market.
PROPERTY AND EQUIPMENT:
Property and equipment, including revenue-producing equipment, is carried
at cost, net of accumulated depreciation and amortization. Revenue
producing equipment in the U.K. consists of oxygen cylinders and oxygen
concentrators. Depreciation for these oxygen cylinders and oxygen
concentrators is provided on the straight-line method over their estimated
useful lives of twenty and seven years, respectively. Revenue producing
equipment in the U.S. consists of home medical equipment (e.g., respiratory
equipment, beds and wheelchairs). Depreciation for this home medical
equipment is provided primarily on the straight-line method over their
estimated useful lives of three to seven years. Buildings are being
depreciated over their useful lives of twenty-five to fifty years and
leasehold improvements are amortized over the related lease terms or
estimated useful lives, whichever is shorter.
F-10
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
INTANGIBLE ASSETS:
Intangible assets, consisting principally of goodwill, are carried at
cost, net of accumulated amortization. All goodwill is enterprise
goodwill.
In July 2001, the Financial Accounting Standards Board issued FAS 142,
"Goodwill and Other Intangible Assets". Under FAS 142, all existing and
newly acquired goodwill and intangible assets deemed to have indefinite
lives will no longer be amortized but will be subject to annual impairment
tests. Effective October 1, 2001, the Company adopted FAS 142 and
suspended the amortization of goodwill. In accordance with the
transitional provisions of FAS 142, previously recognized goodwill was
tested for impairment. The Company completed its annual impairment test
required under FAS 142 during the fourth quarter of fiscal 2002 and
determined there is no impairment to its recorded goodwill balance.
The following table present the changes in the carrying amount of goodwill
for the year ended September 30, 2002:
YEAR ENDED SEPTEMBER 30, 2002
---------------------------------------------------------------
U.K. HOME U.S.
OPERATIONS HEALTHCARE CORPORATE TOTAL
------------------- ------------------------ ----------------
Balance at September 30, 2001 $ 105,542 $ 3,884 $ $ 109,426
Goodwill acquired during year 9,444 9,444
Goodwill on acquisition of 2,300 2,300
minority interest
Foreign exchange difference 6,228 6,228
----------------- ------------- ------------ -------------
Balance at September 30, 2002 $ 121,214 $ 3,884 $ 2,300 $ 127,398
================= ============= ============ =============
The amortization expense, net income (loss) and net income (loss) per
share of the Company for the year ended September 30, 2002, the period of
initial application of FAS 142, and, on a pro forma basis, for the years
ended September 30, 2001 and 2000 are as follows:
YEAR ENDED
SEPTEMBER 30,
2002 2001 2000
AS REPORTED PRO FORMA PRO FORMA
------------- -----------------------------
Reported net income (loss) $ 4,794 $( 26,612 ) $( 24,944)
Add back: Goodwill amortization - 3,839 3,145
--------- ----------- ---------------
Adjusted net income (loss) $ 4,794 $( 22,773 ) $( 21,799)
========= =========== ===============
Basic and diluted net income (loss) per $ 0.20 $( 1.53 ) $( 1.42)
share
Add back: Goodwill amortization per share - 0.22 0.18
--------- ----------- ---------------
Adjusted basic and diluted net income
(loss) per share 0.20 $( 1.31 ) $( 1.24)
========= =========== ===============
F-11
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
RECENT ACCOUNTING PRONOUNCEMENTS:
In October 2001, the FASB issued FAS No. 144, "Accounting for Impairment
or Disposal of Long-lived Assets." FAS No. 144 supersedes FAS No. 121,
"Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed Of", and addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This
statement is effective for fiscal years beginning after December 15, 2001.
Adoption of this statement is not expected to have a material impact on
the Company's consolidated financial position or results of operations.
In April 2002, the FASB issued FAS No. 145, "Rescission of FASB Statements
No. 4 (Reporting Gains and Losses From Extinguishment of Debt), 44
(Accounting for Intangible assets of Motor Carries), and 64
(Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements),
Amendment of FASB Statement No.13 (Accounting for Leases), and Technical
Corrections." FAS No. 145 addresses gain or loss on the extinguishment of
debt and sale-leaseback accounting for certain lease modifications. This
statement is effective for fiscal years beginning after May 15, 2002. The
Company adopted FAS 145, effective October 1, 2001, and recorded a charge
of $925 in interest expense for the year ended September 30, 2002. The
Company also reclassified $1,167 to interest expense which was previously
recorded as an extraordinary item in fiscal 2000.
In June 2002, the FASB issued FAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." FAS No. 146 addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." This statement is effective for exit and disposal
activities initiated after December 15, 2002. Adoption of this statement
is not expected to have a material impact on the Company's consolidated
financial position or results of operations.
DEFERRED FINANCING COSTS:
Costs incurred in obtaining long-term financing are amortized over the
terms of the long-term financing agreements using the interest method. At
September 30, 2002 and 2001, other assets included $4,746 and $6,761 of
deferred financing costs net of accumulated amortization of $2,677 and
$1,554 respectively. Amortization of deferred financing costs is included
in interest expense in the accompanying Consolidated Statements of
Operations.
FOREIGN CURRENCY TRANSLATION:
Assets and liabilities of foreign subsidiaries whose functional currency is
other than the U.S. dollar are translated to U.S. dollars using the
exchange rates in effect at the balance sheet date. Results of operations
are translated using weighted average exchange rates during the period.
Adjustments resulting from the translation process are included as a
separate component of stockholders' equity.
F-12
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
CONCENTRATIONS OF CREDIT RISK:
Financial instruments which potentially subject the Company to
concentrations of credit risk are cash equivalents and accounts receivable.
The Company places its cash equivalents with high credit quality financial
institutions. The Company believes no significant concentration of credit
risk exists with respect to these cash equivalents.
The Company grants credit without collateral to its patients, who are
primarily insured under third-party agreements. The Company maintains an
allowance for doubtful accounts based on the expected collectibility of
accounts receivable. At September 30, 2002, 73.6%, 0.7% and 0.8% of
accounts receivable was due from the NHS and other U.K. governmental
payors, Medicare and Medicaid, respectively with the balance due from
various other third-party payors and self-pay patients (none of which
comprise greater than 10% of the balance). At September 30, 2001, 72.7% of
accounts receivable is due from the NHS and other U.K. governmental payors.
The remaining accounts receivable balance is comprised of various other
third-party payors and self-pay patients (none of which is greater than 10%
of the balance).
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Cash, accounts receivable, accounts payable and accrued expenses
approximate fair value due to the short-term maturity of those instruments.
The estimated fair value of the Company's outstanding borrowings was
$149,198 and $181,553 at September 2002 and 2001, respectively, compared to
$148,530 and $180,781 total debt outstanding.
USE OF MANAGEMENT'S ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. Estimates are used for, but not limited to, the accounting for
allowance for doubtful accounts, contractual allowance, valuation of
inventories, accrued expenses, depreciation and amortization.
RECLASSIFICATIONS:
Certain prior year balances have been reclassified to conform to the
current year presentation.
F-13
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
3. CORPORATE REORGANIZATION:
On April 24, 2002, the Company entered into a Master Reorganization
Agreement ("Reorganization Agreement"), with its U.K. subsidiaries --
Allied Healthcare Group Limited (the "Allied Healthcare (UK)") and TWUK --
and certain investors in such subsidiaries.
