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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED
DECEMBER 31, 2002
COMMISSION FILE NUMBER 1-11570
-------------------------------------------------------------
ALLIED HEALTHCARE INTERNATIONAL INC.
(Exact name of Registrant as specified in its charter)
NEW YORK 13-3098275
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
555 MADISON AVENUE, NEW YORK, NEW YORK 10022
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 750-0064
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at February 11, 2003
Common Stock 22,258,945 Shares
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [ ]NO [X]
ALLIED HEALTHCARE INTERNATIONAL INC.
FIRST QUARTER REPORT ON FORM 10-Q
TABLE OF CONTENTS
PART I
Item 1. Financial Statements (Unaudited)............................................................3
Condensed Consolidated Balance Sheets - December 31, 2002 (Unaudited) and
September 30, 2002........................................................................4
Condensed Consolidated Statements of Operations (Unaudited) - For the Three
Months Ended December 31, 2002 and December 31, 2001......................................5
Condensed Consolidated Statements of Cash Flows (Unaudited) - For the Three
Months Ended December 31, 2002 and December 31, 2001......................................6
Notes to Condensed Consolidated Financial Statements (Unaudited)............................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................................14
Item 3. Quantitative and Qualitative Disclosures about Market Risk..................................24
Item 4. Controls and Procedures.....................................................................25
PART II
Item 2. Changes in Securities and Use of Proceeds...................................................26
Item 6. Exhibits and Reports on Form 8-K............................................................27
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. This Quarterly Report contains certain
forward-looking statements and information that are based on the beliefs of
management as well as assumptions made by and information currently available to
management. The statements contained in this Quarterly Report relating to
matters that are not historical facts are forward-looking statements that
involve risks and uncertainties, including, but not limited to, future demand
for the company's products and services, general economic conditions, government
regulation, competition and customer strategies, capital deployment, the impact
of pricing and reimbursement and other risks and uncertainties. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated or expected.
Page 2
PART I
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED).
The consolidated financial statements of Allied Healthcare International Inc.
(the "Company") begin on page 4.
3
ALLIED HEALTHCARE INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, SEPTEMBER 30,
2002 2002
(UNAUDITED)
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 15,139 $ 18,807
Restricted cash 40,126 19,840
Accounts receivable, less allowance for doubtful
accounts of $24,627 and $24,499, respectively 35,759 33,634
Inventories 1,100 956
Prepaid expenses and other assets 10,622 9,450
-------- --------
Total current assets 102,746 82,687
Property and equipment, net 10,167 9,506
Restricted cash 3,022 43,678
Intangible assets, net 174,157 127,398
Deferred financing costs and other assets 4,639 4,844
-------- --------
Total assets $294,731 $268,113
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 40,126 $ 19,840
Short-term debt 3,480
Current portion of long-term debt 6,421 6,249
Accounts payable 3,345 2,251
Accrued expenses 23,157 25,504
Taxes payable 5,056 4,756
-------- --------
Total current liabilities 78,105 62,080
Long-term debt 119,102 118,961
Deferred income taxes and other long term liabilities 889 875
-------- --------
Total liabilities 198,096 181,916
-------- --------
Commitments and contingencies
Redeemable convertible preferred stock, 7,774 shares
issued and outstanding (liquidation value of $35,213) $ 32,797 $ 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 78
Common stock, $.01 par value; authorized
62,000 shares, issued 22,505 and
20,945 shares, respectively 225 209
Additional paid-in capital 144,566 139,231
Accumulated other comprehensive loss (860) (3,112)
Accumulated deficit (78,482) (80,785)
--------- ---------
65,527 55,621
Less notes receivable from officers (969) (958)
Less cost of treasury stock (266 shares) (720) (720)
--------- ---------
Total stockholders' equity 63,838 53,943
--------- ---------
Total liabilities and stockholders' equity $ 294,731 $ 268,113
========= =========
See notes to condensed consolidated financial statements.