The following transactions are referred to as the "Reorganization." Both
the Reorganization Agreement and Reorganization were voted upon and
approved at the Company's annual meeting of shareholders on June 7, 2002
and the Reorganization subsequently closed on July 25, 2002. Under the
Reorganization:
o Holders of outstanding redeemable shares of TWUK exchanged their
redeemable shares for shares of the Company's common stock, using the
net exercise method, and received either 0.1308 or 0.1657 shares of the
Company's common stock per redeemable share (depending upon the
exercise price of the redeemable share). As a result, the Company
issued 414 shares of common stock.
o Holders of ordinary shares of TWUK exchanged their ordinary shares for
shares of the Company's common stock at an exchange ratio of 2.867 TWUK
ordinary shares for every one share of the Company's common stock
(which is the equivalent of 0.3488 shares of the Company's common stock
for every ordinary share of TWUK). This ratio of TWUK securities for
the Company's securities is referred to as the "Exchange Ratio." As a
result, the Company issued 366 shares of common stock.
o All warrants held by the mezzanine lenders (the "Mezzanine Warrants")
of TWUK , that were issued in connection with the refinancing of the
Company's U.K. operations in 1999, were exercised for an aggregate of
1,640 ordinary shares of TWUK. Each resulting ordinary share was
exchanged for 0.3488 shares of the Company's common stock. As a result,
the Company issued 572 shares of common stock.
o Holders of the equity warrants of TWUK, that were issued in
connection with the refinancing of the Company's U.K. operations
in 1999, exercised their equity warrants through the tender of the
senior subordinated promissory notes of Allied Healthcare (UK)
(exclusive of accrued and unpaid PIK interest) and received an
aggregate of 22,287 ordinary shares of TWUK. Each resulting
ordinary share was exchanged for 0.3488 shares of the Company's
new Series A preferred stock for an aggregate of 7,774 shares.
F-14
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
3. CORPORATE REORGANIZATION (CONTINUED):
o In the Reorganization, accrued and unpaid interest owed to the
holders of the senior subordinated promissory notes (the "Notes")
issued by Allied Healthcare (UK) in the refinancing of the
Company's U.K. operation in 1999, was satisfied by either the
exchange for shares of the Company's common stock or the right to
receive a funding note (the "Loan Notes") and the Loan Notes
holders are required to exchange the loan notes for shares of the
Company's common stock. The satisfaction of accrued and unpaid
interest for shares of the Company's common stock was exchanged at
the rate of 0.3488 shares for every(pound)2.00 of Loan Notes. As
of September 30, 2002, the Company issued 117 shares of common
stock in settlement of accrued and unpaid interest and an
additional 890 shares of common stock were issued fiscal 2003.
o Lastly, the special voting share of TWUK held by Triumph Partners
III, L.P. was exchanged for one ordinary share of TWUK. However,
since conversion of this ordinary share at the Exchange Ratio
would result in 0.3488 shares of the Company's common stock being
issued, it has been agreed that, in the Reorganization, the
Company would issue zero shares of the Company's common stock in
respect of the ordinary share into which the special voting share
has been exchanged.
Thus, the Company issued an aggregate of 1,469 shares of the Company's
common stock and 7,774 shares of the Company's Series A preferred stock in
the Reorganization and in addition issued 890 shares of common stock in
fiscal 2003.
The following table displays the unaudited pro forma results of operations
and related per share information as if the Reorganization was completed
as of October 1, 2001. The unaudited pro forma results principally reflect
the reversal of interest expense, net of tax, related to the Notes of
Allied Healthcare (UK) to reflect the exercise of Equity Warrants and the
related exchange of TWUK shares for the Company's new Series A preferred
stock.
YEAR ENDED
SEPTEMBER 30, 2002
-------------------
NET REVENUES $ 259,898
GROSS PROFIT 71,790
OPERATING INCOME 20,537
NET INCOME 4,984
NET INCOME AVAILABLE FOR COMMON SHAREHOLDERS 869
INCOME PER SHARE OF COMMON STOCK:
BASIC AND DILUTED $ 0.04
F-15
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
3. CORPORATE REORGANIZATION (CONTINUED):
The above pro forma results, exclude the following one time and
non-recurring adjustments related to the Reorganization:
o The Company recognized compensation expense of $1,619 on the
exchange of 2,523 management's and employees' redeemable shares of
TWUK for 414 shares of the Company's common stock calculated using
a net exercise method.
o The Company recognized a gain of $5,143 on the settlement of
accrued and unpaid interest owed to the holders of the Notes of
Allied Healthcare (UK).
o The Company recognized a charge of $925 to reflect the write off
of deferred costs associated with the Notes of Allied Healthcare
(UK) issued in 1999, which were exchanged in the Reorganization.
o The Company recognized a charge of $686 to reflect the costs
associated in completing the Reorganization transaction.
The Company has agreed to register, at its expense, the resale of all of
the shares of common stock to be issued in the Reorganization and the
shares of common stock issueable upon conversion of the Series A preferred
stock.
4. BUSINESS COMBINATIONS AND DISPOSALS:
COMBINATIONS:
In fiscal 2002 the U.K. Operations acquired a total of 6 flexible staffing
agencies for approximately $2,184 in cash. The transactions include
provisions to pay additional amounts, payable in cash, of up to $5,606 in
contingent consideration dependent upon future earnings of the acquired
entities. These acquisitions were accounted for as purchase business
combinations. The pro forma results of operations and related per share
information for these acquisitions have not been presented as the amounts
are considered immaterial.
On September 27, 2001 TWUK acquired all of the issued and outstanding
shares of Staffing Enterprise Limited and Staffing Enterprise (PSV) Limited
(collectively "Staffing Enterprise"), a London based provider of flexible
staffing of specialist nurses and other healthcare professionals to London
NHS Trust and independent hospitals. The consideration included $7,100 in
cash, $14,800 in demand notes plus an additional sum of up to approximately
$30,800 in contingent consideration dependent upon Pre-Tax Profits (as
defined in the agreement for sale and purchase) for the fiscal year ended
September 30, 2002.
F-16
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
4. BUSINESS COMBINATIONS AND DISPOSALS (CONTINUED):
The following table displays the unaudited pro forma results of operations
and related per share information for the two years ended September 30,
2001 and 2000, as if the acquisition of Staffing Enterprise was completed
as of October 1, 1999 and the U.K. subsidiaries had been consolidated for
the entire year ended September 30, 2000:
2001 2000
---------------------- -------------------
(unaudited) (unaudited)
Net revenues $208,528 $212,314
Net loss (24,181) (22,415)
Net loss per share of common stock:
Basic and Diluted (1.39) (1.28)
The acquisition was accounted for as a purchase business combination.
Accordingly, the total cost of the acquisition was allocated on the basis
of the estimated fair value of the assets acquired and liabilities assumed
and incurred. Assets acquired and liabilities assumed were assigned values
of approximately $11,200 and $4,200, respectively, with the remaining
portion of approximately $14,900 attributable to goodwill and other
identifiable intangible assets. As the acquisition was completed on
September 27, 2001, there are no amounts relating to Staffing Enterprise
included in the Consolidated Statement of Operations for fiscal 2001.
In addition to the acquisition of Staffing Enterprise, during fiscal 2001
the U.K. Operations acquired a total of 11 other flexible staffing agencies
for approximately $9,144 in cash and the issuance of $5,720 in demand notes
and resulted in the Company recording approximately $13,300 of additional
goodwill and other identifiable intangible assets. The transactions include
provisions to pay additional amounts, payable in cash, of up to $12,993 in
contingent consideration dependent upon future earnings of the acquired
entities. These acquisitions were accounted for as purchase business
combinations.
The pro forma results of operations and related per share information for
these acquisitions have not been presented as the amounts are considered
immaterial.
F-17
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
4. BUSINESS COMBINATIONS AND DISPOSALS (CONTINUED):
Effective April 1, 2000 TWUK acquired all of the issued and outstanding
shares of Nightingale Nursing Bureau Limited ("Nightingale"), a
London-based provider of registered nursing and care staff to NHS Trust
Hospitals and the independent sector, with an additional branch in Sydney,
Australia, for approximately $15,362, plus an additional sum of up to
approximately $5,600 in contingent consideration dependent upon Pre-Tax
Profits (as defined in the agreement for sale and purchase) for certain
periods ending in 2000 and 2001. As of September 30, 2002, $5,910 of the
contingent consideration has been earned of which $2,163 was paid in cash
in fiscal 2001 and $3,747 was issued in loan notes in fiscal 2002.
Approximately $13,691 of the purchase price for this acquisition was paid
using cash on hand and funds borrowed under the senior credit facilities
with the approximate remaining $1,671 of consideration being paid in 1,050
shares of 5 pence par value class A1 common shares of TWUK. Accordingly,
the Company has included the results of operations, financial position and
cash flows of Nightingale in its consolidated results effective April 1,
2000.
The total cost of the acquisition was allocated on the basis of the fair
value of the assets acquired and liabilities assumed and incurred.
Accordingly, assets and liabilities were assigned values of approximately
$3,435 and $2,029, respectively, with the remaining portion of $16,119
attributable to goodwill and other identifiable intangible assets.
The pro forma results of operations and related per share information for
Nightingale have not been presented as amounts are considered immaterial.
DISPOSITIONS:
U.S MAIL-ORDER
In September 2000, the Company approved a plan to exit its U.S. Mail-Order
Operations and on September 18, 2000, entered into an agreement to sell
certain assets of this segment located in Jacksonville, Florida. Under the
terms of the transaction, the Company received $2,000 plus an additional
$556 representing the book value of on-hand saleable inventory at September
29, 2000. The Company recognized a pre-tax charge for impairment of
long-lived assets of $12,346 for the year ended September 30, 2000,
principally reflecting the write-down of intangible assets to their fair
value. The Company recorded a $1,288 restructuring charge in the fourth
quarter of fiscal 2000 representing the estimated costs related to exiting
and closing its U.S. Mail-Order Operations. The restructuring charge
included $128 for the write-off of unrecoverable leasehold improvements,
$680 to satisfy existing lease obligations and $480 for severance and
employee related costs.
F-18
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
4. BUSINESS COMBINATIONS AND DISPOSALS (CONTINUED):
Based upon additional information and revised cost benefit estimates by
management, the Company recorded an additional charge of $1,900 to reflect
the write-down of the remaining accounts receivable to their estimated net
realizable value for the first quarter of fiscal 2001. In addition to the
write-down, the Company incurred operating expenses of $1,983 in fiscal
2001, prior to the closing of the U.S. Mail-Order Operations.
As of September 30, 2002 the Company had satisfied its obligations under
the restructuring plan and reversed the remaining lease commitments
restructuring accrual of $280 into income.
AMCARE LTD.
On November 22, 2000, the Company sold its U.K. subsidiary, Amcare Ltd.
("Amcare"), for approximately $13,826 in cash. In fiscal 2000, the Company
recorded a charge for impairment of long-lived assets of approximately
$2,727 to reflect the write-down of the carrying value of goodwill,
originally acquired with the purchase of Amcare, to its fair value as well
as a tax charge of approximately $1,654 to reflect the tax effect of the
transaction.
The Company recorded an additional loss of $354 and realized a foreign
exchange loss of $391 in fiscal 2001 as a result of the completion of the
transaction.
5. PROPERTY AND EQUIPMENT:
Major classes of property and equipment, net consist of the following at
September 30:
2002 2001
---------------------- --------------------
Revenue producing equipment $14,185 $11,683
Furniture, fixtures and equipment 9,417 7,682
Land, buildings and leasehold improvements 1,044 1,004
--------- ---------
24,646 20,369
Less, accumulated depreciation and amortization 15,140 12,824
--------- ---------
$9,506 $7,545
========= =========
Depreciation and amortization of property and equipment for the years ended
September 30, 2002, 2001 and 2000 was $2,116, $2,042 and $2,119
respectively. The net book value of revenue producing equipment was $6,613
and $5,508 at September 30, 2002 and September 30, 2001, respectively.
F-19
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
6. INTANGIBLE ASSETS:
Intangible assets, net consist of the following at September 30:
2002 2001
--------------------- --------------------
Goodwill $139,955 $121,110
Covenants not-to-compete 250
----------- -----------
139,955 121,360
Less accumulated amortization 12,557 11,934
----------- -----------
$127,398 $109,426
=========== ===========
In accordance with the provisions of FAS 142, all existing and newly
acquired goodwill and intangible assets deemed to have indefinite lives
were not subject to amortization in fiscal 2002. Amortization of
intangibles for the years ended September 30, 2001 and 2000 was $3,852 and
$3,301 respectively. On a pro forma basis assuming the U.K. subsidiaries
had been consolidated for the entire year ended September 30, 2000, the
amortization of intangibles would have been $4,065.
7. ACCRUED EXPENSES:
Accrued expenses consist of the following at September 30:
2002 2001
--------------------- --------------------
Payroll and related expenses $ 14,186 $ 10,785
Acquisition costs 2,277 1,946
Professional fees 2,521
Other 6,520 8,064
----------- -----------
$ 25,504 $ 20,795
=========== ===========
8. DEBT:
Outstanding borrowings consist of the following at September 30:
FINAL
FACILITY 2002 2001 INTEREST RATE MATURITY
--------- ---------- ------------ ----------------- -------------
SENIOR CREDIT FACILITIES:
Term loan A $ 31,697 $ 35,091 LIBOR + 2.25% Dec. 17, 2005
Term loan C 78,070 73,720 LIBOR + 3.5% Jun. 30, 2007
Acquisition loan - - LIBOR + 2.75% Dec. 17, 2006
---------- ------------
Total senior credit facilities 109,767 108,811
MEZZANINE TERM LOAN(1) 15,443 13,854 LIBOR + 7% Dec. 17, 2007
NOTES WITH WARRANTS 3,480 38,793 9.375% Dec. 17, 2008
NOTES PAYABLE(2) 19,840 19,323 2.99% to 5.50% Jul. 25, 2002
---------- ------------
148,530 180,781
LESS, CURRENT MATURITIES 6,249 4,868
---------- ------------
$ 142,281 $ 175,913
========== ============
-------------------------------
1) Net of unamortized discount of $1,615 and $1,817 as of
September 30, 2002 and 2001, respectively.