Page 4
ALLIED HEALTHCARE INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
---------------------------
DECEMBER 31, DECEMBER 31,
2002 2001
------------ ------------
Revenues:
Net patient services $ 66,529 $ 55,415
Net infusion services 3,202 3,310
Net respiratory, medical equipment and supplies sales 2,708 2,311
-------- --------
Total revenues 72,439 61,036
-------- --------
Cost of revenues:
Patient services 48,233 40,961
Infusion services 2,414 2,448
Respiratory, medical equipment and supplies sales 1,522 1,292
-------- --------
Total cost of revenues 52,169 44,701
-------- --------
Gross profit 20,270 16,335
Selling, general and administrative expenses 12,994 10,427
-------- --------
Operating income 7,276 5,908
Interest income (590) (838)
Interest expense 3,788 4,161
Foreign exchange loss 8 13
-------- --------
Income before income taxes and minority interest 4,070 2,572
Provision for income taxes 1,767 1,071
-------- --------
Income before minority interest 2,303 1,501
Minority interest 44
-------- --------
Net income 2,303 1,457
Redeemable preferred dividend and accretion 994
-------- --------
Net income available to common shareholders $ 1,309 $ 1,457
======== ========
Net income per share of common stock:
Basic $ 0.06 $ 0.08
======== ========
Diluted $ 0.06 $ 0.06
======== ========
Weighted average number of common shares outstanding:
Basic 21,171 17,289
======== ========
Diluted 21,559 17,465
======== ========
See notes to condensed consolidated financial statements.
Page 5
ALLIED HEALTHCARE INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
---------------------------
DECEMBER 31, DECEMBER 31,
2002 2001
------------ ------------
Cash flows from operating activities:
Net income $ 2,303 $ 1,457
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 589 590
Amortization of debt issuance costs 560 510
Write-off of debt discount 601
Provision for doubtful accounts 343 570
Interest accrued on loans to officers (11)
Interest in kind 152 1,028
Minority interest 44
Loss on sale of fixed assets 24
Changes in assets and liabilities, excluding the effect
of businesses acquired and sold:
Decrease in accounts receivable 793 802
(Increase) decrease in inventories (134) 18
Increase in prepaid expenses and other assets (863) (3,887)
Decrease in accounts payable and other liabilities (2,373) (789)
------ --------
Net cash provided by operating activities 1,984 343
------ --------
Cash flows from investing activities:
Capital expenditures (915) (974)
Proceeds from sale of property and equipment 2 14
Payments for acquisitions - net of cash acquired (5,280) (37)
Proceeds limited to future acquisitions 21,683 (640)
Payments on acquisitions payable (3,004) (1,125)
------ --------
Net cash provided by (used in) investing activities 12,486 (2,762)
------ --------
Cash flows from financing activities:
Payments for issuance costs (15)
Payments on notes payable (15,239)
Principal payments on long-term debt (3,303) (2,021)
------ --------
Net cash used in financing activities (18,557) (2,021)
------ --------
Effect of exchange rate on cash 419 (204)
------ --------
Decrease in cash (3,668) (4,644)
Cash and cash equivalents, beginning of period 18,807 15,357
------ --------
Cash and cash equivalents, end of period $ 15,139 $ 10,713
======== ========
Supplemental cash flow information:
Cash paid for interest $ 2,627 $ 2,488
======== ========
Cash paid for income taxes $ 1,598 $ 1,649
======== ========
Supplemental disclosure of non-cash investing and financing activities:
Details of business acquired in purchase transactions:
Fair value of assets acquired $ 7,637
========
Liabilities assumed or incurred $ 2,209
========
Cash paid for acquisitions (including related expenses) $ 5,427
Cash acquired 147
--------
Net cash paid for acquisitions $ 5,280
--------
Issuance of common stock $ 2,880
========
Notes issued for earned contingent consideration $ 34,671
========
See notes to condensed consolidated financial statements.
Page 6
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
1. BASIS OF PRESENTATION:
Allied Healthcare International 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 110 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, supply infusion therapy, respiratory therapy and
home medical equipment and accounted for less than 10% of the Company's
revenues during the three months ended December 31, 2002.
The Condensed Consolidated Financial Statements presented herein are
unaudited and include all adjustments (consisting of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of the financial position and results of operations of the
interim periods pursuant to the rules and regulations of the Securities
and Exchange Commission (the "Commission"). Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the U.S. have
been condensed or omitted. The balance sheet at September 30, 2002 has
been derived from the audited consolidated balance sheet at that date, but
does not include all information and footnotes required by U.S. generally
accepted accounting principles for complete financial statements. These
condensed financial statements should be read in conjunction with the
Company's Form 10-K for the year ended September 30, 2002. Although the
Company's operations are not highly seasonal, the results of operations
for the three months ended December 31, 2002 are not necessarily
indicative of operating results for the full year.