2) Net of unamortized discount of $597 and $1,141 as of
September 30, 2002 and 2001, respectively.
F-20
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
8. DEBT (CONTINUED):
On December 20, 1999, as amended on September 27, 2001, the Company's U.K.
subsidiaries obtained new financing denominated in pounds sterling. The
new financing consists of a senior collateralized term and revolving
credit facility (the "Senior Credit Facility"), mezzanine indebtedness
(the "Mezzanine Loan") and the Notes.
Senior Credit Facility. The Senior Credit Facility consists of a $43,719
term loan A, maturing December 17, 2005, (ii) $19,518 acquisition term
loan B, maturing December 17, 2006 which may be drawn upon during the
first nine years following closing, (iii) per the September 27, 2001
amendment, $78,070 term loan C, maturing June 30, 2007, and (iv) a $7,807
revolving credit facility, maturing December 17, 2005. Repayment of the
loans commenced on July 30, 2000 and continues until final maturity. The
loans bear interest at rates equal to LIBOR plus 2.25% to 3.50% per annum.
As of September 30, 2002, the Company had outstanding borrowings of
$109,767 under the Senior Credit Facility and $39,347 in available
borrowings. As of September 30, 2002 and 2001, borrowings under the senior
credit facilities bore interest at a rate of 6.25% to 7.50% and 6.96% to
8.21%, respectively.
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 earnings
before interest, taxes, depreciation and amortization, 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 TWUK's and its subsidiaries'
assets, a pledge of TWUK's ownership interest in its subsidiaries and
guaranties by TWUK'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
detachable warrants to purchase 2% of the fully diluted ordinary shares of
TWUK. As of September 30, 2002 and 2001, borrowings under the mezzanine
term loan bore interest at a rate of 11.0% and 11.97% , respectively.
The fair value of the Mezzanine Warrants ($2,476) issued to the mezzanine
lenders has been recorded as a discount to the mezzanine loan and is being
amortized over the term of the loan using the interest method. In the
Reorganization, the Mezzanine Warrants were exercised for an aggregate
exercise price of $129 and the ordinary shares of TWUK received upon such
exercise were exchanged at the exchange ratio for an aggregate of 572 of
shares of the Company's common stock in accordance with the terms of the
Reorganization Agreement.
F-21
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
8. DEBT (CONTINUED):
Senior Subordinated Notes. The Notes consisted of an aggregate of $35,051
principal amount of senior subordinated notes of Allied Healthcare (UK)
purchased by several institutional investors and certain members of
management (collectively, the "Investors"), plus equity warrants issued by
TWUK concurrently with the sale of the Notes (the "Warrants") exercisable
for ordinary shares of TWUK ("Warrant Shares") representing in the
aggregate 27% of the fully diluted ordinary shares of TWUK.
The Notes bore interest at the rate of 9.375% per annum payable quarterly
in cash subject to restrictions contained in the Senior Credit Facility
requiring Allied Healthcare (UK) 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).
In the Reorganization, all of the outstanding Notes (in the aggregate
principal amount of (pound)22,287) were surrendered in payment of the
exercise price of the Equity Warrants. The Equity Warrants were exercised
and each resulting Warrant Share of TWUK was exchanged at the Exchange
Ratio for an aggregate of 7,774 shares of Series A preferred stock.
In addition, in the Reorganization, accrued and unpaid PIK interest in the
amount of $9,138 ((pound)5,810), less $58 ((pound)37) that the Company
withheld as withholding taxes (or a net amount of $9,080 ((pound)5,773)),
was exchanged for shares of the Company's common stock or the right to
receive a funding note, which funding note is exchangeable for shares of
the Company's common stock. As of September 30, 2002 117 shares of the
Company's commons stock had been issued in settlement of accrued interest
on the Notes and an additional 890 shares of the Company's common stock
were issued in fiscal 2003.
Notes Payable: At September 30, 2002, the Company had, through TWUK,
outstanding notes payable of $19,840, net of $597 of unamortized discount,
issued in connection with the acquisition of certain U.K. flexible
staffing agencies. The notes payable are secured by the Company's senior
credit lender which requires us to keep an amount on deposit for the sole
purpose of repaying the notes payable. These notes bear interest at rates
ranging from 2.99% to 5.50%. In general, the Company may not redeem the
notes on or before three years after the date of issuance; however, such
notes may be redeemed by the holder within one year from the first
interest payment due date upon giving not less than sixty days written
notice. Accordingly, the notes and related cash restricted to the payment
of such notes have been classified as current in the accompanying
Condensed Consolidated Balance Sheet included in the Company's financial
statements for the fiscal years ended September 30, 2002 and 2001.
F-22
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
8. DEBT (CONTINUED):
Annual maturities of long-term debt for each of the next five years are:
YEAR ENDING SEPTEMBER 30,
-----------------------------------
2003 $ 29,569
2004 8,744
2005 10,930
2006 28,886
2007 54,649
Thereafter 15,752
-------------
$ 148,530
=============
The Company is subject to fluctuating interest rates that may impact its
consolidated results of operations or cash flows for its variable rate
Senior Credit Facility, Mezzanine Loan and cash equivalents. In accordance
with provisions of the Refinancing, on January 25, 2000, the Company hedged
the interest rate (LIBOR cap of 9%) on approximately $41,935 of its
floating rate debt in a contract which expires June 30, 2003. The
approximate notional amount of the contract adjusts down (consistent with
debt maturity) to $30,378 at December 31, 2002.
9. SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK:
In connection with the Reorganization the Company issued 7,774 shares of
its Series A preferred stock to certain equity investors in TWUK in
exchange for 22,287 TWUK ordinary shares which were issued to the equity
investors upon exercise of their TWUK Equity Warrants at the Exchange Ratio
of 0.3488 shares of Series A preferred stock for every ordinary share. The
redeemable convertible preferred stock has been recorded net of issuance
costs which are being accreted using the interest rate method through
December 17, 2007. The following summary highlights the terms of the Series
A preferred stock.
Dividends. Each share of Series A preferred stock is entitled to receive
cumulative, compounding dividends at the per share rate of 9.375% of
(pound)2.857 per year commencing on June 18, 2002. The shares of Series A
preferred stock are entitled to receive dividends at a higher rate in the
event of a covenant breach, as defined, which principally relate to the
protection of the preferred stockholders rights. Any accrued but unpaid
dividends will be paid upon liquidation, redemption or conversion of the
Series A preferred stock. The Company may not declare or pay any
dividends, make any distributions, or set aside any funds or assets for
payment or distribution with regard to its common stock or any other class
or series of its stock ranking junior to the Series A preferred stock
until all accumulated dividends on the Series A preferred stock have been
paid.
F-23
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
9. SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED):
Voting Rights. Each outstanding share of Series A preferred stock is
entitled to that number of votes equal to the number of shares of common
stock into which such share of Series A preferred stock is convertible.
The Series A preferred stock and the common stock will vote as a single
class on all matters submitted to a vote of the Company's shareholders.