2. EARNINGS PER SHARE:
Basic earnings per share ("EPS") is computed using the weighted average
number of common shares outstanding, after giving effect to issuable
shares per agreements. Diluted EPS adjusts basic EPS for the effects of
stock options, warrants and redeemable convertible stock only when such
effect is dilutive. For the three months ended December 31, 2001, diluted
EPS of $0.06 reflects the diluted effect of common stock equivalents
issued by the Company's U.K. subsidiary of approximately $0.02 per share.
Page 7
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
2. EARNINGS INCOME PER SHARE (CONTINUED):
The weighted average number of shares used in the basic and diluted
earnings income per share computations for the three months ended December
31, 2002 and 2001 are as follows:
THREE MONTHS ENDED
DECEMBER 31,
-------------------------
2002 2001
------------ -----------
Weighted average number of common shares outstanding
as used in computation of basic EPS of common stock 21,171 17,289
Effect of dilutive securities - stock options
treasury stock method 388 176
----------- ----------
Shares used in computation of diluted EPS of common stock 21,559 17,465
============ ==========
3. COMPREHENSIVE INCOME:
Components of comprehensive income include net income and all other
non-owner changes in equity, such as the change in the cumulative
translation adjustment, unrealized gains and losses on investments
available for sale and minimum pension liability. Currency translation is
the only item of other comprehensive income impacting the Company. The
following table displays comprehensive income for the three months ended
December 31, 2002 and 2001:
THREE MONTHS ENDED
DECEMBER 31,
----------------------------
2002 2001
------------- -------------
Net income $ 2,303 $ 1,457
Change in cumulative translation 2,252 (517)
adjustment
-------- ---------
Comprehensive income $ 4,555 $ 940
======== =========
4. 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.
5. BUSINESS COMBINATIONS AND DISPOSALS:
COMBINATIONS:
On November 28, 2002 the Company completed its acquisition of Medic-One
Group Limited, a supplier of temporary staffing to the National Health
Services (the "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 $13,734
dependent on earnings before income tax, depreciation
Page 8
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
5. BUSINESS COMBINATIONS AND DISPOSALS (CONTINUED):
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.
On November 18, 2002 the Company completed its acquisition of Dalesway
Nursing Services, a supplier of temporary staffing to NHS hospitals, local
government authorities and private patients in the U.K. The consideration
paid was $306 in cash.
The pro forma results of operations and related per share information for
these acquisitions have not been presented as the amounts are considered
immaterial.
The transactions related to the acquisition of Medic-One Group Limited and
other acquisitions of flexible staffing agencies include provisions to pay
additional amounts, payable in cash, of up to $17,000 in contingent
consideration dependent upon future earnings of the acquired entities.
6. NOTES PAYABLE:
During the quarter ended December 31, 2002, the Company repaid, through
TWUK, notes payable of $15,239 issued in connection with the acquisition
of certain U.K. flexible staffing agencies and wrote-off $601 of related
debt discount. The Company also issued notes payable of $34,671 during the
quarter ended December 31, 2002 to satisfy amounts owed under agreements
to pay additional consideration dependent upon future earnings of certain
acquired entities. The notes payable are secured by the Company's senior
credit lender which requires the Company to keep an amount on deposit for
the sole purpose of repaying the notes payable. The notes bear interest at
rates ranging from 3.50% to 5.25%. 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. The Company
had outstanding notes payable of $40,126 at December 31, 2002 and related
cash restricted to the payment of such notes classified as current in the
accompanying consolidated balance sheet.
7. COMMITMENTS AND CONTINGENCIES:
Related to the acquisitions of flexible staffing agencies in the U.K., the
Company has entered into agreements to pay additional amounts, payable in
cash and shares of the Company's stock, in contingent consideration
dependent upon future earnings of such acquired entities, as further
discussed in Note 5.
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
Page 9
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED):
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.
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.
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 its consolidated financial position, cash flows
or results of operations.
8. OPERATIONS BY BUSINESS SEGMENTS AND GEOGRAPHIC AREAS:
During the three months ended December 31, 2002, the Company operated in
two reportable business segments: (i) U.K. operations and (ii) U.S. Home
Healthcare ("Home Healthcare") operations. The U.K. operations derive its
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 its revenues from infusion
and respiratory therapy services and the sale and lease of home medical
equipment concentrated in New Jersey and New York.
The Company uses differences in geographic areas, as well as in products
and services to identify the reportable segments. The Company evaluates
performance and allocates resources based on profit and loss from
operations before corporate expenses, interest and income taxes. Inter
segment sales are not material.