Until Triumph Partners III, L.P. (or any of its affiliates) beneficially
owns less than 50% of the shares of Series A preferred stock issued to it
in the Reorganization, the holders of Series A preferred stock will be
entitled, voting as a separate class, to elect one director to the
Company's board of directors. In addition, the Series A preferred stock
and the Company's common stock will vote as a single class in the election
of all other directors of its board of directors. In the event of a
Covenant Breach (as that term is defined in the Certificate of Amendment),
the holders of the Series A preferred stock will be entitled to elect one
additional director to the Company's board of directors.
Liquidation Preference. In the event of any liquidation, dissolution or
winding up of the Company, the holders of Series A preferred stock will
be entitled to receive, before the holders of common stock or any other
class or series of stock ranking junior to the Series A preferred stock in
respect of their shares, a liquidation preference equal to (pound)2.867
per share (subject to adjustment for stock splits, stock dividends,
recapitalizations and similar transactions), plus any accrued or declared
but unpaid dividends on such shares of Series A preferred stock, which the
Company refers to as the "Series A Preference Amount"; provided, however,
that in the event that the holders of Series A preferred stock would have
received an amount greater than the Series A Preference Amount had they
converted their Series A preferred stock into shares of common stock
immediately prior to the liquidation, dissolution or winding up of the
Company, such holders will be entitled to receive an amount per share
equal to the amount they would have received had they effectuated such a
conversion.
Conversion into Common Stock. Each share of Series A preferred stock is
currently convertible, at the option of the holder thereof, into one share
of common stock without the payment of additional consideration. Subject
to the satisfaction of certain conditions, the Company has the right to
require the holders of the Series A preferred stock to convert all, but
not less than all, of their shares into common stock.
Redemption. Subject to certain limitations, a majority in interest of the
holders of the Series A preferred stock have the right to require the
Company to redeem their shares of Series A preferred stock upon the
occurrence of a liquidity event (as described in the Certificate of
Amendment (relating to the Series A preferred stock) to the Company's
Certificate of Incorporation) or at any time after December 17, 2007 if
the Company has paid its Senior Credit Facility and the Mezzanine Loan in
full on or before such date. The redemption right can be exercised up to
three times, but for not less than (pound)5 million on any one occasion
(or such lower amount as is necessary to redeem all of the shares of
Series A preferred stock then outstanding). Upon such a redemption, the
holders of the Series A preferred stock will be entitled to receive an
amount equal to the Series A Preference Amount.
F-24
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
10. STOCKHOLDERS' EQUITY:
On April 22, 2002, the Company issued 684 shares of common stock to
Timothy M. Aitken, Chairman and Chief Executive Officer, and 487 shares of
common stock to Sarah L. Eames, President and Chief Operating Officer, as
a bonus for, among other things, services rendered through the date of
issuance. Simultaneously with this issuance, the Company entered into
agreements with Mr. Aitken and Ms. Eames in which the Company agreed to
provide them (through cash bonuses and loans) with substantially all of
the cash necessary for them to pay the income taxes that they are expected
to incur as a result of the issuances. Pursuant to these agreements, the
Company made a cash bonus payment to Mr. Aitken of $1,401 and loaned him
$550 and made a cash bonus payment to Ms. Eames of $846 and loaned her
$390. The loans, which have been issued on a recourse basis, provide for
interest at the rate of 4.65% compounded annually. All outstanding
principal and accrued interest will be due on the earlier of April 30,
2007 or the date on which the employee disposes of the common shares
received in accordance with the agreements. As collateral for the loans
the employees have pledged an aggregate of 1,155 fully vested
non-qualified stock options held by the employees and any proceeds
received from the sale of the underlying securities. In addition, pursuant
to these agreements, TWUK agreed to indemnify Mr. Aitken and Ms. Eames for
certain income tax liabilities that they may incur as a result of these
share issuances, subject to a maximum aggregate amount of $1,000. These
executive bonuses and loans have been approved by the Company's Board of
Directors. The Company has recognized an aggregate expense of $6,558
related to these transactions in the year ended September 30, 2002.
The Company registered, at its expense, the resale of the shares issued to
Mr. Aitken and Ms. Eames.
On April 22, 2002, the Company entered into a Stock Purchase Agreement with
Hyperion TWH Fund II LLC, Triumph Partners III, L.P. and Triumph III
Investors, L.P pursuant to which the Company issued, on April 30, 2002, an
aggregate of 750 shares of the Company's common stock at a per share
purchase price of $4.25 per share. In addition, the Company registered, at
its expense, the resale of such shares.
In January 2001, the Company initiated a stock repurchase program, whereby
the Company may purchase up to approximately $1,000 of its outstanding
common stock in open market or privately negotiated transactions. As of
September 30, 2002, the Company had acquired 266 shares for an aggregate
purchase price of $720 which are reflected as treasury stock in the
consolidated balance sheet at September 30, 2002.
F-25
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
11. INCOME TAXES:
The provision (benefit) for income taxes from continuing operations for the
years ended September 30, is summarized as follows:
2002 2001 2000
--------------- ------------------- --------------------------
Current:
Federal $ - $ - $ -
State - - -
Foreign 4,770 2,623 2,606
Deferred:
Federal - 21,462 (10,478)
State - 116
Foreign 201 32 -
----------- -------------- ----------
Provision (benefit)
for income taxes $ 4,971 $ 24,117 $ (7,756)
=========== ============== ==========
For 2002, 2001 and 2000, deferred income taxes reflect the net tax effects
of temporary differences between the carrying amounts of assets and
liabilities recorded for financial reporting purposes and the amounts used
for income tax purposes. Significant components of the Company's deferred
tax assets and liabilities as of September 30 are as follows:
2002 2001
------------------ --------------------
Current:
Provision for doubtful accounts $ 6,473 $ 6,704
Accrued expenses 265 431
Other, net 152 162
------------ ---------------
Current deferred tax assets 6,890 7,297
------------ ---------------
Non-current:
Federal net operating loss 19,916 17,894
State net operating losses 1,666 1,666
Capital losses 768 768
Other, net 438 72
Depreciation and amortization (1,491) (1,406)
Other, net (749) (548)
------------ ---------------
Non-current deferred tax assets, net 20,548 18,446
------------ ---------------
27,438 25,743
Valuation allowance (28,187) (26,291)
------------ ---------------
Net deferred tax liability $ (749) $ (548)
============ ===============
F-26
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
11. INCOME TAXES (CONTINUED):
Management had been previously committed to implementing tax strategies
that provided for the sale of appreciated assets, including a portion of
the Company's ownership interest in its U.K. subsidiary, to generate
sufficient taxable income to realize the tax net operating losses prior to
their expiration. While the Company believes it will eventually realize the
value of its tax losses, current developments, including the continued
expansion of the U.K. operations has increased the uncertainty as to both
the execution of the original strategy and the appropriateness of a tax
strategy which may not align with the Company's current business strategy.
These uncertainties have impaired the Company's ability to determine
whether it is more likely than not that its deferred tax assets will be
realized. Accordingly, a full valuation allowance for all remaining
deferred tax assets has been provided.
As of September 30, 2002, the Company has a Federal net operating loss
carryforward of approximately $58,000 which if unused, will expire in the
years 2018 through 2022. The Company has a capital loss carryforward of
approximately $2,000 which, if unused, will expire in the year 2003.
Included in taxes payable is an estimate for taxes related to a business
that has been discontinued.