Page 10
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
8. OPERATIONS BY BUSINESS SEGMENTS AND GEOGRAPHIC AREAS (CONTINUED):
The following tables present certain financial information by reportable
business segment and geographic area of operations for the three months
ended December 31, 2002 and 2001.
THREE MONTHS ENDED DECEMBER 31, 2002
---------------------------------------------
U.K. HOME
OPERATIONS HEALTHCARE TOTAL
------------ --------------- --------------
Revenues to unaffiliated customers $ 67,998 $ 4,441 $ 72,439
=========== ============ ===========
Segment operating profit $ 8,021 $ 184 $ 8,205
=========== ============
Corporate expenses (929)
Interest expense, net (3,198)
Foreign exchange loss (8)
-----------
Income before income taxes and minority interest $ 4,070
===========
Depreciation $ 388 $ 199 $ 587
=========== ============
Corporate depreciation 2
-----------
Total depreciation $ 589
===========
Identifiable assets, December 31, 2002 $ 282,906 $ 8,978 $ 291,884
=========== ============
Corporate assets 2,847
-----------
Total assets, December 31, 2002 $ 294,731
===========
Capital expenditures $ 757 $ 156 $ 913
=========== ============
Corporate capital expenditures 2
-----------
Total capital expenditures $ 915
===========
THREE MONTHS ENDED DECEMBER 31, 2001
---------------------------------------------
U.K. HOME
OPERATIONS HEALTHCARE TOTAL
------------ --------------- --------------
Revenues to unaffiliated customers $ 56,582 $ 4,454 $ 61,036
=========== ============ ===========
Segment operating profit $ 6,368 $ 203 $ 6,571
=========== ============
Corporate expenses (663)
Interest expense, net (3,323)
Foreign exchange loss (13)
-----------
Income before income taxes and minority $ 2,572
interest
===========
Depreciation $ 411 $ 175 $ 586
=========== ============
Corporate depreciation 4
-----------
Total depreciation $ 590
===========
Identifiable assets, December 31, 2001 $ 234,100 $ 9,434 $ 243,534
=========== ============
Corporate assets 760
-----------
Total assets, December 31, 2001 $ 244,294
===========
Capital expenditures $ 856 $ 109 $ 965
=========== ============
Corporate capital expenditures 9
-----------
Total capital expenditures $ 974
===========
Page 11
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
9. IMPACT OF RECENT ACCOUNTING STANDARDS:
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 tables present the changes in the carrying amount of
goodwill for the three months ended December 31, 2002:
THREE MONTHS ENDED DECEMBER 31, 2002
---------------------------------------------------------------
U.K. HOME U.S.
OPERATIONS HEALTHCARE CORPORATE TOTAL
------------------ -------------------------- -------------
Balance at September 30, 2002 $ 121,214 $ 3,884 $ 2,300 $ 127,398
Goodwill acquired during quarter 43,421 43,421
Foreign exchange difference 3,338 3,338
----------------- ------------- ------------ -------------
Balance at December 31, 2002 $ 167,973 $ 3,884 $ 2,300 $ 174,157
================= ============= ============ =============
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 did not 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 in the fourth quarter of fiscal 2002.
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.
Page 12
ALLIED HEALTHCARE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
10. CORPORATE REORGANIZATION:
On July 25, 2002, The Company consummated a reorganization (the
"Reorganization") involving the Company and two of its U.K. subsidiaries -
Allied Healthcare Group Limited ("Allied Healthcare (UK)") and Transworld
Healthcare (UK) Limited ("TWUK"). Pursuant to the Reorganization, equity
investments in TWUK and subordinated debt investments in Allied Healthcare
(UK) were exchanged for shares of the Company's common stock and shares of
the Company's new Series A preferred stock. The net effect of the
Reorganization was that TWUK became an indirect wholly-owned subsidiary of
the Company and the senior subordinated debt investments in Allied
Healthcare (UK) were replaced by shares of the Company's Series A
preferred stock. The Company's management believes that the Reorganization
resulted in the Company having a more straight-forward and integrated
management and corporate structure.
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");
the Loan Notes holders were 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. In fiscal 2002,
the Company issued 117 shares of common stock in settlement of accrued and
unpaid interest and the remaining 890 shares of common stock were issued
in the first quarter of fiscal 2003.
In the Reorganization, the Company issued an aggregate of 2,359 shares of
its common stock and 7,774 shares of its Series A preferred stock with a
liquidation preference of 22,287 pounds sterling in exchange for all of
the equity investments in TWUK not already held by the Company and all of
the senior subordinated debt investments in Allied Healthcare (UK). The
exchange rate between the U.S. dollar and pounds sterling for purposes of
the Series A preferred stock has been permanently fixed at $1.58.