Reconciliations of the differences between income taxes computed at Federal
statutory tax rates and consolidated provisions for income taxes on income
(loss) before equity income of and interest income earned from U.K.
subsidiaries for the years ended September 30 are as follows:
2002 2001 2000
----------- ----------- -----------
Income taxes at 34% $ 3,361 $ (841) $ (11,516)
State income taxes, net of
Federal benefit - - -
Nondeductible expenses, primarily
amortization and write down
of intangible assets 943 1,305 1,648
Legal settlement - - 510
Valuation allowance 1,896 24,745 (332)
Foreign tax on sale of subsidiary - - 1,654
Tax contingency - - -
Other, net (1,229) (1,092) 280
----------- ----------- -----------
(Benefit) provision for income taxes $ 4,971 $ 24,117 $ (7,756)
=========== =========== ===========
Income (loss) before income taxes generated from the U.K. operations for
the years ended September 30, 2002, 2001 and 2000 was $14,271, $3,684 and
$(2,046), respectively. On a pro forma basis, assuming the U.K.
subsidiaries had been consolidated for the entire fiscal year ended
September 30, 2000, the loss generated from the U.K. operations would have
been $(965).
F-27
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
12. STOCK OPTION PLAN AND WARRANTS:
Under the Company's 2002 Option Plan ("Option Plan"), options may be
granted by the Compensation Committee of the Board of Directors which
determines the exercise price, vesting provisions and term of such grants.
In accordance with the terms of the Option Plan, the number of shares
available for issuance increases by one percent of the number of shares of
Common Stock outstanding as of the first day of each fiscal year.
Following is a summary of transactions under the Option Plan during the
year ended September 30, 2002, 2001 and 2000:
2002 2001 2000
----------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF STOCK EXERCISE OF STOCK EXERCISE OF STOCK EXERCISE
OPTIONS PRICE ($) OPTIONS PRICE ($) OPTIONS PRICE ($)
----------------------------------------------------------------------
Outstanding beginning of year 1,394 4.22 1,040 5.22 1,130 5.37
Granted 205 5.41 400 1.75 100 1.81
Exercised (4) 1.75
Forfeited (69) 7.25 (42) 5.59 (190) 4.34
----------- ----------- -----------
Outstanding end of year 1,530 4.24 1,394 4.22 1,040 5.22
=========== =========== ===========
Weighted-average fair
value of options granted
during the year 2.93 0.34 0.93
=========== ============ ============
Available for future grants 2,795
===========
On May 28, 1997, the Company adopted a stock option plan for non-employee
directors (the "Directors Plan") which gives non-employee directors
options to purchase up to 100 shares of common stock. As of September 30,
2002, no options have been granted under the Directors Plan. Options under
the Directors Plan may be granted by the Board of Directors which
determines the exercise price, vesting provisions and term of such grants.
F-28
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
12. STOCK OPTION PLAN AND WARRANTS (CONTINUED):
A summary of the 1,530 options outstanding as of September 30, 2002 is as
follows:
WEIGHTED WEIGHTED WEIGHTED
RANGE AVERAGE AVERAGE AVERAGE
OF EXERCISE PRICE REMAINING EXERCISE PRICE
EXERCISE NUMBER OF OPTIONS CONTRACTUAL LIFE NUMBER OF OPTIONS
PRICE ($) OUTSTANDING OUTSTANDING ($) IN YEARS EXERCISABLE EXERCISABLE ($)
----------------------------------- ---------------------------------------------------------------------------
1.75 392 1.75 3.2 392 1.75
1.81 100 1.81 2.7 67 1.81
2.63 323 2.63 1.0 323 2.63
4.31 10 4.31 6.2 10 4.31
5.41 205 5.41 4.7
7.25 500 7.25 5.3 500 7.25
------- -------
1.75 to 7.25 1,530 4.24 3.6 1,292 4.12
======= =======
In accordance with SFAS No. 123, the Company continues to apply APB No. 25
and related Interpretations to account for stock-based compensation using
the intrinsic value method for its stock option plans and, accordingly,
does not recognize compensation expense. If the Company had elected to
recognize compensation expense based on the fair value of the options at
grant date as prescribed by SFAS No. 123, net loss and net loss per share
would have been adjusted to the pro forma amounts indicated in the table
below for the three years ended September 30:
2002 2001 2000
------------------ ------------------- -------------------
Net income (loss) - reported $4,794 $(26,612) $(24,944)
Net income (loss) - pro forma 4,651 (26,708) (25,186)
Basic income (loss) per share - reported 0.20 (1.53) (1.42)
Basic income (loss) per share - pro forma 0.20 (1.53) (1.44)
Diluted income (loss) per share - reported 0.20 (1.53) (1.42)
Diluted income (loss) per share - pro forma 0.19 (1.53) (1.44)
F-29
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
12. STOCK OPTION PLAN AND WARRANTS (CONTINUED):
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions:
2002 2001 2000
------------- ------------- -------------
Expected life (years) 4 4 4
Risk-free interest rate 3.5% 5.5% 5.5%
Volatility 69.1% 61.4% 61.0%
Expected dividend yield 0% 0% 0%
The compensation cost as generated by the Black-Scholes option-pricing
model, may not be indicative of the future benefit, if any, that may be
received by the option holder.
13. COMMITMENTS AND CONTINGENCIES:
ACQUISITION AGREEMENTS:
Related to the Company's acquisitions of flexible staffing agencies, we
have entered into agreements to pay additional amounts, payable in cash,
of up to $38,240 September 30, 2002, in contingent consideration dependent
upon future earnings of such acquired entities.
EMPLOYMENT AGREEMENTS:
The Company has three employment agreements with certain executive
officers (the Company's chief executive officer, the Company's Chief
Operating Officer and the Company's Chief Financial Officer) that provide
for minimum aggregate annual compensation of $1,055 in fiscal 2003. The
agreements contain, among other things, customary confidentiality and
termination provisions and provide that in the event of the termination of
the executive following a "change of control" of the Company (as defined
in such agreements), or a significant change in their responsibilities,
such person will be entitled to receive a cash payment of up to 2.9 times
their average annual base salary during the preceding 12 months (in the
case of its Chief Executive Officer and its Chief Operating Officer) or
one times his base salary (in the case of its Chief Financial Officer).
F-30
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
13. COMMITMENTS AND CONTINGENCIES (CONTINUED):
OPERATING LEASES:
The Company has entered into various operating lease agreements for office
space and equipment. Certain of these leases provide for renewal options
with extension dates in fiscal 2008 and 2013.
Future minimum rental commitments required under operating leases that
have non-cancelable lease terms in excess of one year as of September 30,
2002 are as follows:
2003 $1,756
2004 1,307
2005 1,175
2006 1,097
2007 981
Thereafter 2,379
-----
$8,695
Rent expense under non-capitalized, non-cancelable lease agreements for
the years ended September 30, 2002, 2001 and 2000 amounted to $2,369,
$1,972 and $2,871, respectively.
CONTINGENCIES:
On April 13, 1998, one of the Company's shareholders, purporting to sue
derivatively on its behalf, 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 of
the Company's officers and directors, and Hyperion Partners II L.P.,
breached fiduciary duties owed 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 Hyperion Partners II L.P. 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.