The Company has registered, at its expense, the resale of all of the
shares of common stock issued in the Reorganization and the shares of
common stock issueable upon conversion of the Series A preferred stock.
Page 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion and analysis should be read in conjunction with the
information contained in the Condensed Consolidated Financial Statements and
notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. 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.
We are one of the leading providers of healthcare staffing services, including
nursing and ancillary services, to the United Kingdom ("U.K.") healthcare
industry. We operate 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. 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 United States ("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 three
months ended December 31, 2002. We provide these services and products from the
following reportable business segments:
o our U.K. operations, and
o our U.S. home healthcare operations.
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"). Pursuant to 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 investments in Allied
Healthcare (UK) were 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, 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 our U.K. operation in 1999, was satisfied by either
the exchange for shares of our common stock or the right to receive a funding
note (the "Loan Notes"); the Loan Notes holders were required to exchange the
loan notes for shares of our common stock. The satisfaction of accrued and
unpaid interest for shares of our common stock was exchanged at the rate of
0.3488 shares for every (pound)2.00 of Loan Notes. In fiscal 2002, we issued
116,759 shares of common stock in settlement of accrued and unpaid interest and
the remaining 890,098 shares of common stock were issued in the first quarter of
fiscal 2003.
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 with a liquidation
preference of 22,286,869 pounds sterling in exchange for all of the equity
investments in TWUK not already held by us and all of the
Page 14
senior subordinated debt investments in Allied Healthcare (UK). The exchange
rate between the U.S. dollar and pounds sterling for purposes of the Series A
preferred stock has been permanently fixed at $1.58.
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 receivable, 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. In addition, goodwill
will be evaluated annually in the fourth quarter. However, a more frequent
evaluation would be performed if indicators of impairment were present.
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 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, payable in cash and shares of our
company's stock, in contingent consideration dependent upon future earnings of
such acquired entities. See Note 5 of the Notes to Condensed Consolidated
Financial Statements.
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.
Page 15
We receive a majority of our 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.
RESULTS OF OPERATIONS
Three Months Ended December 31, 2002 vs. Three Months Ended December 31, 2001
Revenues
Total revenues for the three months ended December 31, 2002 and 2001 were
$72,439,000 and $61,036,000, respectively, an increase of $11,403,000 or 18.7%.
This increase relates to the growth of our U.K. flexible staffing operations as
a result of internal growth ($4,611,000) and acquisitions, principally Medic One
Limited ($1,328,000). An increase of $5,464,000 was due to the favorable effects
of changes in foreign exchange.
Gross Profit
Total gross profit increased by $3,935,000 to $20,270,000 for the three months
ended December 31, 2002 from $16,335,000 for the three months ended December 31,
2001. The favorable effects of changes in foreign exchange accounted for
$1,462,000 of the increase. As a percentage of total revenue, gross profit for
the three months ended December 31, 2002 increased to 28.0% from 26.8% for the
comparable prior period. Gross margins for patient services increased (27.5% for
the three months ended December 31, 2002 versus 26.1% for the comparable prior
period) principally due to the mix in the percentage of revenues derived from
the staffing of nurses and other more highly paid professionals, which have
lower margins and the percentage of revenues derived from historical carer
business which have higher margins. Gross margins in the respiratory, medical
equipment and supplies sales were flat (43.8% for the three months ended
December 31, 2002 versus 44.1% for the comparable prior period) and decreased
for infusion services (24.6% for the three months ended December 31, 2002 versus
26.0% for the comparable prior period) principally due to increased product
costs and mix.
Selling, General and Administrative Expenses
Total selling, general and administrative expenses for the three months ended
December 31, 2002 and 2001 was $ 12,994,000 and $10,427,000, respectively, an
increase of $2,567,000 or 24.6%. Changes in foreign exchange accounted for
$877,000 of this increase. The remaining increase was mainly a result of higher
levels of overhead costs in the U.K. operations due principally to acquisitions
and internal growth ($1,690,000).
Interest Income
Total interest income for the three months ended December 31, 2002 was $590,000
compared to $838,000 for the three months ended December 31, 2001, which
represents a decrease of $248,000. This decrease was principally attributable to
lower levels of funds invested as well as decreases in interest rates.
Page 16
Interest Expense
Total interest expense for the three months ended December 31, 2002 was
$3,788,000 compared to $4,161,000 for the three months ended December 31, 2001,
which represents a decrease of $373,000. Excluding $297,000 increase due to the
effect of foreign exchange, the actual decrease in interest expense was
$670,000. This decrease was principally attributable to the exchange of accrued
and unpaid interest on the senior subordinated promissory notes for shares of
the Company's common stock as part of the Reorganization ($891,000). The
decrease is also attributable to reduced bank debt as well as a reduction in
interest rates. The decrease was partially offset by the write-off of debt
discount ($601,000) associated with the repayment of loan notes.
Foreign Exchange Loss
For the three months ended December 31, 2002, the Company realized a foreign
exchange loss of $8,000 compared to $13,000 for the three months ended December
31, 2001.
Provision for Income Taxes
The Company recorded a provision for income taxes amounting to $1,767,000 or
43.4% of income before income taxes for the three months ended December 31, 2002
compared to a provision of $1,071,000 or 41.6% of income before income taxes for
the three months ended December 31, 2001. The difference between the 43.4%
effective tax rate for the three months ended December 31, 2002 and the
statutory tax rate is mainly due to non-deductible interest expense and the
Company's recording of an additional valuation allowance for the tax benefit
associated with the current year's U.S. operating loss.
Minority Interest
The Company recorded a charge for minority interest of $44,000 for the three
months ended December 31, 2001. The minority interest represents the 1,050,000
shares of class A1 common stock of TWUK issued as part of the Nightingale
Nursing Bureau Limited ("Nightingale") consideration. In the fiscal year 2002
Reorganization the Company acquired these shares and the U.K. operations became
wholly owned subsidiaries of the Company.
Net Income
As a result of the foregoing, the Company recorded net income of $2,303,000 for
the three months ended December 31, 2002 compared to net income of $1,457,000
for the three months ended December 31, 2001.
Series A Preferred Stock Dividend
We accrued $866,000 of dividends for the three months ended December 31, 2002
for the Series A preferred stock issued in connections with the Reorganization
and accreted $128,000 of costs related to the issuance of our Series A preferred
stock.
Page 17
LIQUIDITY AND CAPITAL RESOURCES
General
For the three months ended December 31, 2002, we generated cash of $1,984,000
from operating activities. Cash requirements for the three months ended December
31, 2002 for capital expenditures ($915,000), payments on acquisition payable
($3,004,000), payments of acquisitions ($5,280,000), payments on notes payable
($15,239,000) and payments on long-term debt ($3,303,000), were met through
operating cash flows, restricted cash and cash on hand.
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 December 31,
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
December 31, 2002.
We believe the 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 of our 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.
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 December 31, 2002 and September 30, 2002, $35,759,000
(12.1%) and $33,634,000 (12.5%), respectively, of our total assets consisted of
accounts receivable. The increase in the accounts receivable from fiscal year
end is mainly due to the acquisition of Medic-One Group Limited, a supplier of
temporary staffing to NHS hospitals and private hospitals in the U.K., and
timing of cash collections.
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. Day's
sales outstanding ("DSOs") is a measure of the average number of days taken by
our company to collect its accounts receivable, calculated from the date
services are rendered. At December 31, 2002 and September 30, 2002, our average
DSOs were 44 and 42, respectively.
Borrowings
General
On December 17, 1999, as amended on September 27, 2001, our company's U.K.
subsidiaries, TWUK and its subsidiary obtained new financing denominated in
pounds sterling, which aggregates approximately $170,903,000 at December 31,
2002. The financing consists of a $153,220,000 senior collateralized term and
revolving credit facility (the "Senior Credit Facility") and $17,683,000 in
mezzanine indebtedness (the "Mezzanine Loan").
Page 18
Senior Credit Facility
The Senior Credit Facility consists of the following:
o $44,923,000 term loan A, maturing December 17, 2005;
o $20,055,000 acquisition term loan B, maturing December 17, 2006,
which may be drawn upon during the first nine years following
closing;
o $80,220,000 term loan C, maturing June 30, 2007, per the September
27, 2001 amendment,; and
o $8,022,000 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 December 31, 2002, we had outstanding borrowings of
$109,420,000 under the Senior Credit Facility that bore interest at a rate of
6.28% to 7.53%.
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
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. As of December 31,
2002, we had outstanding borrowings under the Mezzanine Loan of $16,103,000,
which bore interest at a rate of 11.03%.