F-31
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
13. COMMITMENTS AND CONTINGENCIES (CONTINUED):
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 one of
its subsidiaries for inadequate consideration. The Company has been
vigorously defending this action. In June 2001, the parties reached a
settlement, which was approved by the court in November 2001, that fully
resolved the litigation. The settlement did not have a material adverse
effect on the Company's consolidated financial position, cash flows or
results of operations.
On August 4, 2000, the Company reached a civil settlement with the U.S.
Department of Justice related to an investigation commenced in July 1997
of two of its U.S. subsidiaries as well as a related qui tam civil
whistleblower case. In addition to its settlement with the federal
government, the Company reached a final settlement with the prior owners
of Respiflow, Inc., MK Diabetic Support Services Inc. and related
subsidiaries (the "Prior Owners") in connection with an ongoing dispute
with such persons. The Company agreed to a corporate integrity agreement
(the "CIA") with the Office of Inspector General related to its mail-order
operations. The Company fulfilled its obligations under the CIA on
November 2, 2001.
Some of the Company's subsidiaries are Medicare Part B suppliers who
submit claims to the designated carrier who is the government's claims
processing administrator. From time to time, the carrier may request an
audit of Medicare Part B claims on a prepayment or postpayment basis. Some
of the Company's subsidiaries currently have pending such audits. If the
outcome of any audit results in a denial or a finding of an overpayment,
then the affected subsidiary has appeal rights. Under postpayment audit
procedures, the supplier generally pays the alleged overpayment and can
pursue appeal rights for a refund of any paid overpayment incorrectly
assessed against the supplier. Some of the subsidiaries currently are
responding to these audits and pursuing appeal rights in certain
circumstances.
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.
F-32
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
13. COMMITMENTS AND CONTINGENCIES (CONTINUED):
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 and has recorded an accrual
of approximately $1,100 to cover its estimate for exposure related to
these matters. Management believes these matters should not have a
material adverse impact on the consolidated financial position, cash flows
or results of operations.
14. OPERATIONS BY BUSINESS SEGMENTS AND GEOGRAPHIC AREAS:
During the year ended September 30, 2002 and 2001 the Company operated in
two reportable business segments: (i) U.K. operations and (ii) U.S. Home
Healthcare ("Home Healthcare") operations (formerly Hi-Tech). The U.K.
operations derive revenues from healthcare services, principally nursing
and ancillary services, and respiratory therapy products to patients
throughout most of the U.K. The Home Healthcare operations derive revenues
from infusion and respiratory therapy services and the sale and lease of
home medical equipment principally in New Jersey and New York.
During the year ended September 30, 2000, the Company also operated the
U.S. Mail Order Operations which derived its revenues from the mail-order
sale of diabetic test strips and glucose monitors, respiratory, diabetic,
maintenance and other commonly prescribed medications, as well as ostomy
and orthotic products.
F-33
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
14. OPERATIONS BY BUSINESS SEGMENTS AND GEOGRAPHIC AREAS (CONTINUED):
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. The
accounting policies of the business segments are the same as those
described in the summary of significant accounting policies. Inter segment
sales are not material. The following tables present certain financial
information by reportable business segments and geographic areas of
operations for the years ended September 30, 2002, 2001 and 2000.
YEAR ENDED SEPTEMBER 30, 2002
---------------------------------------------
U.K. U.S.
HOME
OPERATIONS HEALTHCARE TOTAL
------------- --------------- -------------
Revenues to unaffiliated customers $ 242,828 $ 17,070 $ 259,898
========== ============= ==========
Segment operating profit $ 27,786 $ 1,001 $ 28,787
========== =============
Corporate expenses (10,554 )
Interest expense, net (13,472 )
Gain on settlement of PIK interest 5,143
Foreign exchange loss (19 )
----------
Income before income taxes and minority $ 9,885
interest
==========
Depreciation and amortization $ 1,321 $ 779 $ 2,100
========== =============
Corporate depreciation and amortization 16
----------
Total depreciation and amortization $ 2,116
==========
Identifiable assets, September 30, 2002 $ 256,407 $ 8,733 $ 265,140
========== =============
Corporate assets 2,973
----------
Total assets, September 30, 2002 $ 268,113
==========
Capital expenditures $ 3,082 $ 622 $ 3,704
========== =============
Corporate capital expenditures 9
----------
Total capital expenditures $ 3,713
==========
F-34
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
14. OPERATIONS BY BUSINESS SEGMENTS AND GEOGRAPHIC AREAS (CONTINUED):
YEAR ENDED SEPTEMBER 30, 2001
---------------------------------------------
U.S.
U.K. HOME
OPERATIONS HEALTHCARE TOTAL
------------- --------------- -------------
Revenues to unaffiliated customers $ 138,041 $ 16,592 $ 154,633
========== ============= ==========
Segment operating profit $ 12,676 $ 620 $ 13,296
========== =============
Corporate expenses (3,053 )
U.S. Mail-Order (3,883 )
Interest expense, net (8,433 )
Foreign exchange loss (400 )
----------
Loss before income taxes and minority $ (2,473 )
interest
==========
Depreciation and amortization $ 5,080 $ 767 $ 5,847
========== =============
Corporate depreciation and amortization 47
----------
Total depreciation and amortization $ 5,894
==========
Identifiable assets, September 30, 2001 $ 236,472 $ 10,899 $ 247,371
========== =============
Corporate assets 702
----------
Total assets, September 30, 2001 $ 248,073
==========
Capital expenditures $ 1,244 $ 678 $ 1,922
========== =============
Corporate capital expenditures 15
----------
Total capital expenditures $ 1,937
==========
YEAR ENDED SEPTEMBER 30, 2000
---------------------------------------------------------------
U.S.
U.K. U.S. HOME U.S.
OPERATIONS MAIL-ORDER HEALTHCARE TOTAL TOTAL
------------ ------------ ----------- ------------ ------------
Revenues to unaffiliated $ 97,449 $ 22,476 $ 15,483 $ 37,959 $ 135,408
customers ========== ========== ========= ========== ==========
Segment operating (loss) profit $ 7,860 $( 8,015 ) $ 495 $ (7,520 ) $ 340
========== ========== ========= ==========
Corporate expenses (3,754 )
Impairment of long-lived assets (15,073 )
Legal settlements, net (5,082 )
Restructuring charge (1,288 )
Interest expense, net (9,014 )
----------
Loss before income taxes, $ (33,871)
equity income and ==========
minority interest
Depreciation and amortization $ 3,815 $ 790 $ 767 $ 1,557 $ 5,372
========== ========== ========= ==========
Corporate depreciation and
Amortization 48
----------
Total depreciation and $ 5,420
amortization
==========
Identifiable assets, September $ 140,058 $ 6,555 $ 10,891 $ 17,446 $ 157,504
30, 2000 ========== ========== ========= ==========
Corporate assets 26,242
----------
Total assets, September 30, 2000 $ 183,746
==========
Capital expenditures $ 831 $ 35 $ 336 $ 371 $ 1,202
========== ========== ========= ==========
Corporate capital expenditures 5
----------
Total capital expenditures $ 1,207
==========
F-35
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
14. OPERATIONS BY BUSINESS SEGMENTS AND GEOGRAPHIC AREAS (CONTINUED):
The following table presents certain financial information by reportable
business segment and geographic area of operations pro forma for the
fiscal year ended September 30, 2000 as if the U.K. subsidiaries had been
consolidated for the entire year ended September 30, 2000.