Notes Due in Connection with Acquisitions
During the quarter ended December 31, 2002, we repaid, through TWUK, notes
payable of $15,139,000 issued in connection with the acquisition of certain U.K.
flexible staffing agencies and wrote-off $601,000 of related debt discount. We
also issued notes payable of $34,671,000 during the quarter ended December 31,
2002 to satisfy amounts owed under agreements to pay additional consideration
dependent upon future earnings of certain acquired entities. 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 3.50% to 5.25%. 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
Page 19
due date upon giving not less than sixty days written notice. As of December 31,
2002, we had outstanding notes payable of $40,126,000 and related cash
restricted to the payment of such notes classified as current in the
accompanying Condensed Consolidated Balance Sheet.
Series A Preferred Stock
In connection with the Reorganization we issued 7,773,660 shares of our Series A
preferred stock with a liquidation preference of 22,286,869 pounds sterling to
certain equity investors in TWUK in exchange for 22,286,869 TWUK ordinary shares
which were issued to such equity investors upon exercise of their TWUK equity
warrants that had been issued to them in connection with the 1999 sale of the
senior subordinated notes of Allied Healthcare (UK). The Series A preferred
stock has been recorded net of issuance costs which are being accreted using the
interest rate method through December 17, 2007. The exchange rate between the
U.S. dollar and pounds sterling for purposes of the Series A preferred stock has
been permanently fixed at $1.58. 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)2.867 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. 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 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 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 our company's board of directors. In addition, the Series A
preferred stock and our company's 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 company's Certificate of
Incorporation), the holders of the Series A preferred stock will be entitled to
elect one additional director to our company's 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 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.
Page 20
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 us 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 company's Certificate of Incorporation) or at any time
after December 17, 2007 if we have paid our 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.
Commitments
Acquisition Agreements
Related to our acquisitions of flexible staffing agencies, we have entered into
agreements to pay additional amounts, payable in cash and shares of our
company's stock, of up to $17,000,000, at December 31, 2002, in contingent
consideration dependent upon future earnings of such acquired entities.
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
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 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
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.
Page 21
Contractual Cash Obligations
As described under "Borrowings," "Acquisition Agreements," and "Operating
Leases" above, the following table summarizes our contractual cash obligations
as of December 31, 2002:
Total Debt Total Lease Total Other Total
Fiscal Obligations Obligations Obligations Obligations
------ --------------------------------------------------------------------------
2003 $ 43,177,000 $ 1,448,000 $ 3,266,000 $ 47,891,000
2004 8,985,000 1,380,000 5,872,000 16,237,000
2005 11,231,000 1,222,000 7,862,000 20,315,000
2006 29,681,000 1,132,000 30,813,000
2007 56,154,000 1,013,000 57,167,000
Thereafter 16,421,000 2,447,000 18,868,000
------------------------------------------------------------------------
$ 165,649,000 $ 8,642,000 $ 17,000,000 $ 191,291,000
========================================================================
Lease obligations reflect future minimum rental commitments required under
operating leases that have non-cancelable lease terms as of December 31, 2002.
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
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.
During the normal course of business, we continue to carefully monitor and
review our submission of Medicare, Medicaid and all other claims for
reimbursement. We believe that we are 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 our company, or that our company
will not be found to be in violation of one or more of these provisions. At
present, we cannot anticipate what impact, if any, subsequent administrative or
judicial interpretation of the applicable Federal and state laws may have on our
consolidated financial position, cash flows or results
Page 22
of operations.
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.
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 did not 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
recorded a charge of $925,000 in interest expense for the year ended September
30, 2002.
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.
Page 23
ITEM 3. 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
exposures relate 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" 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 the 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, adversely or otherwise, our 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 1999 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.
As of December 31, 2002, our Series A preferred stock ($32,797,000), net of
unamortized issuance cost ($2,416,000) matures on December 31, 2008 and bears a
fixed preferred dividend rate of 9.375%. Subject to certain limitations, a
majority in interest of the holders of the Series A preferred stock have the
right to require us 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 company's Certificate of
Incorporation) or at any time after December 17, 2007 if we have paid our Senior
Credit Facility and the Mezzanine Loan in full on or before such date.
In connection with the acquisition of several U.K. flexible staffing agencies,
we have notes payable of $40,126,000 at December 31, 2002. The notes payable are
redeemable, at the holder's option, and bear interest ranging from 3.50% to
5.25% at December 31, 2002. The table below represents the expected maturity of
our variable rate debt and their weighted average interest rates at December 31,
2002.
EXPECTED WEIGHTED AVERAGE
FISCAL MATURITY RATE
-------- ---------------- ------------------
2003 $ 3,051,000 LIBOR +1.59%
2004 8,985,000 LIBOR +2.25%
2005 11,231,000 LIBOR +2.25%
2006 29,681,000 LIBOR +3.26%
2007 56,154,000 LIBOR +3.50%
Thereafter 16,421,000 LIBOR +7.00%
----------------
$ 125,523,000 LIBOR +3.66%
================
The aggregate fair value of the our debt was estimated based on quoted market
prices for the same or similar issues and approximated $167,228,000 at
December 31, 2002.
Page 24
ITEM 4. CONTROLS AND PROCEDURES
Within the 90-day period of the date of the filing of this Quarterly Report, 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").
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 Quarterly 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.
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 Quarterly 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.
Page 25
PART II
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) On November 28, 2002, the Company issued an aggregate of 669,738 shares
of its common stock in connection with its acquisition of Medic-One
Group Limited, a supplier of temporary staffing to National Health
Service hospitals and private hospitals in the U.K. The shares were
issued in a transaction exempt from registration pursuant to Regulation
S and/or Section 4(2) under the Securities Act of 1933, as amended,
because, among other things, the shares were issued to two individuals
in an acquisition transaction, each such individual represented that he
or she was not a resident or citizen of the United States and that he
or she was not purchasing or acquiring the shares for the account or
benefit of any U.S. Person (as defined in Regulation S promulgated by
the Securities and Exchange Commission), there was no general
solicitation and restrictive legends were placed on the stock
certificates representing the shares. The holders of such shares have
certain registration rights.
Page 26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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 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).
3.8 Certificate of Amendment to the Certificate of Incorporation of our
company filed on February 12, 2003.
10.1 Employment Agreement, dated as of October 30, 2002, between the
Company and Daniel A. Bergeron (incorporated herein by reference to
Exhibit 10.29 to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 2002).
99.1 Certification of Chairman and Chief Executive Officer pursuant to
18 U.S. C. (section) 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
(section) 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Page 27
(b) Reports on Form 8-K.
The Company filed on October 2, 2002 a Report on Form 8-K dated October
2, 2002, which included information required by Item 5 of Form 8-K. The
Form 8-K disclosed the change in trading symbol from TWH to ADH. No
financial statements were filed.
The Company filed on November 7, 2002 a Report on Form 8-K dated
November 7, 2002, which included information required by Item 5 of Form
8-K. The Form 8-K disclosed the appointment of Daniel A. Bergeron as
the Chief Financial Officer of the Company. No financial statements
were filed.
The Company filed on November 20, 2002 a Report on Form 8-K dated
November 19, 2002, which included information required by Items 5 and 7
of Form 8-K. The Form 8-K disclosed the issuance of the Company's press
release announcing its earnings for the quarter and fiscal year ended
September 30, 2002. No financial statements were filed. However, the
press release attached to the Form 8-K included a table containing
statement of operations data.
Page 28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: February 13, 2003
ALLIED HEALTHCARE INTERNATIONAL INC.
By: /s/ Daniel A. Bergeron
--------------------------
Daniel A. Bergeron
Vice President and Chief Financial
Officer (Principal Financial Officer and
Duly Authorized to Sign on Behalf of
Registrant)
Page 29
CERTIFICATION FOR FORM 10-Q
I, Timothy M. Aitken, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Allied
Healthcare International Inc. (the "Registrant");
2. Based on my knowledge, this Quarterly 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
Quarterly Report;
3. Based on my knowledge, the financial statements and other financial
information included in this Quarterly 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 Quarterly 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 Quarterly 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 Quarterly Report (the "Evaluation Date"); and
(c) presented in this Quarterly 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 Quarterly 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: February 13, 2003
/s/ Timothy M. Aitken
---------------------
Timothy M. Aitken
Chairman of the Board and Chief Executive Officer
(principal executive officer)
Page 2
CERTIFICATION FOR FORM 10-Q
I, Daniel A. Bergeron, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Allied
Healthcare International Inc. (the "Registrant")
2. Based on my knowledge, this Quarterly 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
Quarterly Report;
3. Based on my knowledge, the financial statements and other financial
information included in this Quarterly 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 Quarterly 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 Quarterly 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 Quarterly Report (the "Evaluation Date"); and
(c) presented in this Quarterly 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 Quarterly 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: February 13, 2003
/s/ Daniel A. Bergeron
-----------------------------
Daniel A. Bergeron
Vice President and Chief Financial Officer
(principal financial officer)
Page 2