PRO FORMA YEAR ENDED SEPTEMBER 30,
2000
-----------------------------------------------------------------------
U.S.
U.K. U.S. HOME U.S.
OPERATIONS MAIL-ORDER HEALTHCARE TOTAL TOTAL
------------ ------------ ------------ -------------- ------------
Revenues to unaffiliated customers $ 126,295 $ 22,476 $ 15,484 $ 37,960 $ 164,255
============ ============ ============ ============== ============
Segment operating profit (loss) $ 10,302 $ (8,015 ) $ 495 $ (7,520 ) $ 2,782
============ ============ ============ ==============
Corporate expenses (3,754)
Impairment of long-lived assets (15,073)
Legal settlements, net (5,082)
Restructuring charge (1,288)
Interest expense, net (9,262)
------------
Loss before income taxes and
minority interest $ (31,677)
============
Depreciation and amortization $ 4,914 $ 790 $ 767 $ 1,557 $ 6,471
============ ============ ============ ==============
Corporate depreciation and
Amortization 48
------------
Total depreciation and amortization $ 6,519
============
Identifiable assets, September 30, $140,058 $ 6,555 $ 10,891 $ 17,446 $ 157,504
2000 ============ ============ ============ ==============
Corporate assets 26,242
------------
Total assets, September 20, 2000 $ 183,746
============
Capital expenditures $ 1,418 $ 35 $ 336 $ 371 $ 1,789
============ ============ ============ ==============
Corporate capital expenditures 5
------------
Total capital expenditures $ 1,794
============
The net assets for the U.K. Operations were $81,377 and $33,551 as of September
30, 2002 and 2001, respectively.
15. PROFIT SHARING PLAN:
The Company has a profit sharing plan pursuant to Section 401(k) of the
Internal Revenue Code, concerning all U.S. employees who meet certain
requirements. These requirements include, among other things, at least one
year of service and attainment of the age of 21.
The plan operates as a salary reduction plan whereby participants
contribute anywhere from 1% to 15% of their compensation, not to exceed
the maximum available under the Code.
F-36
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
15. PROFIT SHARING PLAN (CONTINUED):
The Company may make additional matching cash contribution at its
discretion. The Company's contributions to the plan were approximately
$30, $19 and $22 for the years ended September 30, 2002, 2001 and 2000,
respectively.
In addition to the U.S. plan described above, certain of the Company's
U.K. subsidiaries also sponsor personal pension plans. The plans operate
as salary reduction plans, which also allows for lump sum contributions,
whereby participants contribute anywhere from 1% to 40% of their
compensation, not to exceed the maximum available under the U.K. tax laws.
The Company may make an additional contribution (which varies according to
employee contracts and contribution elections) which is in the form of
cash. The Company's contributions to the U.K. plans were $252, $26 and $80
for the years ended September 30, 2002, 2001 and 2000, respectively.
16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents the comparative unaudited quarterly results
for the years ended September 30, 2002 and 2001:
2002 QUARTER ENDED DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, TOTAL
--------------- ------------ --------------- --------------------- -------------
Total revenues $ 61,036 $ 61,884 $ 64,774 $ 72,204 $ 259,898
=========== =========== =========== ========= ============
Gross profit $ 16,335 $ 16,608 $ 17,872 $ 20,975 $ 71,790
=========== =========== =========== ========= ============
Net income loss) $ 1,457 $ 1,626 $ (5,465 ) (a) $ 7,176 (b) $ 4,794
=========== =========== =========== ========= ============
Net income (loss) available
to common shareholders $ 1,457 $ 1,626 $ (5,579 ) $ 6,274 $ 3,778
=========== =========== =========== ========= ============
Basic net income (loss) per
share of common stock $ 0.08 $ 0.09 $ (0.30 ) $ 0.30 $ 0.20
=========== =========== =========== ========= ============
Diluted net income (loss) per
share of common stock $ 0.06 $ 0.07 $ (0.30 ) $ 0.26 $ 0.20
=========== =========== =========== ========= ============
(a) Includes a non-cash charge of $4,216 for the issuance of shares of the
Company's common stock to senior management and a charge for $2,341 for
tax equalization bonuses paid to senior management for reimbursement of
income taxes incurred as a result of the share issuances.
(b) Includes net charges of $2,410 related to the completion of the
Reorganization and $5,143 gain in the settlement of PIK interest.
F-37
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
17. SELECTED QUARTERLY FINANCIAL DATA: (UNAUDITED) (CONTINUED)
2001 QUARTER ENDED DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, TOTAL
--------------- ------------ --------------- ----------------- ---------------
Total revenues $ 36,922 $ 35,917 $ 37,420 44,374 $ 154,633
=========== =========== =========== ========== ============
Gross profit $ 11,223 $ 11,272 $ 11,650 13,834 $ 47,979
=========== =========== =========== ========== ============
Net (loss) income $ (2,796 ) (a) $ (448 ) $ 40 (23,408 ) (b) $ (26,612 )
=========== =========== =========== ========== ============
Basic and diluted net
(loss) per share of
common stock $ (0.16 ) $ (0.03 ) $ 0.00 (1.35 ) $ (1.53 )
=========== =========== =========== ========== ============
(c) The Company recorded an additional charge of $1,900 to reflect the
write-down of the remaining U.S. Mail-Order operations accounts
receivable to their estimated net realizable value.
(d) The Company recorded a full valuation allowance of $24,745 for all
remaining deferred tax assets.
18. SUBSEQUENT EVENT: (UNAUDITED)
On November 28, 2002 the Company completed its acquisition of Medic-One
Group Limited, a supplier of temporary staffing to NHS hospitals and
private hospitals in the U.K., The consideration included $4,642 in cash,
and the issuance of 700 shares of the Company's common stock. The Company
is also obligated to issue additional contingent consideration of up to
approximately $13,246 dependent on earnings before income tax,
depreciation and amortization of the business in fiscal 2003 and fiscal
2004 The additional contingent consideration, if any, will be satisfied by
a combination of cash and shares of the Company's stock.
F-38
ALLIED HEALTHCARE INTERNATIONAL INC.
(IN THOUSANDS)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
- --------------------------- ------------ -------------------------------- ------------- ------------
Additions Charged to
------------- ------ -----------
Balance at Balance at
Beginning Cost and Other End of
Description of Period Expenses Accounts Deductions Period
- --------------------------- ------------ ------------- ----------- ------------- ------------
Allowance for Doubtful
Accounts:
Year ended
September 30, 2002 $ 24,611 $1,836 $ 158(B) $ 2,106(A) $ 24,499
Year ended
September 30, 2001 $ 21,219 $3,568 $ 347(B) $ 523(A) $ 24,611
Year ended
September 30, 2000 $ 19,870 $9,026 $ (142)(B) $ 7,535(A) $ 21,219
(A) Doubtful accounts written off, net of recoveries and sold.
(B) Assumed in acquisitions and adjustments arising from translation of
foreign financial statements to U.S. dollars.
S-1